Is the External Audit Report Useful for Bankruptcy Prediction? Evidence Using Artificial Intelligence

Nora Muñoz-Izquierdo, María-del-Mar Camacho-Miñano, María-Jesús Segovia-Vargas and David Pascual-Ezama
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Nora Muñoz-Izquierdo: CUNEF—Colegio Universitario de Estudios Financieros, Leonardo Prieto Castro, 2, Ciudad Universitaria, 28040 Madrid, Spain
María-del-Mar Camacho-Miñano: Facultad de Ciencias Económicas y Empresariales, Complutense University of Madrid, Campus de Somosaguas, Pozuelo de Alarcón, 28223 Madrid, Spain
María-Jesús Segovia-Vargas: Facultad de Ciencias Económicas y Empresariales, Complutense University of Madrid, Campus de Somosaguas, Pozuelo de Alarcón, 28223 Madrid, Spain
David Pascual-Ezama: Facultad de Ciencias Económicas y Empresariales, Complutense University of Madrid, Campus de Somosaguas, Pozuelo de Alarcón, 28223 Madrid, Spain

IJFS, 2019, vol. 7, issue 2, 1-23

Abstract: Despite the number of studies on bankruptcy prediction using financial ratios, very little is known about how external audit information can contribute to anticipating financial distress. A handful of papers have shown that a combination of ratios and audit data is significant for predictive purposes, but only one recent paper provided a predictive accuracy of 80% solely by using the disclosures contained in audit reports. This study was complemented by simplifying the analysis of audit reports for prediction purposes and the same predictive accuracy was achieved. By applying three artificial intelligence techniques (PART algorithm, random forest, and support vector machine), the predictive ability of more easily extracted information from the report was examined and a practical implication suggested for each user. Simply by (1) finding the audit opinion, (2) identifying if a matter section exists, and (3) the number of comments disclosed, any user may predict a bankruptcy situation with the same accuracy as if they had scrutinized the whole report. In addition, an extended literature review is included, on previous studies on the interaction between bankruptcy prediction and the external audit information.

Keywords: bankruptcy prediction; audit report; artificial intelligence; PART algorithm (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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