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The main purposes of this paper are to provide evidence about corporate failure diagnosis in SMEs, identify the predictor variables that enhance the accuracy of the corporate failure diagnosis models, and perform comparative analysis of the proposed models with the existing literature. The paper supports the proposition that the majority of the proposed corporate failure diagnosis models in the literature exhibit an endogenous drawback since their construction is based on large entities or listed corporations' samples.

The present study employs multiple discriminant analysis, logit analysis, and probit analysis to construct corporate failure diagnosis models based on SMEs longitudinal data from Greece.

The paper provides evidence that the contribution of human capital is immensely more important to the viability of SMEs than to the viability of large corporations. Moreover, this study identifies interactions among seemingly insignificant variables that exhibit incremental information content and attribute massive discriminant power to the proposed corporate failure diagnosis models.

The results of this study encourage regulatory authorities to adopt enhancements to the Basel II framework and financial institutions as regards to constructing their corporate failure diagnosis models. The models is based upon internal default experience and mapping to external data incorporating both quantitative and qualitative variables.

The contribution of this paper is the proposition of new value-relevant variables that enhance the accuracy of existing corporate failure diagnosis models for SMEs.

The purpose of this paper is to contribute to the debate on the current economic crisis and to highlight the importance of the counter‐party credit risk, which was surprisingly neglected by the Basel Committee on Banking Supervision in its proposed enhancements to the Basel II framework. The paper supports the proposition that there is an incentive for synergy between bank management, corporate management and auditors as long as all these parties' remuneration schemes are based on the same principles.

In this paper an advanced IRB corporate credit‐rating system is constructed in accordance with the Basel II framework and the current literature. The impact of common creative accounting and banking practices on the manipulation of that system is explored.

The paper shows how creative accounting and banking practices can be used in manipulating an advanced IRB corporate credit‐rating system, and thus presenting a high‐risk corporation as a highly attractive (low‐risk) bank customer.

The regulatory authorities should take into consideration the inability of rating agencies to ascertain the risk associated with the US sub‐prime mortgage market and the decline of auditors' independence.

The contribution of the paper is the propositions made to the Basel Committee on Banking Supervision in order to enhance the Basel II framework, and avoid repetition of the current economic crisis in the future.