International Accounting and Earnings Quality in Ex-post Failed Firms

Abstract

The study analyses whether sales manipulation in failed firms that adopted the International Financial Reporting Standards (IFRS) differ from that of failed firms non-adopters. The inquiry is motivated by a paucity of research on the consequences of IFRS reporting for failed firms. Using a sample of UK bankrupt firms, it finds that IFRS adopters exhibit earnings management as opposed to non-adopters of IFRS by implementing real operating actions. The results show that failed firms adopters have, on average, negative abnormal cash flows, given their reported levels of sales while this is not the case for non-adopters. The study explores the motivation for these observations by analysing the setting of the UK GAAP and IFRS. The contribution of this study is that while failed firms have been reported to manage earnings, this appears to persist with IFRS failed firms when compared to non-IFRS firms. It indicates that high-quality IFRS standards may have the unintended consequence of assisting failed firms adopters in exploring real earnings management options when compared to non-IFRS failed firms.