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The Effect of Auditor Tenure and Industry Expertise on Classification Shifting

Sat, January 19, 7:30 to 8:30am, TBA

Abstract

In this study, we investigate how auditors’ client- and industry-specific knowledge, proxied by tenure and industry expertise (at both the national and city level), impact client firms’ tendency to reclassify cost of goods sold (COGS) and/or selling, general and administrative expenses (SGA) as income-decreasing special items. Our results show that both extended auditor tenure and auditor industry expertise can mitigate the SGA reclassification, but not COGS shifting. Our findings indicate that while industry expertise at either the national or city level individually can reduce clients’ SGA shifting, the joint expertise at both levels is the most effective in constraining SGA reclassification. Our study sheds light on the constraints of core expense shifting. We provide evidence on how auditors differentially affect client firms’ misclassification of COGS versus SGA.

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