The Effects of International Financial Reporting Standards on Reporting Quality of Financial Institutions in Ghana

Edmond Amissah,Reginald Djimatey,Paul Hammond

doi:10.5296/ijafr.v10i2.16851

Abstract

This study sought to examine the reporting quality of financial institutions in Ghana after adopting International Financial Reporting Standard (IFRS) as its official national reporting standard. Using a fixed effect logistic regression, the study compares the earnings management of banks and insurance firms before and after IFRS adoption on reporting quality. The data used was drawn from 51 financial institutions made up of 23 universal banks and 28 insurance companies observed over the period 2003 to 2014. The empirical results indicate that financial institutions exhibit more earnings management during the post-adoption era which is interpreted as a decline in the quality of financial reporting among financial institutions in Ghana. The results documented in this study add to the dearth of literature and contributes to the debate on IFRS adoption and its related impact on reporting quality (earnings management) among financial institutions from the perspective of an emerging market. The study is unique in the sense that it includes the insurance industry where the literature is largely silent especially, on the impact of IFRS adoption by countries on the African continent. Furthermore, unlike previous studies, this paper considers both listed and non-listed firms.

Highlights

The proliferation of financial scandals over the years (e.g. Enron, 2001; WorldCom, 2002; Parmalat, 2003, etc.) has awakened the concerns of investors and the international community regarding the quality and credibility of information reported by firms (Cheung et al, 2010; Griffin, Lont, & Sun, 2009; Li, Pincus, & Rego, 2008; Morais & Curto, 2008; Penman, 2003)
We find evidence of increase earnings management practices under both proxies after International Financial Reporting Standard (IFRS) adoption which indicate a decline in reporting quality
The correlation results show a positive correlation for the main variable of interest (IFRS) with the dependant variable Loss avoidance (LA) but negatively correlated with the just meeting or beating prior year‟s earnings (JMBE)

Summary

Introduction

The proliferation of financial scandals over the years (e.g. Enron, 2001; WorldCom, 2002; Parmalat, 2003, etc.) has awakened the concerns of investors and the international community regarding the quality and credibility of information reported by firms (Cheung et al, 2010; Griffin, Lont, & Sun, 2009; Li, Pincus, & Rego, 2008; Morais & Curto, 2008; Penman, 2003). Considerable effort has been made by regulators in the search for a mechanism that will ensure an improvement in the quality of financial reporting as a result of persistent demand (Onumah et al, 2012) Notable among these interventions is the introduction of “high quality” International Financial Reporting Standards (IFRS) by the International Accounting Standard Board (IASB), that is expected to provide the much-desired high-quality information around the world‟s financial markets. Cameran & Perotti, 2014; Jeanjean & Stolowy, 2008; Morais & Curto, 2008; Hung & Subramanyam, 2007) They attribute the variations in the quality of financial reporting to differences in the level of implementation and other deep-seated political and economic factors that tend to influence reporting quality. The application of IAS reflects combined effects of features of the financial reporting system, including standards, their interpretation, enforcement, and litigation (Barth, Landsman, & Lang, 2008b)

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Conclusion