International Financial Reporting Standards and Earnings Management: Comparative Study of Pre-Post Full Convergence of Ifrs in Malaysia

Abstract

Purpose -The purpose of this study is to examine the influence of full convergence of IFRS (International Financial Reporting Standards) on earnings management using a sample of companies listed on Bursa Malaysia given that the rationale for adoption of IFRS in Malaysia was to make the published financial statements of public listed companies more transparent and comparable. Design/Methodology/Approach -A sample of 200 firms listed on Bursa Malaysia (Malaysian Stock Exchange) were chosen to investigate and examine the quality of accounting information by evaluating and measuring the Earning Management in the context of Malaysian listed companies. This research was carried out using the earnings management model, which was first introduced by Jones (1991) and later modified by Dechow et al. (1995). Findings -The findings from this research suggested that the full convergence of IFRS is negatively and significantly associated with earnings management. Research Limitations/Implications -This study examined only one aspect of IFRS i.e. full convergence of IFRS on the intensity of Earnings Management, hence any conclusions drawn are based on that one aspect only. Furthermore, EM (Earnings management) is not limited to and identified via the accruals model only, so future studies may use other models as well. Finally, the residuals of accruals model was extracted cross-sectionally, which assume that all firms in the industry tend to employ similar accruals techniques. In practice however, firms differ from one another in structure, character and in many other regards.

The Impact of COVID-19 Pandemic and IFRS Adoption on Earnings Quality: Malaysian Evidence

“…The implementation of IFRS, they indicated at the study's conclusion, may be able to lessen the use of EM practises during a financial crisis. In a recent study, Garrett et al (2020) investigate whether the adoption of IFRS in Malaysia had any impact on Earnings Management procedures. Their findings revealed that, following the full convergence of IFRS, there had been a downward tendency in earnings management across the Malaysian industrial sector.…”

Governance Issues on Earning Management: A Case of Manufacturing Industry

“…Earnings management is a mechanism in which financial decisions are made on intentional assumptions that are consistent with the financial reporting process as well as the main objective behind which is referred to as deception, concealment, or data manipulation, thereby giving a boost to earnings management [20]. According to Healy and Wahlen [24], the reason for this conduct is to confuse shareholders and stakeholders in order to extract advantageous outcomes from company contracts using distorted accounting information.…”

“…The International Financial Reporting Standards (IFRS) embodies the highest quality accounting principles to improve financial reporting transparency and comparability (Wahyuningtyas, 2018) [45]. Garrett et al [20] stated that the idea of financial statements is to inform users about the true and fair status of companies. However, companies in practice tend to mislead people when facing crises by not reporting their current status and manipulating financial reports.…”

“…For instance, the Enron company's scandal involved the office of three established state-owned accountants, known as Arthur Andersen LLP, which involved in the energy sector manipulated financial statements by reporting company profits of US$600 million to which the business actually suffered losses. The downfall of Enron was not only destroyed by the organization but also by the US economy, and this consequently hit the world as stock prices dropped dramatically around the world [20].…”