Do independent directors and big-4 audit firms limit classification shifting: evidence from Indian firms

Abstract

PurposeThis study investigates the moderating role of Big-4 audit firms on the association between board independence and classification shifting (CS) in Indian firms.Design/methodology/approachThis 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.FindingsBased 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.Originality/valueThis study is one of its kind to examine the moderating role of Big-4 audit firms between board independence and CS.

Do CEO duality and expertise affect earnings management behavior? The moderating effect of family ownership

“…Nonetheless, we found that audit quality has an insignificant influence on EM practices. This finding is not supported by recent studies (Mulchandani and Mulchandani, 2022;Rusmin, 2010) which provide evidence of a negative association between Big 4 auditors and earnings management practices.…”

“…Following prior studies, we assume that Big 4 audit firms are more likely to stem earnings management compared to non-Big 4 auditors because of their higher resources, and increased reputational capital risk (Vann and Presley, 2018; Watkins et al ., 2004). In this line, past research documented that the Big 4 audit firms play a pivotal role in curbing earnings management practices by firms in emerging markets (Mulchandani and Mulchandani, 2022; Viana et al ., 2022).…”

Debt covenants and classification shifting: moderating role of audit quality

“…This finding is consistent with Nagar et al . (2021) and Mulchandani and Mulchandani (2022) that firms audited by Big4 have a lesser magnitude of expense shifting. Further, we find that firms audited by the big four are not engaged in expense shifting to avoid violation of debt covenants as the coefficient of NOE*BigN*Slack is insignificant positive (0.072, p > 0.10).…”

“…Second, the study adds to the literature on the role of audit quality in curbing earnings management practices. Prior studies document the constraining effects of audit quality on AEM (Chen et al ., 2011; Persakis and Iatridis, 2016; Houqe et al ., 2017), on REM (Alhadab and Clacher, 2018) and expense misclassification (Nagar et al ., 2021; Mulchandani and Mulchandani, 2022). Our study is among the first to investigate the impact of audit quality on revenue misclassification and found a non-constraining effect; hence, suggesting authorities make separate forensic accounting standards for auditors to critically evaluate the revenue items in the income statement.…”

Firm's life cycle and cash flow classification: evidence from Indian firms

“…Accrual EM is manipulating accounting numbers without going beyond the permissible limits as accounting standards (AS) provide flexibility in exercising managerial discretion, whereas, in REM, earnings are managed by deviating from the firm's ordinary course of business. Nowadays, much importance by researchers and academicians is given to CS (Nagar and Sen, 2014; Mulchandani and Mulchandani, 2022; Bansal, 2021a), a novel EM technique wherein managers misclassify items in income statements or/and cash flow statements to manage the earnings or/and cash flows.…”