Academic journal article Academy of Accounting and Financial Studies Journal

How Mandatory Ifrs Adoption Changes Firms' Opportunistic Behavior: Empirical Evidences from the Earnings Management Perspective

Academic journal article Academy of Accounting and Financial Studies Journal

How Mandatory Ifrs Adoption Changes Firms' Opportunistic Behavior: Empirical Evidences from the Earnings Management Perspective

Article excerpt


Managerial opportunistic behaviour in the scope of financial reporting has become one of the main concerns for years. Agency theory has long argued that when the ownership and management are separated, the accounting and operational functions are affected by agency conflicts (Jensen and Meckling, 1976) and increase the information asymmetry between principal and managers. As a consequence, managers may have the incentive to make decisions to fulfil their interest while to some extent, neglecting the interests of principal. Earnings management practice is one of those activities as a result of agency conflicts.

Numerous researches have tried to uncover the reasons (and consequences) of the earnings management practice. However, we emphasized the roles of accounting standards that may inhibit (or foster) managerial opportunistic behaviour through earnings management.

International Financial Reporting Standards was gradually implemented in Indonesia since 2012 in a hope to increase accounting and financial reporting quality. Researches however are stand divided about this. For example, more flexible accounting standard as in IFRS provides a greater scope for the discretion policy and involve a higher degree of subjectivity implied in the application of criteria (Jeanjean and Stolowy, 2008). These "flexible" rules encourage managers to have a broader space in applying their policies that can be used for their own interests if there is no effective control mechanism. Callao and Jarne (2010) maintained that firms regulated by the "loose" accounting standards tend to engage more earnings management (Callao and Jarne, 2010). Additional evidences showed that the principle-based accounting standards in IFRS provides more flexibility and hence looser as compared to the competing generally accepted accounting principles (GAAP) which is known to be "rules-based". Capkun et al. (2012) also documented that earnings management increase can be observed among the companies in the countries that allow early IFRS adoption.

However, Pelucio-Grecco et al. (2014) found that IFRS have restricted effect on earnings management in Brazil after the full implementation of IFRS. Sellami and Fakhfakh (2014) on the other hand found that there is a decrease in the value of the absolute discretionary accruals during the six years after the mandatory adoption of IFRS in France. Doukakis et al. (2014) shows that mandatory IFRS does not significantly affect the level of accrual and real earnings management.

Our research on the other hand, does not attempt to test whether there is a blessing (or curse) after IFRS implementation. Rather, we try to uncover the earnings management practices on the accrual properties of accounting and manager's tendencies to manage their reported earnings through real operational activities; which are also one of our contributions in the financial accounting literature. Healy (1999) maintained that accrual-based earnings management are usually conducted by using extensive judgment in preparing the financial reporting and modifying financial transactions to mislead the users of financial statements about the firms' real performance. Roychowdury (2006) on the other hand, define real earnings management as management desire to mislead the users of financial reporting by manipulating the operational activities that are supposed to in normal fashion. Our contributions also stem from the fact that the impact of IFRS to real earnings management is categorized into their three main activities, namely: abnormal production costs, abnormal net cash flow from operations and abnormal discretionary expenses. We also test whether IFRS may inhibit or foster those activities

The remainder of the paper is organized as follows. Section 2 provides a review of relevant literature and hypotheses development. Section 3 describes the sample selection, variable measurement and research design. …

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