Going Concern Prediction Models of Liquidated Non-Financial Firms of Pakistan.

Abstract

The main focus of this study is whether the original version of the prediction models are the best proxy for evaluating the firm’s status as going concern that are operated in creditor-oriented regime. This study is much more precise for the selection of firm as an analysis sample to formulate the prediction model for the firm that are operated in the creditor-oriented regime. The selection is based on such type of firms, whose: a) continuous financial years net losses, b) the external and independent auditors issue the non-going concern opinion of the audited client, and c) all the operations of firms are liquidated. The analysis sample consist of one hundred and twenty-four (124) non-financial firms. In first stage, the validity of the original version of the existing firm’s bankruptcy prediction models, like Altman (1968) and Rashid and Abbas (2011); the original version of the existing going concern prediction models, like Koh and Killough (1990), and Koh (1991); and the original version of the existing liquidation prediction models, like Kuruppur, Laswad and Oyelere (2003) are examined. In second stage these aforesaid models are re-estimated (or updated) and the revised prediction models are formulated for the firms that are operated in creditor regime. In third stage, this study formulated the prediction models by using the MDA and LR techniques to deal with the issues faced by the auditor for evaluating the firm’s status as going concern. The type I error and type II error of the formulated prediction models for evaluating the firm’s status as going concern is less than the type I error and type II error of the existing firm’s prediction models, re-estimated (or updated) version of the existing firm’s prediction models and new prediction models based on the pool of variables. The proposed prediction models are considered as the best alternative for evaluating the firm’s status as going concern. The finding based on five (5) discriminatory ratios that are the part of statement of profit and loss, and the statement of financial positions, the newly formulated prediction models, consist of accounting ratios, is not only a useful tool for accessing the firm’s status as going concern, but also a supportive tool for accessing the firm’s financial fraud risk, for the external and independent auditors in order to construct their opinion for a firm that is operated in the creditor-oriented regime. Implication that emerge from these results has developed the instrument which will be highly recognized by the accounting and auditing practitioners like the auditors of developed economies. Therefore, the regulatory authorities in Pakistan, like SECP, SBP and PSX; and the audit practitioner institutes, like ICAP, and ICMAP, to use these formulated the prediction models for evaluating the firm’s status as going concern that are operated in creditor-oriented regime. The proposed models would also be helpful in monitoring and assessing the financial health of the firms as well.