The effect of the mandatory adoption of IAS/IFRS on earnings management: Empirical evidence from South Africa

  • Authors

    • Yosra Mnif Sellami High Institute of Business Administration of Sfax
    • Imen Slimi faculty of Economics and management
    2016-06-22
    https://doi.org/10.14419/ijaes.v4i2.6121
  • IFRS, Earnings Management, Corporate Governance, South Africa.
  • This research investigates the effect of mandatory transition of South African companies to IFRS on earnings management, essential attribute of accounting quality. Specifically, the study examines whether the mandatory adoption of IFRS is associated with reduction of earnings management and therefore, an improvement of accounting quality. In addition, the paper focuses on the effect of corporate governance factors on earnings management.

    Earnings management is assessed by the magnitude of discretionary accruals and accruals quality. The paper compares earnings management in the pre-mandatory IFRS adoption period; 2002-2004 and the post IFRS adoption period; 2010-2012. This study focuses on a sample of 276 firm-year observations, 46 firms drawn from the 413 South African listed companies. A regression model was applied to examine the relation between mandatory adoption of IFRS, corporate governance mechanisms and discretionary accruals controlling for other some factors explaining earnings management.

    Our findings show that mandatory adoption of IFRS by South African companies is associated with lower earnings management. This result suggests that mandatory transition to IFRS contribute to an improvement in the quality of accounting information. Furthermore, results show that the percentage of independent outside directors, the separation of roles of CEO and Chairman of the board and company size have significant influence on reducing discretionary accruals.

  • References

    1. [1] Alali, F.A and Foote, P.S. (2012) ‘the value relevance of International Financial Reporting Standards: Empirical evidence in an Emerging Market’, The International Journal of Accounting, Vol. 47, pp. 85 - 108.http://dx.doi.org/10.1016/j.intacc.2011.12.005.

      [2] Alves, S. (2014) ‘the Effect of Board Independence on the Earnings Quality: Evidence from Portuguese Listed Companies’, Australasian Accounting, Business and Finance Journal, Vol. 8 No.3, pp. 23-44.http://dx.doi.org/10.14453/aabfj.v8i3.3.

      [3] Aussenegg, W., Inwinkl, P., Jelic, R. and Schneider, G. (2011) ‘Earnings Management Behaviour and Choice of Accounting Standards, working paper.

      [4] Ball, R., Robin, A., & Wu, J. S. (2003) ‘Incentives versus standards: Properties of accounting income in four East Asian countries, and implications for acceptance of IA’, Journal of Accounting and Economics, Vol. 36 (1–3), pp.235 – 270.http://dx.doi.org/10.1016/j.jacceco.2003.10.003.

      [5] Barth, M.E, Landsman, W.R and Lang, M. (2008) ‘International Accounting Standards and Accounting Quality’, Journal of Accounting Research, Vol. 46 No. 3, pp.467 - 498.http://dx.doi.org/10.1111/j.1475-679X.2008.00287.x.

      [6] Bartov, E., F.A. Gul and J.S.L. Tsui. (2001) ‘Discretionary-accruals Models and Audit Qualifications’, Journal of Accounting and Economics, Vol. 30 No.3, pp. 421–452. http://dx.doi.org/10.1016/S0165-4101(01)00015-5.

      [7] Bedard, J., Chtourou, S. M., and Courteau, L. (2004) ‘The effect of audit committee expertise, independence, and activity on aggressive earnings management’, Auditing: A Journal of Practice & Theory, Vol. 23 No.2, pp. 13–35.http://dx.doi.org/10.2308/aud.2004.23.2.13.

      [8] Ben Othman, H., and Zeghal, D. (2006) ‘a study of earnings-management motives in the Anglo-American and Euro-Continental accounting models: The Canadian and French cases’, The International Journal of Accounting, Vol. l No.41, pp. 406–435.http://dx.doi.org/10.1016/j.intacc.2006.09.004.

      [9] Bowen, R., S. Rajgopal and M. Venkatachalam. (2008) ‘Accounting Discretion, Corporate Governance, and Firm Performance’, Contemporary Accounting Research, Vol.25 No.2, pp. 351–405.http://dx.doi.org/10.1506/car.25.2.3.

      [10] Bryce, M., Jahangir Ali, M., and 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. 163-181.http://dx.doi.org/10.1016/j.pacfin.2014.12.002.

      [11] Callao, S. and Jarne, J.I. (2010) ‘Have IFRS Affected Earnings Management in the European Union?’ Accounting in Europe, Vol. 7 No. 2, and pp.159 - 189.http://dx.doi.org/10.1080/17449480.2010.511896.

      [12] Chen, H., Tang, Q., Jiang, Y. and Lin, Z. (2010) ‘the role of International Financial Reporting Standards in Accounting Quality: Evidence from the European Union’, Journal of International Financial Management and Accounting, Vol. 24 No. 3, pp. 220 - 278.http://dx.doi.org/10.1111/j.1467-646X.2010.01041.x.

      [13] Chen, X., Cheng, Q., and Wang, X. (2015) ‘Does increased board independence reduce earnings management? Evidence from recent regulatory reforms’, Review of Accounting Studies, Vol. 20 No.2, pp.899-933.http://dx.doi.org/10.1007/s11142-015-9316-0.

      [14] Chua, Y., Cheong, C. and Gould, G. (2012) ‘the Impact of Mandatory IFRS Adoption on Accounting Quality: Evidence from Australia’, Journal of International Accounting Research, Vol. 11No. 1, pp.119 - 146.http://dx.doi.org/10.2308/jiar-10212.

      [15] Daske, H., Hail, L., Leuz, C. and Verdi, R. (2008) ‘Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences’, Journal of Accounting Research, Vol. 46 No. 5 (December), pp.1085 - 1142.http://dx.doi.org/10.1111/j.1475-679x.2008.00306.x.

      [16] Dechow, P.M. and Dichev, I. (2002) ‘the quality of accruals and earnings: the role of accruals estimation errors’, The Accounting Review, Vol. 77 (Supplement), pp.35 - 59.http://dx.doi.org/10.2308/accr.2002.77.s-1.35.

      [17] Dechow, P. M., R. G. Sloan, and A. P. Sweeney. (1995) ‘Detecting earnings management’, The Accounting Review, Vol. 70 No. 2, pp.193 - 225.

      [18] DeFond, M. L., and Jiambalvo, J. (1994) ‘Debt covenant violation and manipulation of accruals’, Journal of Accounting and Economics, Vol.17 No.1/2, pp. 145–176.http://dx.doi.org/10.1016/0165-4101(94)90008-6.

      [19] Ebrahim, A. (2007) ‘Earnings management and board activity: an additional evidence’, Review of Accounting and Finance, Vol. 6 No.1, pp. 42-58.http://dx.doi.org/10.1108/14757700710725458.

      [20] Epstein, B., &Mirza, A. (2002) IAS 2002; interpretation and application of international accounting standards. John Wiley & Sons Inc.

      [21] Ewert, R., and A. Wagenhofer. (2005) ‘Economic effects of tightening accounting standards to restrict earnings management’, The Accounting Review, Vol. 43, pp.1101 – 1124.http://dx.doi.org/10.2308/accr.2005.80.4.1101.

      [22] Fama, E. F., & Jensen, M. C. (1983) ‘Separation of ownership and control’, Journal of Law and Economics, Vol. 26, pp. 301–325.http://dx.doi.org/10.1086/467037.

      [23] Francis, J., LaFond, R., Olsson, P. and Schipper, K. (2005) ‘The market pricing of accruals quality’, Journal of Accounting and Economics, Vol. 39, pp. 295 - 327.http://dx.doi.org/10.1016/j.jacceco.2004.06.003.

      [24] Iatridis, G. (2010) ‘International Financial Reporting Standards and the quality of financial statement information’, International Review of Financial Analysis, Vol. 19, pp.193 - 204.http://dx.doi.org/10.1016/j.irfa.2010.02.004.

      [25] Iatridis, G., and Rouvolis, S. (2010) ‘The post-adoption effects of the implementation of International Financial Reporting Standards in Greece’, Journal of International Accounting, Auditing and Taxation, Vol. 19, pp.55 - 65.http://dx.doi.org/10.1016/j.intaccaudtax.2009.12.004.

      [26] Ismail, W.A.W., Kamarudin, K.A., Zijl, T. and Dunstan, K. (2013) ‘Earnings quality and the adoption of IFRS based Accounting Standards: Evidence from an emerging Market’, Asian Review of Accounting, Vol. 21 No. 1.

      [27] Jeanjean, T. and Stolowy, H. (2008) ‘Do accounting standards matter? An explanatory analysis of earnings management before and after IFRS adoption’, Journal of Accounting and Public Policy, Vol. 27, pp.480 - 494.http://dx.doi.org/10.1016/j.jaccpubpol.2008.09.008.

      [28] Jiang, W., Lee, P. and Anandarajan, A. (2008) ‘The association between corporate governance and earnings quality: further evidence using the GOV score’, Advances in Accounting incorporating Advances in International Accounting, Vol. 24, pp. 191-201.http://dx.doi.org/10.1016/j.adiac.2008.08.011.

      [29] Jones, J. (1991) ‘Earnings management during import relief investigations’, Journal of Accounting Research, Vol. 29 No.2, pp. 193 - 228. http://dx.doi.org/10.2307/2491047.

      [30] Jouber, H., and Fakhfakh, H. (2011) ‘Earnings management and board oversight: an international comparison’, Managerial Auditing Journal, Vol. 27 No.1, pp. 66 – 86.http://dx.doi.org/10.1108/02686901211186108.

      [31] Kao, L., and Chen, A. (2004) ‘The effects of board characteristics on earnings management’, Corporate Ownership & Control, Vol. 1 No.3, pp.96-107.

      [32] Klein, A. (2002) ‘Audit Committee, Board of Director Characteristics, and Earnings Management’, Journal of Accounting Economics, Vol. 33, pp. 375–400.http://dx.doi.org/10.1016/S0165-4101(02)00059-9.

      [33] Kothari, S.P., Leone, A.J. and Wasley, C.E. (2005) ‘Performance matched discretionary accrual measures’, Journal of Accounting & Economics, Vol. 39, pp.163 - 197.http://dx.doi.org/10.1016/j.jacceco.2004.11.002.

      [34] Lee, K. W., Lev, B., and Yeo, G. (2007) ‘Organizational structure and earnings management’,Journal of Accounting, Auditing and Finance, Vol. 22 No.2, pp. 293–331.

      [35] Leif, A., Beisland, K., and Henry, K. (2015) ‘Have IFRS changed how stock prices are associated with earnings and book values? Evidence from Norway’, Review of Accounting and Finance, Vol. 14 No.1, pp. 41 – 63.http://dx.doi.org/10.1108/RAF-06-2013-0079.

      [36] Marra, A., Mazzola, P., and Prencipe, A. (2011) ‘Board Monitoring and Earnings Management Pre- and Post-IFRS’, the International Journal of Accounting, Vol. 46, No. 2, pp. 205- 230.http://dx.doi.org/10.1016/j.intacc.2011.04.007.

      [37] McMullen, D. A. (1996) ‘Audit committee performance: An investigation of the consequences associated with audit committees’, Auditing: A Journal of Practice and Theory, (spring), pp. 87–103.

      [38] McNichols, M.F. (2002) ‘Discussion of The Quality of Accruals and Earnings: The role of Accrual Estimation Errors’, The Accounting Review, Vol. 77, and pp.61 - 69.http://dx.doi.org/10.2308/accr.2002.77.s-1.61.

      [39] Meek, K.J., Roa, P.R. and Skousen, J.C. (2007) ‘Evidence on factors affecting the relationship between CEO stock option compensation and earnings management’, Review of Accounting and Finance, Vol. 6 No. 3, pp. 304-23.http://dx.doi.org/10.1108/14757700710778036.

      [40] Pelucio-Grecco, M.C., SantostasoGeron, M.C., BegasGrecco, G. & Lima, P.C. (2014) ‘ The effect of IFRS on earnings management in Brazilian non-financial public companies’, Emerging Markets Review, Vol. 21, pp. 42-66.http://dx.doi.org/10.1016/j.ememar.2014.07.001.

      [41] Prather-Kinsey, J. (2006) ‘Developing countries converging with developed-country accounting standards: Evidence from South Africa and Mexico’, The International Journal of Accounting, Vol. 41, pp.41 - 162.http://dx.doi.org/10.1016/j.intacc.2006.04.007.

      [42] Reynolds, J. and J. Francis. (2000) ‘Does Size Matter? The Influence of Large Clients on Officelevel Auditor Reporting Decisions’, Journal of Accounting Economics, Vol. 30, pp. 375–400.http://dx.doi.org/10.1016/S0165-4101(01)00010-6.

      [43] Street, D. L., & Gray, S. J. (2002) ‘Factors influencing the extent of corporate compliance with International Accounting Standards: Summary of a research monograph’, Journal of International Accounting Auditing &Taxation, Vol. 11, pp. 51–76.http://dx.doi.org/10.1016/S1061-9518(02)00054-X.

      [44] Stubben, S.R. (2010) ‘Discretionary revenues as a measure of earnings management’, The Accounting Review, Vol. 85 No. 2, pp.695 - 717.http://dx.doi.org/10.2308/accr.2010.85.2.695.

      [45] Sun, J., Lan, G., and Liu, G. (2014) ‘Independent audit committee characteristics and real earnings management’, Managerial Auditing Journal, Vol. 29 No. 2, pp. 153-172.http://dx.doi.org/10.1108/MAJ-05-2013-0865.

      [46] Tsalavoutas, I., André, P. and Evans, L. (2012) ‘The transition to IFRS and the value relevance of financial statements in Greece’, The British Accounting, Vol. 44, pp.262 - 277.http://dx.doi.org/10.1016/j.bar.2012.09.004.

      [47] Van Tendeloo, B., and Vanstraelen, A. (2005) ‘Earnings management under German GAAP versus IFRS’, European Accounting Review, Vol. 14, pp.155 - 180.http://dx.doi.org/10.1080/0963818042000338988.

      [48] Watts R., Zimmerman J.L. (1986). « Positive accounting theory », Prentice Hall, Engelwood Cliffs, NJ.

      [49] Watts, R. L., & Zimmerman, J. L. (1990)‘Positive accounting theory: A ten year perspective‘, The Accounting Review, Vol. 65 No.1, pp. 131–156.

      [50] Wang, D. (2006)‘Founding Family Ownership and Earnings Quality‘, Journal of Accounting Research, Vol. 44 No.3, pp. 619–656.http://dx.doi.org/10.1111/j.1475-679X.2006.00213.x.

      [51] Xie, B., Davidson, W. N., III, and Dadalt, P. J. (2003)‘Earnings management and corporate governance: The role of the board and the audit committee‘, Journal of Corporate Finance, Vol. 9, pp. 296–316.http://dx.doi.org/10.1016/s0929-1199(02)00006-8.

      [52] Zeghal, D, Chtourou, S.M. and Fourati, Y.M. (2012) ‘The Effect of Mandatory Adoption of IFRS on Earnings Quality: Evidence from the European Union’, Journal of International Accounting Research, Vol. 11 No. 2, pp.1 - 25.http://dx.doi.org/10.2308/jiar-10221.

      [53] Zeghal, D., Chtourou, S. and MnifSellami, Y. (2011) ‘An analysis of the effect of mandatory adoption of IAS/IFRS on earnings management’, Journal of International Accounting, Auditing and Taxation, Vol. 20, pp.61 - 72.http://dx.doi.org/10.1016/j.intaccaudtax.2011.06.001.

  • Downloads

  • How to Cite

    Mnif Sellami, Y., & Slimi, I. (2016). The effect of the mandatory adoption of IAS/IFRS on earnings management: Empirical evidence from South Africa. International Journal of Accounting and Economics Studies, 4(2), 87-95. https://doi.org/10.14419/ijaes.v4i2.6121