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The authors examine whether internal corporate governance mechanisms are effective in curbing cash flow manipulation through real activities, misclassification, and timing.

The sample comprises of firms from an emerging market, India with data for years 2004 through 2015. The authors use the methodology given in Roychowdhury (2006).

The authors find that corporate boards in India play an active role in curbing cash flow manipulation through real activities but fail to control cash flow manipulation through misclassification and timing.

The study suggests that corporate boards should pay more attention to the reported cash flow numbers. Regulators can reduce the opportunities available for cash flow misclassification by fixing relevant accounting and governance norms. Auditors can also help by critically focusing on the cash flow classifications presented by management.

This study, to the authors’ knowledge, is the first study that talks about the role of internal governance in a trade-off between different cash flow manipulation techniques.

The purpose of this paper is to examine whether firm-level corporate governance measures and regulatory reforms constrain manipulation of operating cash flows, an important firm performance indicator.

The sample comprises firms from an emerging market, India, with data from 2005 to 2011. The authors use the methodology given in the paper by Lee (2012) and multiple regressions.

The authors find that cash flow manipulation is likely to increase with an increase in the controlling ownership. Furthermore, board diligence and better audit fail to curb such manipulation. However, the authors do find that such manipulation has gone down in the recent years, and diligent boards constrain it, possibly due to the recent steps taken by the Indian Government for improving the corporate governance environment in India.

The findings can act as feedback for the regulators and policy makers. Potential investors and analysts may also benefit from the study, since they can be more vigilant about the firms’ cash flow manipulation practices and can demand better governance.

The findings suggest that good corporate governance makes managers substitute earnings management with cash flow manipulation.

This short case provides income statements and balance sheets for a recent year for 7 Indian firms from 7 industries in Exhibits 1 and 2. These firms belong to the following industries.1 Airline2. Banking 3. Information Technology Services 4. Liqour Producer 5. Oild Exploration and Development 6. Pharmaceutical 7. Retail. The task before the students is to evaluate the financial statements given in the exhibits and identify the appropriate industry for each firm.

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.

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.