Earnings Management Under German Gaap Versus IFRS
Posted: 16 Mar 2005
This paper addresses the question whether adoption of IFRS-standards is associated with lower earnings management. Ball et al. (2003) argue that adopting high-quality standards might be a necessary condition for high quality information, but not necessarily a sufficient one. In Germany, a code-law country with low investor protection rights, a relatively large number of companies have chosen to adopt IFRS. We investigate whether German companies that have adopted IFRS engage significantly less in earnings management compared to German companies reporting under German GAAP, while controlling for other differences in earnings management incentives. Our sample, consisting of German listed companies, contains 636 firm-year observations relating to the period 1999-2001. Our results suggest that adopting IFRS does not constitute a significant constraint on earnings management, as measured by the level of discretionary accruals. On the contrary, adopting IFRS seems to increase the magnitude of discretionary accruals. Moreover, it appears that companies that have adopted IFRS engage more in earnings smoothing, although this effect is significantly reduced when the company has a Big 4 auditor. However, when hidden reserves are taken into consideration, IFRS-adopters do not present different earnings management behavior compared to companies reporting under German GAAP. These findings contribute to the current debate on whether high quality standards are sufficient and effective in countries with weak investor protection rights. They indicate that adopters of IFRS cannot be associated with lower earnings management.
Keywords: Earnings management, German GAAP, IFRS
JEL Classification: M41, M44, M43, M49, M47, G34, K10
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