Earnings management by classification shifting and IPO survival

This study examines how auditors react to clients' engagement in classification shifting which refers to the intentional misallocation of line items within the income statement. We find that classification shifting is positively associated with audit fees, audit report lags, the issuance of a modified audit opinion, and auditor resignations. Additional analyses show that auditors' responses to multiple-year classification shifting are similar to our main findings. We further find that classification shifting is associated with a higher likelihood of financial misstatements in the classification shifting year, and future announcements of financial restatements. We also find that the probability of future restatements is even higher when audit clients engage in both classification shifting and real earnings management. Overall, our results imply that auditors become more cautious in response to audit clients' classification shifting behavior.

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Motivations for Classification Shifting: A Systematic Review

Asian Journal of Finance & Accounting ◽

10.5296/ajfa.v11i1.14242 ◽

2019 ◽

Vol 11 (1) ◽

pp. 29

Author(s):

Nisreen Mohammed Almaleeh

Keyword(s):

Systematic Review ◽

Corporate Governance ◽

Earnings Management ◽

Ownership Structure ◽

Financial Distress ◽

Financial Statements ◽

Special Items ◽

Governance Environment ◽

Classification Shifting ◽

Earnings Benchmarks

The purpose of the current paper is to highlight the motivations that may encourage managements of firms to shift core expenses to special items in order to inflate core or operating earnings i.e. to practice classification shifting, which would have an effect on the decisions of financial statements' users. This was done through conducting a systematic review on the available literature about classification shifting. The most obvious findings to emerge from this study is that management may engage in classification shifting for the reason that it is less costly than other earnings management methods, the firm being in current or potential state of financial distress, the desire of the management of the firm to meet or beat earnings benchmarks, the ownership structure of the firm having some characteristics that encourage management to engage in such a practice, the firm performing in a weak corporate governance environment, or due to the fact that classification shifting is tough to be detected by external monitors compared to other earnings management methods.

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Earnings Management Through Classification Shifting: Evidence in Indonesia, Singapore, and Malaysia

Proceedings of the 5th International Conference on Accounting and Finance (ICAF 2019) ◽

10.2991/icaf-19.2019.21 ◽

2019 ◽

Author(s):

R. Gati Reditya Saputra

Keyword(s):

Earnings Management ◽

Classification Shifting

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Selection of profit management strategy

Linguistics and Culture Review ◽

10.21744/lingcure.v6ns1.2090 ◽

2022 ◽

Vol 6 ◽

Author(s):

Ni Wayan Sukma Kartika Dewi ◽

Ni Made Dwi Ratnadi ◽

I Ketut Yadnyana ◽

I Gusti Ngurah Agung Suaryana

Keyword(s):

Earnings Management ◽

Management Strategy ◽

Stock Exchange ◽

Linear Regression Analysis ◽

Secondary Data ◽

Sampling Technique ◽

Real Earnings Management ◽

Annual Reports ◽

Manufacturing Companies ◽

Classification Shifting

The purpose of this study is to empirically prove the companies in the growth, mature, and stagnant stages use accrual earnings management, real earnings management, and classification shifting. The data used is secondary data obtained from the annual reports of manufacturing companies listed on the Indonesia Stock Exchange in the 2016-2020 period. The data analysis technique used multiple linear regression analysis. The sampling technique used was purposive sampling technique and obtained a sample of 53 manufacturing companies or the same as 265 observational data. Based on the results of the analysis, it was found that the company is in the growth mature and stagnant stage using the accrual earnings management strategy. The growth stage of the company does not use a real earnings management strategy, the mature and stagnant stage, the company uses a real earnings management strategy. Companies in the growth and mature stages do not use the classification shifting strategy.

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Analyst Coverage and Earnings Management Using Classification Shifting

Accounting and Finance Research ◽

10.5430/afr.v7n3p172 ◽

2018 ◽

Vol 7 (3) ◽

pp. 172

Author(s):

Fang Zhao

Keyword(s):

United States ◽

Earnings Management ◽

Financial Analysts ◽

Positive Association ◽

The United States ◽

Real Earnings Management ◽

International Studies ◽

Analyst Coverage ◽

External Monitoring ◽

Classification Shifting

This study examines the association between analyst coverage and classification shifting. Prior studies on external monitoring factors and classification shifting provide mixed results: international studies (Haw, Ho, & Li, 2011; Behn, Gotti, Herrmann, & Kang, 2013) find that external monitoring factors mitigate classification shifting, while Abernathy, Beyer, and Rapley (2014) find that external monitoring factors promote classification shifting when accrual-based earnings management and real earnings management are constrained. Using a sample of firms in the United States, this study finds a positive association between classification shifting and an external monitoring factor: analyst coverage. This result suggests that when higher analyst coverage has stronger monitoring role on earnings management, managers are more likely to use classification shifting. The implication of this study should be of interest to financial analysts.

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