Going concern risk disclosures by companies in financial reports as required by the IFRS helps investors and financial analysts to establish if going concern is in jeopardy. The management complies with IFRS but still companied end up being delisted due to going concern issues. This study was guided by three objectives: to establish if there are textual disclosures on going concern risk by listed firms in Kenya, to determine the extent of prediction of going concern risk using the selected bankruptcy predicting models on listed firms in Kenya and to establish whether the textual disclosures and selected bankruptcy predicting models are statistically significant in assessing the going concern risk of listed firms in Kenya. The population of the study comprised of firms listed at the NSE from 2000 to 2015. Proportionate sampling was adopted where six firms that were either delisted or placed under statutory management were analysed alongside the corresponding thirteen going concern firms from the same sectors. The annual financial reports collected from the Capital Market Authority (CMA) resource centre were analyzed five years prior to going concern risk. Data was presented in tables and statements. In a sample of 13 going concern firms and 6 non going concern firms, the study established that there were textual disclosures for the entire period of analysis. On the extent of prediction of going concern risk using the selected bankruptcy predicting models, the study found that the means of the going concern firms in all the sectors were above the cut off scores at 1.10 for Altman revised four variable model, above 0.862 for Springate model and above 0 for Fulmer model. Sector wise the results showed that the three selected bankruptcy prediction models can, to a significant extent assess going concern risk in the manufacturing, commercial and telecommunication sectors. Results from the regression matrix for both samples, showed a positive relationship between the selected bankruptcy predicting models in assessing the going concern risk. Further, using the T test results failed to accept the null hypothesis at 5% significant level as the p values were all below 0.05, implying that the selected bankruptcy predicting models were not significant in assessing the going concern risk. Finally, results from the T test, provided a p value of 0.902 in a going concern sample and 0.810 in a non going concern sample and showed that textual disclosures are not statistically significant in assessing going concern. The study failed to reject the null hypothesis that textual disclosures were not significant in assessing the going concern risk. This study recommends that textual disclosures be used alongside selected bankruptcy prediction models in financial management decisions.

Background of the Study 
Several topical financial researches, investors and financial analysts emphasise the need for a timely model of financial failure prediction to help determine if business firms’ are reasonably going concerns. Textual disclosure on going concern, made from financial statements is the act of releasing all relevant information pertaining to a company that may influence an investment decision. Textual disclosure provides information about presence or absence of a going concern or a potential warning to users that the company is in danger of failure based on the last available financial reports (Boritz and Sun, 2004). Key symptoms of non-going concern or business failure identified from company’s financial statements include a company’s declining profitability, substantial operating losses, decreasing sales at a constant price, increased borrowing, a decline in liquidity, a net liability position, withdrawal of financial support, adverse key financial ratios, negative cash flows, arrear dividends, inability to pay creditors, change to cash on delivery basis and inability to obtain finance for essential needs (International Standard on Auditing (ISA) 570, 2011). 

Financial Accounting Standards Board, (2008) argues that the company’s success and going concern is of great concern to interested parties such as companies’ management, stockholders, creditors and employees who are all concerned about the going concern of the company as presented in the audited financial reports. The going concern textual disclosure aspect is fundamental in the preparation of a company’s financial statements as required by the generally accepted accounting principles (GAAPs). This postulate states that, in the absence of evidence to the contrary, the firm should be viewed as remaining in operation indefinitely (The American Institute of Certified Public Accountants, 2010). Similarly, FASB (2008) indicates that accounting standards makes it mandatory for the registered companies to disclose, in the form of notes to the accounts any information that may jeopardize the going concern status. Financial analysts are guided by the going concern requirement and a company facing going concern threat will present its assets and liabilities at net realizable value followed by the auditors qualified audit report (FASB, 2008) 

On the other hand, the International Federation of Accountants (IFAC) (2010) requires that assets and liabilities of a going concern entity should be recorded on the basis that the company will be able to realize its assets and discharge liabilities in the normal course of business. Njoku and Inanga (2010) found that just as the auditors must evaluate the company’s ability to continue as a going concern, financial analysts have a duty to evaluate going concern abilities. Traditional accounting practice gives directors the responsibility for assessing the going concern risk but the auditor has a legal responsibility to evaluate whether audit procedures carried out can reveal conditions and events of substantial doubt about company’s continuity as a going concern (Marshall & Dasaratha; 2006 AICPA, 2010) 

In Kenya, the institute of certified public accountants of Kenya (ICPAK) maintains a close working relationship with other regulatory institutions such as the central bank of Kenya (CBK) and the capital markets authority (CMA) to ensure high standards of financial reporting. Financial analysts rely on published financial statements which are required to conform to International Financial Reporting Standards (IFRS) (Accountants Act, 2008). Of much importance to the financial analysts is the Companies Act, Cap 486 (2009) which sets out the responsibilities for both management and the auditor to ensure proper use of the going concern assumption in preparation of a company’s financial statements. In addition, all listed companies are required by CMA to disclose periodic financial information on going concern basis which is also enforced through the CMA guidelines (CMA Handbook, 2012). 

The going concern concept use in financial reports is important to investors whose major desire is to maximize returns of their investments in businesses that will continue in operational existence into the foreseeable future, and such companies must have no intention to go into liquidation or make drastic cutbacks to the scale of operations (Collier, 2003). The Textual disclosure on going concern therefore interrogates the ability of a company to continue functioning as a business entity into a foreseeable future, unless there is reasonable doubt to assume otherwise (AASB, 2009). 

There exists a challenging in predicting going concern risk, even for auditors who have a good knowledge of firms’ financial position as they often fail to make an accurate judgment on firms’ going concern conditions (Lili, 2014). These challenges necessitate the use of bankruptcy prediction models which rely on financial statement data to detect sensitive bankruptcy risks and the ability of firms’ to experience business failure. These models effectively predict going concern risks by focusing on company’s profitability, liquidity, cash flow generation, and leverage (Boritz and Sun, 2004). The Multivariate Discriminant Models (MDM) using linear combination of bankruptcy scores of certain discriminatory variables have been instrumental detecting firms potential of failure and success (Altman, 1968; as cited in Obande, 2008). Rahnama et al., (2009) posit that a firm that is able to predict the going concern risk more accurately and swiftly is capable of protecting shareholders interests in addition to minimizing the danger of bankruptcy. Financial analysts therefore use bankruptcy prediction models in advising clients and to make judgment on companies’ abilities to continue as a going concern (Altman & McGough, 1974 study as cited in Grice, 2010). Similarly, Boritz and Sun, (2004) suggest that a well-developed statistical model serves as a decision aid for managers to make better going concern judgments. Further, Elizabeth (2004) appreciates that the auditor’s assessment of the going concern issue can be a complex process. This is because it requires the use of a decision aid such as bankruptcy prediction models to provide information and indicate to the financial analysts of certain problems that may be difficult to detect using traditional auditing procedures. 

The emphases on this study were firms listed in Nairobi Securities Exchange which is regulated by the CMA in Kenya. The interest in the area of going concern prediction has increased due to considerable number of firms that have been delisted since the early 1990s. The NSE and CMA have a regulatory responsibility of surveillance on firms listed in NSE with overall aim of ensuring that listed firms are financially stable (Barako, 2007). Nairobi Securities Exchange has been in existence for over 60 years to date but has failed to pick the growth momentum. Currently the market has just 63 listed firms with some firms’ not in a financially sound position. Nairobi Securities Exchange has a responsibility to develop and regulate the market operations to ensure efficient trading and ensure that companies listed are financially healthy. The Accountants Act (2008) ensures that the CMA issues guiding regulatory requirement on going concern textual disclosures, allows ICPAK representation on the disclosures and standards committee to ensure adherence to the requirements of financial reporting standards and going concern textual disclosures. This population was also important in this study since annual financial statement and information, including the management report for most of the companies was readily available. 

It is important to explore the relative performance of MDMs and managements’ textual disclosures on going concern in predicting going concern risk due to the challenging nature of going concern prediction not only to managers but also to the financial analysts. Several studies have been done to compare the performance of managements’ going concern textual disclosures with MDMs in predicting going concern risk with mixed results. Some studies show that MDMs outperform textual disclosure on going concern, while others find that statistical models and auditors’ opinions are inconsistent in their prediction ability. It is on this understanding that the study evaluated the applicability of textual disclosure and selected bankruptcy prediction models in assessing the going concern risk of listed firms in Kenya. 

Statement of the Problem 
When a firm is established, the belief is that it will be operational into perpetuity but shockingly many firms collapse unexpectedly bringing to an end the assumption of going concern raising a number of questions on the agency and principal relationships. The stakeholders normally are major losers bringing into perspective the importance of bankruptcy prediction models and textual disclosures ongoing concern by regulators and financial analysts. 

The Accountants Act CAP 531, laws of Kenya, requires that annual financial reports be prepared on a going concern basis except where a firm is to cease operations of companies as a disclosure to potential users. Many companies have complied with this requirement but some companies have still been delisted from the NSE due to their being non going concerns. This has prompted a number of researchers to use bankruptcy prediction models in testing going concern issues in companies and this has resulted into the development of a number of bankruptcy prediction models with mixed results. 

Mohamed (2013) used Altman revised four variables model to study bankruptcy in listed firms and found that the model was suitable for non-manufacturing firms. However, this study did not incorporate textual disclosures on going concern. In another study, Boritz and Sun (2004) used Springate, Altman (1968) and Ohlson models and found that all the three bankruptcy prediction models significantly outperformed the textual disclosures in identifying bankrupt firms. A study by Unegbu and Adefila (2013) which did not consider the effect of textual disclosures on going concern found that the operating cash flow model had a higher going concern risk prediction than the Z-score models. Similarly, Grice (2010) used Zmijewski, Ohlson, and Altman (1968) bankruptcy prediction models and found that there was no consistency between the models’ predictions and textual disclosures. In view of these contradicting findings, the study sought to evaluate the applicability of textual disclosures and selected bankruptcy predicting models in assessing the going concern risk of listed firms in Kenya for a period of five from when a firm is delisted in each sector.

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Item Type: Kenyan Topic  |  Size: 101 pages  |  Chapters: 1-5
Format: MS Word  |  Delivery: Within 30Mins.


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