Estimating corporate failure as an auditor's going concern evaluation factor.

Abstract

One of the most important tasks of the audit profession is the assessment of their going concern opinion. Among many issues an auditor has to examine before issuing an opinion, is the ability of an entity to support its operations financially, in other words, to not be in danger of failure due to liquidity problems. During the last decades, finance literature has examined potential methods to estimate the probability of a firm to fail, exploiting financial as well as market indicators, through bankruptcy prediction models. The purpose of this study is to test the predictive accuracy of MDA, Probit and ANN in foreseeing an entity’s bankruptcy, applied in a dataset of 81 bankrupt and 81 healthy US firms. MDA proved to be the optimum model to predict bankruptcy, right before its occurrence, while Probit and ANN can also be used as capable tools to assist auditors with their judgement.