Misclassifying cash flows from operations: intentional or not?

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The purpose of this paper is to investigate the accuracy and informational quality of the cash from operations section of the cash flow statement. Design/methodology/approach -This paper empirically tested the accuracy of the cash from operations reported by Canadian non-financial companies. The authors studied 262 companies at three different time periods providing 786 firm observations. For each observation, the balance sheet was used to confirm the figures reported in the statement of cash flows. In addition, the authors investigated management's disclosure of the particular working capital items. Findings -The findings suggest that in recent years, companies are more likely to overstate their cash flow from operations, thereby presenting a better financial picture than is supported by the balance sheet accounts. This would suggest that the investing or financing section would be correspondingly understated. The presence of acquisitions reduces overstatements, which may be the result of more auditor presence. Research limitations/implications -This paper extends previous research from documented single, isolated instances of cash from operations being misstated to include a significant sample with more generalizable findings. The data are Canadian which may limit the generalizability to other countries. Future research should address the extent to which financial analysts rely on the reported cash from operations figure.Practical implications -This preliminary study may have implications for financial analysts and others relying on the free cash flow figure.Originality/value -This study expands on previous research which has taken place only on a case-by-case basis.

The effect of auditor industry specialization and board independence on the cash flow reporting classification choices under IFRS: evidence from Taiwan

“…Understanding the cause of this divergence may shed light on board of director decisions, quality monitoring mechanisms and other modalities within CPA firms. Lightstone et al (2014) postulated the existence of auditor effects on cash flow statement development. Our paper provides more evidence of such effects and provides further insight into how auditor partner and firm characteristics affect the cash flow reporting decision.…”

“…The existence of a more questioning environment at the top may also lead to more questioning by individuals below the executive suite level, leading to greater circumspection about taking actions that may be seen as unethical or having a lower level of perceived legitimacy than other actions. Also, how much does the behavior of other firms in the same industry matter in cash flow reporting choices (Lightstone et al, 2014)?…”

“…Gordon et al (2017), for example, found an insignificant relationship between auditor type (Big Four vs non-Big Four) and operating cash flow classification. Lightstone et al (2014) argue for the potential importance of auditor influence on reducing cash flow overstatements with respect to cash flow reporting of Canadian firms when acquisitions are involved. However, Kretzmann et al (2015) document that German firms whose financial statements are audited by a Big Four audit firm are prone to choose options that increase reported operating cash flow.…”

“…As of January 1, 2013, Taiwanese firms were required to follow IFRS accounting standards, giving publiclylisted firms in Taiwan the opportunity to either retain interest and dividend reporting within the operating cash flow section of the statement of cash flows or to move this reporting to either the investing or financing sections of the statement of cash flows. This is an important issue because cash flows provide critical information to potential investors/creditors as to the sustainability of the firm's business operations (Lightstone et al, 2014). Understanding the determinants of interest/dividend reporting choices, then, is one important avenue toward the understanding of corporate accounting policy choice more generally (Cole et al, 2012;Kretzmann et al, 2015;Lee, 2012;Zalata and Roberts, 2016).…”