IDEAS home Printed from https://ideas.repec.org/p/iim/iimawp/14482.html
   My bibliography  Save this paper

Are auditors unable to detect classification shifting or merely not willing to report it? Evidence from India

Author

Listed:
  • Desai, Naman
  • Nagar, Neerav

Abstract

Prior research suggests that Big-4 auditors fail to curb classification shifting in the countries with weak legal institutions. However, it is not known whether the auditors are unable to detect the use of this earnings management tool or if they are able to detect such misclassifications but are not motivated to report them. We conduct two experiments to examine this issue. Our results indicate that, auditors are sensitive to various types of classification shifting while assessing fraud risk and audit effort. However, their willingness to report such discretionary earnings management is affected by the overall legal liability regimes and institutional controls of the region in which their clients operate. More specifically, our results indicate that the presence of weak legal institutions in a country reduces the litigation risk faced by auditors which make them less likely to report misclassifications. On the other hand, auditors are significantly more likely to report misclassifications by qualifying their audit report if, a company is cross listed in a country with strong institutional controls and legal regime.

Suggested Citation

  • Desai, Naman & Nagar, Neerav, 2016. "Are auditors unable to detect classification shifting or merely not willing to report it? Evidence from India," IIMA Working Papers WP2016-03-22, Indian Institute of Management Ahmedabad, Research and Publication Department.
  • Handle: RePEc:iim:iimawp:14482
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lin, Shu & Xia, Hui Harry & Ryabova, Tatyana, 2020. "The effect of analysts’ GAAP earnings forecasts on managers’ classification shifting," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    2. Saibal Ghosh, 2023. "Auditor Exits and Firm Performance: Is There a Link?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 22(1), pages 31-56, March.
    3. Meshram, Vedprakash Vasantrao & Arora, Jagriti, 2021. "Accounting constructs and economic consequences of IFRS adoption in India," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 45(C).
    4. Junwei Lu & Xiaoxia Bu & Jing Chen, 2021. "Do inflowing sophisticated investors induce classification shifting? New evidence from market liberalisation in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(5), pages 6193-6223, December.
    5. Nagar, Neerav & Desai, Naman & Jacob, Joshy, 2021. "Do Big 4 auditors limit classification shifting? Evidence from India," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 42(C).
    6. Poonawala, Sakina H. & Nagar, Neerav, 2019. "Gross profit manipulation through classification shifting," Journal of Business Research, Elsevier, vol. 94(C), pages 81-88.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iim:iimawp:14482. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/eciimin.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.