Enforcement of Accounting Standards: How Effective is the German Two-Tier System in Detecting Earnings Management?

Review of Managerial Science, Vol. 9 (2015), pp. 431-485

73 Pages Posted: 5 Feb 2011 Last revised: 16 Jun 2015

See all articles by Hans-Joachim Böcking

Hans-Joachim Böcking

Goethe University Frankfurt - Department of Accounting and Auditing

Marius Gros

Niederrhein University of Applied Sciences; Goethe University Frankfurt - Department of Accounting and Auditing

Daniel Worret

Goethe University Frankfurt - Department of Accounting and Auditing

Date Written: November 10, 2014

Abstract

Within the European Union, the IAS-Regulation has harmonized applicable accounting standards for consolidated financial statements of capital market oriented companies by requiring IFRS since 2005. Regarding enforcement of financial reporting, the IAS-Regulation offered only small guidance for EU member states which led to the implementation of different enforcement systems. Currently, harmonization efforts are taken, in particular by the European Securities and Markets Authority (ESMA), to establish a cross-jurisdictional accounting enforcement regime. This paper contributes to the discussion of standardized EU-wide enforcement mechanisms by assessing the effectiveness of the current German two-tier enforcement system in detecting earnings management. Using a unique data set provided by the German capital market authority, we find that the German enforcement system is effective in detecting earnings management, but shows weak ability in constraining earnings management in years following error releases.

Keywords: Enforcement, IFRS, Accounting Error, Earnings Management, Accounting Quality

JEL Classification: K22, M41, M48

Suggested Citation

Böcking, Hans-Joachim and Gros, Marius F. and Worret, Daniel, Enforcement of Accounting Standards: How Effective is the German Two-Tier System in Detecting Earnings Management? (November 10, 2014). Review of Managerial Science, Vol. 9 (2015), pp. 431-485, Available at SSRN: https://ssrn.com/abstract=1755122 or http://dx.doi.org/10.2139/ssrn.1755122

Hans-Joachim Böcking

Goethe University Frankfurt - Department of Accounting and Auditing ( email )

Mertonstr. 17-25
60325 Frankfurt
Germany

Marius F. Gros

Niederrhein University of Applied Sciences ( email )

Germany

Goethe University Frankfurt - Department of Accounting and Auditing ( email )

Theodor-W.-Adorno-Platz 1
60323 Frankfurt
Germany

Daniel Worret (Contact Author)

Goethe University Frankfurt - Department of Accounting and Auditing ( email )

Mertonstr. 17-25
60325 Frankfurt
Germany

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