Improving earnings quality: The effect of reporting incentives and accounting standards

In this study, we examine which factor, firms’ accounting standards or firms’ reporting incentives, has a greater impact on firms’ earnings management behavior. To answer this question, we utilize unique hand-collected data that consists of foreign firms cross-listed in the U.S. using U.S. GAAP. This interesting setting allows us to control for differing accounting standards and external monitoring from the SEC between foreign firms and their U.S. domestic counterparts. Therefore, if there is any observed difference in the level of firms’ earnings management, that difference can be mainly attributed to firms’ reporting incentives rather than firms’ accounting standards. Our findings suggest that cross-listed foreign firms using U.S. GAAP exhibit more accruals-based and real activities earnings management relative to domestic firms. The results suggest that accounting standards, regulations, and enforcement is not enough to eliminate opportunistic reporting behavior. Firm incentives will still impact the magnitude of earnings management. This finding is particularly important given the hot debate regarding whether the U.S should adopt IFRS or not. No matter what accounting standards firms choose, U.S GAAP or IFRS, firms’ earnings quality can still vary with differing reporting incentives.

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Accounting Standards and Earnings Quality — Evidence from Registered ADRs

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091518500224 ◽

2018 ◽

Vol 21 (04) ◽

pp. 1850022

Author(s):

Yaseen S. Alhaj-Yaseen ◽

Kean Wu ◽

Leslie B. Fletcher

Keyword(s):

Financial Reporting ◽

Earnings Quality ◽

Accounting Standards ◽

Securities And Exchange Commission ◽

High Quality ◽

Reporting Standard ◽

International Financial Reporting Standard ◽

The Us ◽

Us Gaap

This paper examines the changes in earnings quality of registered American Depositary Receipts (ADRs) as a result of switching accounting standards. We aim to shed light on the potential impact of International Financial Reporting Standard (IFRS) adoption on US firms. A suboptimal approach to achieve this goal is through examination of US firms’ surrogates such as ADRs. Unlike previous studies, we made a distinction between registered and unregistered ADRs and affirmed that registered ADRs are the closest surrogates with which to conduct our analysis because they are exclusively required to adhere to the Securities and Exchange Commission (SEC)’s stringent disclosure requirements. When cross-listing their equity on the US exchanges, foreign issuers can file their financial reports with the SEC using IFRS, US GAAP (generally accepted accounting principles), or their domestic GAAP with reconciliation to US GAAP. An improvement in earnings quality is documented when ADRs adopt US GAAP or IFRS versus domestic GAAP. However, when the comparison is made between US GAAP and IFRS, no difference in earnings quality is documented. These results indicate that switching to high-quality accounting standards is likely to improve earnings quality. This improvement is maximized when the difference between reporting standards is high and minimized if otherwise. Our conclusion is that the adoption of IFRS in the US is unlikely to change earnings quality of local issuers. Moreover, we drew a distinction between reconciliation with and adoption of high-quality accountings standards and find that while the former can enhance earnings quality, the latter can further improve it.

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Zar, Inc.: A Case in Earnings Quality

Issues in Accounting Education ◽

10.2308/iace.2002.17.4.419 ◽

2002 ◽

Vol 17 (4) ◽

pp. 419-429 ◽

Cited By ~ 1

Author(s):

Jimmy W. Martin

Keyword(s):

Financial Reporting ◽

Audit Committee ◽

Earnings Quality ◽

Accounting Standards ◽

Controversial Issue ◽

High Tech ◽

Additional Information ◽

The Future ◽

The Way

Zar, Inc., a high-tech company, has recently experienced turnover in its CEO and CFO positions. Zar, like other firms in its industry, is undergoing a down year due to the declining economy. Thomas Brown, who has recently been hired as the CFO, quickly realizes that there is little he can do to avoid the firm's first loss in many years. However, Thomas also understands that there are things that he can do to pave the way toward greater profits in the future. You are invited to listen in on three separate conversations that the CFO has with the CEO, the firm's audit committee, and finally with Zar's independent auditor. After hearing each conversation, you will be asked to evaluate the CFO's ideas as well as those of other parties to the dialogue. Some of the questions are rather straightforward and can be answered by recalling or researching specific accounting standards. Other questions are more open-ended and will require your best judgment based on the facts given in the case. Some questions may require you to provide additional information before making a definite decision. All of the scenarios focus on earnings quality and should enhance your understanding of this critical and controversial issue that pervades financial reporting today.

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The impact of the global economic crisis of 2008 on earnings quality in Mexico

Journal of Accounting in Emerging Economies ◽

10.1108/jaee-08-2016-0071 ◽

2019 ◽

Vol 9 (3) ◽

pp. 407-421

Author(s):

Jose Miranda-Lopez ◽

Ivan Valdovinos-Hernandez

Keyword(s):

Earnings Management ◽

Economic Crisis ◽

Earnings Quality ◽

Accounting Standards ◽

Previous Literature ◽

Income Smoothing ◽

Accounting Quality ◽

Content Type ◽

Global Economic Crisis

Purpose The purpose of this paper is to examine the earnings quality of companies listed on Mexico’s primary stock market, the Bolsa Mexicana de Valores (Bolsa) before and during the global economic crisis of 2008. Previous research has shown that these economic events can have potentially conflicting effects on the quality of earnings of listed companies in capital markets around the world. Design/methodology/approach This paper operationalizes earnings quality based on earnings management. Therefore, four constructs to proxy for earnings quality are developed from previous literature, and multiple regression analysis along with tests of differences across two time periods, 2005–2007 and 2008–2010, are used to determine if there is a significant change in the accounting quality of companies listed on the Bolsa before and after the start of the global economic crisis. Findings Results indicate a statistically significant decrease of earnings quality on three out of the four constructs used to proxy for earnings management. There is only one construct in this category that shows a significant increase of earnings quality. Research limitations/implications There are different number of constructs and methodologies used to test for earnings quality. This study draws on four different constructs on two dimensions of earnings quality from previous literature, but other methodologies and constructs can potentially be used as well, such as discretionary accruals. Furthermore, there is a chance that there can be confounding factors affecting the results of this study besides the effects of the global economic crisis. Finally, the sample used in this study comprises non-financial public companies listed on the Bolsa, which can affect the generalization of the results to countries other than Mexico. Practical implications The results of this study can be of interest to Mexican and foreign investors, standard setters and regulators of the Bolsa, as the results show a strong incentive to manage companies’ earnings using income smoothing in an emerging economy during an economic crisis even after converging to a higher-quality set of accounting standards. Results can also be of interests to investors and regulators in other Latin-American countries with economies similar to that of Mexico. Originality/value This is the first study to test the quality of earnings of Mexican companies before and during the global economic crisis of 2008. Thus, this study contributes to the accounting quality literature by offering evidence showing a significant increase of income smoothing during the global economic crisis for companies listed in a developing economy with a relevant history of economic crises, even when these companies were using recently converged, higher-quality accounting standards.

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Earnings quality and the adoption of IFRS‐based accounting standards

Asian Review of Accounting ◽

10.1108/13217341311316940 ◽

2013 ◽

Vol 21 (1) ◽

pp. 53-73 ◽

Cited By ~ 37

Author(s):

Wan Adibah Wan Ismail ◽

Khairul Anuar Kamarudin ◽

Tony van Zijl ◽

Keitha Dunstan

Keyword(s):

Earnings Quality ◽

Accounting Standards

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Tax Reporting Aggressiveness and Its Relation to Aggressive Financial Reporting

The Accounting Review ◽

10.2308/accr.2009.84.2.467 ◽

2009 ◽

Vol 84 (2) ◽

pp. 467-496 ◽

Cited By ~ 472

Author(s):

Mary Margaret Frank ◽

Luann J. Lynch ◽

Sonja Olhoft Rego

Keyword(s):

Stock Returns ◽

Financial Reporting ◽

Accounting Standards ◽

Financial Accounting ◽

Tax Law ◽

Reporting Incentives ◽

Reporting Behaviors ◽

Aggressive Financial Reporting ◽

Tax Reporting ◽

Better Than

ABSTRACT: We investigate the association between aggressive tax and financial reporting and find a strong, positive relation. Our results suggest that insufficient costs exist to offset financial and tax reporting incentives, such that nonconformity between financial accounting standards and tax law allows firms to manage book income upward and taxable income downward in the same reporting period. To examine the relation between these aggressive reporting behaviors, we develop a measure of tax reporting aggressiveness that statistically detects tax shelter activity at least as well as, and often better than, other measures. In supplemental stock returns analyses, we confirm that the market overprices financial reporting aggressiveness. We also find that the market overprices tax reporting aggressiveness, but only for firms with the most aggressive financial reporting.

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