The external auditors play a huge role in solving. India is supposed to have relatively strong legal institutions as it is a common law country. However, the enforceability of laws in India is rather lax; as a result, the external auditing firms should be under less pressure to prevent earnings management. We argue that the Big 4 auditors have incentives to develop and maintain strong and uniform reputations worldwide because of their global operations. Therefore, the Big 4 auditors would have more to lose than non-Big four auditors by allowing greater discretion in reported earnings through accruals management or classification shifting. As a result, even in a country with poor legal enforceability, such as India, the Big 4 auditors would provide a superior quality of audit service as evidenced by reduced managerial discretion in the reported earnings. Overall, the results indicate that the Big 4 auditors are aware of the increased prevalence of the classification shifting as a form of earnings management and are taking necessary steps to curb it.
The increase in audit fee is significantly higher for the Big 4 auditors than for the non-Big four auditors, thus, suggesting that Big 4 auditors do charge a higher price compared to the non-Big four auditors, which leads to an improvement in the reported earnings in the form of reduced classification shifting.
The results of our study indicate that the type of auditor (Big 4 versus non-Big 4) has a significant impact on classification shifting and that Big 4 auditors are significantly more likely to prevent classification shifting than non-Big four auditors. Our analysis of audit fees indicates that both Big 4 and non-Big four auditors charge higher fees to curb classification shifting.
0 Comments