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Mandatory IFRS adoption: the trade-off between accrual-based and real earnings management

Accounting and business research, 2017-01, Vol.47 (1), p.91-121 [Peer Reviewed Journal]

2016 Informa UK Limited, trading as Taylor & Francis Group 2016 ;2016 Informa UK Limited, trading as Taylor & Francis Group ;ISSN: 0001-4788 ;EISSN: 2159-4260 ;DOI: 10.1080/00014788.2016.1238293

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  • Title:
    Mandatory IFRS adoption: the trade-off between accrual-based and real earnings management
  • Author: Ipino, Elisabetta ; Parbonetti, Antonio
  • Subjects: accrual-based earnings management ; Companies ; Compliance ; Earnings ; Earnings management ; Enforcement ; IFRS adoption ; IFRS adoption in non-EU countries ; Incentives ; International Financial Reporting Standards ; Mandatory reporting ; real earnings management ; Scrutiny ; Transparency ; Zero tolerance
  • Is Part Of: Accounting and business research, 2017-01, Vol.47 (1), p.91-121
  • Description: This paper examines whether firms substituted real earnings management for accrual-based earnings management after the International Financial Reporting Standards (IFRS) became mandatory. Using a sample of 101,331 firm-year observations from 33 countries between 2000 and 2010, we show that IFRS adoption came with the unintended consequence of certain firms substituting real earnings management for accrual-based earnings management, especially among firms in countries with strict enforcement regimes. Furthermore, we document that the trade-off is confined to EU countries in which strong firm-level characteristics (i.e. the firm-level mechanism of control, the market's level of scrutiny, and firm-specific incentives to provide transparency) are coupled with strong enforcement. We also show that IFRS had an effect in countries outside the EU, albeit at a different time. Overall, the results suggest that accounting regulators' efforts to increase earnings quality might have had the unintended consequence of increasing real earnings management activities.
  • Publisher: Abingdon: Routledge
  • Language: English
  • Identifier: ISSN: 0001-4788
    EISSN: 2159-4260
    DOI: 10.1080/00014788.2016.1238293
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