The purpose of the study is to develop a logistic model based on financial statement information to identify qualified audit reports. The empirical data are retrieved from audit reports from thirty-seven publicly-traded companies (HeSE) in the years 1992, 1993 and 1994. Thus, there are in all 111 audit reports of which only eight are qualified in the way of including remarks or supplementary information. These eight qualifications concerned three companies during the period of study. The qualification decision (0/1) is explained by sixteen financial ratios and by the audit lag. Univariate analysis showed that the qualification of an audit report is mainly associated with low profitability, high indebtedness and low (negative) growth. The multivariate logistic model showed that the likelihood of receiving a qualification is larger, the lower the growth of the firm, the lower the share of equity in balance sheet and the smaller the number of employees. The total error rate of the model in Lachenbruch validation was only 5.4%. When two qualified reports containing remarks on an additional and a separate auditor were considered as non-qualified, the corresponding total error rate for a re-estimated logistic model was as low as 1.8%. This model also included the audit lag as an explanatory variable. The results of the study indicate that an efficient model to explain qualifications in the audit reports of Finnish publicly-traded companies can be found.

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This paper first briefly discusses six alternative methods that have been applied to financial failure prediction: linear discriminant analysis, logit analysis, recursive partitioning, survival analysis, neural networks and the human information processing approach. The main objective was to study empirically whether the results stemming from the use of alternative methods differ from each other. This was conducted using the Finnish data one, two and three years prior to failure in empirical analysis. The results indicated that there was a statistically significant difference in prediction accuracy only between logistic analysis and survival analysis one year prior to failure. Two and three years prior to failure statistically significant differences were not found. The results indicate, with the three variables employed in this study, that no superior method has been found. Even one of the latest applications, neural networks, is in its present form only as effective as discriminant analysis was as early as thirty years ago.

Purpose – The purpose of this study is to find the effect of transformational leadership in profitability in different contexts. Design/methodology/approach – Data are gathered of 200 Finnish firms. Profitability is measured by profitability ratios one to two years after the survey to take account of lagged effects. The sample is split into sub-samples with respect to four context variables indicated by prior research to be important for transformational leadership: size, competition, perceived environmental uncertainty (PEU) and research and development (R & D) effort. The effect of leadership dimensions on lagged profitability was assessed by partial least squares analysis. Findings – Factor analysis gave a five-factor solution for transformational leadership variables indicating dimensions as: challenging, enabling, visioning, rewarding and contesting. Results did show that transformational leadership has a weak general effect on profitability. Results also offer some support for hypotheses for the strong effects of transformational leadership in different contexts. Enabling has an effect in low competition context; rewarding has an effect in low PEU, low competition and high R & D contexts; and contesting has an effect in large companies and in high PEU context. Research limitations/implications – The commonly used Bass’ measurement of transformational leadership was not used here; instead, Kouzes and Posners’ modified version was in use. Factor analysis of this version resulted to the three factors only in a few loadings, even if high. Practical implications – The importance of rewarding behavior of leaders is even stronger than previously thought. Thus, managers should concentrate more on the positive feedback of followers. Originality/value – This paper fulfills a gap of research on leadership and profitability and also stresses the importance of situational variables which may affect the usefulness of different leadership styles.

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