Empirical evidence from the corporate collapse literature suggesting re-examination of accounting standards in relation to valuation of assets

Hossari, Ghassan and Rahman, Sheikh 2005, Empirical evidence from the corporate collapse literature suggesting re-examination of accounting standards in relation to valuation of assets, International journal of business research, vol. 3, no. 1, pp. 141-149.

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Title Empirical evidence from the corporate collapse literature suggesting re-examination of accounting standards in relation to valuation of assets
Author(s) Hossari, Ghassan
Rahman, Sheikh
Journal name International journal of business research
Volume number 3
Issue number 1
Start page 141
End page 149
Total pages 9 p.
Publisher International Academy of Business and Economics (IABE)
Place of publication Lynchburg, Va.
Publication date 2005
ISSN 1554-5466
Keyword(s) corporate collapse
financial ratios
valuation of assets
Summary This paper examines the recent spectacular corporate collapses of Parmalat in Europe, Enron and WorldCom in the USA and HIH in Australia and argues for a re-examination of corporate governance regulations, particularly in relation to accounting standards regarding the valuation of assets. The recommendation that is put forward in this regard is based upon empirical evidence arising from further examination of the empirical results in (Hossari and Rahman, 2004). Specifically, the recommendation is based upon the realization that, among the 48 financial ratios across the 50-plus refereed studies, five financial ratios, all of which contained assets as one of the variables, were a relatively robust indicator of corporate collapse. The five ratios are: Net Income/Total Assets, Current Assets/Current Liabilities, Total Liabilities/Total Assets, Working Capital/Total Assets, and Earnings Before Interest and Taxes/Total Assets. This paper suggests that it's not the failure of the corporate collapse prediction models, rather it's the erosion of the reliability of some key input data, namely assets and the valuation thereof, that is largely responsible for the apparent failure of these models in capturing impending collapses, such as those that we witnessed in the recent past. Such empirical findings support the argument that assets are soft targets for misrepresentation, because of the leeway granted in accounting standards with regards to their valuation.
Language eng
Field of Research 150201 Finance
HERDC Research category C1 Refereed article in a scholarly journal
Persistent URL http://hdl.handle.net/10536/DRO/DU:30003006

Document type: Journal Article
Collection: Deakin Graduate School of Business
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