Is earnings management affected by international financial reporting standards?

Abstract

International Financial Reporting Standards (IFRS) are considered to be instrumental for meeting requirements of comparability, relevance and transparency when examining companies’ results globally. The idea of IFRS is rational and reasonable, though opponents, who disagree that IFRS might provide some benefit, exist. The information asymmetry between managers and stakeholders (especially investors) could potentially be decreased by using one set of accounting standards to ensure that all necessary information is available for decision making. However, managers might affect the reporting performance for their benefits. This paper examines the relationship between a single set of accounting standards—in this case IFRS—and earnings management. When looking at this relationship, the following question presents itself: can IFRS improve manager behaviour and decrease activities of earnings management? While some research (e.g. [10], [31], [23]) related to this topic has been conducted, results have not been conclusive. Some of the research has appeared to confirm the importance of IFRS, while other studies have demonstrated that mandatory IFRS adoption increases earnings management. IFRS may indeed influence earnings management, but not as an isolated issue. This relationship presents a fertile field for future research.