Preprint Article Version 1 This version is not peer-reviewed

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

Version 1 : Received: 6 November 2018 / Approved: 8 November 2018 / Online: 8 November 2018 (14:45:12 UTC)

How to cite: Muñoz-Izquierdo, N.; Camacho-Miñano, M.; Segovia-Vargas, M.J.; Pascual-Ezama, D. Is the External Audit Report Useful for Bankruptcy Prediction? Evidence Using Artificial Intelligence. Preprints 2018, 2018110220 (doi: 10.20944/preprints201811.0220.v1). Muñoz-Izquierdo, N.; Camacho-Miñano, M.; Segovia-Vargas, M.J.; Pascual-Ezama, D. Is the External Audit Report Useful for Bankruptcy Prediction? Evidence Using Artificial Intelligence. Preprints 2018, 2018110220 (doi: 10.20944/preprints201811.0220.v1).

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 show that a combination of ratios and audit data can provide significant predictive purposes, but a recent paper by Muñoz-Izquierdo et al. (2018) provided an 80% predictive accuracy solely by using the disclosures of audit reports. We complement this study. Applying an artificial intelligence method (the PART algorithm), we examine the predictive ability of more easily extracted information from the report and suggest a practical implication for each user. Simply by (1) finding the audit opinion, (2) identifying if a matter section exist, (3) and the number of comments disclosed, then any user may predict a bankruptcy situation with the same accuracy as if they had scrutinised the whole report. In addition, we also provide an extended literature review about previous studies on the interaction between bankruptcy prediction and the external audit information.

Subject Areas

bankruptcy prediction; audit report; artificial intelligence; PART algorithm

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