Earnings management using revenue classification shifting – evidence from the IFRS adoption period

2017 ◽  
Vol 25 (3) ◽  
pp. 333-355 ◽  
Author(s):  
Minyoung Noh ◽  
Doocheol Moon ◽  
Laura Parte
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Securities And Exchange Commission ◽  
Unintended Consequences ◽  
Content Type ◽  
Publicly Traded Companies ◽  
Ifrs Adoption ◽  
Classification Shifting ◽  
Core Earnings ◽  
Earnings Targets

Purpose This paper aims to provide evidence of an unintended observable consequence of International Financial Reporting Standards (IFRS) adoption by examining opportunistic use of earnings management through revenue as well as expense items classification shifting in the year of transition. Design/methodology/approach To document classification shifting, the authors take advantage of the Korean mandatory IFRS adoption in 2011, when broad discretion was given to publicly traded companies’ managers to present operating profits. Findings It is found that companies strategically use both revenues and expenses to manage core earnings at the time of transition by shifting other income as a common tactic to improve their operating performance and special expenses just to meet or beat earnings targets. Originality/value Given the concerns of the Securities and Exchange Commission (SEC) about classification shifting behavior and the debate over whether the SEC should mandate the use of IFRS for US companies, the findings of this study are timely and contribute to authors’ understanding of the unintended consequences of mandatory IFRS adoption.

Accrual-based and real earnings management before and after IFRS adoption

2016 ◽  
Vol 17 (1) ◽  
pp. 2-23 ◽  
Author(s):  
Aikaterini C. Ferentinou ◽  
Seraina C. Anagnostopoulou
Keyword(s):  
Earnings Management ◽  
Cash Flows ◽  
Unintended Consequences ◽  
Production Costs ◽  
Real Earnings Management ◽  
Significant Shift ◽  
Accounting Quality ◽  
Content Type ◽  
Ifrs Adoption ◽  
Before And After

Purpose – The purpose of this study is to examine the use of accrual-based vs real earnings management (EM) by Greek firms, before and after the mandatory adoption of International Financial Reporting Standards (IFRS). The research is motivated by the fact that past studies have indicated the existence of significant levels of EM for Greece in particular before IFRS. Design/methodology/approach – Accrual-based earnings management (AEM) is examined by assessing performance-adjusted discretionary accruals, while real earnings management (REM) is defined in terms of abnormal levels of production costs, discretionary expenses, and cash flows from operations, for a three-year period before and after the adoption of IFRS in 2005. Findings – The authors find evidence on a statistically significant shift from AEM to REM after the adoption of IFRS, indicating the replacement of one form of EM with the other. Research limitations/implications – The validity of the results depends on the ability of the empirical models used to efficiently capture the existence of AEM and REM. Practical implications – IFRS adoption aims to improve accounting quality, especially in countries with high need for such an improvement; however, the tendency to substitute one form of EM with another highlights unintended consequences of IFRS adoption, which do not improve the informational content of financial statements if EM continues under different forms. Originality/value – Under the expectation that IFRS adoption should lead to improvements in accounting quality, this study examines whether IFRS actually led to a reduction of EM practices for a country with exceptionally high levels of EM before IFRS, by accounting for all possible forms of EM.

The state of IFRS in Africa

2019 ◽  
Vol 17 (4) ◽  
pp. 635-649 ◽  
Author(s):  
Vincent Tawiah
Keyword(s):  
Financial Reporting ◽  
Unintended Consequences ◽  
International Accounting ◽  
African Countries ◽  
Accounting Standard ◽  
Content Type ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Audit Firms ◽  
Professional Capacity

Purpose The purpose of this paper is to appraise existing literature on International Financial Reporting Standards (IFRS) in Africa. It covers all 54 African countries and their membership in regional and international accounting bodies. Design/methodology/approach This paper uses qualitative research methods, including review and synthesis of a variety of archival materials. Findings Unlike the numerous variations in IFRS adoption on other continents, IFRS countries in Africa have adopted the standards as issued by International Accounting Standard Board (IASB). However, most countries are slow to implement the ROSC (AA) recommendations for IFRS adoption due to lack of institutional and professional capacity. With regards to the unintended consequences, IFRS adoption has made international professional qualifications such as Association of Certified Chartered Accountants popular in Africa; hence, national accounting qualifications are not attractive to prospective accountants. Similarly, IFRS adoption has created a competitive advantage for the Big4 audit firms because companies in IFRS countries prefer the services of the Big4 to that of the local audit firms. Originality/value It is concluded that international organisations that recommend IFRS to Africa, such as the IFRS foundation, IMF and World Bank, should build the sustainable professional and institutional capacity of the countries before persuading them to adopt IFRS, because in Africa, adopting a law is easy but operationalising it has always been the challenge.

Debt financing and classification shifting of private firms

2021 ◽  
Vol 36 (7) ◽  
pp. 921-950
Author(s):  
Heesun Chung ◽  
Bum-Joon Kim ◽  
Eugenia Y. Lee ◽  
Hee-Yeon Sunwoo
Keyword(s):  
Financial Reporting ◽  
Ordinary Least Squares ◽  
Debt Financing ◽  
Private Firms ◽  
Private Debt ◽  
Content Type ◽  
Public Firms ◽  
Reporting Incentives ◽  
Classification Shifting ◽  
Core Earnings

Purpose This study aims to examine whether debt financing creates incentives for private firms to engage in earnings management via classification shifting. Especially, the authors examine whether debt-induced financial reporting incentives differ depending on the type of debt (i.e. public bonds versus private loans) and whether such incentives are influenced by the characteristics of external auditors (i.e. initial audits and auditor size). Design/methodology/approach The study uses data on 93,427 Korean private firms from 2001 to 2016. Classification shifting is measured by the positive correlation between non-core expenses and unexpected core earnings estimated with ordinary least squares. Findings The empirical analyses reveal that private firms engage in classification shifting as do public firms. Importantly, classification shifting is observed only in private firms that have outstanding debt, but not in private firms without debt. Among debt-financing private firms, classification shifting is more prevalent for firms that issue public debt than for firms that only use private debt. In addition, classification shifting of debt-financing private firms is more successful when they are audited by new auditors that are one of the non-Big 4 firms. Research limitations/implications The study provides evidence of classification shifting in private firms, which is novel to the literature. However, the inferences in the study depend on the validity of the model for detecting classification shifting. Practical implications This study helps lenders enhance their understanding on the financial reporting behaviors of borrowing firms. The results in this study suggest that lenders should be cautious in using core earnings for their investment decisions. Originality/value This study contributes to the literature by providing novel evidence of classification shifting in private firms. In addition, the authors contribute to the literature on debt-induced incentives for financial reporting.

Mandatory IFRS adoption in Europe: effect on the conservative financial reporting

2018 ◽  
Vol 16 (4) ◽  
pp. 543-563
Author(s):  
Walid Guermazi ◽  
Halioui Khamoussi
Keyword(s):  
Financial Reporting ◽  
Unintended Consequences ◽  
The European Union ◽  
Content Type ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Intention To Adopt ◽  
Conditional Conservatism ◽  
The Usa ◽  
The Impact

Purpose The purpose of this paper is to investigate how the mandatory shift from domestic standards to International Financial Reporting Standards (IFRS) in Europe affects the conservatism level of reported accounting earnings (i.e. conditional conservatism), with the objective of gaining insights that are relevant for standard setters, capital providers and other users of financial accounting information. Design/methodology/approach Various models have been used in the literature to capture conditional conservatism. In the main tests in this paper, the authors use the Basu’s (1997) earnings-return specification. The authors use a panel data methodology to carry out the paper. Findings In contrast to previous international research studies, it is found that conditional conservatism has increased after the mandatory adoption of IFRS in Europe in 2005, with this increase being dependent on the extent of the accounting changes involved in switching from domestic accounting standards to IFRS reporting. Practical/implications These findings are expected to be particularly relevant to some countries which have not yet adopted IFRS, such as the USA, Japan, Columbia, etc., but have announced their intention to adopt IFRS and to regulators in different jurisdictions who are interested in the impact of IFRS conversion. Originality/value The research to date, based on a multi-country setting, consistently shows a significant decrease in conditional conservatism after adopting IFRS. Based on a sample of firms from the European Union over a long period, the authors provide novel evidence for potentially unintended consequences of IFRS adoption, finding an increase in conditional conservatism behavior.

scholarly journals Abnormal real activities, meeting earnings targets and firms' future operating performance: evidence from an emerging economy

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Lara M. Alhaddad ◽  
Mark Whittington ◽  
Ali Meftah Gerged
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Operating Performance ◽  
The Body ◽  
Production Costs ◽  
Method Of Moment ◽  
Content Type ◽  
Listed Firms ◽  
Earnings Targets

PurposeThis paper aims to examine the extent to which real earnings management (REM) is used in Jordan to meet zero or previous year's earnings, and how this impacts the subsequent operating performance of Jordanian firms.Design/methodology/approachThe study used a sample of 98 Jordanian listed firms over the 2010–2018 period. To test the research hypotheses, which are formulated in accordance with both, agency theory and signalling theory, multivariate regression is performed using a pooled OLS estimation. Additionally, a two-step dynamic generalised method of moment (GMM) model has been estimated to address any concerns regarding the potential occurrence of endogeneity issues.FindingsThe results show that Jordanian firms that meet zero or last year's earnings tend to exhibit evidence of real activities manipulations. More specifically, suspect firms show unusually low abnormal discretionary expenses and unusually high abnormal production costs. Further, consistent with the signalling earnings management argument, the authors find that abnormal real-based activities intended to meet zero earnings or previous year's earnings potentially improve the subsequent operating performance of Jordanian firms. This implies that REM is not totally opportunistic, but it can be used to enhance the subsequent operating performance of Jordanian firms. Our findings are robust to alternative proxies and endogeneity concerns.Practical implicationsThe findings have several implications for policymakers, regulators, audit professionals and investors in their attempts to constrain REM practices to enhance financial reporting quality in Jordan. Managing earnings by reducing discretionary expenses appeared to be the most convenient way to manipulate earnings in Jordan. It provides flexibility in terms of time and the amount of spending. The empirical evidence, therefore, reiterates the crucial necessity to refocus the efforts of internal and external auditors on limiting this type of manipulation to reduce the occurrence of REM activities and enhance the subsequent operating performance of listed firms in Jordan. Drawing on Al-Haddad and Whittington (2019), the evidence also urges regulators and standards setters to develop a more effective enforcement mechanism for corporate governance provisions in Jordan to minimise the likelihood of REM incidence.Originality/valueThis study contributes to the body of the accounting literature by providing the first empirical evidence in the Middle East region overall on the use of REM to meet zero or previous year earnings by Jordanian firms. Moreover, the study is the first to empirically examine the relationship between REM and Jordanian firms' future operating performance.

scholarly journals The impact of IFRS-based accounting standards on earnings management: evidence from Malaysia

2016 ◽  
Vol 5 (1) ◽  
pp. 1
Author(s):  
Yosra Makni Fourati ◽  
Rania Chakroun Ghorbel
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Emerging Market ◽  
Accounting Standards ◽  
Absolute Value ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Earning Quality ◽  
The Impact ◽  
Different Levels

This study aims to examine the consequences of International Financial Reporting Standards (IFRS) convergence in an emerging market. More specifically, we investigate whether the adoption of the new set of accounting standards in Malaysia is associated with lower earnings management. Using a sample of 3,340 firm-year observations across three reporting periods with different levels of IFRS adoption, we provide evidence that IFRS convergence improves earning quality. In particular, we find a significant decrease in the absolute value of discretionary acccruals in the partial IFRS-convergence period (2007-2011), whereas this effect is restrictive after the complete IFRS- implementation.

Corporate social responsibility and earnings management in the EU: a panel data analysis approach

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Panagiotis E. Dimitropoulos
Keyword(s):  
Corporate Social Responsibility ◽  
Panel Data ◽  
Social Responsibility ◽  
Earnings Management ◽  
Financial Reporting ◽  
Negative Association ◽  
Content Type ◽  
Corporate Social ◽  
The Eu

Purpose Over the past decades, corporate social responsibility (CSR) has been considered as a significant corporate strategy and also has been documented as a main information dissemination mechanism of corporations to shareholders, creditors and other external stakeholders. This fact makes the CSR activities and CSR performance interconnected with the quality of firms’ financial reporting. The purpose of this paper is to study the impact of CSR performance on the earnings management (EM) behaviour using a sample from 24 European Union (EU) countries summing up to 121,154 firm-year observations over the period 2003–2018. Design/methodology/approach The study uses a multi-country data set with various dimensions of CSR performance including indexes regarding workforce, community relations, product responsibility and human rights protection. The empirical analysis is conducted with panel data regressions. Findings Evidence supports the negative association between CSR and EM indicating that high CSR performing firms are associated with less income smoothing and discretionary accruals, thus with higher financial reporting quality. Practical implications Regulatory agencies in the EU could use the findings of the study for the improvement of the accounting framework via enhancing the use and publications of social and environmental responsibility information and reports. Social implications Also, the current paper could be of interest not only to academic researchers but also to potential and existing investors in European corporations. The negative association between CSR performance and EM could be used by investors in assessing the risk of firms and the quality and reliability of their financial information. Originality/value This is the first study within the EU, which considers the multi-facet characteristics of CSR on the quality of accounting earnings and offers useful policy implications for regulators and investors.

scholarly journals Heterogeneity in earnings quality between different classes of companies after IFRS adoption: evidence from Brazil

2017 ◽  
Vol 28 (73) ◽  
pp. 113-131
Author(s):  
Roberto Black ◽  
Sílvio Hiroshi Nakao
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Value Relevance ◽  
Earnings Quality ◽  
Economic Incentives ◽  
Net Income ◽  
Accounting Earnings ◽  
Ifrs Adoption ◽  
Before And After

ABSTRACT This paper aims to investigate the existence of heterogeneity in earnings quality between different classes of companies after the adoption of the International Financial Reporting Standards (IFRS). IFRS adoption is generally associated with an increase in the quality of financial statements. However, companies within the same country are likely to have different economic incentives regarding the disclosure of information. Thus, treating companies equally, without considering the related economic incentives, could contaminate earnings quality investigations. The case of Brazil is analyzed, which is a country classified as code-law, in which tax laws determined accounting practice and in which IFRS adoption is mandatory. First, Brazilian companies listed on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBOVESPA) were separated into two classes: companies issuing American Depositary Receipts (ADRs) before IFRS adoption and companies that did not issue ADRs until the adoption of IFRS. Then, this second class of companies was grouped, using cluster analysis, into two different subclasses according to economic incentives. Based on the groups identified, the quality of accounting earnings is tested for each class of the companies before and after IFRS adoption. This paper uses timely recognition of economic events, value relevance of net income, and earnings management as proxies for the quality of accounting earnings. The results indicate that a particular class of companies began showing conditional conservatism, value relevance of net income, and lower earnings management after IFRS adoption. On the other hand, these results were not found for the two other classes of companies.

Financial statement effects of adopting IFRS: the Canadian experience

2018 ◽  
Vol 26 (4) ◽  
pp. 466-491 ◽  
Author(s):  
Eva K. Jermakowicz ◽  
Chun-Da Chen ◽  
Han Donker
Keyword(s):  
Financial Reporting ◽  
Stock Exchange ◽  
Panel Data Analysis ◽  
Financial Statement ◽  
Net Income ◽  
Cross Sectional ◽  
Toronto Stock Exchange ◽  
Content Type ◽  
Publicly Traded Companies ◽  
Interaction Terms

Purpose The purpose of this study is to examine the effects of adopting International Financial Reporting Standards (IFRS) on financial statements of the largest Canadian firms (S&P/TSX 60) listed on the Toronto Stock Exchange (TSX). Design/methodology/approach This study investigates the financial statement effects of 46 companies from the S&P/TSX 60 index which report under IFRS in 2011 and switched to IFRS from CGAAP. This study used panel data analysis, which can be considered as more powerful when conducting cross-sectional and in time analysis among companies. Because of weakness of Cramer statistic on R-square, the authors used interaction terms as suggested by Hope (2007). Findings Consistent with the authors’ perceptions, this study finds that significant effects of adopting IFRS are associated with industry practices. The empirical results show that the adoption of IFRS in Canada created more relevant financial reporting for book value of equity and net income in the post-adoption periods. Originality/value This study should be of interest to the US regulators considering IFRS adoption by US publicly traded companies as well as to regulators, standard setters and listed companies in all countries worldwide that are in transition to IFRS.

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