Effect of Accounting Red Flags on Corporate Failure of Listed Manufacturing Companies in Nigeria

From a global perspective, accounting red flags play a pivotal role in preventing corporate failure by highlighting areas of financial risk that could threaten business sustainability. The paper examines the impact of accounting red flags on corporate failure in listed manufacturing firms in Nigeria with a focus on liquidity and debt capital red flags. The Z-Score used is Altman Z-Score which is the propensity of corporate failure and the salient predictors of corporate failure are aimed to be identified. The quantitative methodology was taken and it involved analysis of financial statements of a sample of 516 listed manufacturing companies. Strong linear regression methods were used to deal with heteroscedasticity and the models were stratified based on Altman Z-Score to the distress, grey, and safe regions so that strong models were used. The main results reveal that liquidity red flags have a considerable impact only on the distress area, but it has a negative impact on the safe area, hence, suggesting efficient management in less volatile companies. A red flag of debt capital reveals the importance of effective management of debt capital as the negative impact is high, and it is important to avoid the risk of failure. One of the key recommendations is that companies need to focus on the improvement of profitability rates and sound management of debt to enhance financial stability. Besides, quality auditing and strong liquidity control is unavoidable, especially to companies that are already distressed. These findings provide useful information to managers, investors, and policymakers who aim to alleviate risks of corporate failure within the Nigerian manufacturing industry.