The impact of audit characteristics, audit fees on classification shifting: evidence from Germany

Abstract

Purpose This paper aims to examine the relationship between audit characteristics (ACs) and audit fees on classification shifting (CS) among German-listed non-financial firms. Design/methodology/approach Using a sample of 130 German-listed (Deutscher Aktienindex, Mid Cap dax and Small caps Index) firms from 2010 until 2019, this study investigated the impact of audit committee size, audit committee meetings, audit committee financial expertise and audit fees on CS. Findings This study found the evidence of CS, meaning that managers misclassify recurring expenses in the income statement into non-recurring expenses to inflate core earnings. This study also found that the audit fee ratio, audit committee financial expertise and frequency of audit meetings are negatively associated with CS among German-listed firms. However, the audit committee size does not influence CS. Research limitations/implications This study will help the board improve its internal auditing practices and provide essential information to investors to assess how ACs affect the quality of financial reporting. Originality/value This study focused on a bank-oriented economy, i.e. Germany, with lower investor protection and low transparency. This paper documents new evidence on how ACs and audit fees impact CS among German firms, as most of the previous studies on CS mainly focused on market-oriented economies such as the UK and the USA.

The impact of audit committee effectiveness on firms’ outcomes in China: a systematic review

“…This study is motivated by regulators, practitioners, investors and academicians in China regarding the need for effective, accountable, ethical and governance audit committees among the Chinese listed firms. Audit committees are responsible for monitoring the integrity of financial statements and ensuring the quality of financial reports (Salem et al , 2021; Usman et al , 2022; Hegazy, Chong and Hegazy, 2014). From 2000 to 2002, a series of corporate scandals have shaken investors’ confidence and raised concerns about the quality of financial reporting and the effectiveness of an audit committee in protecting the shareholders’ interests (Chiang et al , 2020; Frobes, 2002; Salem et al , 2020).…”

The impact of board characteristics on the extent of earnings management: conditional evidence from quantile regressions

“…Consequently, agency literature suggests the need to monitor managers to ensure that their actions align with the interest of shareholders (Jensen, 1986; Jensen and Meckling, 1976). Consistent with the agency theory, previous studies have examined the impact of CG characteristics and chief executive office (CEO) compensation on EM (AlHares et al , 2020; Sial et al , 2019; Usman et al , 2022; Assenso-Okofo et al , 2020).…”

“…Managers (agents) hold more superior information than outside investors (principals). They could take advantage of their privileged position to misrepresent earnings (Salem et al, 2020(Salem et al, , 2021Komal et al, 2021;Usman et al, 2022) by adopting various EM techniques such as accrual EM (AEM).…”

“…Despite these CG guidelines, numerous studies reported that UK firms continue to adopt accounting techniques that deliver predetermined profits or achieve a consensus earnings figure expected by market analysts (Peasnell et al , 2005; Zalata and Roberts, 2017; Owusu et al , 2020). To add to the ongoing debate in the EM literature, we used quantile regression, as prior studies that use conventional methods (ordinary least squares [OLS], fixed and random effects) have inconclusive findings (Peasnell et al , 2000; Alhadab, 2018; Usman et al , 2022). For instance, the OLS method observes the average behaviour of the sample outside the central region and poorly describes the tail behaviours of the sample.…”

The relationship between religiosity and voluntary disclosure quality: a cross-country evidence from the banking sector

“…We specify several control variables at the bank and country levels. Following Du et al (2014a, b), McGuire et al (2012) and Sahyoun and Magnan, (2020), Usman et al (2022), we have taken into account the auditing quality proxies (Big4, IA_C, AC_S, AC_M and AC_G), which may have a potential influence on enhancing the quality of disclosed information and its association with religiosity (Adhikari and Agrawal, 2016). In the face of contradictory aims and varying degrees of desire, Hambrick and Mason (1984) indicated that managers make business decisions not only on a logical analysis of techno-economic considerations but also on their personal beliefs and cognitive underpinnings.…”