The Effects Of IFRS Adoption On Earnings Management

Since 2005,listed firms in the European Union were required to report consolidated financial statements under IFRS issued by the European Parliament. Prior to 2005,firms in the EU had the choice either to follow national Generally Accepted Accounting Principles(GAAP) or IFRS. The aim of these new accounting standards is to obtain comparability and transparency of financial reports. Apart from comparability an transparency, higher reporting quality is also expected. This means that the new international accounting standards should help the requirement is only subjected to public firms, some privately held firms have voluntarily adopted or switched to IFRS. This adoption of these new standards was really a big change in financial reporting and got the attention over the past several years.This paper contributes to the existing literature by exploring the effects of IFRS adoption on earnings management for non-listed companied, since most of the relevant studies only focused on public firms. The objective of this study is to examine the impact of adopting International Financial Reporting Standards(IFRS) on earnings management using a sample of UK private firms. We examine the impacts of IFRS adoption on earnings management using data of the UK’s privately held firms and the time period is from 2003 to 2010.Previous studies use the absolute value of discretionary accruals as a measure of earnings management, we split discretionary accruals into absolute, negative and positive discretionary accruals to examine whether IFRS adoption has different impacts on earnings management considering of the directions of managed earnings. Meanwhile, we also examine that whether firm feathers might affect the level of earnings management for IFRS adopters.The results of this empirical study show IFRS adoption is positively related to absolute discretionary accruals significantly, which indicate that IFRS-adoption firms are related with stronger earnings management. However, audit quality does not affect earnings management for IFRS adopters with income-increasing manipulation. In fact, higher audit quality causes earnings management to a higher level for IFRS adopters with income-decreasing accruals. In addition, larger firm size intensifies earnings management for IFRS adopters with income-increasing accruals.Some limitations may be considered in interpreting the results. First, as IFRS is mandatory for listed firms in the UK merely from the year 2005,the time duration is not long enough to conduct unbiased analysis. So it is suggested to take longer time duration for further research as such. Second, the discretionary accruals are only measured by Modified Jones Models. Even though this model has been frequently used on detecting earnings management, its effectiveness is still controversial. Third, the results might be biased due to the small proportion of firm adopting the new accounting standards.