Accounting Standards, Earnings Management, and Earnings Quality

2012 ◽  
Author(s):  
Ralf Ewert ◽  
Alfred Wagenhofer
Keyword(s):  
Earnings Management ◽  
Earnings Quality ◽  
Accounting Standards

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

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.

scholarly journals Accounting Standards, Reporting Incentives, and Earnings Management

2020 ◽  
Vol 9 (2) ◽  
pp. 60
Author(s):  
Xiaoxiao Song ◽  
Jennifer L. Bannister
Keyword(s):  
Earnings Management ◽  
Earnings Quality ◽  
Accounting Standards ◽  
Foreign Firms ◽  
Management Behavior ◽  
Reporting Behavior ◽  
Domestic Firms ◽  
External Monitoring ◽  
Reporting Incentives ◽  
The U.S

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.

Economic Effects of Tightening Accounting Standards to Restrict Earnings Management

2005 ◽  
Vol 80 (4) ◽  
pp. 1101-1124 ◽  
Author(s):  
Ralf Ewert ◽  
Alfred Wagenhofer
Keyword(s):  
Earnings Management ◽  
Rational Expectations ◽  
Earnings Quality ◽  
Accounting Standards ◽  
Relevant Information ◽  
Economic Effects ◽  
Real Earnings Management ◽  
Accounting Earnings ◽  
Marginal Benefit ◽  
Accounting Earnings Management

This paper examines the usual claim that tighter accounting standards reduce earnings management and provide more relevant information to the capital market. We distinguish between accounting and real earnings management and assume that a standard setter can only influence accounting earnings management by the tightness of standards. In a rational expectations equilibrium model, we find that earnings quality increases with tighter standards, but we identify several consequences that may outweigh this benefit. First, managers increase costly real earnings management because the higher earnings quality increases the marginal benefit of real earnings management. Second, tighter standards can increase rather than decrease expected accounting and total earnings management. Third, the expected total costs of earnings management can also increase. We provide conditions for the occurrence of each of these effects.

PENGARUH EARNINGS MANAGEMENT TERHADAP EARNINGS QUALITY

2010 ◽  
Author(s):  
Pupun Tri Wahyuni ◽  
Resti Yulistia Muslim
Keyword(s):  
Earnings Management ◽  
Sampling Method ◽  
Stock Exchange ◽  
Earnings Quality ◽  
Manufacturing Companies ◽  
Financial Report ◽  
Earnings Response Coefficient ◽  
Discretionary Accrual ◽  
Response Coefficient ◽  
Earnings Response

This research objective is to axamine empirically the influence of earnings management on earnings quality. The study motivated by the controversy of previous study about earnings management and earnings quality. Earnings management was measured by Discretionary Accrual and earnings quality was measured by Earnings Response Coefficient (ERC). The units were 128 (16x8) Quartal financial report in manufacturing companies listed in the Jakarta Stock Exchange, started from the year 2005 up to 2006. The data was collected using purposive sampling method. Statistical method used to test the hypotheses was multiple regressions. The result of the research showed that: the influence of earnings management on earnings quality was negative, sig 0.049. It means that the lower earnings management will be followed by higher earnings quality. This study supported the result of Fetham and Pae (2000), Nelson et al. (2000), Scott (2000), Lobo and Zhou (2001), also Teixeira (2002), Pudjiastuti (2006). 

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.

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.

Revisiting earnings quality and bank efficiency among East African developing economies: do systemic banking and financial crises matter?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
David Mutua Mathuva ◽  
Moses Nyangu Nzuki
Keyword(s):  
Earnings Management ◽  
Developing Economies ◽  
Earnings Quality ◽  
Bank Loan ◽  
East African ◽  
Loan Loss ◽  
Profit Efficiency ◽  
Regional Economic ◽  
Content Type ◽  
Economic Bloc

PurposeIn this paper, the authors investigate whether the systemic local banking crises (LBCs) and global financial crisis (GFC) impact the association between bank profit efficiency and earnings quality in developing economies.Design/methodology/approachUsing panel data spanning 29 years over the period 1991–2019 for 169 banks drawn from five East African countries, the authors perform difference-in-difference multivariate analyses using the generalised method of moments (GMM) system estimator on a sample consisting of 2,261 bank-year observations.FindingsThe results, which are robust for endogeneity and other checks, show that banks with higher profit efficiency consistently report higher quality earnings. The authors further establish that whereas systemic LBCs contribute negatively to bank earnings quality, the GFC tends to have a positive impact. These results are upheld when the joint impacts of both systemic LBCs, GFC and profit efficiency on earnings quality are considered. The positive influence of profit efficiency and GFC on earnings quality is pronounced under income-decreasing earnings management. The impacts of profit efficiency, LBCs and GFC on earnings quality appear to be non-monotonic and vary across the sampled countries.Research limitations/implicationsThe study's findings are based on banks in five developing countries within a regional economic bloc. Additional studies could focus on other economic blocs for enhanced generalisability of the findings. In addition, some of the variables examined are studied at bank-level, while other variables are at country-level. Finally, the study establishes an association between the variables of interest, and this does not necessarily imply causation.Practical implicationsThe results provide useful insights to bank regulatory and supervisory agencies on the need to exercise increased risk-based scrutiny over bank loan loss provisioning and minimum loan loss reserve requirements. From an audit perspective, auditors need to be cautious and apply an enhanced risk-based audit especially when auditing banks during and after a financial, banking or systemic crisis. Credit rating agencies need to pay closer attention to the LLPs of distressed banks. Finally, bank investors and customers should be cautious when using bank financial statements, since bank managers of poorly performing banks might engage in aggressive earnings management.Originality/valueThe study is perhaps the first to examine the joint effects of systemic LBCs on the association between bank profit efficiency and the quality of earnings in a larger dataset of banks in a developing regional economic bloc. The authors also employ the GMM system estimator in the modelling, which helps address some weaknesses in prior studies.

Accounting Standards and Earnings Quality — Evidence from Registered ADRs

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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