Author :
Abstract
This study examines classification shifting, which is considered a relatively more implicit profit management tool in financial reporting, from a corporate governance perspective. Classification shifting enables the steering of reported core profit through the reclassification of income statement items without altering total profit, and in this respect, it exhibits a structure that is more difficult to detect compared to traditional profit management practices. The main objective of the study is to reveal under which corporate governance mechanisms classification shifting is more likely to occur and to highlight the role of these mechanisms in financial reporting behavior. In this context, the literature on classification shifting has been systematically reviewed, and the relationship between corporate governance structures and this practice has been evaluated. The findings show that strong corporate governance mechanisms limit accrual-based earnings management, while directing managers towards more covert and difficult-to-detect methods such as classification shifting. In particular, audit committee effectiveness, audit quality, and managerial incentives were found to be decisive in the intensity and preferred form of classification shifting. The results of the study reveal that classification shifting should be evaluated not only as a technical accounting choice but also as a reflection of corporate governance quality and the reporting environment. In this respect, the study offers a comprehensive perspective on earnings management and corporate governance literature and provides important insights for regulatory bodies, auditors, and investors regarding the enhancement of financial reporting transparency.
Keywords
Abstract
This study examines classification shifting, which is considered a relatively more implicit profit management tool in financial reporting, from a corporate governance perspective. Classification shifting enables the steering of reported core profit through the reclassification of income statement items without altering total profit, and in this respect, it exhibits a structure that is more difficult to detect compared to traditional profit management practices. The main objective of the study is to reveal under which corporate governance mechanisms classification shifting is more likely to occur and to highlight the role of these mechanisms in financial reporting behavior. In this context, the literature on classification shifting has been systematically reviewed, and the relationship between corporate governance structures and this practice has been evaluated. The findings show that strong corporate governance mechanisms limit accrual-based earnings management, while directing managers towards more covert and difficult-to-detect methods such as classification shifting. In particular, audit committee effectiveness, audit quality, and managerial incentives were found to be decisive in the intensity and preferred form of classification shifting. The results of the study reveal that classification shifting should be evaluated not only as a technical accounting choice but also as a reflection of corporate governance quality and the reporting environment. In this respect, the study offers a comprehensive perspective on earnings management and corporate governance literature and provides important insights for regulatory bodies, auditors, and investors regarding the enhancement of financial reporting transparency.
