Does Mandatory Adoption of IFRS Improve Accounting Quality? Preliminary Evidence

Abstract

We provide evidence on the preliminary effects of mandatory adoption of International Financial Reporting Standards (IFRS) on accounting quality for a relatively broad set of firms from 20 countries that adoptedIFRSin 2005 relative to a benchmark group of firms from countries that did not adoptIFRSmatched on the strength of legal enforcement, industry, size, book‐to‐market, and accounting performance. Relative to these benchmark firms, we find thatIFRSfirms exhibit significant increases in income smoothing and aggressive reporting of accruals, and a significant decrease in timeliness of loss recognition; however we do not find significant differences acrossIFRSand benchmark firms in meeting or beating earnings targets. Our findings contrast with findings in earlier studies which suggest thatIFRSadoption leads to increased accounting quality. Our findings primarily hold for firms in strong enforcement countries, which suggests that enforcement mechanisms in these countries were not able to counter the initial effects of greater flexibility inIFRSrelative to domesticGAAP.