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A comparison of nearest neighbours, discriminant and logit models for auditing decisions

Chrysovalantis Gaganis (), Fotios Pasiouras, Charalambos Spathis () and Constantin Zopounidis

Intelligent Systems in Accounting, Finance and Management, 2007, vol. 15, issue 1‐2, 23-40

Abstract: This study investigates the efficiency of k‐nearest neighbours (k‐NN) in developing models for estimating auditors' opinions, as opposed to models developed with discriminant and logit analyses. The sample consists of 5276 financial statements, out of which 980 received a qualified audit opinion, obtained from 1455 private and public UK companies operating in the manufacturing and trade sectors. We develop two industry‐specific models and a general one using data from the period 1998–2001, which are then tested over the period 2002–2003. In each case, two versions of the models are developed. The first includes only financial variables. The second includes both financial and non‐financial variables. The results indicate that the inclusion of credit rating in the models results in a considerable increase both in terms of goodness of fit and classification accuracies. The comparison of the methods reveals that the k‐NN models can be more efficient, in terms of average classification accuracy, than the discriminant and logit models. Finally, the results are mixed concerning the development of industry‐specific models, as opposed to general models. Copyright © 2007 John Wiley & Sons, Ltd.

Date: 2007
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