The Effect of IFRS Convergence on Earnings Quality: Empirical Evidence from Indonesia

Abstract

Objective - The purpose of this research is to examine the impact of the International Financial Reporting Standard (IFRS) convergence in Indonesia on earnings quality. Methodology/Technique - Earnings quality is measured on both accrual earnings management and real earnings management. Indonesia began convergence IFRS in 2012. IFRS is considered capable of improving comparability, transparency, and earnings information, which is expected to ultimately improve earnings quality. The sample in this research uses manufacturing firms listed on the Indonesian Stock Exchange that were suspected to avoid loss during the observation period. The data consist of 45 companies examined between 2008 and 2015. Results - This study uses statistical methods and multiple regression linear to analyse the data. The research results show that IFRS convergence in Indonesia has had a negative impact on accrual earnings management and no impact on real earnings management. Novelty - The evidence shows that IFRS convergence in Indonesia has the ability to improve earnings quality related to a decrease in accrual earnings management but not real earnings management. Type of Paper: Empirical Keywords: IFRS; Discretionary Accrual; Abnormal Cash Flow Operation; Abnormal Production; Abnormal Discretionary Expenditure. JEL Classification: M40, M41, M49

Determinant of Earnings Quality

“…This position is in line with previous studies, including Kusumaningwedari & Oktorina (2017), Kristanto et al (2014), andHouqe et al (2011), which the findings generally showed that IFRS convergence does not effect on quality of earnings. However, other studies did not support this position, such as Almaharmeh & Masa'deh (2018), Sutrisno & Djashan (2017), Syarif & Pasaribu (2015), and Ismail et al (2013), which the findings generally revealed that IFRS convergence has effect on earnings quality.…”

“…Studies carried out by Almaharmeh & Masa'deh (2018) and Sutrisno & Djashan (2017) found that IFRS convergence affects earnings quality. Inggrid & Wardhani (2011) discovered that during the high season of demand for converting accounting standards to IFRS, the convergence has been proved as capable to increse company earnings quality.…”

“…The use of IFRS as global accounting standards has decreased the number of options of accounting methods that the company can use. Sutrisno & Djashan (2017) said that IFRS convergence in Indonesia minimizes the capability of managing board to commit fraud and helps to ensure that information presented in financial statements is in better quality.…”

“…Information that is free from manipulation indicates that this information has high quality, including information about earnings. Few empirical studies showed that IFRS convergence affected earnings quality of public companies (Almaharmeh & Masa'deh, 2018;Sutrisno & Djashan, 2017;Syarif & Pasaribu, 2015;Ismail et al, 2013). Referring to this explanation, first hypothesis is written as following:…”

“…Quality of earnings can provide information that can influence investors in investment decision making. However, earnings quality itself is affected by several factors, such as IFRS convergence (Almaharmeh & Masa'deh, 2018;Sutrisno & Djashan, 2017), accounting disclosure (Suryanto, 2016;Febrina & Suaryana, 2011), and audit committee (Darabali & Saitri, 2016;Suryanto, 2016;Silfi, 2016;and Simamora, Tanjung, & Julita, 2014). The imperative for the companies at stock exchange (listed companies) to use IFRS has been one of the most noticeable development of accounting regulations (Daske, Hail, Leuz, & Verdi, 2008).…”