Bankruptcy Predictors Revisited

Wayne Brasch · 2005-06-13T23:59:47+00:00

There are four main bankruptcy predictors. Two of them are more prevalent than the others. If you were to have put data from Enron's financial statements for 1997 into these two, the result would have shown that they were headed toward bankruptcy back in that year. The Security and Exchange Commission admitted since Enron's downfall that they had not looked at those financial statements as they should have done. It is there job to protect all investors and prospective investors from investing in such companies.These two bankruptcy predictors are so accurate that one of them can predict bankruptcy with a 95% accuracy rate while the other is in the high 80% range. Both of these can predict failure about three years before it happens.Check it out and find out when Enron finally declared bankruptcy. Those 1997 financial statements predicted their downfall then within three years. This is even more strongly pointed out when we realize that Enron failed to report all their debt on their most recent financial statements just prior to bankruptcy.I think more accountants and business people should become more aware of the power of accounting by using these predictors. Accounting is not just a historical reporting device. It is a dynamic and powerful discipline that should be used to help people who own a business no matter how large or small.Wayne Brasch

Jun 13, 2005 26 Replies

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Duane Bozarth 21 years ago

Well, I was making the (apparently rash) assumption you were trying to raise awareness of the methods and were interested in discussing the basis for their success (or lack thereof). I figured you would be eager to share the location of where updated references to the fundamental work could be found...

I would think it unwise for anyone to simply take a spreadsheet and "plug 'n chug" magic numbers and surprised you apparently are recommending that.

Go ahead and send it, I'll look into what you've done...

dpbozarth at swko dot net (de-munging is obvious)

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Duane Bozarth 21 years ago

...

btw, I'm not out on a vendetta here, Wayne. I'm currently laid up (broke an arm, needn't get into how :) ), and given past wrt empirical modeling this seemed like an interesting topic to explore...so, if we were going to explore it, figured it best to have references to what you were referring to explicitly, that's all.

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Wayne Brasch 21 years ago

Duane, I'm sorry about your arm. I truly hope it gets better very fast. If you ever want to get this workbook, please let me know.

Wayne Brasch

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Duane Bozarth 21 years ago

Thanks...it's only been a few days so far, so it'll be awhile.

Re the subject--

So you're not interested in the underlying methodology? And unwilling to point me to current research?

I'm still not understanding your motivation here. Ah, well...

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Wayne Brasch 21 years ago

Duane, I researched the underlying methodology myself and created this Excel workbook. If you look at it and understand how to use Excel, you can reconstruct the methodology yourself without any further research on your part.

I have no ulterior or other motives concerning these predictors other than making some accountants, who don't know they exist, aware of them. I think they are a great way for us to help our clients survive in their business-if that's what they want to happen. They are a very powerful indicator of what might happen.

Wayne Brasch

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Duane Bozarth 21 years ago

Wayne Brasch wrote: ...

Equations, yes, no doubt...

But I'm a big believer in knowing enough to know when a methodology may (or more importantly may ) be applicable.

I'd like to read the original papers...what's so hard in giving a reference?

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Wayne Brasch 21 years ago

Duane, as far as I know there exists no one place I can cite as a reference for the four of these predictors. Dr. Edward Altman is the one who started his back in 1968. He has modified it many times and has presented it in various books and articles in various magazines. Christine Zavgren is the creator of one of them. Gordon L. V. Springate created one. John G. Fulmer, Jr. also created one. Maybe with these names you can find the references you want to see.

Maybe with this information, you can create your own spreadsheets or whatever...

Wayne Brasch

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