Peter Secord
Professor, Saint Mary’s University, Canada.
Ying Que
Visiting Scholar, Saint Mary’s University, Canada.Mitigation of Earnings Management with IFRS
Adoption: An Empirical Study of Chinese Markets
This paper examines the change in the quality of reported earnings
associated with the progression toward full IFRS adoption in the
People`s Republic of China. The Accounting Standards for Business
Enterprises (“ASBEs”), a new set of IFRS-based accounting standards,
became mandatory for listed Chinese enterprises on January 1, 2007. To
determine whether this accounting reform is associated with greater
accounting quality, we compared the degree of earnings management
of listed firms in the post-reform period to the pre-reform period. We
base our metrics for earnings management on the variance of the
change in net income, the ratio of the variance of the change in net
income to the variance of the change in cash flows, the correlation
between accruals and cash flows, and the frequency of small positive
net income. Generally, we find that firms exhibit a lower degree of both
income smoothing and earnings management in the post-reform
period, indicating an apparently higher quality of earnings with the
application of ASBEs and this stage in the move toward IFRS.