Internal Corporate Governance and Classification Shifting Practices

Abstract

The corporate governance literature shows that strong internal corporate governance improves the monitoring of managerial discretion over accounting choices. However, most of these studies investigated the role of internal governance in a setting highly regulated through accounting standards, such as the treatment of accruals. Thus, there is little evidence available on whether internal governance collaborates or substitutes for strict accounting regulations. This study therefore investigates whether boards and audit committees also protect shareholders' interests in areas that are less regulated through generally accepted accounting principles (GAAP). Non-recurring items are relatively lightly regulated under International Accounting Standard 1 (IAS 1) and there is increasing concern over the use of non-recurring items to mislead investors (i.e., classifying some recurring expenses as non-recurring). This study therefore investigates whether internal corporate governance constrains classification shifting. Using a sample of 713 U.K. firm-year observations, we find that high-quality internal governance, in terms of the overall quality of board and audit committees, mitigates classification shifting, suggesting therefore that strong internal governance tends to act as a substitute for strict accounting standards. In particular, it appears that long tenure and independence help to mitigate classification shifting, and more CEO directors and share ownership instead may lead to lower quality monitoring.

Female CEOs and Core Earnings Quality: New Evidence on the Ethics Versus Risk-Aversion Puzzle

“…Unlike AEM, classification shifting is not related to the measurement or recognition of items (Fan et al 2010;Haw et al 2011); rather it is related to the appropriate categorization of expenses within the income statement (McVay 2006;Zalata and Roberts 2016). The appropriate categorization is subject to high managerial discretion, and therefore regulators and external monitors might have limited ability to verify it (Zalata and Roberts 2017), leading to lower litigation and reputation concerns (or low risk) than concerns about AEM (Alfonso et al 2015;McVay 2006).…”

“…First, while the extant classification-shifting research focusses on neoclassical determinants of classification shifting either at the firm (i.e., Zalata and Roberts 2016) or country (i.e., Haw et al 2011) level, our paper seeks to relate CEOs' gender to classification shifting. That is, our paper contributes to the earnings management literature by offering evidence for the first time that shows that the level of classification shifting is a function of CEOs' gender, particularly after considering the impact of the legal environment (i.e., the passage of SOX).…”

أثر ممارسات إدارة الأرباح من خلال إدارة عرض بنود قائمة الدخل على جودة الأرباح المحاسبیة مع دراسة تطبیقیة على الشرکات المساهمة المصریة

“…. (Athanasakou, et al, 2011;Zalata and Roberts, 2016) ‫نيا‬ ‫اس‬ ‫نرق‬ ‫ش‬ ‫ني‬ ‫ف‬ ‫نت‬ ‫يم‬ ‫اليي‬ ‫اسات‬ ‫الدر‬ ‫يجت‬ ‫اسي‬ ‫كما‬ . (Haw, et al, 2011) ‫ناد‬ ‫ب‬ ‫نب‬ ‫يباي‬ ‫نال‬ ‫س‬ ‫الد‬ ‫في‬ ‫المبالغة‬ ‫بغية‬ ‫الدالل‬ ‫قائمة‬ ‫نى‬ ‫عم‬ ‫نرافات‬ ‫المص‬ ‫نن‬ ‫م‬ ‫نغيمية‬ ‫اليش‬ ‫ناد‬ ‫الب‬ ‫نب‬ ‫يباي‬ ‫نبلل‬ ‫ال‬ ‫نن‬ ‫م‬ ‫اليشغيمي‬ ‫الل‬ ‫اسة‬ ‫در‬ ‫يائج‬ ‫اييعق‬ ‫يشغيمية.‬ ‫يير‬ ‫اد‬ ‫ب‬ ‫ها‬ ‫أ‬ (Noh, et al, 2014 (Haw, et al, 2011;Desai and Nagar, 2016 (Ertimur, et al, 2003;Marquardt and Wiedman, 2004 (McVay, 2006, Cohen et al, 2009, Zalata and Roberts, 2017, Fan, et al, 2010, Fan, et al, 2017…”

Does Religion Matter for Earnings Management?

“…2 Zalata and Robert, (2015); Fan et al, (2010) andMcVay, (2006) indicate that whilst the various methods of earnings management raise expectations of future performance, both real-activities and accrual-based earnings management have the effect of reducing future or past earnings. Consequently, the reputation and the quality of the company is compromised (Cao, Myers and Omer, 2012).…”