The OK-Score continues to prove a consistently accurate predictor of corporate failure and distress

The OK-Score Institutes in Antwerp and Rotterdam have now published

the fifth empirical accuracy assessment of the OK-Score Model

The portfolio consisted end 2017 of 2,930 credit scores dating from the years 2000-2017, containing 75 cases of Business Failure. The OK-Score Model has issued a warning on 74 occasions with its OK-Class 10 and on 1 occasion with an OK-Class 9.

There was only one false warning on Wolters Kluwer in 2009 (Type-1 error 0.035%).  The report (LINK) identifies every one of the 75 business failures: name, year and type of failure.

Business Failure is the phase in which a company is forced to take drastic measures: asset stripping, turnaround, forced recapitalization or forced sale, while Chapter 11 and bankruptcy cannot be excluded. The OK-Score Model warns one to three years in advance.

Accuracy assessment started in 2013 by external compliance.. The portfolio then consisted of some 2,000 credit scores. After the first assessment report came out in September 2013, the portfolio has grown by almost 1000 credit scores until 2930 at the end of 2017. The error-levels have remained extremely low: 1.33% down from 1,43%.

The official gatekeepers (credit rating agencies and accountants) have extreme difficulties in getting their predictions right:

  • Credit rating agencies don’t warn for two-thirds of the defaults, while three out of every four warnings they issue is false. ‘Default’ is a narrow section of the Business Failure spectrum, and credit rating agencies are supposed to warn 0-12 months in advance. This is almost an impossible job.
  • Accountants fail to provide investors with reliable warnings for going concern issues. When going concern issues arise, it appears that the accountants had not warned in more than half of the cases. Their false-warning level even exceeds 80%. ‘Going concern’ is a difficult concept, and reports must be issued 0-12 months in advance. This is an extremely tough job.

The conclusion must be that investors should rely on the OK-Score Model rather than on the mandatory reports from credit rating agencies and accountants.