In a recent manuscript, Brajcich and Friesner (2022) proposed a new methodology to assess financial comparability in not-for-profit organizations. Their approach utilizes entropy-based information theory, and thus requires few prior assumptions about the formation and implications of financial statement comparability. This manuscript assesses the practical utility of the Brajcich and Friesner (2022) methodology by comparing its results to those generated by nonhierarchical cluster analysis. The analysis was conducted using balance sheets drawn from Washington State critical access hospitals in 2019, using a similar set of hospitals and an identical set of variables outlined in Brajcich and Friesner (2022). We find that our entropy-based results closely mimic those from Brajcich and Friesner (2022), suggesting that the method produces internally consistent results. Additionally, non-hierarchical cluster analysis and the entropy-based methodology produce consistent results, but only when a sufficient number of peer groups is assumed in the non-hierarchical cluster analysis.
Friesner, D., and A. Brajcich. 2022. Validating Financial Statement Comparability Assessment in Non-Profit Firms. The North American Accounting Studies 5 (1): 1-17.