Core earnings management: How do audit firms interact with classification shifting and accruals management?

2021 ◽  
Vol 25 (1) ◽  
pp. 142-165
Author(s):  
Aasmund Eilifsen ◽  
Kjell Henry Knivsflå
Keyword(s):  
Earnings Management ◽  
Accruals Management ◽  
Audit Firms ◽  
Classification Shifting ◽  
Core Earnings

Earnings management using revenue classification shifting – evidence from the IFRS adoption period

2017 ◽  
Vol 25 (3) ◽  
pp. 333-355 ◽  
Author(s):  
Minyoung Noh ◽  
Doocheol Moon ◽  
Laura Parte
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Securities And Exchange Commission ◽  
Unintended Consequences ◽  
Content Type ◽  
Publicly Traded Companies ◽  
Ifrs Adoption ◽  
Classification Shifting ◽  
Core Earnings ◽  
Earnings Targets

Purpose This paper aims to provide evidence of an unintended observable consequence of International Financial Reporting Standards (IFRS) adoption by examining opportunistic use of earnings management through revenue as well as expense items classification shifting in the year of transition. Design/methodology/approach To document classification shifting, the authors take advantage of the Korean mandatory IFRS adoption in 2011, when broad discretion was given to publicly traded companies’ managers to present operating profits. Findings It is found that companies strategically use both revenues and expenses to manage core earnings at the time of transition by shifting other income as a common tactic to improve their operating performance and special expenses just to meet or beat earnings targets. Originality/value Given the concerns of the Securities and Exchange Commission (SEC) about classification shifting behavior and the debate over whether the SEC should mandate the use of IFRS for US companies, the findings of this study are timely and contribute to authors’ understanding of the unintended consequences of mandatory IFRS adoption.

Earnings Management Using Discontinued Operations

2010 ◽  
Vol 85 (5) ◽  
pp. 1485-1509 ◽  
Author(s):  
Abhijit Barua ◽  
Steve Lin ◽  
Andrew M. Sbaraglia
Keyword(s):  
Earnings Management ◽  
Classification Shifting ◽  
Core Earnings ◽  
Reporting Frequency ◽  
Discontinued Operations

ABSTRACT: This study investigates whether managers use classification shifting to manage earnings when reporting discontinued operations. Using a methodology similar to McVay (2006), we find evidence consistent with the hypothesis that firms shift operating expenses to income-decreasing discontinued operations to increase core earnings. Our findings also indicate that managers use classification shifting to meet or beat analysts’ forecasts. Finally, we find that, since the introduction of SFAS No. 144, the reporting frequency of discontinued operations has increased; however, the magnitude of classification shifting has decreased. We provide potential explanations for this finding.

UKURAN KANTOR AKUNTAN PUBLIK, DISCRETIONARY ACCRUALS DAN OPINI AUDIT GOING CONCERN

2019 ◽  
Vol 15 (1) ◽  
pp. 11
Author(s):  
Ravaela Amba Masiku ◽  
Christine Novita Dewi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Stock Exchange ◽  
Discretionary Accruals ◽  
Audit Firm ◽  
Going Concern ◽  
Discretionary Accrual ◽  
Audit Firms ◽  
Going Concern Opinion ◽  
Positive Effect

The purpose of this study is to examine auditor’s concervatism in term of their reaction to client’s earnings management behavior and their limitations to issue the going concern opinions (GCO). The population of this study consists of 672 observations from 69 companies are listed on the Indonesia Stock Exchange (BEI) during 2012-2017. The author used the modified Jones model to measure discretionary accruals as a proxy of earnings management. The results of this study indicate that size of audit firm has a positive effect to discretionary accrual. Companies that have been audited by the Big4 tend to apply discretionary accrual in their financial reporting than companies audited by Non-Big4. Further, to strenghten the first hypothesis, we examine the effect of discretionary accruals and going concern opinion on companies that audited by audit firms Big4 lower than companies that audited by audit firms Non-Big4. We found that the result is consistent with the first hypothesis. Keywords : auditor reputation, discretionary accruals, going concern opinion, audit firm  ABSTRAK Tujuan dari penelitian ini adalah untuk menguji konservatisme auditor dalam hal reaksi auditor terhadap akrual diskresioner yang dilakukan oleh perusahaan dan keterbatasan auditor untuk menerbitkan opini Going Concern (GC). Populasi penelitian terdiri dari 672 pengamatan dari 69 perusahaan yang terdaftar di Bursa Efek Indonesia (BEI) selama tahun 2012-2017. Penulis menggunakan model modifikasi Jones untuk mengukur akrual diskresioner sebagai proksi manajemen laba. Hasil dari penelitian ini menjelaskan bahwa ukuran kantor akuntan publik berpengaruh positif terhadap akrual diskresioner, hal tersebut diperkuat dengan pengaruh akrual diskresioner dan opini audit going concern yang diaudit oleh kantor akuntan publik Big4 lebih rendah dari perusahaan yang tidak diaudit oleh kantor akuntan publik Non-Big4. Kata kunci : reputasi auditor, akrual diskresioner, opini audit going concern, kantor akuntan publik

Real Earnings Management: Do the Experience and Gender of Big4 Auditors Matters?

2021 ◽  
Vol 6 (3) ◽  
pp. 155-166
Author(s):  
Abdul Halim Chew Abdullah ◽  
Norman Mohd Saleh
Keyword(s):  
Quality Control ◽  
Earnings Management ◽  
Business Environment ◽  
Individual Characteristics ◽  
Moral Judgments ◽  
Real Earnings Management ◽  
Audit Firms ◽  
Prior Literature ◽  
And Gender ◽  
Stringent Quality

Objective - This study examines whether the experience and gender of auditors in Big4 firm in relationship of deterring Real Earnings Management (REM).Different from the majority of previous studies, this study focuses on auditors in Big4 audit firms and real earnings management within Malaysian business environment. Big4 audit firms are associated with high quality audit because of the reputation to uphold, thus adopted stringent quality control and assurance approach, systems and procedures. Once adopted, the effect of individual characteristics may become less important. Thus, it is questionable whether individual characteristics such as auditor experience and gender could still have an influence on the outcomes of an audit, in this case, REM, when the audit firms are Big 4 (assuming very stringent quality control procedures are adopted). Methodology/Technique –This study substantiates prior literature and conducted tests only on companies audited by Big4 audit firms. We also find that auditor experiences confirms to Agency Theory where REM reduces when the experience increases. Data was obtained from the Companies Commission of Malaysia (SSM), DataStream and Bursa Malaysia. Findings - The result confirms prior literature that auditor experience is still an important factor that can limit REM, even in companies audited by the Big4 firms. The results however reveal that Big4 female auditors do not have any significant effect in reducing REM. Novelty -Although female auditors are claimed by Gender Socialization Theory, to have better moral judgments than male auditors, the result shows both genders are equal, at least in limiting REM. Type of Paper: Empirical. JEL Classification: M40; M41; M42 Keywords: Big4 Auditors; Auditor Experience; Real Earnings Management; Auditor Gender; Bursa Malaysia

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

2021 ◽  
Author(s):  
Mai Dao ◽  
Hongkang Xu ◽  
Trung Pham
Keyword(s):  
Earnings Management ◽  
Audit Fees ◽  
Real Earnings Management ◽  
Audit Report ◽  
Audit Opinion ◽  
Income Statement ◽  
Financial Restatements ◽  
Classification Shifting ◽  
Financial Misstatements

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.

Fixing the Core, Earnings Management, and Sustainable Emergence From Financial Distress: Evidence From China’s Special Treatment System

2021 ◽  
pp. 0148558X2110511
Author(s):  
Jiao Jing ◽  
Kenneth Leung ◽  
Jeffrey Ng ◽  
Janus Jian Zhang
Keyword(s):  
Earnings Management ◽  
Financial Distress ◽  
Operating Efficiency ◽  
Special Treatment ◽  
Multiple Stakeholders ◽  
Listed Firms ◽  
The Core ◽  
Distressed Firms ◽  
Core Earnings

Throughout their business life cycle, firms may experience financial distress. Successful emergence from such distress is important to their multiple stakeholders. Using a sample of publicly listed firms in China that emerged from Special Treatment (an indicator of delisting risk), we focus on the key actions such firms take prior to emergence, namely, fixing the core of the business and earnings management. We examine how these actions are associated with sustainable emergence, which we define as emergence from Special Treatment without reentry in the next 5 years. Consistent with the expectation that shortcut fixes to problems do not yield a long-term solution, we find that repairing the core of the business by improving operating efficiency is positively associated with sustainable emergence, whereas earnings management is negatively associated with it. We also find that the positive (negative) association between fixing the core (earnings management) and sustainable emergence is pronounced only for state-owned enterprises. Our article adds to the limited literature that examines issues related to distressed firms’ sustainable turnaround.

scholarly journals RELATIONSHIP BETWEEN AUDITORS' FEES AND EARNINGS MANAGEMENT

2017 ◽  
Vol 57 (2) ◽  
pp. 148-157 ◽  
Author(s):  
ANTONIO LOPO MARTINEZ ◽  
ARQUIMEDES DE JESUS MORAES
Keyword(s):  
Earnings Management ◽  
Research Question ◽  
Audit Fees ◽  
Perception Of Risk ◽  
Audit Firms ◽  
Using Data ◽  
The Relationship

ABSTRACT This study investigates the relationship between audit fees and earnings management in the Brazilian market. In response to the research question, we used a sample of 300 firms listed on the BM&FBovespa for which it was possible to identify the amount paid to the auditors, using data gathered from the Economatica® database and the website of the Brazilian Securities Commission (Comissão Brasileira de Valores Mobiliários [CVM]). We analyzed the regressions with the aim of supporting or refuting the hypothesis that audit firms that charge less for their service tend to be more relaxed regarding earnings management by their client companies. The results support this hypothesis. The main contribution of this study is the possibility of stating that more aggressive earnings management occurs predominantly among firms that pay less than expected for audit services. This study evidences the perception of risk by audit firms and how this is reflected in the audit fees charged.

Motivations for Classification Shifting: A Systematic Review

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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