The relationship between financial reporting standards and accounting irregularities: evidence from US banks

Abstract

PurposeThe purpose of this paper is to explore whether the choice of International Financial Reporting Standards (IFRS) vs Generally Accepted Accounting Principles (GAAP) is associated with the frequency and likelihood of accounting irregularities and fraud in US banks.Design/methodology/approachThe authors examine the relationship between financial reporting standards and accounting irregularities in publicly listed US banks. Using a sample of 4,284 banks with accounting irregularities observed in the USA over the period of 1996–2014. They used logit model to estimate the likelihood of corporate misreporting having been committed in terms of accounting irregularities.FindingsThe authors show that banks that use US GAAP exhibit better operating performance than fraudulent banks that use IFRS except for certain variables. They also find that fraudulent banks are more likely to commit accounting irregularities when they have to follow IFRS and banks have relatively better bank performance.Practical implicationsOverall, the empirical findings result consistent with Kohlbeck and Warfield’s (2010) find that accounting standards are linked to fewer accounting irregularities.Originality/valueIn this study, accounting irregularities have a significant effect on bank performance during the Dodd–Frank period. It finds that banks that choose to use IFRS are more likely to have accounting irregularities and to engage in fraud.