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

Hossari, Ghassan and Rahman, Sheikh 2004, Connection between commonly used financial ratios and misrepresentation of financial statements of collapsed corporations, The business review, Cambridge, vol. 2, no. 1, Summer, pp. 256-263.


Title Connection between commonly used financial ratios and misrepresentation of financial statements of collapsed corporations
Author(s) Hossari, Ghassan
Rahman, Sheikh
Journal name The business review, Cambridge
Volume number 2
Issue number 1
Season Summer
Start page 256
End page 263
Publisher American Academy of Business, Cambridge
Place of publication Hollywood, Fla
Publication date 2004
ISSN 1553-5827
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.
Language eng
Field of Research 150201 Finance
HERDC Research category C1.1 Refereed article in a scholarly journal
Persistent URL http://hdl.handle.net/10536/DRO/DU:30028274

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