The Effects of Accounting Standards on Financial Reporting Quality Evidence from Germany

Abstract

This study investigates whether the introduction of new accounting standards influences the financial reporting properties of private firms. The evidence is based on Germany where the legislator enacted the German Accounting Law Modernization Act in 2009 with the aim to align German-GAAP with IFRS and to improve the provision of information of German financial statements. Reforming the German accounting standards the legislator deleted numerous accounting options and transferred several accounting rules of IFRS to German-GAAP; however, with slight modifications. This paper examines whether the use of these new accounting rules results in different financial reporting properties. We use four financial reporting property measures: discretionary accruals, the correlation between operating cash flow and accruals, persistence of earnings, and predictability of earnings. The results reveal no improvement in discretionary accrual measures, in persistence and predictability of earnings. There is limited evidence that the new rules result in decreasing smoothing activities. The examination of disclosure compliance for a limited subsample leads to the conclusion that there is a need of improvement. Additionally, we do not find a significant association between disclosure and the effects of the German Accounting Law Modernization Act on financial reporting properties.