The effect of client-auditor mismatches on earnings management using classification shifting: Evidence from China
Shanmei Luo, Danning Yu, Shudan Jin
TL;DR
This study explores how mismatched auditor-client relationships in China affect earnings management practices, finding that mismatch direction and internal controls influence financial reporting behavior.
Contribution
The study introduces new evidence on how client-auditor mismatches influence earnings management in China, emphasizing the moderating role of internal controls and auditor expertise.
Findings
Upward client-auditor mismatches reduce classification shifting in earnings management.
Strong internal controls reduce the impact of mismatches on earnings management.
Auditor industry expertise partially explains the relationship between mismatches and classification shifting.
Abstract
Using a sample of Shanghai and Shenzhen A-share listed companies from 2008 to 2022, this study examines the impact of client-auditor mismatch on earnings management using classification shifting. The results indicate that upward mismatches—where clients engage higher-tier auditors than expected—mitigate classification shifting, while downward mismatches amplify it. Further analysis reveals that strong internal control moderates this relationship, constraining earnings management behavior. Additionally, we find that auditor industry expertise partially mediates the relationship between client-auditor mismatch and classification shifting.
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Taxonomy
TopicsAuditing, Earnings Management, Governance · Corporate Governance and Financial Management · Financial Reporting and XBRL