Abstract
The main purpose of this paper is to examine the impact of International Financial Reporting Standards (IFRS) adoption and Audit Quality (AQ) on Earnings Management (EM) practices in Saudi Arabia listed firms. EM is measured by the discretionary accrual using Healy (1985) and Kothari, Leone, and Wasley (2005) models. The research sample contains 16 Saudi listed firms during the period from 2014 to 2019. Statistical analysis including t-test and linear regression were used to test the research hypotheses. The investigation indicates that there is a negative relationship between IFRS adoption and EM practices, especially if it is combined with AQ, while it found a positive relationship between firms’ size and accrual EM, and no significant impact of AQ on firms’ debt ratio and EM practices. The importance of these results lies in providing clear evidence that the adoption of IFRS in developing countries has helped reduce earnings manipulation practices, which contributes to gaining confidence in Saudi firms and thus attracting many foreign investments.
Highlights
It is very important for users of financial statements to obtain transparent and credible financial statements that are useful in making decisions
The purpose of this research was to study the effect of the International Financial Reporting Standards (IFRS) adoption and the audit quality on Earnings Management (EM) practices in Saudi Arabia
Our empirical tests were based on 96 observations of 16 Saudi non-financial companies over the six years from 2014 to 2019 that were chosen randomly based on the completeness of their financial statements, we collected data from (Tadawul) and (Argaam) websites and were processed using the t-test and multiple regression analysis on panel data
Summary
It is very important for users of financial statements (whether investors or government organizations) to obtain transparent and credible financial statements that are useful in making decisions. Saudi Arabia was adopting Saudi GAAP in accounting and auditing operations, as Saudi Organization for Certified Public Accountants (SOCPA) issued 22 accounting and 15 auditing standards guided by available international standards such as the American and British. After agreeing to the adoption of IFRS, SOCPA conducted the necessary discussions in order to study the implementation stages with the help of many experts. It was necessity of dividing the companies that will implement the standards into two groups: Firms listed in Saudi Stock Market Exchange (Tadawul) must implement the standards at the beginning of 2017 which will follow Standards for large firms, while unlisted firms should start applying standards for SMEs at the beginning of 2018
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