The impact of religion on classification shifting in the presence of corporate governance and BIG 4 audit

Abstract

This paper explores the nexus between earnings management and religiosity. It complements prior research on the impact of religious social norms of the firm's environment on earnings management practices. Using a sample of 11,105 U.S. firm-year observations between 2004 and 2013, we find that religiosity is negatively associated with the accruals-based method, but positively related to both real-activities and classification shifting. This suggests that religiosity could serve as a correction mechanism to accruals earnings management practices. However, managers in highly religious areas consider real-activities and classification shifting as ethically and morally appropriate. In addition, we interact religiosity measures with governance variables to provide evidence of the importance of religion in relation to board characteristics. As part of robustness analysis we examine the impact of religion in high and low religious areas, as well as in urban and rural areas. Our findings remain robust and argue in favour of the importance of religious social norms in earnings management.

The Effect of Managerial Ability on Earnings Classification Shifting and Agency Cost of Iranian Listed Companies

“…Earnings management is one of the dominant patterns in accounting researches that its roots have to be explored in the choice of accounting procedure. In this regard, two patterns of earnings management through accruals and real activities manipulation are most studied [17,18,25,26]. However, the use of each of these methods has limitations in both time and cost [21].…”

“…Classification shifting is a tool of earnings management that used to shift items in the income statement, while net income value does not change [17]. us, classification shifting is often disguised as a practice of standard accounting in financial statements, although, it is within the boundaries of accounting frameworks of regulatory, in practice, it is difficult to detect [26].…”

Do CEO social connections promote corporate malpractices? Evidence from classification shifting

“…Athanasakou et al, 2009;Fan et al, 2010) and avoiding debt covenant violations (Fan et al, 2019) trigger the use of classification shifting. At the same time, the religious social norms of the firm environment (Boahen & Mamatzakis, 2020) and internal corporate governance characteristics, such as board independence and outside directors' tenure (Zalata & Roberts, 2016), have been shown to mitigate the misclassification of core expenses as income-decreasing special items.…”

“…Previous studies in this area have examined what drives the misclassification of income statement line items (e.g. Athanasakou et al, 2009;Boahen & Mamatzakis, 2020;Fan et al, 2010;Fan et al, 2019), considering the widespread use of this practice (e.g. Haw et al, 2011;Zalata & Roberts, 2017).…”

“…Haw et al, 2011;Zalata & Roberts, 2017). For example, they have documented that equity market incentives (Athanasakou et al, 2009;Fan et al, 2010), EBITDA-based debt covenants (Fan et al, 2019), and religious social norms (Boahen & Mamatzakis, 2020) affect the use of classification shifting. Although these studies have identified several important drivers of classification shifting, the role that CEO social connections play in classification shifting is still an unexplored research question.…”