Research indicates that auditors fail to curb classification shifting in countries with relatively weaker legal institutions. However, it is not known whether auditors are unable to detect misclassifications or if they are merely not motivated to report them. We conduct two experiments to...

Classification shifting involves misclassifying operating expenses as non-recurring expenses to inflate the core earnings of the company. Managers are motivated to misclassify earnings because the market participants focus more on core earnings rather than just the bottom line GAAP earnings....