Impact of Regulatory Change on Income Smoothing and Earning Distortions? Evidence from a Univariate Approach
Keywords:
Income smoothing; Earnings management; Generally Acceptable Accounting Practices; International Financial Reporting Standards, Discretionary accruals, Univariate testingAbstract
There are reports that managers may commit to misstating or h manipulating their financial performance by underestimating or overestimating actual economic items. Notably, research presents evidence that a change in accounting standards has implication for the reduction in such manipulations. The paper applies univariate analysis to examine whether there is likely difference between income smooth and earnings management – two common measures of financial report manipulations – between the two accounting regulatory regimes (Generally Acceptable Accounting Practices and the Financial Reporting Standards) in South Africa. The finding confirms that the adoption of IFRS caused, to some extent a reduction in discretional income smoothing and earnings distortion. Furtherance, the outcome is robust and not sensitive to the methods applied for the test; thus, the evidence can be used to make informed policy decisions. The result has implication for regulation, policy making and modification of extant Standards.
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