FIRM CHARACTERISTICS AND EARNINGS MANAGEMENT USING CLASSIFICATION SHIFTING

Abstract

Prior literature has shown that there are three major strategies of Earning Management Accrual-based earnings management (AEM), Real earnings management (REM) and Classification shifting. The study introduces various earning management techniques and build up a conceptual framework on the basis of past literature available The paper tries to examine various firms’ characteristics and firms’ possible adoption of any of these Earning Management techniques in general and classification shifting in specific. The paper also tries to examine the level of adoption of these techniques by the firms. We find that adoption and level of adoption of Earning Management techniques depend on multiple factors. While AEM and REM adoption pose a risk of being discovered at a later date or deferring of expenses required for smooth running of business, classification shifting is merely shifting of numbers where auditors/analysts may not have sufficient motivation to question managers on this number shifting. Hence we concluded that Classification shifting is presenting itself to be a less costly, less hassle free, less technical and less to be discovered earning management technique by the Firms world over.