Chunhui Liu
Assistant Professor, University of Winnipeg, Canada.An Empirical Study of the Impact of IFRS on
Earnings Management
This research examines whether and how earnings management
changes with International Financial Reporting Standards (IFRS)
adoption in a regulated market, the People’s Republic of China (P. R.
China) where a new set of substantially IFRS-convergent accounting
standards has become mandatory for listed firms since 2007.
Previous studies (Briston, 1978; Samuels and Oliga, 1982) suggest
that international accounting standards are irrelevant or even harmful
to developing countries that radically changed from capitalistic to
communistic economies with large and dominant public sectors
(Chamisa, 2000). However, it is dangerous to generalize such findings
to P. R. China due to noteworthy differences in historical developments
and economic philosophies between P. R. China and the countries
studied before (Chamisa, 2000). The impact of IFRS adoption on
accounting quality is an important issue for both Chinese regulators
and regulators with similar institutional environments who are
contemplating the adoption of IFRS. How IFRS influence accounting
quality in P. R. China is particularly interesting also because the 2007
market value of publicly traded shares in P. R. China ranks the second
largest in the world next only to the United States. Both domestic and
international investors in the Chinese market are influenced by the
quality of accounting reports by Chinese firms.
This study contributes to literature by examining whether earnings
management, a key proxy for accounting quality (Van der Meulen et al.,
2007), has changed or improved since the implementation of
substantially IFRS-convergent accounting standards in P. R. China.
Changes to earnings management through accounting accruals,
research and development expenditures are investigated to find a
decrease in earnings management through accruals since the
implementation of the new set of standards. Earnings management is
examined for the period 2005~2008 with only firms mandated to adopt
IFRS. The findings indicate that earnings management through accruals
has decreased in P. R. China since 2007 when the new set of standards
took effect. Analysis shows that such a change is more likely a result
from the standard change than a result from economic condition
change.