By including credit scoring techniques in their credit risk assessments, both auditors and credit rating agencies can substantially improve the accuracy profile of their failure predictions. Indeed, following the Model that European Rating House uses for its credit risk assessments, can increase the overall accuracy to more than 75% - even as high as 97%.
One judges the accuracy of failure prediction by looking at the reliability of its warning toward business failure in the following year. Advantages of more accurate warnings can be significant to issuers, investors, and society at large.
Would you entrust your child with the following group of doctors? 7149 patients with complaints were examined by a group of doctors. Of these patients, 1571 (22%) received a prognosis predicting they would die within one year. Virtually 99% of the predictions were inaccurate: a year later only 69 patients had actually died, and of those patients only 71% had not been predicted to die.
The research results shown above have been presented by Prof. Breesch (VUB University, Brussels) and Dr. Hardies (University of Antwerp) during the EAA Annual Congress 2014 in Tallinn. Their research, however, did not regard death-prediction of sick patients, but focused on failure-prediction of auditors regarding financially distressed companies.