DOES IFRS INFLUENCE EARNINGS MANAGEMENT? EVIDENCE FROM INDIA

Abstract

The issue of earnings management has always been an anxiety for the reliability of published accounting reports. Previous studies have shown that accounting standards add value to accounting information in the developed economy. However, it is uncertain whether such benefits also apply to developing or emerging economies. In spite of the fact that authors classified India as one of the countries that engage in the highest levels of earnings management in the world, there were very few studies on earnings management in India with no inferences on influences of accounting standards on earning management. It is still an open question as to whether the adoption of international standards improves the quality of accounting information, thereby reducing the level of earnings management. With this background, the emerging market in India provides a unique opportunity to examine whether the firms in India, adopting international standards, is associated with reduced level of earnings management and thus have better reported earnings than non adapting firms, which is the objective of this study. For the purpose of analysis, regression model is used by taking ‘IFRS adoption’ as independent variable and ‘opportunistic earnings management’ as dependent variable. The sample size is 100 large Indian companies and the earnings quality is measured by the modified Jones model. Our results contradict most of the previous findings based on developed countries by indicating that firms adopting International Standards are more likely to smooth earnings compared to non-adopting firms. These findings could prompt the regulators to think about the effectiveness of IFRS in reducing opportunistic earnings management in an emerging economy, like India. It is especially relevant in Indian context now when the Indian accounting standards are undergoing substantial changes with the convergence of IFRS in a phased manner.