AUDIT-FIRM GROUP APPOINTMENT: AN ARTIFICIAL INTELLIGENCE APPROACH EFSTATHIOS KIRKOS, a CHARALAMBOS SPATHIS b *AND YANNIS MANOLOPOULOS c a Department of Accounting, Technological Educational Institution of Thessaloniki, PO Box 141, 57400, Thessaloniki, Greece b Division of Business Administration, Department of Economics, Aristotle University of Thessaloniki, 54124, Thessaloniki, Greece c Department of Informatics, Aristotle University of Thessaloniki, 54124, Thessaloniki, Greece SUMMARY Auditor appointment can be regarded as a matter of pursued audit quality and is driven by several factors. The adoption of an effective auditor procurement process increases the likelihood that a company will engage the right auditor at a fair price. In this study, three techniques derived from artificial intelligence (AI) are used to propose models capable of discriminating between cases where companies appoint a Big 4 or a Non-Big 4 auditor. These three AI methods are then compared with the broadly used method of logistic regression. The results indicate that two of the AI techniques outperform logistic regression. In addition, one method further improves its performance by applying bagging. Finally, significant factors associated with auditor appointment are revealed. Copyright © 2009 John Wiley & Sons, Ltd. Keywords: auditor appointment; artificial intelligence; audit quality; data mining 1. INTRODUCTION Today’s economy is facing several unsettling phenomena. The collapse of major corporations like Enron, WorldCom and Tyco, the increasing number of management fraud cases (Kirkos et al., 2007a) and the recent financial crisis have led to the losses of billions of dollars. Such phenomena call for improved controlling mechanisms. Governments are currently attempting to address the situation by establishing rules and regulations, such as the Sarbanes Oxley Act in the USA and the 8th Directive in the EU. One of the main controlling mechanisms is auditing. The primary objective of auditing is to ensure the proper disclosure of a company’s financial status and, thus, to reduce the asymmetry of the infor- mation flow among managers, shareholders and creditors. Auditing can have a variety of beneficial effects. According to agency theory, the separation of ownership and control in modern corporations creates incentives for managers, who are not owners, to act in their own interests at the expense of stakeholders and creditors (Kane and Velury, 2004). Auditing can prevent management’s malfeasance, by adding credibility to statutory financial reporting, thus reducing the risk of misinformation and, consequently, investment risk. In this sense, reliable auditing can drive share prices higher and reduce the cost of capital (Houghton and Jubb, 2003). Auditing may also lead to an improvement in the Copyright © 2009 John Wiley & Sons, Ltd. * Correspondence to: Charalambos Spathis, Division of Business Administration, Department of Economics, Aristotle Univer- sity of Thessaloniki, 54124, Thessaloniki, Greece. E-mail: hspathis@econ.auth.gr INTELLIGENT SYSTEMS IN ACCOUNTING, FINANCE AND MANAGEMENT Intell. Sys. Acc. Fin. Mgmt. 17, 1–17 (2010) Published online 17 December 2009 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/isaf.310