A Comparison of Nearest Neighbours, Discriminant and Logit Models for Auditing Decisions

Intelligent Systems in Accounting, Finance and Management, Vol. 15, pp. 23-40, 2007

Posted: 21 May 2007

See all articles by Chrysovalantis Gaganis

Chrysovalantis Gaganis

University of Crete - Faculty of Social Sciences - Department of Economics

Fotios Pasiouras

GSCM-Montpellier Business School

Charalambos Spathis

Aristotle University of Thessaloniki - Department of Economics

C. Zopounidis

Technical University of Crete (TUC) - Department of Production Engineering and Management

Abstract

This study investigates the efficiency of k-Nearest Neighbours (k-NN) in developing models for estimating auditors' opinion, as opposed to models developed with discriminant and logit analyses. The sample consists of 5,276 financial statements, out of which 980 received a qualified audit opinion, obtained from 1,455 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 as it concerns the development of industry-specific models as opposed to general ones.

Keywords: auditing, classification, nearest neighbours, discriminant, logit

JEL Classification: M41, M49, C63

Suggested Citation

Gaganis, Chrysovalantis and Pasiouras, Fotios and Spathis, Charalambos and Zopounidis, Constantin, A Comparison of Nearest Neighbours, Discriminant and Logit Models for Auditing Decisions. Intelligent Systems in Accounting, Finance and Management, Vol. 15, pp. 23-40, 2007, Available at SSRN: https://ssrn.com/abstract=987650

Chrysovalantis Gaganis

University of Crete - Faculty of Social Sciences - Department of Economics ( email )

University Campus
Rethymno, Crete, 74100
Greece

HOME PAGE: http://economics.soc.uoc.gr/en/staff/4551/17

Fotios Pasiouras

GSCM-Montpellier Business School ( email )

2300, Avenue des Moulins
Montpellier, 34185
France

Charalambos Spathis

Aristotle University of Thessaloniki - Department of Economics ( email )

Division of Business Administration
Thessaloniki
Greece
+30 2310 996465, 996688 (Phone)
+30 2310 996452 (Fax)

Constantin Zopounidis (Contact Author)

Technical University of Crete (TUC) - Department of Production Engineering and Management ( email )

University Campus
Chania
Crete, 73100
Greece
+30 28210 37236 (Phone)
+30 28210 69410, 37236 (Fax)

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