Financial Risk Analysis Model in the Context of the Romanian Accounting System

• Author: Delia Mihaela Ib?ni?teanu (Ionasz)
• Position: PhD in progress, University 'Valahia' Targoviste, Romania
• Pages: 429-440

ISSN: 2067 – 9211 The Youth of Today - The Generation of the Global Development

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Financial Risk Analysis Model in the Context of the

Romanian Accounting System

Delia Mihaela Ibănişteanu (Ionasz)1

Abstract: Accounting plays an important role in the risk management process. Based on the information

provided by it, potential risks can be identified and the company’s exposure to specific risks can be measured.

The information provided by the accounting is influenced by the accounting model adopted and the way in

which it is presented varies. The Professional Management Accountants’ Corps (CIMA) in London

underlines the significant implications of accountants in the risk management process and internal control

system of their organisations, professional knowledge adding value to processes (Collier, Berry & Bu rke,

2007, p. 5). The objective of this study is to create a credit risk assessment model using a number of useful

financial rates in the company’s creditworthiness prediction. This will be achieved through a quantitative

model designed using real data from companies in op eration or bankruptcy and statistical methods specific to

the modelling oAf this type of risk. The aim o f the research is to provide relevant scientific conclusions

leading to an understanding of the relationship between the Romanian accounting model and the assessment

of financial risk, how they influence each other, and the importance of knowledge link.

Keywords: financial risk; accounting model; risk management; scoring; logit model

JEL Classification: M41; G32

1. Introduction

Currently there are several approaches to financial risk shaping. As commercial banks generally lend

to private firms and they are best suited to the scoring rating model, the study aims to create such a

model. Although scoring also has some drawbacks, it is still one of the most widely used

methodologies used to assess the risk profile of private firms. Three main variables affect the credit

risk: the probability of bankruptcy (noted in the PD literature), default loss (LGD), bankruptcy

recovery rate (RR) and bankruptcy risk exposure (EAD). The main attention was paid to the first

factor assessment (Altman, Resti & Sironi, 2004, p. 183).

The first category of credit risk models were those based on the methodology developed by Merton in

1974, where the bankruptcy process was considered to be driven by the value of the company’s assets.

Merton’s basic intuition was relatively simple: the company went bankrupt when its assets (the

company’s market value) were lower than its debts. The first structured models are outlined by

researchers Black and Cox (1976), Geske (1977) and Vasicek (1984) (Fernandes, 2005, p. 2 ) and they

seek an improvement in Merton’s model by eliminating unrealistic assumptions. With these models

new approaches and concepts are introduced, such as a more complex capital structure, interest

1 PhD in progress, University “Valahia” Targoviste, Romania, Address: Blvd. Regele Carol I 2, Targoviste 130024, Romania,

Tel.:0245 206 101, Corresponding author: delia.ionasz@yahoo.com.