Does the IFRS improve earnings quality? A comparison of Turkish GAAP and IFRS

Purpose The purpose of this study is to reveal the effect on earnings quality of switching to International Financial Reporting Standards (IFRS) from Turkish generally accepted accounting principles (GAAP) by comparing two sets of financial statements based on Turkish GAAP and IFRS. Design/methodology/approach This study is based on mathematical modeling. The variables (total assets, net income, total accruals, cash receivables, return on assets and size) in the models are core to the quantitative research that examines the relationship between them. In this study, the total accruals are computed based on the indirect approach, and the prediction error of the model represents discretionary accruals that reflect earnings management. The data set includes financial data prepared under IFRS and Turkish GAAP. The univariate and multivariate analyses are conducted by SPSS. Findings The results of this study indicate that IFRS does not cause any significant differences in total assets, but the net income under IFRS is larger compared to that under the Turkish GAAP. It is also found that while there is no significant difference in total accruals, there is a difference in discretionary accruals. In other words, Turkish firms use income-reducing discretionary accruals when adopting IFRS. Originality/value This study provides more insights into the effect of IFRS on earnings quality. It also provides evidence of the effect of accounting culture on IFRS adoption. As a code-law country in Turkey, publicly traded firms have to prepare financial statements based on both Turkish GAAP, which is rule-based and restricts management decisions with strict rules, and the principle-based IFRS which leaves more room to manipulate. To the authors’ knowledge, this is the first study that reveals the effect of accounting standards on earnings management by comparing two sets of financials of the same period prepared under different standards.

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The impact of CEOs’ accounting backgrounds on earnings management and conservatism

Journal of CENTRUM Cathedra (JCC) The Business and Economics Research Journal ◽

10.1108/jcc-10-2016-0016 ◽

2017 ◽

Vol 10 (1) ◽

pp. 4-24

Author(s):

Nan Hu ◽

Rong Huang ◽

Xu Li ◽

Ling Liu

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Discretionary Accruals ◽

Accounting Conservatism ◽

Policy Implications ◽

Good News ◽

Content Type ◽

Accounting Research ◽

Significant Difference ◽

The Impact

Purpose Existing literature in experimental accounting research suggests that accounting professionals and people with accounting backgrounds tend to have a lower level of moral reasoning and ethical development. Motivated by these findings, this paper aims to examine whether chief executive officers (CEOs) with accounting backgrounds have an impact on firms’ earnings management behavior and the level of accounting conservatism. Design/methodology/approach The authors classify CEOs into those with and without accounting backgrounds using BoardEx data. Using discretionary accruals from several different models, they do not find that CEOs with accounting backgrounds are more likely to engage in income-increasing accruals. However, the authors find that CEOs with accounting backgrounds exhibit lower levels of conservatism, proxied by C-scores and T-scores (Basu, 1997). This finding suggests that CEOs with accounting backgrounds recognize bad news more quickly than good news, consistent with the accounting principle of “anticipating all losses but anticipating no gains”. Findings The authors show that firms whose CEOs have accounting backgrounds exhibit lower levels of accounting conservatism. However, these firms do not exhibit higher levels of income-increasing discretionary accruals. This study documents the impact of CEOs’ educational backgrounds on firms’ accounting choices and confirms prior findings in experimental accounting research using large sample archival data. Originality/value This paper is the first study that investigates the impact of CEOs’ accounting backgrounds on firms’ financial reporting policy. The findings may have some policy implications. If accounting backgrounds of CEOs can make a significant difference on firms’ behavior, it is reasonable to make CEOs accountable for the quality of financial reporting. This paper is one of the first to empirically test inferences drawn by experimental accounting research. There has been a gap between archival and experimental accounting studies. The authors propose that interesting research questions can be addressed by filling in such a gap.

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

Revista Contabilidade & Finanças ◽

10.1590/1808-057x201702750 ◽

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.

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The role of state ownership on earnings quality: evidence across public and private European firms

Journal of Applied Accounting Research ◽

10.1108/jaar-07-2016-0067 ◽

2018 ◽

Vol 19 (2) ◽

pp. 312-332 ◽

Cited By ~ 5

Author(s):

Cristina Gaio ◽

Inês Pinto

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Capital Markets ◽

Capital Market ◽

Earnings Quality ◽

State Ownership ◽

Public And Private ◽

Content Type ◽

Large Sample

Purpose The purpose of this paper is to examine the role of state ownership on financial reporting quality regarding the characteristics of conservatism and earnings management. Design/methodology/approach Using a large sample of public and private European firms during the period 2003-2010, the authors test the hypotheses following Ball and Shivakumar’s (2005) model for conservatism and the modified Jones (1991) model proposed by Dechow and Sloan (1995) for earnings management. To ensure that the results are robust, the authors conduct sensitivity analysis with regard to potential endogeneity and selection bias. Findings The authors find that state-owned firms are less conservative than non-state-owned firms, which is consistent with the idea that there is less need for accounting conservatism due to government protection. The authors also show that capital markets play an important role in shaping the relation between state ownership and earnings management. Among public firms, the authors find that state-owned firms have higher abnormal accruals and worse accruals quality than non-state-owned firms, which suggests that state-owned firms are not immune to capital market pressures. Research limitations/implications The study has two limitations. First, as state-owned and non-state-owned firms face quite different incentive structures, management behavior might be determined by factors that have yet to be identified. Second, prior research results suggest an inverted U-shape relation between ownership concentration and earnings management (Ding et al., 2007). It would be interesting to investigate the impact of different levels of state ownership on earnings quality. Practical implications As the paper investigates the role of state ownership on earnings quality using a sample of European firms, it brings new insights regarding the role of state ownership in accounting quality and firm performance. In addition, it considers the role of capital markets in the relation between the quality of financial reporting and ownership by considering a sample with both public and private firms. Originality/value The study contributes to the debate about state intervention in the corporate sector, by extending the knowledge of the effects of government ownership on earnings quality by using a large sample of European firms. Furthermore, the authors also introduce the effect of capital market forces on managers’ behavior in state-owned and non-state-owned companies by analyzing private and publicly listed firms.

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Corporate social responsibility disclosures and earnings quality

Managerial Auditing Journal ◽

10.1108/maj-02-2014-0997 ◽

2015 ◽

Vol 30 (3) ◽

pp. 277-298 ◽

Cited By ~ 46

Author(s):

Mohammad Badrul Muttakin ◽

Arifur Khan ◽

Mohammad I Azim

Keyword(s):

Earnings Management ◽

Earnings Quality ◽

Discretionary Accruals ◽

Financial Reports ◽

Content Type ◽

Opportunistic Behaviour ◽

Context Specific ◽

Corporate Social ◽

The Relationship ◽

Responsible Manner

Purpose – This paper aims to explore the relationship between corporate social responsibility (CSR) disclosures and earnings quality proxied by earnings accruals. Specifically, we examine whether CSR disclosures are context-specific, that is, whether companies dominated by powerful stakeholders are obliged to behave in a responsible manner to constrain earnings management, thereby reporting higher-quality earnings to investors. Design/methodology/approach – This paper explores the relationship between CSR disclosures and earnings quality proxied by earnings accruals. Specifically, we examine whether CSR disclosures are context-specific, that is, whether companies dominated by powerful stakeholders are obliged to behave in a responsible manner to constrain earnings management, thereby reporting higher-quality earnings to investors. Findings – Results show that managers in an emerging economy manage earnings when they provide more CSR disclosures. Such earnings management is achieved through income increasing discretionary accruals. Furthermore, companies from export-oriented industries dominated by powerful stakeholders (international buyers) disclosing more CSR activities, provide transparent financial reports through constraining earnings management. Originality/value – The findings of this study are significant for both investors and policymakers. Investors should not take for granted that firms engage in CSR activities, behave ethically and provide transparent financial reports. As we document that firms might manipulate earnings through discretionary accruals and provide less transparent financial reports to shareholders, the credibility of firms’ CSR policies should be assessed with caution. Policies directing at promoting socially responsible practices instead of motivating the desired behaviour, may provide managers with additional incentives to utilise CSR for opportunistic behaviour. Thus, policymakers need to be cautious about this opportunistic behaviour and enhance monitoring to enforce social compliance. Possibly, some guidelines can be introduced to confirm that CSR disclosures are based on actual practice and not just a “green wash” statement to deceive stakeholders.

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Issuance Of Subsidiary Stock As An Earnings Management Strategy

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v21i1.1495 ◽

2011 ◽

Vol 21 (1) ◽

Author(s):

Susan Perry Williams ◽

Thomas H. Williams

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Management Strategies ◽

Academic Research ◽

Financial Statements ◽

Research Literature ◽

Securities And Exchange Commission ◽

Net Income ◽

Earnings Expectations ◽

Income Statement

Arthur Levitt, chairman of the Securities and Exchange Commission, expressed concern that the pervasiveness of earnings management in American corporate financial statements threatens the integrity of financial reporting.  Levitt referred to the “cookie jar” phenomenon wherein U.S. firms have earmarked opportunities to “find gains” when earnings are less than anticipated.  The academic research literature includes a large number of studies on earnings management strategies.  One relatively unexplored strategy is the use of stock issuances by subsidiaries to generate gains under the provisions of SEC Staff Accounting Bulletin No. 51.  Based upon a sample of 125 observations of this accounting choice over the period 1985 through 1997, our study provides compelling evidence that recognition of gains on the issuance of subsidiary stock coincides with periods when earnings fail to meet expectations (as measured by analysts’ forecasts), and that the recognition of these gains in the income statement is effective in achieving earnings expectations. Further, the amounts of these gains are large relative to pre-gain net income

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Deferred tax and earnings management under MASB 25

Social and Management Research Journal ◽

10.24191/smrj.v8i2.5203 ◽

2011 ◽

Vol 8 (2) ◽

pp. 57

Author(s):

Noor Hasimah M. Yacob ◽

Nor'azam Mastuki ◽

Rohaya Md Noor

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Financial Statements ◽

Discretionary Accruals ◽

Income Taxes ◽

Management Behavior ◽

Reporting Standard ◽

Accounting Standard ◽

Deferred Tax ◽

Accounting For Income Taxes

This paper investigates whether Malaysian publicly listed companies in 10 sectors use deferred tax and discretionary accruals as tools to manage earnings in order to meet earning targets: 1) to avoid an earning decline and 2) to avoid a loss. This research examines financial statements prepared during the period 2003 to 2005 when the Malaysian Accounting Standard Board (MASB) 25 Accounting for Income Taxes was in place. This study uses Burgstahler and Dichev's approach to identify earnings management firms. Healy's model and a modified Jones model are also employed to identify and separate accruals. The results show no evidence that deferred tax has been used by firms as a tool to manage earnings during the period of study. The finding suggests that the implementation of the MASB 25 (now known as Financial Reporting Standard (FRS) 112), which is more comprehensive and specific than lAS 12, has reduced the use of deferred tax by firms in managing their earnings. In contrast, the findings of this study provide evidence that firms use discretionary accruals to avoid reporting losses. The results ofthis study may be of use to researchers studying earnings management behavior and for standard setters with regard to establishing and monitoring standards.

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Business group affiliation, earnings management and audit quality: evidence from Bangladesh

Managerial Auditing Journal ◽

10.1108/maj-01-2016-1310 ◽

2017 ◽

Vol 32 (4/5) ◽

pp. 427-444 ◽

Cited By ~ 12

Author(s):

Mohammad Badrul Muttakin ◽

Arifur Khan ◽

Dessalegn Getie Mihret

Keyword(s):

Earnings Management ◽

Audit Quality ◽

Earnings Quality ◽

Investor Protection ◽

Discretionary Accruals ◽

Business Group ◽

Group Affiliation ◽

Content Type ◽

Controlling Shareholders ◽

Business Group Affiliation

Purpose This study aims to investigate the moderating role of audit quality on the association between business group affiliation of firms and earnings management in the South Asian emerging economy of Bangladesh. Design/methodology/approach A usable sample of 917 firm-year observations was drawn from companies listed on the Dhaka Stock Exchange from 2005 to 2013. Data were collected from the annual reports of sample companies. Earnings management was measured using the absolute value of discretionary accruals, and two proxies were used to measure audit quality: auditor size and industry specialisation. Findings Results showed that the level of discretionary accruals is positively associated with business group affiliation status, and higher audit quality reduces this association. This suggests that in environments without strong investor protection, complex ownership structures create opportunities for controlling shareholders to expropriate minority shareholders. The controlling shareholders could then mask this practice through earnings management. The findings also show that in environments lacking strong investor protection, audit quality can help improve earnings quality for group-affiliated firms. Practical implications The results suggest that financial statement users need to consider audit quality for a reasonable evaluation of the earnings quality of business groups. The study also informs regulators by illuminating audit quality as a key area of focus in any effort directed at enhancing stock market efficiency through improved earnings quality in environments where business group affiliation is prevalent. Originality/value This study documents empirical evidence on the moderating effect of audit quality on the positive association between business group affiliation and earnings management.

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The impact of internet financial reporting on Egyptian company’s performance

Journal of Financial Reporting and Accounting ◽

10.1108/jfra-10-2020-0293 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Amani Hussein ◽

Ghadir Nounou

Keyword(s):

Financial Reporting ◽

Stock Price ◽

Stock Return ◽

Regulatory Body ◽

Regression Analyses ◽

Data Set ◽

Content Type ◽

Company Value ◽

Significant Difference ◽

The Impact

Purpose This study aims to examine the impact of internet financial reporting (IFR) on companies’ performances as measured by three performance indicators, namely, stock price, stock returns and company value. Design/methodology/approach A sample of 139 non-financial companies listed in the Egyptian stock exchange is used and classified as 108 IFR companies and 31 non-IFR companies. To test the research hypotheses, an independent t-test and multiple linear regression analyses are used. Findings The results indicate that there are no significant differences between IFR companies and non-IFR companies for both stock price and stock return variables. Conversely, there is a significant difference between IFR companies and non-IFR companies in the company value variable. These results imply rejecting hypotheses H1 and H4 and accepting the hypothesis of H7 that the presence of IFR has an impact on company value. The multiple regression analyses results indicate a significant relation between the scope of IFR and stock price. Likewise, between the degree of IFR and company value. Both degree and scope of IFR have an insignificant impact on stock return, which infer that applying different performance measures can reveal different conclusions. Research limitations/implications This research is a snapshot of IFR limited to a cross-sectional study and could not study the longitudinal data of internet reporting. Second, Marston and Polei (2004) contend that “weights contain an element of subjectivity, which cannot be completely avoided in the composition of such a score” (p. 297) and a variation in the disclosure index can lead to a modification in the results (Kaur and Kaur, 2020). This research applied a weighted index to measure the degree of IFR, which may affect the results and may change it if other indexes are applied. Moreover, the scores of the degree and scope of information disclosure are assumed to be similar every year due to the lack of information regarding the variations in content and presentation in the companies’ websites. Finally, the absence of a complete data set and stock prices for some companies in the sample. Practical implications To enhance the quantity and quality of IFR could be implemented through setting regulations and standards to govern IFR practices companies in Egypt. Moreover, the trade-off of the requirement of the Egyptian Financial Supervisory Authority for Egyptian companies make information available online and the secrecy culture profound in the Egyptian society (Ahmed et al., 2015) involve assigning a regulatory body for monitoring the IFR practices to ensure disseminating timely and accurate information that helps investors make rational decisions. Social implications The researchers recommend the suggestion to have an external assurance conducted by external auditors to enhance the accuracy and credibility of the IFR information. Originality/value Based on prior literature, no studies in Egypt compare between IFR companies and non-IFR companies concerning stock price and company value as measured by Tobin’s Q. Moreover, few research studies in Egypt covered the degree of IFR disclosure whilst not addressing the impact on the stock price. In addition, no prior study examined the scope of IFR disclosure in Egypt. Therefore, the research findings attribute to literature.

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Audit committee, internal audit function and earnings management: evidence from Jordan

Meditari Accountancy Research ◽

10.1108/medar-06-2017-0160 ◽

2019 ◽

Vol 27 (1) ◽

pp. 72-90 ◽

Cited By ~ 6

Author(s):

Ebraheem Saleem Salem Alzoubi

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Audit Committee ◽

Internal Audit ◽

Reporting Quality ◽

Discretionary Accruals ◽

Least Squares Regression ◽

Content Type ◽

Internal Audit Function ◽

The Impact

PurposeThis study aims to examine the influence of audit committee existence and internal audit function on the earnings management of companies.Design/methodology/approachThis paper uses generalised least squares regression to investigate the influence of audit committee existence, internal audit function and the interaction of these two mechanisms on earnings management for a sample of 86 industrial companies listed on the Amman Stock Exchange over a four-year period from 2007 to 2010. The paper uses the extent of discretionary accruals as the proxy for earnings management.FindingsThis paper finds that audit committee existence and the internal audit function reduce the level of earnings management. The number of meetings between the audit committee and internal audit function also reduces discretionary accruals. Overall, this study finds that audit committee existence and internal audit function decrease earnings management and improve the financial reporting quality.Originality/valueThe main contribution of this study is that it investigates the combined effects of audit committee existence and internal auditors on earnings management. Furthermore, this study is the initial paper to examine the impact of audit committee and internal audit on earnings management in Jordan.

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Does XBRL disclosure management solution influence earnings release efficiency and earnings management?

International Journal of Accounting and Information Management ◽

10.1108/ijaim-06-2017-0079 ◽

2019 ◽

Vol 27 (1) ◽

pp. 74-95 ◽

Cited By ~ 2

Author(s):

Tien-Shih Hsieh ◽

Zhihong Wang ◽

Mohammad Abdolmohammadi

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Time Lag ◽

Implementation Strategies ◽

Cash Flows ◽

Good News ◽

Corporate Management ◽

Data Set ◽

Content Type ◽

Disclosure Management

Purpose This study aims to investigate whether eXtensible Business Reporting Language (XBRL) disclosure management solution improves public companies’ earnings release efficiency and mitigates earnings management. Design/methodology/approach This study adopts a unique survey data set from the Financial Executives Research Foundation 2013 to identify companies’ XBRL implementation strategies. Earnings release efficiency is measured by earnings announcement time lag. Multiple indicators of both accruals- and real activities-based earnings management are adopted to examine the research hypotheses. Findings The authors find that the disclosure management solution (DMS) XBRL implementation is positively associated with earnings release efficiency for companies with good news. The authors also find that DMS implementation strategy is negatively related to accruals-based earnings management, but positively related to real activities-based earnings management measured by abnormal cash flows. Research limitations/implications The results of this study can inform regulators, investors and corporate management on how XBRL adoption is associated with corporate financial reporting. Originality/value The study contributes to the XBRL literature by providing empirical evidence on how the strategies adopted by companies to implement XBRL may affect the results of XBRL mandatory adoption.

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