Connection between commonly used financial ratios and misrepresentation of financial statements of collapsed corporations

Hossari, Ghassan and Rahman, S. 2004, Connection between commonly used financial ratios and misrepresentation of financial statements of collapsed corporations, in Proceedings of The Global Business and Finance Research Conference, London, Finance Forum, July 2004, The Business Review, Cambridge, Hollywood, Fla., pp. 256-263.

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Title Connection between commonly used financial ratios and misrepresentation of financial statements of collapsed corporations
Author(s) Hossari, Ghassan
Rahman, S.
Conference name Global Business and Finance Research. Conference (2004 : London, England)
Conference location London, England
Conference dates 14-17 July 2004
Title of proceedings Proceedings of The Global Business and Finance Research Conference, London, Finance Forum, July 2004
Editor(s) Turan Senguder, Gordon
Publication date 2004
Conference series Global Business and Finance Research Conference
Start page 256
End page 263
Publisher The Business Review, Cambridge
Place of publication Hollywood, Fla.
Summary This paper unravels dynamic and intriguing shifts in the use of financial ratios in signaling corporate collapse. An empirical examination of the anecdotal evidences from notable recent corporate collapses coupled with the short-lived usefulness of financial ratios in various prediction models suggest that companies(1) that deliberately misrepresent their financial statements may have taken cues from the ratios that are commonly investigated. This proposition is supported by an extensive examination of over 50 studies conducted between 1968 and 2002. The erosion in the reliability of numbers in financial statements has led to significant distortions in the predictive power of financial ratios when used in signaling corporate collapse. Recent collapses such as Parmalat in Europe, Enron and WorldCom in the U.S. and HIH in Australia, present yet another reminder that financial statement items are being misrepresented. These are all large corporations with well-established household names, and are for sure closely monitored by financial communities around the globe. Nevertheless, a common thread seems to link the collapse of these companies: none of these collapses were foreseen by credit rating agencies or foretold by the widely accepted bankruptcy prediction models. Why? This paper attempts to use some anecdotal evidence in order to provide logical explanations to the existence of such a common thread. It argues that there appears to be anecdotal evidence to suggest that directors of publicly listed companies that have collapsed may have deliberately misrepresented financial statement items.
Notes Published in 'The Business Review, Cambridge'
Language eng
Field of Research 150201 Finance
Socio Economic Objective 970115 Expanding Knowledge in Commerce, Management, Tourism and Services
HERDC Research category E1 Full written paper - refereed
Persistent URL http://hdl.handle.net/10536/DRO/DU:30005343

Document type: Conference Paper
Collection: Deakin Graduate School of Business
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