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Audit quality and classification shifting: evidence from UK and Germany

Muhammad Usman (Department of Business, University of Central Lancashire, Preston, UK)
Jacinta Nwachukwu (University of Central Lancashire, Preston, UK)
Ernest Ezeani (Department of Accounting, Economics and Finance, Heriot-Watt University, Edinburgh, Scotland)
Rami Ibrahim A. Salem (Department of Accounting and Finance, University of Central Lancashire, Preston, UK) (University of Gharyan, Gharyan, Libya)
Bilal Bilal (Durham Business School, Durham University, Durham, UK)
Frank Obenpong Kwabi (Faculty of Business and Law, De Montfort University, Leicester, UK)

Journal of Applied Accounting Research

ISSN: 0967-5426

Article publication date: 1 August 2023

Issue publication date: 28 May 2024

383

Abstract

Purpose

The authors examine the impact of audit quality (AQ) on classification shifting (CS) among non-financial firms operating in the UK and Germany.

Design/methodology/approach

This paper used various audit committee variables (size, meetings, gender diversity and financial expertise) to measure AQ and its impact on CS. The authors used a total of 2,110 firm-year observations from 2010 to 2019.

Findings

The authors found that the presence of female members on the audit committee and audit committee financial expertise deter the UK and German managers from shifting core expenses and revenue items into special items to inflate core earnings. However, audit committee size is positively related to CS among German firms but has no impact on UK firms. The authors also document evidence that audit committee meetings restrain UK managers from engaging in CS. However, the authors found no impact on CS among German firms. The study results hold even after employing several tests.

Research limitations/implications

Overall, the study findings provide broad support in an international setting for the board to improve its auditing practices and offer essential information to investors to assess how AQ affects the financial reporting process.

Originality/value

Most CS studies used market-oriented economies such as the USA and UK and ignored bank-based economies such as Germany, France and Japan. The authors provide a comparison among bank and market-oriented economies on whether the AQ has a similar impact on CS or not among them.

Keywords

Citation

Usman, M., Nwachukwu, J., Ezeani, E., Salem, R.I.A., Bilal, B. and Kwabi, F.O. (2024), "Audit quality and classification shifting: evidence from UK and Germany", Journal of Applied Accounting Research, Vol. 25 No. 3, pp. 448-475. https://doi.org/10.1108/JAAR-11-2022-0309

Publisher

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Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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