Preventing Corporate Failure by Using Ratios and studying the impact of accounts manipulation on overall performance

By

ABSTRACT

Bankruptcy, and particularly the prediction of bankruptcy, has been the focus of extensive research in the past several decades. This has been due to the importance of bankruptcy prediction to investors and lenders as well as the potentially bankrupt firm itself. There are many reasons for bankruptcy. In the past few decades, a number of companies have filed applications for bankruptcy, including the famous bankruptcy of Enron, which was a U.S.A. based Giant company. In this dissertation, we will see that how can we predict the bankruptcy of a company in advance through using financial ratio analysis and other models. The need to support and maintain a strong economy requires business enterprises to be financially healthy. Corporate, financial distress and poor financial performance significantly impacts the economy. In this study, it is assumed that stakeholders include both current and potential creditors, current and potential stockholders, management, employees, government, and the general public. Corporate failure can be defined as failure by a company that means technical insolvent, where a firm is unable to meet its maturing obligations. Corporate failure is an essential component of an efficient market economy, allowing the recycling of financial, human and physical resources into more productive organization. Armed with accurate information about a firm's financial troubles, lenders could make superior decisions about the size of loans to be made, repayment schedules and restrictive covenants. A lending institution, say a bank, could reduce its default risk by accurately eliminating loans to firms with a high risk of bankruptcy.

ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

Signed __________________ Date _________________

Table of contents

ABSTRACTII

ACKNOWLEDGEMENTIII

DECLARATIONIV

CHAPTER 1: INTRODUCTION1

1. 1 Introduction1

1.2 Background of the study1

1.3 Problem statement2

1.4 Aims and objectives of the study3

1.5 Research questions4

1.6 Expected outline of the study4

CHAPTER 2: LITERATURE REVIEW7

2.1 Overview7

2.2 Characteristics of a company in financial distress10

2.3 The Importance of Predicting Financial Distress13

2.4 Bankruptcy Theory and Prediction Model14

2.5 The Role of Financial Ratios15

2.6 Fraud Analytical Studies16

2.7 Bankruptcy Models18

2.7 Univariate bankruptcy modelling18

2.9 Multivariate Modelling - Altman's Z-score19

2.10 Logit Analysis21

CHAPTER 3: METHODOLOGY23

3.1 Overview of Qualitative and Quantitative Research Approaches23

3.2 Overview of the Mixed Method Research Approach24

3.3 Data Analysis25

3.3.1 Qualitative Data Analysis25

3.3.2 Quantitative Data Analysis25

REFERENCES26

CHAPTER 1: INTRODUCTION

1. 1 Introduction

This project is about accounts manipulations in the financial statements and how does the manipulated data leads to corporate failure leading to either loss of a company`s revenue or its closure and how to resolve the corporate failure problem. In this topic special emphasis will be made with respect to the ENRON Corporation an energy trading, natural gas, and electric utilities company ...