Does Mandatory Adoption of IFRS Improve Accounting Quality? Preliminary Evidence

Contemporary Accounting Research (Impact Factor: 1.43). 07/2012; 30(4). DOI: 10.2139/ssrn.1502909


We provide evidence on the preliminary effects of mandatory adoption of International Financial Reporting Standards (IFRS) on accounting quality for a relatively broad set of firms from 20 countries that adopted IFRS in 2005 relative to a benchmark group of firms from countries that did not adopt IFRS matched on the strength of legal enforcement, industry, size, book-to-market, and accounting performance. Relative to these benchmark firms, we find that IFRS firms exhibit significant increases in income smoothing and aggressive reporting of accruals, and a significant decrease in timeliness of loss recognition; however we do not find significant differences across IFRS and benchmark firms in meeting or beating earnings targets. Our findings contrast with findings in earlier studies which suggest that IFRS adoption leads to increased accounting quality. Our findings primarily hold for firms in strong enforcement countries which suggests that enforcement mechanisms in these countries were not able to counter the initial effects of greater flexibility in IFRS relative to domestic GAAP.

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    • "However, while comparability of accounting information is considered of paramount importance for facilitating investors' decisions and enhancing efficient asset allocation, to date most studies that investigate the mandatory adoption of IFRS focus on either changes in financial reporting quality or capital market consequences rather than on changes in cross-country comparability. Studies that focus on changes in financial reporting quality include Ahmed et al. 2010; Atwood et al. 2010; Beuselinck et al. 2009; Capkun et al. 2008; Garcia et al., 2009; Landsman et al. 2009; Platikanova and Nobes, 2006. Taken together, the studies so far present an ambiguous picture about the quality effect of mandatory IFRS adoption. "
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    ABSTRACT: We investigate the effects of mandatory IFRS adoption on the comparability of financial accounting information. Using two comparability proxies based on De Franco et al. [2011] and a comparability proxy based on the degree of information transfer, our results suggest that the overall comparability effect of mandatory IFRS adoption is marginal. We hypothesize that firm-level heterogeneity in IFRS compliance explains the limited comparability effect. To test this conjecture, we first hand-collect data on IFRS compliance for a sample of German and Italian firms and find that firm-, region-, and country-level incentives systematically shape IFRS compliance. We then use the identified compliance determinants to explain the variance in the comparability effect of mandatory IFRS adoption and find it to vary systematically with firm-level compliance determinants, suggesting that only firms with high compliance incentives experience substantial increases in comparability. Moreover, we document that firms from countries with tighter reporting enforcement experience larger IFRS comparability effects, and that public firms adopting IFRS become less comparable to local GAAP private firms from the same country.
    Review of Accounting Studies 10/2015; 20(1):242-282. DOI:10.1007/s11142-014-9296-5 · 2.02 Impact Factor
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    • "It was concluded, among other things, that the studies on the impacts of IFRS adoption still have limited results, largely due to the fact that legal requirement of IFRS adoption is very recent. Ahmed, K. et al. (2013) have conducted a meta-analysis of studies on the effect of IFRS adoption on information quality, measured as value relevance and discretionary accruals, and on analysts' prediction quality . Their results suggest: absence of a relevant increase in the value of equity and a reduction in discretionary accruals; the existence of a significant increased value in the results, when assessed by pricing models; and improved prediction of outcomes by financial analysts. "
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    ABSTRACT: This study characterizes the results of scientific research on the effect of adopting the International Financial Reporting Standards (IFRS) that have been published in the most prestigious scientific journals in the field of accounting at the international level and it identifies avenues for further research. Based on the analysis of a set of 67 articles published by the accounting journals that make up the Social Sciences Citation Index (SSCI), published between 2000 and 2013, it is concluded that, as a general rule, IFRS adoption has a positive effect on information quality, the capital market, analysts' ability to predict, comparability, and information use. Nevertheless, this effect depends on some factors, such as country's characteristics (namely, the enforcement level) and companies' characteristics. Sharing rules is not, by itself, enough to create a common business language, and management incentives and institutional factors play a major role in framing the characteristics of financial reporting. Finally, some gaps are identified in the literature and avenues for further research are introduced.
    05/2015; 26(ahead):00-00. DOI:10.1590/1808-057x201500090
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    • "Capkun et al. (2012) argue that IFRS changed significantly from 2003 to 2005, allowing managers greater flexibility and discretion. They conclude that these changes explain the contradictory results of Barth et al. (2008) for voluntary and Christensen et al. (2008) and Ahmed et al. (2013) for mandatory IFRS adopters. An improvement in accounting quality is documented by Chen et al. (2010), who find evidence of a decrease in earnings management toward a target, a decrease in absolute discretionary accruals, and a decrease in the standard deviation of unexplained accruals. "
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    ABSTRACT: This study examines the effect of mandatory adoption of International Financial Reporting Standards (IFRS) on both accrual-based and real earnings management. While prior literature has mainly examined the effects of IFRS adoption on accrual-based earnings management, no study to date has focused on the impact of IFRS adoption on real earnings management. Using a sample of 15,206 observations from 22 European countries between 2000 and 2010, this study employs a control sample of voluntary adopters and applies a differences-in-differences design to control for confounding concurrent events. The results suggest that mandatory IFRS adoption had no significant impact on either real or accrual-based earnings management practices. Additional analysis on a sub-sample of firms with relatively strong earnings management incentives supports a dominant role for firm-level reporting incentives over accounting standards in shaping financial reporting quality.
    Journal of Accounting and Public Policy 12/2014; 33(6):551-572. DOI:10.1016/j.jaccpubpol.2014.08.006 · 1.05 Impact Factor
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