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Core earnings management: How do audit firms interact with classification shifting and accruals management?
Author(s) -
Eilifsen Aasmund,
Knivsflå Kjell Henry
Publication year - 2021
Publication title -
international journal of auditing
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.583
H-Index - 21
eISSN - 1099-1123
pISSN - 1090-6738
DOI - 10.1111/ijau.12214
Subject(s) - accounting , audit , earnings management , business , accrual , big four , equity (law) , auditor independence , norwegian , quality audit , incentive , joint audit , earnings , internal audit , economics , linguistics , philosophy , political science , law , microeconomics
This study examines the interaction of audit firm characteristics with two core earnings management tools: classification shifting (CS) and core accruals management (CACM). CS occurs when management intentionally misclassifies recurring operational expenses as special items to inflate perceptions of core earnings. A Norwegian sample of companies, with forthcoming equity issues and acquisitions, reveals that CS substitutes for CACM for clients of Big 4 and industry‐specialized audit firms. By contrast, CS complements CACM for clients of non‐Big 4 and non‐specialized audit firms. The level of auditor‐provided non‐audit services during a forthcoming equity issue, a measure of economic bond potential, also interacts with CS and CACM, though this interaction is different for clients of Big 4 and non‐Big 4 audit firms. The overall results suggest that auditor incentives may support tolerating CS, which raises a question about the effectiveness of current accounting and auditing standards.