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Scirj, Volume VI [2018]
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Scirj Volume VI, Issue X, October 2018 Edition
ISSN: 2201-2796

Audit Committee and Classification Shifting of Earnings Management: Evidence from Sub-Sahara African Firms

ORJINTA, HOPE IFEOMA ; VEN. DR. ONUORA, JKJ; Dr. (MRS) AGUBATA, NONYE, S.

Abstract: This study investigated whether managers use classification shifting to reclassify recurring expenses into non-recurring ones, placing more emphasis on the effect of audit committee in curbing such opaque manipulations. A sample of 75 quoted non-financial firms from three Sub-Sahara African countries (Nigeria, Kenya and South Africa) was used for the period of ten years spanning 2008 to 2017. The study employed ex-post facto and cross-sectional research design in analyzing secondary data collected. Using a methodology similar to McVay (2006) and a sample of 750 Sub-Sahara African firm-year observations, our result revealed that classification shifting is less prevalent in firms whose audit committee is characterized by more meetings, more financial expert members and more independent directors as this leads to lower levels of recurring items misclassification. Specifically, our result discovered that audit committee independence has negative and significant effect on classification shifting which was statistically significant at 10% level of significance while audit financial expertise and audit committee diligence have negative and significant effect on classification shifting at 1% and 5% levels of significance respectively. The findings showed that about 68.4% of changes in total variation in the classification shifting of earnings management can be attributed to the joint effect of all the explanatory variables while about 31.6% was unaccounted for thereby captured by stochastic error term. However, based on the following findings, we suggest that users of financial statements should take account of firms audit committee composition when evaluating firms core earnings.

Reference this Paper: Audit Committee and Classification Shifting of Earnings Management: Evidence from Sub-Sahara African Firms by ORJINTA, HOPE IFEOMA ; VEN. DR. ONUORA, JKJ; Dr. (MRS) AGUBATA, NONYE, S. published at: "Scientific Research Journal (Scirj), Volume VI, Issue X, October 2018 Edition, Page 62-77 ".

Search Terms: Earnings management, classification shifting, non-recurring items, audit committee

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