The Dependence of Earnings Management on the Implementation of IFRS
Changes in the regulatory perspective directly affect earnings management. Almaharmeh et al. (2021) confirm that the introduction of IFRS contributes to a decrease in the degree of earnings management of the company. However, the results obtained are somewhat ambiguous as there are conflicting results for the various REM and AEM models used as earnings management measures. IFRS implementation is significant and positive for the two REM scores (ROYCFO and ROYPRO) and negative for the AEM scores (SJM and KM) (Almaharmeh et al., 2021). The conclusions reached by El Idrissi Rioui et al. (2021) and Eiler et al. (2022) are consistent with the findings of Almaharmeh et al. (2021) regarding the fact that the implementation of IFRS contributes to fewer earnings management compared to local accounting standards.
Regulatory perspective and earnings management are directly related. In contrast to the above researchers, Rahmaningtyas and Mita (2018) argue that adopting IFRS improves earnings management. In turn, the dependence of earnings management on adopting IFRS is reduced when the economy has strong investor protection. This is supported by a study by McLaney and Atrill (2020), who argue that IFRSs primarily serve the interests of investors. The interests of investors, to a greater extent, reflect the needs of other users since they are the providers of capital and do not influence the decisions made on reporting. In this regard, according to Atril and McLaney (2019), strong support from law enforcement, the capital market regulator, and the government is significant in reducing the negative impact of the transition to IFRS on the quality of financial reporting.
On the contrary, several scholars refute the impact of the adoption of IFRS on the practice of earnings management. Said (2019), based on an analysis of the profits of 791 Canadian firms, concluded that the implementation of IFRS does not directly impact earnings management. Moreover, studies by Amalinazahroh and Hamidah (2018) and Soderstrom and Sun (2007) confirm a negative association between IFRS implementation and earnings management. Thus, the impact of the introduction of IFRS on earnings management is an ambiguous issue since the positions of various researchers contradict each other. In this regard, this issue needs further research.
The Dependence of Earnings Management on Corporate Governance
The problem of the relationship between the quality of corporate governance and the performance of the company remains debatable. Theresia et al. (2021) raise an important question regarding the relationship between earnings management and corporate governance. The scientists concluded that without stress, companies do not need to engage in profit management. On the contrary, troubled companies need to manage profits to attract investment. In turn, Okougbo and Okike (2015), examining the experience of Nigerian firms, concluded that regardless of the company’s state, there is a significant positive relationship between corporate governance and earnings management. Management’s efforts to increase profits and reduce losses are critical to attracting foreign investment into the domestic economy (Okougbo & Okike, 2015). The relationship between earnings management and corporate governance has also been explored by Adjaoud et al. (2007) with data from Canadian companies. A statistically significant direct dependence of economic profit on indicators of the quality of corporate governance was revealed. Thus, corporate governance has a significant impact on earnings management.
Corporate governance affects the scale of earnings management. According to Man and Wong (2013), corporate governance can reduce or even eliminate earnings management. The researchers concluded that various corporate governance tools could have an additional impact on profit management, especially in companies with weak corporate governance. Corporate governance arrangements are expected to act as a mechanism to limit opportunistic financial reporting as they can influence outcomes when parties face conflicting objectives. Supardi and Asmara (2019) also explored the role of corporate governance in earnings management. Scientists note that corporate governance indirectly affects earnings management through such variables as profitability, firm size, and financial distress. The findings support the theory that corporate governance can weaken profit management practices.
Reference List
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