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Auditors tend to focus more on income-increasing items compared to income-decreasing items because they are trained to be conservative and also because the risk of litigation is significantly higher for failing to detect material income-increasing items compared to material income-decreasing items. Auditors’ consideration of transaction-level items is also affected by their evaluation of company-level information. Therefore, this study aims to examine how the interaction between company-level information and sign of the material items affects auditors’ evaluation of income-increasing and income-decreasing items.

A three-treatment between-subjects experiment was conducted to investigate the research questions.

The results indicate that in the absence of company-level information, auditors intuitively associate a higher risk and audit effort to income-increasing items. When the company-level information indicates that management is under pressure to inflate earnings, auditors’ conservatism associated with income-increasing items gets amplified. This leads to an increase in the difference in assessed risk and audit effort between income-increasing and income-decreasing items. However, when the company-level information indicates that management is not under pressure to inflate earnings, there are no significant differences in assessed risk and audit effort between income-increasing and income-decreasing items. These results indicate that auditor conservatism is affected by company-level information.

The findings indicate how an analysis of company-level information (as prescribed by auditing standards) and inherent auditor conservatism could potentially affect audit procedures and have important implications for the audit profession.

The purpose of this paper is to examine the relationship between corporate governance and earnings management in US context and provide further insights on the effects of board of directors' characteristics on earnings management.

The paper uses a sample of three groups of US firms; where firms with relatively high negative, firms with relatively high positive, and those with low levels of discretionary accruals in the year 2004 are examined. Descriptive statistics, univariate analysis, multivariate analysis, board of directors' characteristics, and possible relationships between corporate governance variables and earnings management proxy provide the basis for discussion.

Firms with annually elected boards, small size boards, 100 percent independent nominating committees, and 100 percent independent compensation committees have more negative discretionary accruals. However, firms with 75‐90 percent independent board or firms with a board size of between nine and 12 have higher positive discretionary accruals.

Certain board characteristics may be the important factors associated with constraining the propensity of managers to engage in earnings management.

Results are limited by the accuracy of the models applied to isolate discretionary accruals. Additionally, the direction diverse of discretionary accruals may differ with selecting a time series of three or more years as a base for the analysis.

In contrast to prior literature, where board composition is defined as an insiders‐ or outsiders‐controlled board, this paper classifies board composition into seven discrete categories, using the same seven categories employed by Institutional Shareholder Services in evaluating and assigning corporate governance quotient scores to firms. The paper's major contributions to the existing literature are its findings that income‐increasing and income‐decreasing discretionary accruals have a different relationship with corporate governance practices and its expansion of the scope of corporate governance from board independence and audit committee independence to other corporate governance characteristics. This paper provides evidence that supports US regulators' initiatives that stronger corporate governance mechanisms provide greater monitoring of the financial accounting process and may be the important factors in improving the integrity of financial reporting.

This study aims to examine the relationship between the types of discontinued operations (i.e. income-increasing versus income-decreasing) and a firm’s dividend payout policy. The authors extend our analysis to examine whether equity investors react differently to dividend payout changes that are preceded by the reporting of different types of discontinued operations.

Ordinary least squares regressions are used to test the association between discontinued operations and dividend payouts. The investor response test uses cumulative abnormal return around the announcement of dividend payout changes.

The authors find that firms temporarily increase (decrease) their dividend payout in the quarter following the reporting of income-increasing (income-decreasing) discontinued operations. The authors further find that these results are stronger when the magnitude of the income increase or income decrease is larger and when firms report disposal gains or losses. Although prior literature finds evidence that dividend increases are associated with a significant positive market reaction, the results show that investors do not react positively to dividend increases that are preceded by reporting income-increasing discontinued operations.

This study adds to the literature on the effects of financial reporting (i.e. the types of discontinued operations) on a firm’s payout policy (i.e. dividend payout). The authors also add to the literature that examines investors’ perceptions of a firm’s payout changes when such changes are transitory in nature.

This study examines whether real earnings management (REM) choices are connected with the ownership structure of politically connected businesses (PCBs). The authors also discuss the moderating role of audit quality (AQ) and family control (FC) on the relationship between PCBs and REM.

The authors' study sample comprises firms registered on the Pakistan Stock Exchange (PSE). The sample examines the financial data of the firms that remained listed for the last eight years, i.e. from 2011 to 2018, excluding nonfinance companies and firms with incomplete data. The authors test the hypothesis using feasible generalized least squares (FGLS) regression methods.

The authors find that PCBs show a high level of involvement in income-decreasing REM compared to nonPCBs due to lower litigation risk in REM. However, the authors' results also show that two monitoring mechanisms, AQ and FC, curb the opportunistic behavior of PCBs and reduce the intensity of REM in PCBs.

The findings of the study are beneficial in decision-making for both internal and external stakeholders, such as creditors, shareholders and competitors. In countries like Pakistan, which fall in the category of emerging economies, PCBs show involvement in income-decreasing REM to change the accurate picture of financial information to attain personal goals, and investors in such countries have a low level of knowledge about earnings management strategies; thus, this study offers detailed knowledge and information to investors and shareholders about political connections and REM. This plays a crucial role for regulators in stiffening the rules and regulations to further assist in more secure financial reporting.

This study contributes to the literature by providing a nuanced understanding of the interplay between political connections, REM, FC and AQ in the business context. Second, family-controlled businesses often exhibit distinct characteristics and governance structures compared to nonfamily-controlled firms. Exploring the moderating role of FC in the following relationship could provide valuable insights into how family dynamics influence the financial reporting practices of PCBs. Third, AQ is a critical factor in ensuring financial reporting transparency. However, the interaction between AQ, political connections, and REM remains relatively unexplored. This study explains how audit oversight affects the earnings management behavior of PCBs.

This study aims to examine whether US oil and gas companies engaged in earnings management during the 2011 Arab Spring, which resulted in significant increases in both crude oil and gasoline prices.

Following a similar research methodology from prior research, this study tests the existence of earnings management based on discretionary total accruals, current accruals and non-current accruals to determine whether both large petroleum refining firms and relatively small oil and gas-producing firms, jointly and separately, lowered reported earnings.

The results show that, overall, US oil and gas companies as a group engaged in income-decreasing earnings management during the Arab Spring. The results seem to support the political cost hypothesis. However, further analyses indicate that the results are driven by abnormal income-decreasing accruals of the relatively small oil and gas-producing firms, which are politically less sensitive.

The findings suggest that there may be other non-political cost incentives, such as income smoothing, for the relatively small oil and gas-producing firms managing earnings downward during periods of large oil price increases. However, the possibility for firms with reversals of income-increasing activity from other quarters is not ruled out.

This study not only is the first empirical study of earnings management by oil and gas companies during the Arab Spring, but also contributes to extant earnings management literature regarding political cost hypothesis, which still remains a major concern for US oil and gas companies.

This paper aims to examine whether financially distressed firms manipulate core or operating income through the misclassification of operating expenses as income-decreasing special items.

This sample comprises firms in the USA with data from 1989 to 2010. The authors used the methodology given in McVay (2006) and multiple regressions.

Managers of financially distressed firms are more likely to inflate core or operating income as compared to the healthy firms to meet or beat earnings benchmarks. They do so by misclassifying core or operating expenses as income-decreasing special items. Specifically, core expenses are shifted to income-decreasing special items like goodwill impairments, settlement costs, restructuring costs and write downs.

The paper sheds light on an important firm characteristic, financial distress that intensifies classification shifting – an earnings management tool which auditors, investors and regulators find tough to detect. The findings have implications for investors, as they fail to comprehend such shifting (McVay, 2006); analysts, who issue forecasts based on street earnings; lenders, as distressed firms may be concealing their true performance; and regulators, as the misclassification of income statement items is a violation of accounting principles.

The authors extend the literature on accruals and real earnings management by the financially troubled firms and present first evidence that the managers of such firms also manipulate core or operating income through classification shifting.

This paper aims to examine whether firms in the decline stage of lifecycle manipulate core or operating income through misclassification of operating expenses as income-decreasing special items.

The sample comprises of firms from an emerging market, India with data from 1996 to 2011. The paper uses the methodology given in McVay’s (2006) work and multiple regressions.

Managers of Indian firms also engage in classification shifting, primary incentive being the desire to avoid reporting of operating losses. Furthermore, the use of classification shifting is dependent upon the stage of lifecycle in which firm is in. Specifically, firms in the decline stage of lifecycle are more likely to use classification shifting to avoid reporting of operating losses.

The paper sheds light on a critical phase of the firm lifecycle, decline, which increases the possibility of the use of classification shifting, an earnings management technique which is tough to detect. Firms in decline, thus, may be trying to fool the investors who are infusing capital to save the company from going bankrupt; regulators, who are likely to focus less on troubled firms; and auditors, who may not be expecting core income manipulation in such firms.

The paper extends the literature on classification shifting and presents first evidence that such shifting is more likely to take place during the decline phase of firm lifecycle.

The purpose of this paper is to investigate whether earnings management that surpasses a threshold is associated with market mispricing.

The paper examines the level of discretionary current accruals (DCA) as a proxy for earnings quality. Operationally the threshold of earnings management is defined as the mean DCA, and it is assumed that highly managed firms (both income‐decreasing and income‐increasing) produce low‐quality earnings information. It is postulated that such management may lead to mispricing errors by investors who make incorrect adjustments for lower earnings quality.

The evidence suggests that investors possess idiosyncratic perceptions toward earnings management. Investors of income‐decreasing firms tend to under‐adjust for analyst optimism, while investors of income‐increasing firms are inclined to over‐adjust for analyst optimism. In addition, investors of both types of highly managed firms appear to under‐adjust for earnings management. These investor characteristics result in a post‐earnings announcement upward drift of cumulative abnormal returns (CARs) for income‐decreasing firms and a downward drift for income‐increasing firms.

The findings strongly indicate that there is a significant mispricing at the earnings announcement date for the income‐decreasing (P1) and income‐increasing (P5) portfolios and the mispricing persists in the short run. Thus, it may be possible for investors to exploit the mispricing by holding a long position in P1 and a short position in P5.

Prior studies concentrate on extreme cases of earnings management that are subject to securities and exchange commission (SEC) enforcement. In contrast to these studies, this paper focuses on the market reaction to earnings management, which may or may not lead to SEC enforcement actions.

The purpose of this paper is to examine how publicly available accounting risk metrics influence the aggressiveness of managers’ discretionary accounting decisions by making those decisions more transparent to the public.

The experiment used a 2 × 3 between-participants design, randomly assigning 122 financial reporting managers among conditions in which we manipulated whether the company was currently beating or missing analysts’ consensus earnings forecast and whether an accounting risk metric was indicative of low risk, high risk or a control. Participants chose whether to manage company earnings by deciding whether to report an amount of discretionary accruals that was consistent with the “best estimate” (i.e. no earnings management) or an amount above or below the best estimate.

Aggressive (income-increasing) earnings management is deterred when managers believe such behavior will cause their firm to be flagged as aggressive (i.e. high risk) by an accounting risk metric. Some managers attempt to “manage” the risk metric into an acceptable range through conservative (income-decreasing) earnings management. These results suggest that by making the aggressiveness of accounting choices more transparent, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing).

The operationalization of the manipulated variables of interest may limit the study’s generalizability.

Users of accounting risk metrics (e.g. investors, auditors, regulators) should be cautious when relying on such risk metrics that may be of limited reliability and usefulness due to managers’ incentives to manipulate their companies’ risk scores by being overly conservative in an effort to prevent being labeled “aggressive”.

By increasing the transparency of the aggressiveness of accounting choices, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing).

This study aims to investigate whether managers of Japanese firms that adopt international financial reporting standards (IFRS) engage in earnings management by shifting core expenses to reported discontinued operations. Based on this purpose, the author also investigates the impact of continuing operations reporting on core earnings.

This study uses regression analysis mainly using the expected-core-earnings model (McVay, 2006) on a sample of Japanese firms adopting IFRS. The sample consists of 317 firm-year observations representing 48 Japanese firms that adopted IFRS from 2010 to 2018, noting that Japan has adopted IFRS since 2010.

The author finds that firms shift operating expenses of continuing operations to discontinued operations to increase core earnings. Additionally, the author desegregates reported discontinued operations into core and non-core earnings because previous literature assumes that firms engage in classification shifting using special items. Results reveal that firms use the classification shifting using negative non-core earnings of discontinued operations. Furthermore, the income-increasing discontinued operations negatively influence both current and future core earnings while income-decreasing discontinued operations do not.

The result could rely on the efficiency of the expected core earnings model. The author intentionally use only the Japanese sample rather than a global sample to control the characteristics of each country that can be noise; it could be a bias of this study.

The author revealed that firms engaged in the classification shifting using negative non-core earnings of discontinued operations. Providing detailed information on discontinued operations, segmented core earnings and non-core earnings (special items) is necessary. Deficiency of details on discontinued operations can create information asymmetry between managers and investors. It can encourage managers to engage in opportunistically earnings management using discontinued operations, taking advantage of investors’ ignorance of the nature of the expenses allocated to discontinued operations.

This study would be beneficial to investors by informing them of the potential usefulness and risks of IFRS because it is believed that IFRS is to be the predominant set of accounting standards in the world.

The author exposes a potential earnings management practice under IFRS by extending the literature on classification shifting through examining the relationship between unexpected core earnings and discontinued operations. The author extends prior research for classification, developing it to an investigation of the impact on core earnings, finding that income-increasing discontinued operations negatively influence core earnings, whereas income-decreasing discontinued operations do not. This study indicates that standard setters should pay close attention to the potential problems of line-item separations of discontinued operations.