The Role of Corporate Governance on the Relationship Between IFRS Adoption and Earnings Management: Evidence From Bangladesh

Mohammad Tariq Hasan,Azhar Abdul Rahman

doi:10.5430/ijfr.v11n4p329

Mohammad Tariq Hasan, Azhar Abdul Rahman

Open Access

https://doi.org/10.5430/ijfr.v11n4p329

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Abstract

Purpose: This study investigates the relationship between IFRS adoption and earnings management (EM) i.e. discretionary accruals (DA) and real earnings management (REM) in developing economy like Bangladesh. Moreover, the study examine the relationship between corporate governance (CG) strength and EM as well as moderating role of CG strength on the relationship between IFRS adoption and EM.Design/methodology/approach: The study employs 94 firms listed in Dhaka Stock Exchange (DSE) for 6 years i.e. 564 firm years observation, over two time period as pre (2004-06) and post (2013/14-15/16) adoption of IFRS. Underpinning theory of the study is agency theory which explained the relationship among variables. Based on earlier literature a CG index is developed to measure the strength of CG. The study uses random effect GLS with robust regression in a balanced panel data.Findings: The results show that IFRS and CGI both have significant negative relationship with EM. Moreover, it is documented that the CG strength significantly moderates the relationship between IFRS and REM. It implies that the presence of good CG may help to attain the objectives of IFRS adoptionOriginality/value: To the best of the author’s knowledge, this is one of the first empirical attempts at providing evidence about the role of CG on the relationship between IFRS adoption and EM in Bangladesh. The findings of this study can be beneficial for the member of the regulatory bodies and researchers to formulate new policy and enhance corporate governance practices in Bangladeshi companies as well as develop a better framework for all stakeholders involved in financial reporting. Future studies may also investigate the interacting effect of corporate governance strength on other related variables which may influence the level of earnings management.

Highlights

It has long been the craving of most international equity markets to have a standardized or unique set of guidelines for preparation of financial statements
Future studies may investigate the interacting effect of corporate governance strength on other related variables which may influence the level of earnings management
It implies that the introduction of International Financial Reporting Standard (IFRS) and the presence of good corporate governance help to reduce the level of earnings management which is factual for both types of earning management in Bangladesh

Summary

Introduction

It has long been the craving of most international equity markets to have a standardized or unique set of guidelines for preparation of financial statements. IFRS is introduced as a single set of standard, to ensure the uniformity of accounting rules and regulation in practice. It may produce more reliable and simplified financial statements for the user. Earnings management is considered as an imperative determinant of the quality of financial reporting (Dechow, Ge, & Schrand, 2010; Key & Kim, 2020). A diverse evidence is documented in various studies related to the outcome of IFRS adoption on financial reporting quality (Brüggemann, Hitz, & Sellhorn, 2013; Kaaya, 2015).

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