The Earnings Management Effect of IFRS Implementation: Evidence from an Emerging Economy
Keywords:
IFRS; Earnings management; Discretionary accruals; Capital market, Random effect estimationAbstract
The issue of earnings management continues to be focus of recent research in accounting due to its implications for capital market. This study assesses the effects of IFRS adoption on earnings management for emerging economy with specific evidence based on comprehensive samples of listed firms on South Africa (SA). Using a sample of 186 listed firms, the procedure supposes a random effect estimation to examine the relationship between earnings management and considered variable, for the “prior-IFRS period (2000 to 2004)” and the “post-IFRS period (2017 to 2022)”. The finding confirms significant negative effect of IFRS-adoption on earnings misreporting, suggesting that IFRS-adoption caused a reduction in earnings manipulations in SA. Moreso, book-to-market values, returns on assets and cash flow from operations significantly explains earnings management practices in SA. Lastly, the outcome is observed to be robust and not sensitive to the methods applied for the test; thus, the evidence can be used to make informed policy decisions. The findings have implication for regulation, policy making, and would boost stakeholder’s interests on the capital market in the economy. We recommend that regulators should ensure regular assessment and quality audits of firms’ reports, as such would enhance the integrity of represented financial information and protect investor’s funds.
References
Abuda, I.R. & Rudiawarni, F.A. (2014). The Impacts of IFRS Adoption on Financial Statement Quality for Firms Listed in Indonesia Stock Exchange. Global Journal of Business and Social Science Review Journal Review, Vol. 2(4), pp. 95–102. Available: http://repository.ubaya.ac.id/id/eprint/25531.
Adedokun, W.M.; Gbadebo, A.D.; Adekunle, A.O. & Akande, J.O. (2022). IFRS Adoption and Accrual-Based Managed Earnings in Nigeria. Asian Economic and Financial Review, Vol. 12(12), pp. 1041–1073.
Baiga, M. & Khanb, S.A. (2016). Impact of IFRS on Earnings Management: Comparison of Pre-Post IFRS Era in Pakistan. 3rd International Conference on New Challenges in Management and Organization: Organization and Leadership, 2 May 2016, Dubai, UAE. Procedia - Social and Behavioral Sciences, Vol. 230, pp. 343–350.
Brennan, N.M. (2022). Connecting earnings management to the real world: What happens in the black box of the boardroom? The British Accounting Review, Vol. 53(6).
Bryce, M.; Jahangir Ali, M. & Mather, P.R. (2015). Accounting Quality in the Pre-/Post-IFRS Adoption and the Impact on Audit Committee Effectiveness - Evidence from Australia. Pacific-Basin Finance Journal, Vol. 35, pp. 163-81.
Cadot, J.; Rezaee, A. & Chemama, R.B. (2021). Earnings Management and Derivatives Reporting: Evidence from the Adoption of IFRS Standards in Europe. Applied Economics, Vol. 53(14), pp. 1628-1637.
Chebaane, S. & Othman, H.B. (2014). The Impact of IFRS Adoption on Value Relevance of Earnings and Book Value of Equity: The Case of Emerging Markets in African and Asian Regions. Procedia - Social and Behavioural Sciences, 145, pp. 70–80.
Chimonaki, C. & Konstantinos, V.K. (2020). Evaluating the Effect of IFRS Adoption on Earnings Management in Greece. A Logit Approach. International Journal of Financial Engineering and Risk Management, Vol. 3(2), pp 130-145.
Dechow, P.M.; Sloan, R.G. & Sweeney, A.P. (1995). Detecting Earnings Management. Account Review, Vol. 70, pp. 193–225. Available at SSRN: https://ssrn.com/abstract=5520.
DeFond, M.; Gao, X.; Li, O.Z. & Lijun Xia (2018). IFRS Adoption in China and Foreign Institutional Investments. China Journal of Accounting Research, Vol. 12, pp. 1–32.
De-Moura, A.A.F.; Altuwaijri, A. & Gupta, J. (2020). Did Mandatory IFRS Adoption Affect the Cost of Capital in Latin American Countries. Journal of International Accounting, Auditing and Taxation, Vol. 38.
De-Moura, A.A.F. & Gupta, J. (2019). Mandatory Adoption of IFRS in Latin America: A Boon or A Bias. Journal of International Financial Markets Institutions and Money. Vol. 60, pp. 111–133.
Dimitropoulos, P.E.; Asteriou, D.; Dimitrios Kousenidis, D. & Leventis, S. (2013): The impact of IFRS on accounting quality: Evidence from Greece. Advances in Accounting, incorporating Advances in International Accounting, Vol. 29(1), pp. 108–123.
Groff, M.Z. & Mörec, B. (2020). IFRS 9 Transition Effect on Equity in a Post Bank Recovery Environment: The Case of Slovenia. Economic Research-Ekonomska Istraživanja, Vol. 34(1), pp. 670-686.
Guermazi, W. & Khamoussi, H. (2018). Mandatory IFRS Adoption in Europe: Effect on the Conservative Financial Reporting. Journal of Financial Reporting and Accounting, Vol. 16(4).
IFRS Foundation (2023). Use of IFRS Standards by Jurisdiction. Available at: www.ifrs.org/usearoundthe-world/use-of-ifrs-standards-by-jurisdiction.
Isaboke, C. & Chen, Y. (2019). IFRS Adoption, Value Relevance and Conditional Conservatism: Evidence from China. International Journal of Accounting & Information Management, Vol. 27(4), pp. 529-546.
Jones, J. (1991). Earnings Management during Import Relief Investigations. Journal of Accounting Research, Vol. 29, pp. 193–228.
Ki, D.H.; Lee, W.B. & Yuk, J.H. (2019). The Effect of IFRS Adoption on the Value Relevance of Accounting Information: Evidence from South Korea. Investment Management and Financial Innovations, Vol. 16(2), pp. 78-88.
Kim, J.H. & Lin, S. (2019). Accrual Anomaly and Mandatory Adoption of IFRS: Evidence from Germany. Advances in Accounting, Vol. 47.
Klish, A.A.; Shubita, M. & Wu, J. (2021). IFRS Adoption and Financial Reporting Quality in the MENA Region. Journal of Applied Accounting Research, Vol. 23(3).
Kothari, S.P.; Leone, A.J. & Wasley, C.E. (2005). Performance Matched Discretionary Accrual Measures. Journal of Accounting and Economics, Vol. 39, pp. 163–197.
Kousay, S. (2019). The Impact of IFRS Adoption on Earnings Management-Results from Canada. Journal of Economics and Business. Vol. 2(3), pp. 540- 554.
Leung, E. & Verriest, A. (2015). The Impact of IFRS 8 on Geographical Segment Information. Journal of Bus. Finance & Accounting, Vol. 42(3) & (4), pp. 273–309.
Li, Si & Richie, Nivine (2009). Income Smoothing and the Cost of Debt. Available at SSRN: http://ssrn.com/abstract=1621760.
Lo, K.; Ramos, F. & Rogo. R. (2017). Earnings Management and Annual Report Readability. Journal of Accounting and Economics, Vol. 63(1), pp. 1–25.
Ma, C.; Awan, R.U.; Ren, D.; Alharthi, M.; Haider, J. & Kouser, R. (2022). The IFRS adoption, accounting quality, and banking performance: An evaluation of susceptibilities and financial stability in developing economies. PLOS ONE, Vol. 17(7).
Malofeeva, T.N. (2018). The Impact of IFRS Adoption on Earnings Management in Russia. European Research Studies Journal, Vol. 21(2), pp. 147-164.
Martínez, C.R. (2015). The Impact of the Convergence to IFRS on the Accounting Quality in Mexico. http://ssrn.com/abstract=2611735.
Mensah, E. (2020). The Effect of IFRS Adoption on Financial Reporting Quality: Evidence from Listed Manufacturing Firms in Ghana. Economic Research-Ekonomska Istraživanja, Vol. 34(1), pp. 2890-2905.
Mongruta, S. & Winkelried, D. (2019). Unintended Effects of IFRS Adoption on Earnings Management: The case of Latin America. Emerging Markets Review, Vol. 38, pp. 377–388.
Odoemelam, N.; Okafor, G.R. & Ofoegbu, G.N. (2019). Effect of International Financial Reporting Standard (IFRS) Adoption on Earnings Value Relevance of Quoted Nigerian Firms. Cogent Business & Management, Vol. 6(1).
Ozili, P. & Outa, E. (2018). Bank Income Smoothing in South Africa: Role of Ownership, IFRS and Economic fluctuation. https://ssrn.com/abstract=3242530.
Ozili, P.K. (2017). Discretionary Provisioning Practices among Western European Banks. Journal of Financial Economic Policy, Vol. 9(1), pp. 109-118.
Salah, W. & Abdallah, A. (2019). The Effects of International Financial Reporting Standards on Financial Reporting Quality. Athens Journal of Business and Economics, Vol. 5(3), pp. 221-242. Available at https://buescholar.bue.edu.eg/bus_admin/60/.
Shubita, M. (2015). The impact of income smoothing on earnings quality in emerging markets: Evidence from GCC markets. Journal of Accounting in Emerging Economies, Vol. 5(3). pp. 299-324.
Tawiah, V. & Boolaky, P. (2020). A Review of Literature on IFRS in Africa. Journal of Accounting and Organizational Change. Vol. 16(1), pp. 47-70.
Udayakumara, K.G.A. & Weerathunga, P.R. (2016). The Impact of IFRS/SLFRS Adoption on the Earnings Management of Sri Lankan Firms. http://ssrn.com/abstract=2682437.
Unerman, J. (2020). Risks from self-referential peer review echo chambers developing in research fields. The British Accounting Review, Vol. 52(5).
Yeboah, B. & Yeboah, M. (2015). When Is Accounting Quality Improved? Assessing the Earnings Management Effect of IFRS for South Africa. International Journal of Accounting and Financial Management Research. Vol. 5(2), pp. 1–16. Available: http://www.tjprc.org/publishpapers/2-35-1424259502-1.%20Accounting%20-%20IJAFMR%20%20-When%20is%20Accounting%20Quality%20%20%20-%20Benjamin%20Yeboah%20%20-%20Ghana.pdf.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Emmanuel Imuede Oyasor
![Creative Commons License](http://i.creativecommons.org/l/by-nc/4.0/88x31.png)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
The author fully assumes the content originality and the holograph signature makes him responsible in case of trial.