Do Big 4 auditors limit classification shifting? evidence from India

Abstract

Extant research suggests that Big 4 auditors compared to non-Big 4 auditors act as a superior deterrent to accrual-based earnings management. We extend this research to another form of earnings management, classification shifting. Our study examines whether Big 4 auditors are more likely to reduce classification shifting in settings where the enforcement of laws is weak. Big 4 accounting firms, because of their global operations, have incentives to develop and maintain strong and uniform reputation globally. Consistent with this argument, we find that employing Big 4 auditors in India is associated with significantly lower levels of classification shifting. Our results also indicate that Big 4 auditors are likely to charge significantly higher fees than non-Big 4 auditors, which, in turn, is associated with a significant reduction in classification shifting.