IFRS Adoption, Corporate Governance, and Information Quality: Evidence From KSA
DOI:
https://doi.org/10.51325/ejbti.v2i1.109Keywords:
IFRS, Earnings Management, Discretionary Accruals, Corporate Governance, KSA.Abstract
This research evaluates the effectiveness of implementing International Financial Reporting Standards (IFRS) in reducing earnings management in Saudi Arabia (KSA). Recognizing that earnings management is influenced by multiple factors, the study also examines the role of corporate governance in enhancing the reliability of accounting information. Empirical evidence is drawn from a sample of 51 Saudi listed firms observed from 2014 to 2020. Discretionary accruals (DA), estimated using the model by Dechow et al. (1995), serve as a proxy for identifying earnings management. A multivariate regression analysis is then conducted to investigate the relationship between DA, IFRS adoption, and corporate governance structures. The findings reveal that the independence of the board of directors and the audit committee significantly reduces earnings management in Saudi industrial firms. However, other corporate governance factors, such as the size of the board, the size of the audit committee, and the frequency of audit committee meetings, do not exhibit a significant impact on DA. Based on these results, the study recommends implementing mandatory measures to strengthen corporate governance mechanisms, which could further enhance the quality of financial reporting in a developing economy like Saudi Arabia.
References
Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit committee characteristics and restatements. Auditing: A Journal of Practice & Theory, 23(1), 69–87. https://doi.org/10.2308/aud.2004.23.1.69
Abdullah, W. R. W., Maruhun, E. N. S., Tarmizi, M. A., & Rahman, L. A. (2018). Mitigating earnings management: Adoption of IFRS and corporate governance practices in Malaysia. International Journal of Academic Research in Business and Social Sciences, 8(2). https://doi.org/10.6007/IJARBSS/v8-i2/3983
Ahmed, A. S., Duellman, S., & Abdel-Meguid, A. M. (2006). The Sarbanes-Oxley Act, auditor independence, and accounting accruals: An empirical analysis. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.887364
Akhtaruddin, M., & Haron, H. (2010). Board ownership, audit committees' effectiveness, and corporate voluntary disclosures. Asian Review of Accounting. https://doi.org/10.1108/13217341011089649
Akhtaruddin, M., Hossain, M. A., Hossain, M., & Yao, L. (2009). Corporate governance and voluntary disclosure in corporate annual reports of Malaysian listed firms. Journal of Applied Management Accounting Research, 7(1), 1. http://mahossain.com/wp-content/uploads/2020/09/Akhter_JAMAR_v7.1_Corp_gov_-Malaysia-1-2.pdf
Alnodel, A. A. (2018). The impact of IFRS adoption on the value relevance of accounting information: Evidence from the insurance sector. International Journal of Business and Management, 13(4), 138. https://doi.org/10.5539/ijbm.v13n4p138
Alqahtani, S. (2014). Top management teams' influence on strategic decision-making and firms' outcomes in the case of Saudi Arabia's private sector [Doctoral dissertation, University of Southampton]. http://eprints.soton.ac.uk/id/eprint/364312
Al-Shaer, H., Salama, A., & Toms, S. (2017). Audit committees and financial reporting quality: Evidence from UK environmental accounting disclosures. Journal of Applied Accounting Research. https://doi.org/10.1108/JAAR-10-2014-0114
Ames, D. (2013). IFRS adoption and accounting quality: The case of South Africa. Journal of Applied Economics and Business Research. http://www.aebrjournal.org/uploads/6/6/2/2/6622240/3._ames.pdf
Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of Accounting Research, 46(3), 467–498. https://doi.org/10.1111/j.1475-679X.2008.00287.x
Baxter, P., & Cotter, J. (2009). Audit committees and earnings quality. Accounting & Finance, 49(2), 267–290. https://doi.org/10.1111/j.1467-629X.2008.00290.x
Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review, 71(4), 443–465. https://www.jstor.org/stable/248566
Bedard, J. C., & Johnstone, K. M. (2004). Earnings manipulation risk, corporate governance risk, and auditors' planning and pricing decisions. The Accounting Review, 79(2), 277–304. https://doi.org/10.2308/accr.2004.79.2.277
Cai, L., Rahman, A. R., & Courtenay, S. M. (2008). The effect of IFRS and its enforcement on earnings management: An international comparison. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1473571
Capkun, V., Collins, D., & Jeanjean, T. (2016). The effect of IAS/IFRS adoption on earnings management (smoothing): A closer look at competing explanations. Journal of Accounting and Public Policy, 35(4), 352–394. https://doi.org/10.1016/j.jaccpubpol.2016.04.002
Capkun, V., Jeny, A., Jeanjean, T., & Weiss, L. A. (2011). Setting the bar: Earnings management during a change in accounting standards. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1870007
Chalaki, P., Didar, H., & Riahinezhad, M. (2012). Corporate governance attributes and financial reporting quality: Empirical evidence from Iran. International Journal of Business and Social Science, 3(15). https://bit.ly/3Y9fS5q
Chua, Y. L., Cheong, C. S., & Gould, G. (2012). The impact of mandatory IFRS adoption on accounting quality: Evidence from Australia. Journal of International Accounting Research, 11(1), 119–146. https://doi.org/10.2308/jiar-10212
Cornett, M. M., Marcus, A. J., & Tehranian, H. (2008). Corporate governance and pay-for-performance: The impact of earnings management. Journal of Financial Economics, 87(2), 357–373. https://doi.org/10.1016/j.jfineco.2007.03.003
Davidson, R., Goodwin‐Stewart, J., & Kent, P. (2005). Internal governance structures and earnings management. Accounting & Finance, 45(2), 241–267. https://doi.org/10.1111/j.1467-629x.2004.00132.x
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225. https://www.jstor.org/stable/248303
Ebrahim, A. (2007). Earnings management and board activity: an additional evidence. Review of Accounting and Finance, 6(1), 42-58. https://doi.org/10.1108/14757700710725458
El Zoubi, J. R. (2017). Expected benefits and challenges of adopting IFRS: A focus on Saudi Arabia. International Journal of Novel Research in Humanity and Social Sciences, 4(4), 19–25. https://www.noveltyjournals.com/upload/paper/Expected%20benefits%20and%20challenges-1114.pdf
Farber, D. B. (2005). Restoring trust after fraud: Does corporate governance matter? The Accounting Review, 80(2), 539–561. https://doi.org/10.2308/accr.2005.80.2.539
Hashed, A., & Almaqtari, F. (2021). The impact of corporate governance mechanisms and IFRS on earning management in Saudi Arabia. Accounting, 7(1), 207–224. https://doi.org/10.5267/j.ac.2020.9.015
Hassan, M. F. (2019). Analysis of effects of IFRS adoption on the comparability of financial reporting: Evidence from Saudi listed companies. Journal of Emerging Issues in Economics, Finance, and Banking, 8(1). http://globalbizresearch.org/economics/images/files/82323_1166_JEIEFB_Mohammed Faisal Hassan.pdf
Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption. Journal of Accounting and Public Policy, 27(6), 480–494. https://doi.org/10.1016/j.jaccpubpol.2008.09.008
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193. https://doi.org/10.2307/2491047
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375–400. https://doi.org/10.1016/S0165-4101(02)00059-9
Knapp, M. C. (1987). An empirical study of audit committee support for auditors involved in technical disputes with client management. The Accounting Review, 62(4), 578–588. https://www.jstor.org/stable/247578
Larcker, D. F., Richardson, S. A., & Tuna, I. R. (2007). Corporate governance, accounting outcomes, and organizational performance. The Accounting Review, 82(4), 963–1008. https://doi.org/10.2308/accr.2007.82.4.963
Latridis, G. (2010). International Financial Reporting Standards and the quality of financial statement information. International review of financial analysis, 19(3), 193-204. https://doi.org/10.1016/j.irfa.2010.02.004
Mbir, D. E. G., Agyemang, O. S., Tackie, G., & Abeka, M. J. (2020). IFRS compliance, corporate governance, and financial reporting quality of GSE-listed non-financial firms. Cogent Business & Management, 7(1), 1759856. https://doi.org/10.1080/23311975.2020.1759856
Mohamad, W. I. A. W., & Sulong, Z. (2010). Corporate governance mechanisms and extent of disclosure: Evidence from listed companies in Malaysia. International Business Research, 3(4), 216. https://doi.org/10.5539/ibr.v3n4p216
Păşcan, I. D. (2015). Measuring the effects of IFRS adoption on accounting quality: A review. Procedia Economics and Finance, 32, 580-587. https://doi.org/10.1016/S2212-5671(15)01435-5
Peasnell, K. V., Pope, P. F., & Young, S. (2000). Accrual management to meet earnings targets: UK evidence pre-and post-Cadbury. The British Accounting Review, 32(4), 415–445. https://doi.org/10.1006/bare.2000.0134
PwC. (2014). IFRS and US GAAP: Similarities and differences. https://www.pwc.com/cz/en/ucetnictvi/ifrs-publikace/pwc-ifrs-and-us-gaap-similarities-and-differences.pdf
Siregar, S. V., & Utama, S. (2008). Type of earnings management and the effect of ownership structure, firm size, and corporate-governance practices: Evidence from Indonesia. The International Journal of Accounting, 43(1), 1–27. https://doi.org/10.1016/j.intacc.2008.01.001
Song, J., & Windram, B. (2000). Benchmarking audit committee effectiveness in the UK. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.249865
Song, J., & Windram, B. (2004). Benchmarking audit committee effectiveness in financial reporting. International Journal of Auditing, 8(3), 195–205. https://doi.org/10.1111/j.1099-1123.2004.00090.x
Vafeas, N. (2000). Board structure and the informativeness of earnings. Journal of Accounting and Public Policy, 19(2), 139–160. https://doi.org/10.1016/S0278-4254(00)00006-5
Xie, B., Davidson III, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: The role of the board and the audit committee. Journal of Corporate Finance, 9(3), 295–316. https://doi.org/10.1016/S0929-1199(02)00006-8
Zhou, H., Xiong, Y., & Ganguli, G. (2009). Does the adoption of international financial reporting standards restrain earnings management? Evidence from an emerging market. Academy of Accounting and Financial Studies Journal, 13(1), 43. https://bit.ly/3P80ylJ
Downloads
Published
Issue
Section
License
Copyright (c) 2023 EuroMid Journal of Business and Tech-Innovation (EJBTI)
This work is licensed under a Creative Commons Attribution 4.0 International License.
