Motivations for Classification Shifting: A Systematic Review

Abstract

The purpose of the current paper is to highlight the motivations that may encourage managements of firms to shift core expenses to special items in order to inflate core or operating earnings i.e. to practice classification shifting, which would have an effect on the decisions of financial statements' users. This was done through conducting a systematic review on the available literature about classification shifting. The most obvious findings to emerge from this study is that management may engage in classification shifting for the reason that it is less costly than other earnings management methods, the firm being in current or potential state of financial distress, the desire of the management of the firm to meet or beat earnings benchmarks, the ownership structure of the firm having some characteristics that encourage management to engage in such a practice, the firm performing in a weak corporate governance environment, or due to the fact that classification shifting is tough to be detected by external monitors compared to other earnings management methods.