Search results

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).

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.

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.

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.

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.

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.

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.

This study examines the effect of non-audit fees (NAF) provisions on interest payments classification shifting. In addition, we investigate to what extent the NAF economic bonding and interest payments classification shifting is contingent on internal governance and firm financial well-being.

This study employed probit regression using a sample of UK non-financial firms indexed in FT UK (500) over the period from 2009 to 2017.

We find evidence that the economic bonding of NAF between external auditors and their clients is more likely to encourage managers in UK firms to manipulate operating cash flows through interest payment classification shifting. In addition, and interestingly, our results evince that classification-shifting may be the less costly and soft choice of managers in firms with strong governance and charging higher NAF. Furthermore, we show that financially distressed firms associated with their auditors in purchasing non-audit services are more prone to attempting to manipulate and engage in interest payments classification-shifting. Our result did not provide a significant effect of external auditor tenure on the interest payments classification shifting.

Our findings are subject to the following limitations: First, this study uses a composite index to measure the quality of internal corporate governance. It focuses only on the board of directors, but this index does not reflect other internal governance mechanisms. Second, this study is subject to limited study time due to the implementation of key IFRS standards (IFRS 9 Financial Instruments and IFRS 15 Revenue from Contract with Customers) from 2018–2019.

This study was motivated by the UK’s Financial Reporting Council regulators' pressure on the Big 4 audit firms to move more audit time into main auditing activities, reduce cross-selling to audit clients and separate their audit practices by 2024. Overall, we provide new evidence that directs a close spotlight on the threats of NAF that are potentially useful to regulators, shareholders and investors.

It is motivated by the UK’s Financial Reporting Council regulators' pressure on the Big 4 to move more audit firm time into main auditing activities, reduce cross-selling to audit clients and separate their audit practices by 2024. Overall, we provide new evidence that directs a close spotlight on the threats of NAS that are potentially useful to regulators, shareholders and investors.

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.

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.

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.

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.

The study aims to investigates which form of classification shifting is preferred by firms to avoid the violation of debt covenants and whether the higher-audit quality constraints the shifting practices of firms incentivized to avoid covenant violations or not.

A sample of 1,644 Bombay Stock Exchange (BSE)-listed firms during the period 2009–2021 has been used in this study and tested through panel data regression models. Two forms of classification shifting, namely expense shifting and revenue shifting have been taken into account. The findings are validated through the propensity-score matching technique.

The findings deduced from the empirical evidence demonstrate that firms prefer revenue shifting over expense shifting to avoid covenant violations, consistent with the notion of the ease-need-advantage-based shifting framework, where firms are found to prefer a shifting tool with greater relative advantage. Further, the author finds that superior audit quality has a constraining effect on expense shifting, but not on revenue shifting, indicating the partial effectiveness of high-quality auditors in curbing the corporate misfeasance of classification shifting. These results are robust to the problem of endogeneity and self-selection bias.

The paper provides new evidence on debt market incentives behind classification shifting, where firms are found to substitute classification shifting forms to avoid covenant violations. Further, the study is among pioneering attempts to investigate the impact of audit quality on revenue shifting and document the non-constraining effect.

This study aims to investigate earnings management practice of classification shifting of revenues in Chinese-listed firms.

The study employs a dataset of 2,920 A-listed firms from Chinese stock exchanges of Shanghai and Shenzhen for the period of 2003–2019. We apply both univariate and panel regression analysis by using fixed effect estimation with robust standard errors.

Our findings reveal that firms misclassify revenues by taking advantage of the flexibility provided by applicable financial reporting standards. The empirical evidence obtained through regression analysis suggest that managers reclassify non-operating revenues as operating revenue to alter the economic reality while seeking the advantage of financial reports users’ vulnerability for valuing the upper half of income statement items more as compared to lower part. The results further indicate that international financial reporting standards adoption inhibits the earnings management practices using classification shifting of revenues. It is also concluded that firms, which are suffering losses or having low growth, are more persistently involved in misclassification of revenues.

The study is unique from the point of view that it investigates earnings management from the prospective of revenue’s classification in an emerging market characterized by various market imperfections such as lower investor protection and higher information asymmetry.

This study investigates the moderating role of Big-4 audit firms on the association between board independence and classification shifting (CS) in Indian firms.

This study has employed a fixed-effect panel data regression model to analyze the sample data. Board independence is measured by taking the proportion of independent directors on a firm’s board. CS is measured from the core earnings expectation model (McVay, 2006). Principal Score Matching is applied to validate the results.

Based on 6,016 firm-year observations of Indian firms listed on the Bombay Stock Exchange, results show that firms with a higher proportion of independent directors on board are effective in limiting expense CS. Further, firms that Big-4 audit firms audit play a significant role in curbing expense CS. Overall, results also exhibit that Big-4 audit firms significantly influence the association between board independence and CS.

This study is one of its kind to examine the moderating role of Big-4 audit firms between board independence and CS.

Foreign exchange losess bear some pressures for numerous companies in Indonesia particularly for those having liabilities denominated in foreign currencies. This occurs when Indonesian Rupiah (IDR) current exchange rate has weakened against foreign currencies. Related to those phenomenon, this study aims to investigate model earnings management actions using foreign exchange losses (FEL) which provides a method for the detection of earnings management. By employing a quantitative approach, this study used secondary data of financial statements. The data were collected from 50 companies with the largest market capitalisation, 50 of the most active companies based on trading volume, 50 of the most active companies based on the value of trade and 50 of the most active companies by frequency trading. Totally, 200 public companies listed in Indonesia Stock Exchange were gained as the data based on IDX statistical report 2013. The results identify that FEL model is capable to detect earnings management from a transaction in foreign exchange losses. However, the model cannot capture the phenomenon of earnings management if the company does not own or reported long-term debt and profit/loss on foreign exchange. To prove whether the manager will perform earnings management from FEL, it is suggested to conduct further research using the hypothesis of positive accounting theory (PAT).

We develop theoretical and conceptual insights into a social movement’s strategic articulation, through an examination of the relationships among the conservative, moderate and radical organizations within a movement field before, during and after a wave of contention. Definitions for conservative, moderate and radical organizations that have been lacking in the literature are provided. Three U.S. cases are employed including the Civil Rights Movement, the Animal Rights Movement, and the AIDS Movement to illustrate/apply our concepts and test our theoretical assertions. We find a distinct conservative flank in movements which facilitates linkages to state officials. Moderates have a unique role as the bridge between the radical and conservative flanks. A lack of formal organization among radicals appears to incite state repression. The radical flank, or strong ties between the radial flank and moderates or conservatives, does not have a positive effect prior to or at the peak of a wave of contention when there is significant state repression. In the absence of state repression and after concessions or the peak of activism, moderates and conservatives benefit by distancing from the radical flank. Moderate organizations marginally institutionalize except when conservative movement organizations are absent; then full incorporation occurs.

The purpose of this paper is to explore the modernity of current classification theory and work, and outline a foundation for moving classification toward a late‐modern conception.

The paper examines the conceptual foundation for current modern classification work, provides critical analysis of that approach, and outlines three conflicts with modernity that shape the path out of the consequences of modernity.

The paper presents an understanding of classification that establishes classification on a late‐modern epistemology, and it lays the contours of how to reclaim the intellectual core of classification theory and work.

The paper establishes a foundation for rethinking classification work, outlines consequences of current mainstream work, and provides concept for developing late‐modern classification theory and practice.