Does Enforcement Change Earnings Management Behavior? Evidence from the EU after Mandatory IFRS Adoption
53 Pages Posted: 2 Dec 2015
Date Written: November 30, 2015
We examine the expected preventive function of enforcement of financial reporting which has been subject to reforms in several EU member states in the years following mandatory IFRS adoption. Specifically, we are interested in the question whether accounting quality – proxied by several earnings management metrics – improved in countries with substantive changes in their enforcement setting. For this reason, we compare the development in earnings management activities for a treatment sample of firms from 7 countries with enforcement changes with two control samples from 13 countries in total that do not exhibit comparable enforcement reforms. In contrast to prior literature, we cannot provide consistent evidence for a decrease in earnings management activities; however, some results indicate less upwards and more downwards earnings management after a strengthening of enforcement, arguably as an overcautious counter reaction of responsible managers. Given the limited numbers of observations, we regard our findings as a preliminary inventory in the attempt of assessing the effectiveness of accounting enforcement in the EU.
Keywords: Enforcement, IFRS, Earnings Management, Earnings Quality, Discretionary Accruals
JEL Classification: M41
Suggested Citation: Suggested Citation