The Economic cost of business failure is relatively large, Government, providers of capital, as well as management and employees are severely affected. More critical are the reporting accountants who are likely to face potential litigation if their report failed to provide an early warning signal. Apart from profit making objective, all corporate business concerns share one fundamental objective which is to remain as going concern. As businesses strive hard to perpetuate, one of the most significant threats irrespective of their size and nature of operation is illiquidity and insolvency. Extant evidence shows that in past decades business failures have occurred in higher rates than at any time. The disastrous and social effects of corporate failure makes it imperative for shareholders, creditors, government, etc. to continually monitor the operations of a corporate entity in order to avoid possible failure. The main focus of this presentation is to consider the causes and remedies of corporate failure.

2. The Economic cost of business failure is
relatively large, Government, providers
of capital, as well as management and
employees are severely affected. More
critical are the reporting accountants
who are likely to face potential litigation
if their report failed to provide an early
warning signal.
Apart from profit making objective, all
corporate business concerns share one
fundamental objective which is to
remain as going concern.

3. As businesses strive hard to perpetuate, one of the most significant
threats irrespective of their size and nature of operation is
illiquidity and insolvency. Extant evidence shows that in past
decades business failures have occurred in higher rates than at any
time.
The disastrous and social effects of corporate failure makes it
imperative for shareholders, creditors, government, etc. to
continually monitor the operations of a corporate entity in order to
avoid possible failure. The main focus of this presentation is to
consider the causes and remedies of corporate failure.

4. The factors that led to business failure vary. While many economists
attributed this phenomenon to high interest rates, recession,
squeezed profit, macroeconomic instability, bad political atmosphere,
excessive deregulation policies, dubious practices, heavy debt burden,
and deteriorated financial discipline, among others. Recent studies
associates failure to mismanagement and lack of good corporate
governance.
This disastrous effects forced government, investors and management
to devised different strategy to remedy the scenario. From the
academic world various efforts were made and still on to device and
suggest ways to prevent failure as well as provide scientific models
that can provide early warning signal of failure before it occurs. This
presentation seeks to make an exploratory discussion on why
corporations failed, and how the failure should be remedied.

5.  To ascertain and examine the concept and nature of corporate
failure
 To discuss the causes of corporate failure
 To examine the roles of professional accountants in averting
corporate failures
 To present recommended remedies that can minimize
corporate failure

6.  Corporation is an economic entity in which
the ownership is separated from
management. It’s an artificial being invisible,
intangible and exist only by a mere
contemplation of the law.
 Failure is a term used interchangeably with,
distress, illiquidity, insolvency, persistent loss,
Bankruptcy and winding-up.These entire
concepts could mean failure in one way or the
other. From literal dimension failure stands for
the inability for a concern to achieve its
primary objective (profit-making) in the long
run. It could also mean inability to generate
adequate cash flow to retire due debts.

7.  According to Calomiris and Gorton [1991] corporate failure
connotes an unhealthy situation or weaknesses in an
organization’s conditions which prevents the achievement of set
goals and aspirations.
 Komba [1991] perceives failure as an act of being unsuccessful in
an attempt, cessation of normal operation or operating below
normal official acceptable standards or to go bankrupt or
become insolvent.
 Argenti [1976] views it as “company whose performance is so
poor that sooner or later it is bound to have to call in the receiver
or cease to have or to go into voluntary liquidation, or which is
about to do any of these, or has already done so”.
 Altman [1983] foresees it simply as inability of a firm to honour
its obligation when due.

8. For the purpose of this presentation we take failure to cover
 failure to honour obligation [financial],
 failure to operate successfully in the market place [operational]
and
 failure to exist [legal].
This will, however, give us a lead in easy diagnosing the root causes
and remedies in both short and long run.

9. Failure can be identified from the following stages:
Financial Embarrassment

10. Financial Insolvency

11. Total Failure

12. Confirmed Insolvency

13. Corporate failure has been attributed to many
factors which are categorized as
1. Exogenous factors and
2. Endogenous factors

14. EXOGENOUS FACTORS
 Excessive competition
 Change in public demand
 Casualties
 Excessive Shift in government policy
 Socio economic and political unrest

15. ENDOGENOUS FACTORS
 Mismanagement
 Excessive expenses
 Inadequate revenue
 Over capitalization
 Excessive Floating debt
 Unwise dividend policy
 Fraud and embezzlement
 Income smoothing
 Weak corporate governance

16. Lack of accountability in both performance and operations
coupled with cut off of accounting processes, unsound internal
control and inadequate safe keeping and security of documents
has contributed to so many corporations to fail. Furthermore, the
inability of audit reports to provide early warning signal to owners
and regulatory bodies has tremendously affect so many
businesses, and questioned the integrity and adequacy of audit
job in general.
1) Failure of audit to deter and detect any fraudulent activities,
2) Failure of auditors to issue qualified audit reports of a failed
concern,
3) Endorsement on erroneous profit figure, and
4) Issuing a clean report to general public on a distress concern.

17.  Persistent lateness in submitting required return on account to
regulatory bodies.
 Engagement in the falsification of returns, this serves as a more
discoverable evidence of financial distress.
 Rapid staff turnover and /or frequent changes in top
management.
 Affliction with persistent liquidity problems.
 Inability to meet obligations as at when due.

18.  Frequent changes of auditors who refuse to compromise may
also be a symptom of financial failure.
 Use of political influence.
 Incessant complaint by customers.
 Persistent adverse clearing position.
 Borrowing at desperate rates.
 Persistent contravention of laid down rules.
 Window dressing of financial records
 Persistent overdrawing of current account with CBN, etc.

19. The identified causes of corporate failure could be used to
minimize its incidence. The most effective measure of averting
corporate failure is the institution of a very effective
management. The responsibility of management would be to look
at all areas of operations to see how efficiency could be induced.
Such areas include:
 Staff training and development.
 Enhancement of productivity and business process re-
engineering.
 Effective management of the product and product market.
 Compliance with the provisions of the Companies and Allied
Matters Act (CAMA).

20. However, evidences from the literature and current studies from
advanced economies reveals that there are certain critical factors
that will prevent and minimize the frequent occurrence of
corporate failure from accountant’s angle.
Evidence from report on corporate failure world over criticized
the current framework of auditors work: Enron, Parmalat,
WorldCom, and many giant corporations. In all the failure cases
the auditors were charged with negligence and connivance with
top management. This is influenced by fading away of
professional quality of independence. In as much as Auditors will
compromise there independence, then the affairs of a corporation
will be in jeopardy and is better for investors to revert back to
proprietorship form of business.

21. New Framework ForThe Conduct Of Audit Work
 Forensic Auditing
 Auditor Scepticism
 High quality Audit
 Retrospective Audit Procedure
 Interim period report
 Audit committee

22.  A lot of factors, internal and external, to the firm could be
responsible for corporate failure. Corporate failure exerts
negative impact on both local and international economic
environments. The country has experienced a high incidence
of micro, small and medium business failure which has
exerted disastrous negative impact on the local environment.
 An effective way of averting corporate failure is to consider
the relative influence of management, board of directors,
employees, external auditors, regulatory bodies, government
etc. on the operating performance of a firm and see how they
can contribute positively to maintain a firm as a going
concern.

23.  To stem corporate failure and its debilitating effects on the
economy, proper effort should be made towards establishing
and maintenance of a corporate culture that will rely upon a
leadership equipped and able to establish a culture within the
organization that would be able to recognize risk and take
actions that would lead to prosperity. More importantly, the
proposed new audit framework should be enforced in practice
and the existing audit tenure with a single client be limited to
definite short period of time as oppose to current practice of
indefinite time auditor client relationship.