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

The impact of audit characteristics, audit fees on classification shifting: evidence from Germany 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/approachUsing 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.FindingsThis 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/implicationsThis 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/valueThis 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Accounting and Information Management Emerald Publishing

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

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1834-7649
eISSN
1834-7649
DOI
10.1108/ijaim-12-2021-0252
Publisher site
See Article on Publisher Site

Abstract

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/approachUsing 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.FindingsThis 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/implicationsThis 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/valueThis 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.

Journal

International Journal of Accounting and Information ManagementEmerald Publishing

Published: Jun 14, 2022

Keywords: Earning management; Classification shifting; Audit characteristics; Audit fees; Corporate governance

References