Using Altman's Z-Score to assess the appropiateness of management's use of the going assumption in the preparation of financial statements

Abstract

Auditors are responsible for assessing management’s use of the going concern assumption in the financial statements. According to research done in other countries, the Z-Score is a statistical tool that has been proven to aid auditors' going concern decisions. The objective of this paper is to ascertain whether Altman’s Z-Score can aid South African auditors to more accurately assess the appropriateness of management’s use of the going concern assumption in the preparation of financial statements, by applying two corporate failure prediction models developed by Altman to South Africa listed companies. The study compares the predictive accuracy of the two models against each other and against auditors’ actual going concern decisions. The results indicate that the Z-Score is quite accurate in predicting failure for companies that eventually fail.