Financial reporting frameworks and distress prediction models in SME auditing: Evidence from the Visegrad Four countries

Abstract

Although financial reporting and auditing standards are substantially harmonized across the European Union, important differences remain in national accounting regulations, audit thresholds, and the practical application of the going concern principle. These differences are particularly relevant for small and medium-sized enterprises (SMEs), which constitute the dominant segment of the Visegrad Four (V4) economies. This paper examines differences in financial reporting and auditing frameworks among the Czech Republic, Hungary, Poland, and Slovakia and develops sector-specific distress prediction models to support going-concern assessments in SME auditing. The empirical analysis is based on financial statement data for 66,988 active firms obtained from the Orbis database. After data cleaning and consistency checks, a modelling sample of approximately 41,000 SMEs was constructed. Financial distress is defined as a persistent inability to cover interest obligations, represented by two consecutive years in which earnings before interest and taxes (EBIT) are lower than interest expenses. Distress status is modelled using financial ratios, firm-size indicators, industry characteristics, and selected variables inspired by ISA 570. Separate binomial logistic regression models are estimated for country–industry groups derived from NACE classifications and evaluated using hold-out samples. The results confirm that country-and sector-specific models achieve satisfactory predictive performance and provide useful support for assessing going-concern risks. The results also show that the most informative predictors differ across countries and industries, reflecting differences in regulatory environments and economic structures. The study highlights the importance of local calibration when developing distress prediction models and demonstrates that a universal approach may lead to reduced predictive accuracy. The proposed models provide a practical screening tool for auditors, lenders, and SME managers, complementing professional judgement and broader audit procedures. © Michal Karas, Błażej Prusak, Eva Gulyas, Miloš Tumpach, Jiri Lunacek, 2026.