Selection of profit management strategy

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.

The effect of financial distress on earning management practices using classification shifting: The moderating effect of good corporate governance

The existence of good corporate governance is expected to minimize the occurrence of earnings management practices when the company is in financial distress condition. This research aims to provide empirical evidence on the influence of financial distress on earnings management practices as well as the existence of good corporate governance projected by the proportion of independent commissioners and the proportion of audit committees in weakening the influence of financial distress on earnings management practices. The population of this study is property, real estate, and building construction sector companies listed on the Indonesia Stock Exchange for the period 2015-2019. Sampling techniques used are purposive sampling techniques and obtained samples as many as 185 samples. The earnings management tool used in this study was classification shifting. The data analysis techniques in this study used Eviews 10. The results of the analysis provide evidence that financial distress affects earnings management practices, while the proportion of independent commissioners is unable to moderate, and the audit committee strengthens the influence of financial distress on earnings management practices.

Debt financing and classification shifting of private firms

Purpose This study aims to examine whether debt financing creates incentives for private firms to engage in earnings management via classification shifting. Especially, the authors examine whether debt-induced financial reporting incentives differ depending on the type of debt (i.e. public bonds versus private loans) and whether such incentives are influenced by the characteristics of external auditors (i.e. initial audits and auditor size). Design/methodology/approach The study uses data on 93,427 Korean private firms from 2001 to 2016. Classification shifting is measured by the positive correlation between non-core expenses and unexpected core earnings estimated with ordinary least squares. Findings The empirical analyses reveal that private firms engage in classification shifting as do public firms. Importantly, classification shifting is observed only in private firms that have outstanding debt, but not in private firms without debt. Among debt-financing private firms, classification shifting is more prevalent for firms that issue public debt than for firms that only use private debt. In addition, classification shifting of debt-financing private firms is more successful when they are audited by new auditors that are one of the non-Big 4 firms. Research limitations/implications The study provides evidence of classification shifting in private firms, which is novel to the literature. However, the inferences in the study depend on the validity of the model for detecting classification shifting. Practical implications This study helps lenders enhance their understanding on the financial reporting behaviors of borrowing firms. The results in this study suggest that lenders should be cautious in using core earnings for their investment decisions. Originality/value This study contributes to the literature by providing novel evidence of classification shifting in private firms. In addition, the authors contribute to the literature on debt-induced incentives for financial reporting.

Auditors' Responses to Classification Shifting: Evidence from U.S. Firms

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.