Do Religion, Corporate Governance and BIG 4 Audit Interactions Affect Misclassification?

This study examines the extent to which religious socials norms of the firms’ environment interacts with corporate governance and BIG4 audit to affect managers’ motivation to engage in misclassification so as to influence reported core earnings. Using a sample of 23,164 U.S. firm-year observations between 2000 and 2015, we show that religiosity complements corporate governance to mitigate classification shifting in both rural and urban areas. In a religious environment, we find that managers have disincentive to shift revenue items from and core expenses into special items to inflate reported core earnings to avoid market penalties and beat analyst forecast, even more so in the presence of board independence. In addition, we find that the interaction between religiosity and audit from big four auditors also lower the presence of misclassification. Overall, results show that religiosity complements corporate governance and audit against misclassifying revenue items or core expenses.