In 2005, all listed firms in the European Union (EU) were obliged to implement a new
accounting system that is equally applied for all firms, International Financial Reporting
Standards (IFRS). The IFRS is a new principles-based system that has many advantages
but also drawbacks that play a significant role in the accounting quality. This study
focuses on the impact of IFRS on accounting quality and more specifically, on Earnings
Management. Its basic purpose is to re-examine whether the IFRS/IAS adoption enables
managers to use specific Earnings Management techniques in order to decrease or
increase their financial results either in a legal or illegal way. The method that is used to
detect Earnings Management practice is estimating accruals (Total and Discretionary
Accruals). Applying this method we try to find whether the accruals have increased after
the year 2005 when the IFRS were adopted by firms. We considered a sample of listed
companies that have large capitalization and are considered to be among the best. They
are all listed in the FTSE 100 at the London Stock Exchange. We found evidence that the
level of Earnings Management has been increased after the IFRS introduction. In
particular, the accruals have been increased and we are able to confirm other authors that
found similar outcomes in their research. These findings might be due to the transition
from the Generally Accepted Accounting System (GAAP) to IFRS and occur only for the
first year after 2005, but might be due to some room for manipulation of earnings that
really allow firms to take advantage of it.
Declaration of Originality
'I confirm that the submitted work is my own work and that I have clearly
identified and fully acknowledged all material that is entitled to be attributed
to others (whether published or unpublished) using the referencing system set
out in the programme handbook. I agree that the University may submit my
work to means of checking this, such as the plagiarism detection service
Turnitin® UK. I confirm that I understand that assessed work that has been
shown to have been plagiarised will be penalised.
Vasileios Anastasopoulos, 25 August 2012
List of Tables
Table 1. Corresponding table of Databases definitions 35
Table 2.A Total Accruals Descriptive Statistics for all time periods 41
Table 2.B Total Accruals Descriptive Statistics for all time periods 42
Table 3. Total Accruals Quartiles for all time periods 43
Table 4. Statistical Characteristics of Parameters: a, b, c 45
Table 5. Statistical information for a, b and c parameters 45
Table 6. Discretionary Accruals Descriptive Statistics pre and post IFRS adoption 48
Table 7. Discretionary Accruals Quartiles pre and post IFRS adoption 51
Table 8. DA differences pre and post IFRS 52
List of Figures
Figure 1. Time line of the event study 33
Figure 2. Actual, Fitted and Residual Graph 46
List of Graphs
Graph 1. Revenue Growth for 2004, 2005, 2006 years 39
Graph 2. The Total Accruals distribution for the 2002-03 time period 40
Graph 3. The Total Accruals distribution for the 2003-04 time period 40
Graph 4. The Total Accruals distribution for the 2005-06 time period 41
Graph 5. Discretionary Accruals Frequency Histogram for 2003-2004 period 49
Graph 6. Discretionary Accruals Frequency Histogram for 2005-2006 period 50
Table of Contents
Declaration of Originality 2
List of Tables 3
List of Figures 4
List of Graphs 5
Table of Contents 6
1.1 Dissertation overview and Research objectives 10
1.2 Structure of the Dissertation 12
2. Literature Review
2.1 The International Financial Reporting Standards adoption 14
2.1.1 International Financial Reporting Standards 14
2.1.2 Motivation for Adopting IFRS 15
2.1.3 Disadvantages of IFRS 17
2.2 Earnings Management usage 18
2.2.1 Basic idea of Earnings Management 19
2.2.2 Motivation for Earnings Management 20
2.2.3 Earnings Management Techniques by Firms 22
2.2.4 Earnings Management Measurement 23
2.2.5 Theoretical Background of Discretionary Accruals models 25
2.2.6 Decreasing Earnings Management Phenomenon 27
2.3 Impact of IFRS on Financial Reports and Earnings Management 28
2.3.1 Earnings Management after IFRS adoption 28
2.3.2 Existing empirical studies 30
3.1 Overview of Methodological approach 32
3.2 Sample and Data 34
3.3 Methods of Analysis 35
3.4 Research Ethics 38
4. Analysis of findings
4.1 Descriptive statistics: Total accruals 39
4.1.1 The Distribution 40
4.1.2 Basic statistics 43
4.2 Non- Discretionary Accruals regression results 44
4.3 Descriptive statistics for Discretionary Accruals 48
4.4 Change in DA 51
4.5 Discussion of results 52
5.1 Summary of Findings 55
5.2 Limitations and further research opportunities 57
Reference List 59
Appendix A 66
Appendix B 72
The writing of this thesis has been one of the most academic challenges that I had to face.
Without the support of some people, this thesis would be more difficult to complete. I
would like to thank my supervisor Dr Julinda Nuri for her advice and comments in order
to improve all the parts of the dissertation and those at IT service who helped me using the
Bloomberg database in Management School. Lastly, I would like to thank my Father,
Konstantinos and my Mother, Katerina for keeping me motivated from distance.
At – Total Assets
CEO – Chief Executive Officer
DA – Discretionary Accruals
EM – Earnings Management
GAAP – Generally Accepted Accounting Standards
IAS – International Accounting Standards
IASB - International Accounting Standards Board
IFRS – International Financial Reporting Standard
LSE – London Stock Exchange
NDA – Non Discretionary Accruals
OLS – Ordinary Least Squares
PPE – Property Plant and Equipment
TA – Total Accruals
1.1 Dissertation overview and Research objectives
The International Accounting Standards (IAS) that advanced to International Financial
Reporting Standards (IFRS) has created the basis for the synchronization of the different
accounting systems around the world. The new accounting system is an important step for
the improvement of international investments and the development of the economic
globalisation. In spite of the efforts for better synchronization of accounting systems
worldwide, there are still important differences in accounting systems. It is referred in the
bibliography that after the initiation of IFRS, important changes took place regarding the
financial reporting information of the companies.
An important issue that has been referred in the bibliography, numerous times, is that
managers have attempted to practice Earnings Management techniques so as to show a
different picture of the financial performance of the firms. In reality, the Earnings
Management is considered to be financial ‘‘numbers’’ manipulation that improves the
financial information homogeneity presented to the public.
The IFRS introduction in the European Union (EU) initially took place on the 1st of
January in 2005 and after that date. The adoption of IFRS included changes in the
accounting that was done in order to substitute the Generally Accepted Accounting
Standards (GAAP). The motivation for the IFRS adoption in Europe is linked to the
requirements of the international investments, accounting quality and economic
globalisation. The reporting quality that is provided by the firms is really doubtful for the
whole economic environment and as Barth et al (2008) mentioned, the IFRS adoption is
closely related to bad earnings quality or Earnings Management. Good quality of earnings
means transparent accounting information that lessens managerial discretion and do not
allow earning manipulation.
The discussion advanced so far is the structure of this dissertation as its objectives are
correlated to the IFRS introduction with management of earnings. Consequently, this
dissertation has come out due to the opportunities that IFRS has created for firms’
managers. In general, however, accounting theory supports that financial reporting system
decreases information asymmetry by disclosing the proper information (Frankel and Li,
On the contrary, the Earnings Management importance is clear, as Burgstahler and Divhev
(1997) referred to Bank of America’s CEO Richard Rosenberg who stated that
“ Increasing earnings per share was our most important objective for the year”. This can
raise vital questions regarding to the managers who desire to perform Earnings
The outcome of the debate proposed in this dissertation is to examine whether the
implementation of better accounting quality (like IFRS) can be associated with an illusion
of better financial performance. In particular, the aim of this dissertation is to assess the
impact that the IFRS introduction (2005-2006) had on the managers’ behaviour to practice
Earnings Management and influence the financial information quality, such as earnings.
The aims of this research are to find out the IFRS impact on management intention and
behaviour, taking into account Earnings Management. In other words, this dissertation
will seek to understand how, why and to what extent managers manipulate their earnings
by using the new applicable accounting rules.
The following research objectives are pursued:
-To discuss the theoretical framework of IFRS and what changes have been occurred in
-To analyse the Earnings Management concepts.
-To explore the changes brought by the IFRS implementation regarding the Earnings
Management, more specifically, regarding to the Discretionary and Total accruals.
Thus, to assess whether companies that report under IFRS can be related with superior
earnings quality we focus on data gathered from FTSE 100 of London Stock Exchange in
United Kingdom (UK). UK is a common law country with high investor protection rights.
For Earnings Management measurement, it is used Total Accruals and Discretionary
Accruals before and after IFRS adoption in order to examine their degree pre and post
2005. So, through a number of statistical procedures it will be evaluated if there are
significant differences in Earnings Management. The outcomes from this thesis basically
come from the application of econometric regression that is based on two models existing
in the bibliography: Healy (1985) and Jones (1991) models. This research strategy was
adopted in order to determine the Total Accruals first, and Discretionary Accruals that can
easily be manipulated by the management. An increase in accruals might show us that a
worst information quality provided by the IFRS while a decrease means that IFRS related
to superior quality of accounting system.
1.2 Structure of the Dissertation
The present thesis will have two dimensions: theoretical and analytical. In the first part, I
identify those theories and ideas that I believe are the most valuable and interesting for the
research objectives. This will include a variety of journals, books, working papers and
reliable Internet sources which are related to the topic. In the second part of my thesis I
will attempt to explore the IFRS power on the Earnings Management. In other words, how
the implementation of a new accounting system has led financial managers to change their
points of view on how to manipulate earnings in order to meet their objectives and
projections. At this point, a number of data will be used to analyse the degree of
fluctuation. With all this in mind, the thesis can make numerous contributions to other
studies as it is considered the first to analyse firms from a great stock market index, like
Consequently, the remainder of this thesis has been divided into four chapters. Chapter 2
begins by laying out the theoretical dimensions of the research and focus on Earnings
Management literature and the implications of IFRS in Earnings Management. In
particular, it is devoted to explore the debate around IFRS initiation and the potential
impacts that this new accounting system has. Chapter 3 provides an overview of the
Methodological approach and Research design that it is going to be followed for the
purpose of the chapter 4 that provides us the analysis and discussion of the results from
our sample. Specifically, chapter 4 contains the findings from the empirical study. In this
chapter the outputs of the statistical work is also presented to confirm the discussion
provided subsequently. Finally, in 5th chapter findings are summarised, discussed and
suggested new thoughts for our topic. It is also aimed to point out some of the limitations
of this dissertation.
2 Literature Review
2.1 The International Financial Reporting Standards adoption
2.1.1 International Financial Reporting Standards
Over the past century, numerous legal accounting systems have been created, which make
the comparison of financial reports around the world difficult due to the fact that they
contain different economical and political issues. It is known that a lot of legal systems
have their origin in Europe: German, French, English and consequently there was a vast
diversity of accounting systems that were country-oriented accounting systems (Generally
Accepted Accounting Standards). Recognizing this, European Union members were the
frontrunners to harmonize their accounting systems and move toward better accounting
quality standards (Soderstrom and Sun, 2007). That is how International Accounting
Standards Board has been formed.
The International Accounting Standards Board (IASB) had an aim to develop universally
acceptable set of rules or principles that could apply to financial reporting of public
companies (IASB, 2012). This is a basic reason for the development of International
Accounting Standards (IAS), which is currently, renamed International Financial
Reporting Standards (from now on IFRS).
The dominant definition of IFRS is ‘’the transactional accounting rules that have been
adopted, or developed by the International Accounting Standard Board and which should
be followed in preparing the published financial statements of all companies’’ (McLaney
and Atrill,2010,p.714). These rules are trying to align the differences that exist between
countries’ multinational companies by creating a common “language”.
Nevertheless, Callao and Jarne referred to Jeff (2007) support that among countries there
are factors such as cultural differences that obstruct global comparability. Problems that
related to cultural differences are: diverse financial and accounting culture, auditing and
regulatory culture. For this reason, it is imperative need for the firms to adopt a new
global accounting system, IFRS. Strong incentives have been provided by the “ regime”
for upper level financial quality.
2.1.2 Motivation for Adopting IFRS
Several countries around the world have either adopted IFRS or are trying to adopt it
because of the potential benefits of doing so. Supporters of IFRS believe that this set of
rules can lead to reduced information costs as the trading system becomes global step by
step (Ramanna and Sletten, 2009). The expectation is: firms and institutions by using the
internationally acceptable accounting standard lead international investments to efficiency
and improvement. Similarly, others argue that by adopting IFRS will help investors taking
trustworthy investment decisions as there will be provided reduced confusion which
comes from different GAAP systems (Tandeloo and Vanstraelen, 2005).
There is a large volume of published studies describing that the adoption of IFRS has
numerous benefits, the most significant are: a) help investors make right and informed
investment decisions as it encourages international investment b) decrease costs that result
from the financial reporting c) savings allocation becomes more efficient globally (Street
et al., 1999).
Analyzing the corporate level, companies choose to follow IFRS in order to be compatible
with international standards. The change from local GAAP to IFRS seems to be a
commitment for the company to keep transparent financial reporting due to high financial
needs (Tandeloo and Vanstraelen, 2005). A considerable amount of findings show that
companies, which adopt IFRS, are listed companies in stock markets and have high
exports. Therefore, adopting IFRS appears to be a basic reason for investors to follow
attractive investments, not only domestically.
A different aspect has been viewed by Ramanna and Slatten (2009) who categorize the
benefits of IFRS adoption in two values: net political and net economic value of IFRS.
Further, they support that net economic value is based on the quality of local governance
institutions and local GAAP. IFRS supporters argue that as trade becomes more and more
globalized, the information costs and information asymmetry are reduced by the
standards. Whereas net political value based on political lobbying where leading countries
can affect IFRS. A good example is the prevailing position of some developed European
countries in IFRS (Brackney and Witmer, 2005) that their lobby groups urge International
Accounting Standard Board to reconsider IFRS requirements.
Moreover, Ball (2005) cites the ‘’pros’’ and ‘’cons’’ side of IFRS adoption for the
investors. Particularly, the potential benefits for him include:
-IFRS assure more accurate and more informed financial statement information, which
lead to a better valuation and then lower risk to investors.
-IFRS reduce the differences in accounting standard internationally and the comparison in
financial information is more feasible.
-Reducing international differences by using international accounting standards assists to
a great extent in eliminating difficulties to cross-border acquisitions, which theoretically
may reward investors with increased takeover premium.
-Increased transparency makes the firm’s management to act more in favor of
shareholders. While high quality transparency leads to the contracting efficiency between
lenders and firms.
Most countries by adopting IFRS could improve their economic environment if the IFRS
is considered to be helpful for the accounting quality of its firms. Barth et al (2008)
referred to some reasons why IFRS implementation could enhance the quality of
First of all, IFRS can lessen managers’ discretion by excluding many accounting
alternatives. This could prevent managers from using opportunistic Earnings Management
techniques and then advance the quality of accounting (Ewert and Wagenhofer, 2005).
Secondly, IFRS are considered to be principles based standards and might are hard to
avoid. For instance, whether the standards are principles based, it is probably more
difficult not to accept liability recognition through transaction structuring. Thirdly, IFRS
allow managers to use their judgment in using measurement methods. For example, the
use of fair value accounting may be better reflecting the fundamental economics than
local accounting standards of each country.
Last but not least, the harmonization value of IFRS based on the network idea. To be more
specific, this is the case of a network-dependent product becoming more attractive as
more and more governments adopt it (Ramanna and Slatten, 2009). This is what occurs to
IFRS adoption phenomenon as more and more countries accept IFRS. In other words,
countries cannot be constant in the new processes and have to develop their accounting
systems in respect of the new global economy.
2.1.3 Disadvantages of IFRS
It would be mistake to say that accounting systems do not have some weaknesses because
faithful and loyal committees or organizations have designed them. Then, on the ‘’con’’
Ball (2005) mentioned numerous problems related to fair value accounting which includes
issues about market liquidity and illiquid markets. The motives of managers, auditors,
courts, boards, analysts, shareholders and the rating agencies remain still local and do not
go beyond the firm’s country borders. Mainly, the disadvantages are not restricted only by
In addition, many researchers suppose that IFRS adoption may have ineffective rules and
restrict the reporting flexibility when companies report their financial statements. Further,
opponents support the idea that IFRS implementation may not be suitable for all countries
and hence may not improve reliability, transparency and value relevance among different
nations. For instance, important findings have been found and show that in countries
without mature pension systems, the pension accounting may be subject to Earnings
Management (Ball, 2006). Specialists can use numerous techniques and assumptions to
manipulate the financial information for the good of the management. However, using a
global accounting system makes less costly to recognize such techniques (Soderstrom and
Additional difficulties have been argued by Leuz et al (2003): they strongly believe that if
developed countries do not accept the IFRS, the implementation of IFRS becomes costly
due to the benefits come from the previous GAAP (switching costs). On the other hand in
less developed countries, it is a remarkable opportunity when they develop international
acceptable standards probably because it is an essential need for them to progress. One
major criticism of Leuz et al (2003) work is that they do not examine the cultural
differences between developing and developed countries. A lot of researchers have
considered the dissimilarities that exist in social, political and economic level. For
instance, a country like Nigeria may not be able to cope with basic needs of its citizens;
however, it is obliged to adopt IFRS probably in order to meet international needs of
multinational companies. One major criticism of this situation is that such countries
should be helped (by an International organization) to boost their economy first and
afterwards they may be able to use a new accounting system that can advance the
Finally, there are speculations that IFRS reduce accounting quality. Barth et al (2008) as
well, referred two reasons that IFRS implementation might diminish accounting quality.
First, as we already said in the pros side, IFRS could decrease accounting options but
these alternatives might be the most suitable for communicating the fundamental
economics of a business consequently making managers to use less appropriate
accounting methods. In this way, accounting quality becomes poor. Secondly, IFRS are
based on principles. So, this means that the new standards may lack of comprehensive
guidance and thus offer to managers greater flexibility for having opportunistic behavior.
(Langmead and Soroosh, 2009). For example, in some significant areas like multiples
deliverables recognition, the lack of appropriate guidance could lead to increase in
managers’ discretion. The discretion rise owing to lack of appropriate guidance is possible
to lead to more Earnings Management opportunities and inferior accounting quality.
2.2 Earnings Management usage
Earnings management meaning is not consistent in finance and accounting literature.
There are main complications concerning the discussion of that concept. We are trying,
though, to provide a clear perception of that definition building on our judgment.
2.2.1 Basic idea of Earnings Management
Initially, the question should be issued is whether IFRS deter the use of Earning
Management techniques. This is a hard question to be answered as different researchers
have concluded to dissimilar outcomes. We can recognize that when looking at some
empirical studies that are referred at part 3 in literature review chapter. It would be ideal
now to approach the Earnings Management phenomenon.
The issue of Earnings Management (from now on EM) in accounting has been under
analysis owing to its sensitivity. This is because there is a tight relation between
accounting and financial information revealed by firms that can create occasionally
Actually there is no agreement on the definition of EM because it has many avenues.
Healy and Wahlen (1998) assert that EM refers to firms’ managers who alter financial
reporting statement so as to deceive investors and so on about the real performance of the
company; another reason for doing that is to influence events whose outcome associated
with reported accounting numbers. However, EM is regarded as being a specific
procedure in the companies’ financial reporting where managers intend to get some
private benefits (Schipper, 1989).
The definition of EM is not precise in the academic literature and authors make use of a
variety of terms to analyse the phenomenon. After having distinguished among many
related views of EM, I would choose that a common or basic definition of EM is:
‘’ the use of accounting practices within the limits available in a comprehensive basis of
accounting by management in order to achieve a desired result ‘’ (Callao and Jarne, 2010,
‘’Earnings Management is the active manipulation of accounting results for the purpose
of creating an altered impression of business performance ‘’ (Mulford and
According to Yaping (2005) EM is the use of accounting standards in a wrong way for
manipulating purposes. In addition, Yaping referred to the definition by Brown (1999)
who stated that EM is the procedure of specific steps within the limits of accounting in
order to show the desired earnings and not the real performance. Therefore the approach
of definition based on accounting and management perspective. However, irrespective of
the approach all definitions focus on the management’s judgment and preference over
exploiting accounting methods in order to make financial performance of firm be under
management expectations and desires. It can be considered that EM includes creative
accounting essentials and some researchers condescend EM to be creative accounting and
Nevertheless, EM has not been considered as an illegal action but has not been discussed
as legal. Dechow and Skinner (2000) mentioned that EM is classified in three parts:
earnings management, the legal use of accounting discretion and accounting fraud. The
basic difference between these three practices is the motive behind the action. In other
words, EM considered as legitimate because managers have not immoral intentions as
they do with the ‘’deceitful’’ accounting. One question that needs to be asked, however, is
whether EM has also a good aspect and intends to alter unfair financial results to avoid
shareholders’ and even stakeholders fear. But no matter what the managers’ purposes are,
what indeed counts is the investors’ protection.
2.2.2 Motivation for Earnings Management
Capkun et al (2010) referred to Lev (1999) emphasizes that accounting earnings are
considered to be the main financial information that should be viewed in financial
statements as positive earnings news might react favorably stock market (Kothari, 2001).
Hence, investors need to have standard accounting information so as to evaluate the
corporation’s performance. Obviously, this information should be based on the liquidity
and profitability of the firm.
Tandeloo and Vanstraelen (2005) mention that EM is in someway affected by economic
and other factors that exist in countries. In particular, managers exploit legal abnormalities
of countries’ laws. Common law countries such as England, Australia and North America
have accounting systems designed to meet investors’ needs because of the strong
protection of investors. In these countries, accounting standards derive from the need of
investors for financial information. But countries that follow code law (for instance:
Germany, France and Russia) and their capital market are not very ‘’vivid’’ as they adapt
to tax and dividend regulations (Ball et al, 2000). Commercial law and courts institute
accounting standards in code law countries. Thence, EM becomes dominant in the last
case where Leuz et al (2003) examined.
As we will mention later, a mechanism that is used to temporarily inflate or reduce
reported earnings is the use of accruals by CEOs. These executives appear to use
Discretionary Accruals to manage their companies’ reported performance when they
exercise options and trade profitably many firms’ stocks (Bergstresser and Philippon,
2005). In addition, Bergstresser and Philippon referred to Healy (1985) who states that
there is evidence that the accrual mechanisms are linked to the managers’ motives in their
bonus contracts. It is obvious that managers’ engagement in EM goes beyond
compensation in manipulating earnings and includes issues such as self-fulfillment.
Furthermore, the question that arises is whether firms manage their earnings for stock
market purposes. Healy and Wahlen (1998) referred to DeAngelo (1988) examine that
earnings information plays important role in valuations in management buyouts and
suppose that the management of buyouts firms are motivated to lessen earnings. This
makes sense because the acquirer always tries to buyout another firm as “cheap” as
possible since big earnings are a way to create value.
Additionally, a large body of studies examined whether in equity offer periods, managers
attempt to smooth earnings. The findings illustrate that prior to equity offers, initial public
offers (see Teoh, Wong and Rao, 1998) and financial acquisition (Erickson and Wang,
1998), managers use positive unexpected accruals in their reporting. Further studies of
EM have assessed whether managers manipulate earnings in order to meet financial
analysts’ expectations (Healy and Wahlen, 1998).
Lastly, previous findings imply that management is willing enough to sacrifice real
corporate value by making use of transactional strategy so as to manipulate earnings
(Graham et al, 2005). This has led to tighter accounting standards as well as use of laws
such as the Sarbanes Oxley Act in order to reduce managers’ incentives to use discretion
in accrual manipulation (Graham et al, 2005).
2.2.3 Earnings Management Techniques by Firms
Chapman and Steenburgh (2010) referring to Degeorge et al (1999) speculate that EM
behavior can be classified in two ‘’groups’’: misreporting earnings management that is
discretionary accounting and direct earnings management in which the timing of sales and
expenditures is used for the financing decisions. Therefore in the first group aspects of
financial reporting where EM can be affected include estimations of the economic life of
long-term assets, losses from bad debts and asset losses that associated with the managers’
choice of accounting techniques. In the second group, there are subjects that involve
expenditure shifting between periods or selling an asset that is illustrated as undervalued
in the balance sheet (Spohr, 2005). It should be mentioned that the techniques are not
restricted only to those two categories though.
When we focus on EM techniques, we usually first look at accruals which are accounting
components of earnings. In specific, they are considered as the part of sales or expenses
that are real cash collections and payments. So, if we assume that cash is difficult to be
manipulated, accruals show the way to managers on practicing EM. As we already
mentioned, timing is important, for instance, insiders can speed up the reporting of next
years revenues or delay the reporting of current costs to hide poor current performance
(Leuz et al, 2001). Moreover, accruals are balance sheet components of earnings that are
not appeared in current cash flow (Bergstresser and Philippon, 2004). Another technique
that insiders use is not to show strong current firm performance in order to keep ‘’funds’’
for the future. The results of the previous mentioned can be enhanced by Burgstahler and
Dichev (1997) who show that North American managers practice accounting discretion to
avoid small losses reporting.
McNichols (2000) classify his research design in three basic categories: specific accruals,
aggregate accruals and the distribution of earnings after management. These three
methods which depend on the managers’ choice are commonly used in the EM literature.
A strong point though is that these financial decisions are considered to be within the
borders of the general acceptable accounting standards, thus, making the practice of EM
The most important finding is that accruals that can be managed are the discretionary
ones. For that reason, they are used to mitigate earnings and manipulate the financial
statements. The Discretionary Accruals are difficult to be detected and become a well-
matched tool for managers whether they need to meet their accounting aims. Generally
speaking, high values of Discretionary Accruals are correlated to EM use.
2.2.4 Earnings Management Measurement
The E.M measurement is an important factor for the accounting research of this
phenomenon. In order for the researcher to recognize if earnings have been managed,
he/she needs first to estimate earnings before the EM practice, which is hard enough to do
so (Healy and Wahlen, 1998). Generally, EM measurement is done via earnings
distribution, ratio of return on assets (ROA) and largely via accruals (Yaping, 2005).
According to Healy(1985) and Jones(1991) if a researcher attempts to estimate Total
accruals, he has to typically use the following formula:
TAi,t = (ΔCAi,t – ΔCLi,t – ΔCashi,t + ΔSTDi,t – Depi,t)/Ai,t-1
We will discuss about the formulas that it is going to be used in the methodology part.
According to Healy and Wahlen (1998) a very common approach is to detect the
motivations of managers to manage earnings and to estimate if these accruals are related
to their motives. Alternatively, taking into consideration the unexpected accruals that
cannot be explained as part of total accruals. It should be mentioned that information
asymmetry makes the idea of unexpected accruals an assumption and not a standard
method. However, accruals analysis is just a method of the issue of EM and is not proved
that is the most accurate.
Goel and Thakor (2003) measure EM with the use of earnings distribution. If there are
consistent smooth earnings distribution over accounting periods is a sign of earnings
management. This however contains problematic issues because earnings distribution
does not necessarily mean EM. As an alternative method of EM measurement, is the
Return On Assets ratio using histograms and graphs of frequency for that ratio. The
researcher in order to evaluate the measurement tries to detect possible abnormalities in its
distribution. In specific, if any irregularity happens, a space will appear between the
frequencies that approach zero value. Again, this variable is not an essential cause of EM
but it is based on assumptions (Yaping, 2005).
Burgstahler et al (2005) discussed about four alternatives that take into consideration a
range of EM activities. These are when firms tend to avoid small losses, the smoothness
of earnings, the Total Accruals and the correlation of accounting accruals and cash flows.
Furthermore, Leuz et al (2003) using the existing EM literature developed four measures
that are similar to Burgstahler’s alternatives:
-Mitigate the variability by modifying the accruals: the measure that is used is a ratio of
country’s median standard deviation of operating earnings (firm-level) divided by the
standard deviation of operating cash flow (of the firms). Low values show that managers
use accounting discretion in purpose.
-Relation between cash flow from operations and accruals: For instance, managers can
speed up the future incomes reporting or delay of current costs in order to conceal bad
performance. Alternatively, they may misreport the current profitability in order to have
reserves for future reporting. The method that is used to quantify the earnings smoothing
is correlation between changes in accounting accruals and operating cash flow.
-Managers may use their reporting discretion to misstate firm’s performance
Measure: The median absolute value of country’s firms’ accrual divided by firms’
operating cash flow absolute value. It should be mentioned that Discretionary Accruals
are used to increase the financial reports’ information ability.
-Managers avoid small losses. Therefore, using accounting discretion manage earnings.
In other words, for them is more likely to change small losses to earnings than big losses.
What is used as a measure is the ratio of small reported profits to small reported losses.
Small losses means that their range is [-0.01, 0.00).
Likewise, Barth (2008) lists five measures of EM: first, the annual changes in the net
income. Secondly the volatility in net income scaled by the liquidity change. Third the
likelihood of reporting small earnings and fourth reporting large negative earnings. As a
fifth measure the correlation between residual cash flow and residual accruals.
However there is the acknowledgement that the whole techniques, which try to indicate
EM, cannot give precise and flawless measures of the topic.
Finally, it would be useful to classify the estimation approaches that have been published
by the most important authors:
a. Healy (1985), makes use of total accruals as Discretionary Accrual proxy. While
DeAngelo (1986) uses the change in Total Accruals between time periods.
b. Jones (1991), regresses total accruals on changes (delta) in revenues and PPE
(property, plant and equipment).
c. McNichols and Wilson (1988) use as a proxy the residual provision for bad debt.
Beaver and Engel (1996) estimate the residual from a regression of loan losses on charge
d. Burgstahler and Dichev (1997) test whether the annual earnings frequency are
more or less than zero earnings. Whereas, Degeorge et al (1991) find quarterly earnings
frequency and test if it is more or less than zero earnings and last quarterly earnings.
2.2.5 Theoretical Background of Discretionary Accruals models
After looking at the EM measurement it would be valuable to describe the most important
Discretionary-accruals models that are used in detecting any EM practice from managers.
Below, we discuss five Discretionary Accruals models:
a. The DeAngelo model (1986). In order for researchers to find the Discretionary
Accruals they have first to estimate the Non Discretionary Accruals. Using last time
period Total Accruals divided by lagged total assets:
The magnitude of Discretionary Accruals can be found if we subtract NDAt from TAt/At-1.
b. The Healy model (1985). In order to find Non-Discretionary Accruals we have to
use the Total Accruals average divided by lagged Total Assets. Therefore, the model is:
NDAt = 1/nΣτ(TA/Aτ-1)
The magnitude of Discretionary Accruals is found if we subtract NDAt from TA in the
year t (divided by At-1).
c. The Jones model (1991) finds also the NDA first. The model is:
NDAt = a1(1/At-1) +a2(ΔRev/At-1) + a3(PPEt/At-1)
Where: NDA is the Non-Discretionary Accruals, ΔRev is change in revenue between year
t and t-1, PPEt is property plant and equipment while At-1 is total assets and a, b, c
coefficients that are used in finding Total Accruals.
d. The modified Jones model is an advanced model of the Jones one. This model is
trying to eliminate errors of Discretionary Accruals where managers use discretion for
revenue recognition. The model is:
NDAt = a1 (1/At-1) +a2 [(ΔRev-Δrec)/At-1) + a3 (PPEt/At-1)
The only adding is ΔRev, which is the net receivables change between t and t-1. It is
common that Jones and Modified Jones model suppose that Non-Discretionary Accruals
are constant over time.
e. The industry Model suppose that Non-Discretionary Accruals are constant as well.
In reality the Industry model suppose that the determinants of NDA is common across
firms in the same industry.
NDAt = β1 + β2 median (TAt/At-1)
Where NDA is calculated as in Jones Model and β1, β2 coefficients by using OLS
All the previously mentioned methods have been widely used by researchers in order to
detect EM practice by managers. Numerous papers include these models as a method of
finding pre and post effects of an economic event and how this can detect the EM degree.
2.2.6 Decreasing Earnings Management Phenomenon
The management of the firm is influenced and supervised by the structure of corporate
governance. According to Dechow et al (1995) the governance structure has the proper
mechanisms and functions which related to financial reporting and can ensure
transparency and obedience to compulsory reporting requirements as well as keep the
financial statements’ credibility in a high level.
Theoretically, law code and accounting rules if properly imposed, have the strength to
reduce the aptitude of managers to use EM practices though (Leuz et al, 2003). Again,
according to Gore et al (2001) the major supervisors or auditors are those who can
monitor properly and check EM activities. Additionally, as it has been shown, obligatory
audits can ensure precise financial reporting. In reality, the Audit Committee should be
considered independent so as to provide vital quality to fulfill its supervision role
(Chtourou and Bedard, 2001). Krishnan (2003) argues that large ‘accounting’ firms not
only have the proper resources and knowledge to identify and detect EM, but also because
of their reputation and large clientele they need to protect themselves.
Besides the Audit committee, corporations can create an internal audit body to increase
the usage of internal governance framework that already exists. The new body can provide
firms with consulting warranty service, which in turn can improve the corporate
governance, control and risk management effectiveness (Davidson et al, 2005).
Another issue that arises is whether corporate governance practices have any effect on
utility of EM. For example, Chtourou and Beddard (2001) examine whether the members
of the board (managers) hold any certificate in accounting and they support that CEO
should have essential financial or accounting literacy.
In addition, an important factor that can play role in EM shrinking is auditing firms.
Numerous studies have revealed that Big 4 auditors create many obstacles on EM
(DeFond and Jiambalvo, 1991). Nevertheless, Maijoor and Vanstraelen (2002) find that
these limits initiated by Big 4 auditors on EM is not the same for all countries around the
world. In addition, Street and Gray (2002) believe that when a large auditor audits a
company is positively related to IFRS obedience. In respect of this, it is issued whether
IFRS implementation has stronger impact on earnings quality of the company when
audited by a Big 4 firm.
In terms of EM, the European Union obliged all listed companies to implement IFRS so as
to improve accurate reporting with efficient standards across the region.
2.3 Impact of IFRS on Financial Reports and Earnings Management
Arguments suggest that IFRS adoption may lead to actual advantages on the subject of
accounting quality but it is said that the IFRS transition is the most significant factor that
determine the accounting quality and EM. This is true because other factors (such as legal
or political systems) will continue to be different among countries (Soderstrom and Sun,
2.3.1 Earnings Management after IFRS adoption
The IFRSs implementation can reduce information asymmetry and mitigate the difference
in communication among insiders and outsiders (Bushman and Smith, 2001). This may
make managers be more reluctant to use EM techniques.
First of all, to assess the earnings quality we need to concentrate on IAS 1 (Presentation of
Financial Statements) objective that is to prepare the appropriate financial information in
order to meet the needs of individuals who are not in a position to have reports in their
hands (Alfredson et al, 2009). Specifically, paragraph 9 and 7 of IAS 1 underline that
financial statements are designed to provide the proper financial position of the firm by
using a range of components: a statement of financial position, changes in equity and cash
flows. These are the tools that IFRS “uses” so as to make the firms show transparent
One question that needs to be asked is what does ‘’fair presentation’’ mean and is stated in
paragraph 15 of IAS 1? Fair presentation means that the transactions, events and
conditions related to the definitions and recognition of income, expenses and assets
contribute to achieve fair presentation under a faithful representation (Alfredson et al,
2009). All this helps users of the statements to make objective and unbiased economic
decisions. Consequently, fair presentation is supposed to be the way that is stated in IFRS
principles in order to increase accounting quality.
It can be stated that IAS/IFRS accounting standards have initiated better use of fair value
presentation in certain accounts when compared to domestic GAAPs.
For instance, compared to domestic accounting standards, IAS 39 is considered to
increase the fair value of firms’ accounting components. Due to the unavailability of
liquid markets to provide market prices for fixed assets and other forms of financial
components (i.e. receivables), the use of mark-to-model measurements has greatly
increased firms’ discretion. According to Ball (2006), in the case of capital markets
illiquidity, greater discretion has been identified regarding fair value measurements. When
fair values are estimated using valuation models, managers can influence the estimations
through their choices of models and parameters. Thus opening door to greater
An additional example is IAS 16 (PPE), as it enables firms to revalue certain long-lived
assets at fair value systematically, yet with direct consequences for depreciation, expenses
and earnings. Consequently, giving the opportunity to managers to manipulate their
earnings. The same holds for IAS 36 that requires asset impairment to fair value.
Likewise, Ball et al (2003) said that adopting high standards might not be necessarily to
attain high quality reporting. Further, he supports that if the costs of compliance with
IFRS are more than that of non-compliance then non-compliance will be dominant.
Therefore, penalties for non-compliance are doubtful because this condition may affect
the financial disclosure quality.
The suitability of IFRS worldwide and its impact on reporting standards is a significant
issue that has been argued not only in developed but also in developing countries. In the
developed world the argument is based on establishing high quality standards that can
reduce EM in countries without strong investor protection rights, like code law countries
(Tandeloo and Vanstraelen, 2005). In developing countries though, implementing IFRS is
a chance for them to follow a different way of thinking and assist the locals to invest with
Generally speaking, one of the IFRS adoption aims is to provide earnings quality to all
financial statements’ users and make the global financial environment well organised. No
matter what the real aims of IFRS are, I believe that many “spaces” have been created that
allow managers have opportunistic behavior.
2.3.2 Existing empirical studies
Several studies have made an attempt to illustrate that the adoption of IFRS has affected
the utility of EM. It would be useful to see a study that shows the firm’s income behavior
first. Therefore, among these are studies by Iatridis (2010) who investigated the impact of
IFRS implementation on important financial components of UK companies. He focused
on the UK GAAP-based financial numbers in 2004 and the IFRS restated financials that
reported in 2004. The findings show the adoption of IFRS has not decreased the measures
of profitability such as Earnings Per Share and Operating Profit.
To start with, among the studies that indicate the IFRS impact on EM is this by Tandeloo
and Vanstraelen (2005). It has already been referred that they use the magnitude of
absolute Discretionary Accruals and the correlation between reported accruals and cash
flow. Their results illustrate that Financial Reporting Standards did not lead firms to
reduce EM. On the contrary they show that as IFRS appeared, have increased the
management of Discretionary Accruals. Thence, they conclude that IFRS adoption does
not mean lower EM with the exception of some firms that have Big 4 auditor.
Another research by Goncharov and Zimmerman (2006) illustrated the same outcomes.
Their research was drawn by separating into Discretionary and Non-Discretionary
Accruals while using normal accruals as proxy for the Non-Discretionary Accruals which
might be affected by EM. They focus not only in German GAAP but in USA GAAP as
well. Their findings were that firms were more involved in EM when reporting under the
International Financial Reporting Standards.
More recent studies investigated by Jeanjean and Stolowy (2009) focused on UK,
Australia and France. These researchers made an attempt to discover whether firms in
these countries manage their earnings before and after IFRS introduction. The
methodology is focused not only in accruals but also in distribution of reported earnings
and particularly in income before extraordinary items and sales. Similar findings with the
Germany case have been found for France. They thus indicated that IFRS adoption did not
reduce EM, on the contrary it increased. Jeanjean and Stolowy (2009) claim that common
accounting language is not sufficient in management incentives and institutional factors,
which are both vital for the financial reporting quality.
Nevertheless, when examining the region of Europe, it can be noticed differences in
management behavior and how each country takes advantage of accounting changes. In
specific, Callao and Jarne (2010) considered opportunistic behaviour by managers in 11
countries. By analyzing long term and current Discretionary Accruals and determining the
correlation between accruals and corporate variables, the researchers conclude that the
majority of countries manipulate their earnings via the mentioned methods.
With consideration for the IFRS impact on developing countries, Zhou et al (2007)
investigated the impact of IFRS adoption on earnings mitigation. They simply used three
different types of income to show the frequency or variation pre and post adoption of IAS.
Similar to previous results, there was no evidence of declined EM. However there was
neither significant evidence of EM activity when adopt IAS.
Chrinstensen et al (2008) analysed a different case by comparing EM metrics of Early
adopters (from 1998 to 2004) with Late Adopters (2005). After examining 310 German
companies, they found that EM decisions decreased for the Early Adopters while
increased for those who adopted IFRS later. This is a different research and attributes the
difference in results to the need for potential incentives that Early Adopters firms have in
order to follow a high quality accounting standard.
Therefore, in the investigation of earnings management through IFRS adoption, it is valid
to explore the following fields:
- The IFRS impact on accounting performance.
- The volatility of earnings realizations and accruals magnitudes (after and pre IFRS
- The manager’s behavior and intentions when such “event’’ changes take place.
This section aims to discuss and analyse the construction of the methodological tools and
components that will be used in order to reach our research aims and objectives. The
section discusses concepts and issues that support this research project in a more effective
way and that make the reader understand how the presented result has been obtained.
Topics included are related to: strategy, data sampling and formulas, as well as methods of
3.1 Overview of Methodological approach
The main strategy that has been introduced to measure the IFRS effect on the EM
phenomenon are event studies. In reality an event study approach was chosen because it
allows us to find out the variation of the financial occurrence.
Economic researchers are often asked to evaluate the impacts of economic events on the
firms’ value. On the surface, a task like this is difficult, but using an event study makes
the construction of measures much easier. In fact, using data of financial markets, the
effect of a specific event can be measured by an event study regarding the firms’ value.
The event study approach is considered to be a useful tool that can help scientists evaluate
the impact of financial changes in firms’ policies. For instance, by this method, a
researcher determines whether there is an abnormal stock price effect related to an
unexpected event. Determining this, scientists can realise the significance of the event. It
is known that the event study method is used widely in finance or accounting research. It
always measures the firms’ control changes through time (McWilliams and Siegel, 1997).
Benston (1982) states that the event study is also very popular because it avoids the need
of the researcher to analyse accounting-based measures of profit that have been criticised
due to their lack of transparency for evaluating corporate performance. In our study, for
example, financial managers can make use of EM to manipulate the profits because of
their ability to select accounting procedures.
Nevertheless, once this method is extensively used to evaluate the impact of managerial
decision-making it would be essential to make sure that it has been applied properly. In
addition, it is imperative to report the results clearly and to assure the results interpretation
is suitable. It is well recognised that the analytical technique’s usefulness depends on a
range of strong hypothesis (Brown and Warner, 1980, 1985).
Some further disadvantages of the event study methodology are that: the design and
construction of the study are strongly linked to the outcome and many theories may have
been unjustifiably based on incorrect methods. Additionally, as already mentioned, the
methodology of event study depends heavily on assumptions. So, if the researcher violates
these assumptions, the results may be inaccurate and biased. Then, the final conclusion
may be problematic (Palgrave MacMillan, 2012).
It is meaningful to our readers, to select the right length of an event window that the study
takes place in. In this case, the event window used is considered to be categorized as
short run, as we try to capture the consequences of the IFRS application one year before
and one year after the disclosure of financial statements. We could include more sub-
periods prior and after the IFRS adoption but if the event period is too long, other events
or changes (that we cannot examine at the moment) occurring within this window may
impact on our study and reducing its reliability. Generally, problems related to this
approach are several. The problem that may arise is that by using too short event window
we may not capture the real effect of the event. However, a carefully chosen and right
length of event window can present the full consequences of the adoption. Another
problem that should be mentioned is that firms prior to 2005 may use different accounting
policies which mean that after the IFRS adoption, some firms may have more
opportunities than others to manipulate their numbers.
2003 2004 2005 2006
-Transition year- - IFRS adoption-
Figure 1. Timeline of the event study
The research covers the period from 2003-2006 (Figure 1) and it is divided into two sub-
periods: 2003-2004 and 2005-2006. However, the 2004-2005 period is not included as it
is the first time of the IFRS application in the UK and we want to capture the effect before
and after the ‘accounting event’ but we do extract descriptive statistics for that period to
observe what happens in the “ transition year”.
3.2 Sample and Data
Our sample consists of firms that are listed at the London Stock Exchange (LSE) and
particularly the FTSE100 on December 31, 2006. 19 firms (see Appendix A, Table D) are
excluded from the sample of 100 companies, due to them being part of the financial
industry. Additionally, six listed companies (see Appendix A, Table B) are excluded, that
have not used IFRS in the selected period and eight more firms (see Appendix A, Table C)
due to lack of data.
As previously mentioned the research covers the period from 2003 to 2006 and it is
divided into two sub-periods so as to assess the situation pre and post the implementation
of IFRS. Furthermore, it should not be omitted that, firms reported their annual results
under local GAAP for the period 2002-2004, while after 2005 all listed companies in the
United Kingdom implemented International Accounting Standards.
The companies were selected on the basis of their significant capitalisation and their
obligation to apply IFRS in year 2005 and 2006. The companies of FTSE100 represent the
largest UK companies (known as blue chips companies), the index represents
approximately 85% of the UK’s market capitalisation and is suitable as the basis for
investment products, such as funds, derivatives and exchange-traded funds. The FTSE 100
Index also accounts for 8% of the world’s equity market capitalisation (based on the FTSE
All-World Index as at 30 June 2011 (FTSE The Index Company, 2012).
An additional reason choosing this kind of firms is that such giant companies have the
strength and ‘’capabilities’’ to manipulate their financial results. Specifically, FTSE100
firms have more knowledge, experience and motivation to adopt EM techniques in the
interest of their managers or shareholders.
Secondary data have been collected from Amadeus and Bloomberg Database (the firms’
annual reports) to determine the results. The variables that have been selected are
measured differently from each individual database. The following table shows their
specific definitions in both databases.
Selected Variables Amadeus Bloomberg
-Current Assets (CA) Current assets Total Current Assets
-Current Liabilities (CL) Current liabilities Total Current Liabilities
-Cash Cash & cash equivalent Net Changes in Cash
-Long Term Debt (STD) Loans Long-Term Borrowings
-Total Assets (A) Total Assets Total Assets
-Gross Property, Plant, Equipment
(PPE) Tangible Fixed Assets Net Fixed Assets
Table 1. Corresponding table of Databases definitions
3.3 Methods of Analysis
The estimation of discretionary accruals is the main aim of the methodology that should
be followed. As has been discussed in the literature review, accruals are components of
incomes and expenses in a firm that do not include real collections of money or payments
and can be calculated as a difference between earnings and operating cash flow (Callao
and Jarne, 2010). Different authors have measured EM in a variety of ways but our
method focused on specific models.
For the purpose of finding the Total Accruals, as previously indicated are using the Healy
Model (1985), which has been restated by Jones in 1991. Then, Total Accruals are
TAi,t = (ΔCAit – ΔCLi,t – ΔCashi,t + ΔSTDi,t – Depi,t)/Ai,t-1 (1)
TAi,t symbolizes the total accruals of the company i and year t. The Δ (delta) represents
the change in the factors between the year t and t-1. As independent variables, the
following are included : ΔCAi,t,, the currents assets change of company i at year t. ΔCLi,t ,
the current liabilities change. ΔCashi,t , the cash and cash equivalent change. ΔSTDi,t , the
long-term debt change in current liabilities. Depi,t , expenses in depreciation and
amortization and finally Ai,t-1 represents the total assets lagged at t-1 year.
To begin with, the Total Accruals magnitudes can be used in order to measure the
manipulation of earnings between the time periods. Financial managers use accruals to
transfer earnings from one year to another. Therefore, we will make use of descriptive
statistics to examine when profits are ascending or descending for the firms of FTSE100.
Particularly, we will start our analysis with the distribution plots of each time period so as
to discover the specific techniques that have been used and have a first look at our data.
In the case of the Total Accruals being zero, the absence of EM practice can be concluded
regarding the sample under consideration. However, Total Accruals capture a larger
portion of managers’ manipulations.
Having accomplished the previous procedure, the next step to be taken is to determine that
Total Accruals are divided into Non discretionary accruals and Discretionary Accruals.
Generally, Discretionary Accruals (DA) are easier to practice than Non Discretionary
Accruals (NDA), which are difficult to manage. Hence, TA = NDA + DA. (2) We have to
pinpoint Jones (1991) assumption that Non Discretionary Accruals are regarded as
constant. This assumption lessens the difficulties in the computation of the formula.
Subsequently, based on the Jones Model (1991), the following model should be estimated:
TAi,t = a x(1/At-1) + b x(ΔRevi,t) + c x(PPEi,t) +εi,t (3)
ΔRevi,t : change in revenues scaled by total assets at t-1 year.
PPEτ : gross property plant and equipment in year scaled by total assets at t-1 year.
At-1 : total assets at t-1.
a, b, c : firm parameters.
Being at this point, we should use the TAi,t we found in equation (1) and replace them as
an dependent variable in equation (3). In order to do so, we should use the data from pre-
adoption period 2002-2003 of IFRS implementation. The use of that period has been
selected, because it is closer to the event window period.
Having accomplished the tasks described up to this point, our aim now is to estimate the a,
b, c parameters by using the Eviews econometric software. In particular, we are using
Ordinary Least Squares method to find our firm-parameters a, b, c. Afterwards, the
estimated parameters are used so as to construct the following formula:
NDA = a x(1/At-1) + b x(ΔRevi,t) + c x(PPEi,t) (4)
ΔRevi,t : change in revenues scaled by total assets at t-1 year.
PPEτ : gross property plant and equipment in year scaled by total assets at t-1 year.
At-1 : total assets at t-1.
a, b, c : firm parameters.
Thence, having estimated the a, b, c parameters and using the data (2003-2004 now) we
can find the Non Discretionary Accruals that are considered to be constant for all of our
periods (Jones’ assumption). Subsequently, as Non-Discretionary Accruals variables have
already been estimated, the Discretionary Accruals can easily be found (for each period)
by using formula (2): DA = TA – NDA (subtracting NDA from TA).
Quantitative analysis for Discretionary Accruals will be used again with the purpose of
analyzing and comparing their magnitudes for each time period.
3.4 Research Ethics
It is generally accepted that using secondary data and thus secondary analysis raises very
few or no ethical considerations. However, those considerations are based on the use of
quantitative data sets when documentary analysis and archival research is conducted.
Therefore I have to take into account the implications of Data Protection Art (1998). In
other words I check the consent when collecting data. In addition I have to ask myself on
what are my responsibilities towards the researchers who first collected the data and if I
need to take any permission in order to use them in this paper. An ethical approval form
was completed and can be found in the Appendix B.
4 Analysis of findings
4.1 Descriptive statistics: Total Accruals
We begin with an analysis of the trends over time in Total Accruals. Our data is panel data
consisting of 67 observations and 4 time periods, which each of them considered as cross
sectional data. The 67 firms of the FTSE100 sample have an ascending average revenue
growth, which is approximately 30% for the 2003-2004 time period, 40% for the 2004-
2005 and 87% average growth for 2005-2006 time period [graph 1]. It is surprising the
fact that after the IFRS implementation the revenue growth has rapidly increased. Taking
into consideration the new accounting event and comparing the two results prior and after
the adoption, it would be said that it is odd enough when a specific list of companies has
big percentage difference in revenues from one period to another.
Graph 1. Revenue Growth for 2004, 2005, 2006 years
2004 2005 2006
4.1.1 The Distribution
For each time period it can be plotted a distribution graph to obtain a first impression
about the data. The distribution shows the frequency of specific values for a variable. It is
important then to see whether data are normally or skewed regarding their distribution, or
have a kyrtosis to be considered. The reason is that if the data are normally distributed,
this means that the majority of our firms may use EM but we cannot discover whether
they are using ascending or descending techniques for increasing or decreasing their
earnings level respectively. This happens, because all the magnitudes may be equally
around ‘zero’. In short, it would be interesting not to see a bell-shaped graph.
In the next graphs we can see the distribution graphs of Total Accruals for the 3 time
periods 2002-2003, 2003-2004 and 2005-2006. The vertical axis represents the frequency,
while the horizontal axis represents the Total Accruals magnitude.
Graph 2. The Total Accruals distribution
for the 2002-03 time period.
Graph 3. The Total Accruals distribution
for the 2003-04 time period.
Graph 4. The Total Accruals distribution
for the 2005-06 time period.
We have to determine that when Total Accruals are equal to zero, no EM practice detected.
As can be seen from the distribution plots above, the majority of the observations, Total
Accruals are found to be on the left of the mean (zero value). That means that Total
Accruals are negative for the majority of observations. Furthermore when looking at the
plots there is no significant difference between the 2003-2004 time period and the 2005-
2006 time period, apart from the fact that many firms from the time period of 2002-2003
have decreased their earnings management techniques noticeably by making negative or
positive accrual decisions. Then, simple descriptive statistics analysis (Table 2) was used
in order to assess the data.
TAi,t = (ΔCAit – ΔCLi,t – ΔCashi,t + ΔSTDi,t – Depi,t)/Ai,t-1
Mean -0.070825 -0.045337 -0.053117 -0.037313
Median -0.045793 -0.049506 -0.057167 -0.043462
Maximum 0.401350 0.711584 1.417391 0.411547
Minimum -0.977612 -0.475206 -0.71179 -0.685726
Std. Dev. 0.166938 0.153123 0.243846 0.166109
Skewness -3.371846 1.735342 3.316020 -0.455179
Kurtosis 19.97906 12.65493 22.67939 6.922279
Observations 67 67 67 67
Table 2.A Total Accruals Descriptive Statistics for all time periods
0.0 0.2 0.4 0.6
-.6 -.4 -.2 .0 .2 .4 .6 .8
0.8 1.2 1.6
-.8 -.6 -.4 -.2 .0 .2 .4 .6
Jarque-Bera 931.7626 293.8600 1203.940 45.26137
Probability 0.000000 0.000000 0.000000 0.000000
Sum -4.745286 -3.037587 -3.558837 -2.499977
Sum Sq. Dev. 1.839314 1.547477 3.924427 1.821077
Observations 67 67 67 67
Table 2.B Total Accruals Descriptive Statistics for all time periods
It can be noticed from the table above that in the TA 2002-2003 period and the TA 2005-
2006 period, the skewness is negative, which suggests that more values of residual series
are grouped at the left of the mean. However the most striking observation to emerge from
the data comparison is that for the time period of 2003-2004 (pre IFRS adoption period)
the skewness is positive (1.735342) while it is negative (-0.455179) for the 2005-2006
period (post IFRS adoption period).
Generally speaking, a normal distribution has a kurtosis of three (3). Any noteworthy
deviation from this value is described as an unusual shape. Therefore, the shape of the
graphs can be described as having a kurtosis. Strong evidence of unusual shape existence
was found when we calculated the Jarque-Bera test by combining skewness and kurtosis:
So, as we can see below the Jarque-Bera row probability for all the time periods is equal
to zero (Probability=0) which is less than 0.05 (Probability=0.00<0.05). Then, we reject
the null hypothesis and conclude that the data are not normally distributed.
The hypothesis development is:
H0: data are normally distributed
H1: data are not normally distributed
4.1.2 Basic statistics
The average values of Total Accruals were compared in order to see whether there is any
deviation among the time periods. As expected then, TA mean scores are negative for all
the time periods. However, in the post-adoption period (2005-2006) the average TA (-
0.037313) has increased slightly in contrast to the pre-adoption period (2003-2004) for
TA (-0.045337). It is apparent from the combination of the found statistics that the
managers’ intention after the IFRS adoption was to change their accrual technique so as to
increase their earnings. In other words, they use income-increasing accruals techniques to
manipulate their results and show bigger earnings.
Now, it would be useful to examine the Quartiles of the data:
TA 2002-03 TA 2003-04 TA 2004-05 TA 2005-06
-0.087172 -0.079564 -0.1209 -0.078631
Median -0.045793 -0.049506 -0.057167 -0.043462
-0.01645 -0.018427 -0.023586 0.0108511
Quartiles split the observations into four (4) groups. In reality, 25 per cent of the
observations lie below the 25 quartile. In our case 25% of the observations, more
specifically 17 observations out of 67, lie below -0.087172 in the 2002-2003 time period
while 17 observations have a Total Accrual value of more than -0.01645. In other words,
75% of the observations lie below -0.01645 in the 2002-2003 time period. Particularly,
their magnitude range is from -0.977612 to -0.01645 for 75 per cent of our observations,
which means that the majority of companies (75 per cent) use negative EM techniques.
Table 3. Total Accruals Quartiles for all time periods
The data that should be compared at this point are the ones before and after the IFRS
adoption in 2005. It is clear from the table that 25 per cent of our observations in 2003-
2004 and 2005-2006 time periods are below -0.079564 and -0.078631 respectively. These
two numbers are significantly similar which means nothing has changed pre and post the
However the big difference seems to be found in the upper quartile (Q3) where the 25 per
cent of the observations’ values is higher than +0.0108511 for 2005-2006 time period.
While for the time period 2003-2004 the things are totally different, as total accruals
values are negative (-0.018427) for the majority (75%) of the observations and have
turned to positive (+0.0108511) after IFRS adoption. The quartiles enable us to see that
more and more firms have changed their EM techniques after the IFRS adoption. This
gives us the impression that many firms of our sample turned their technique from
decreasing to increasing accrual accounting in order to present larger earnings.
This is obvious when examining the mean of Total Accrual pre and post the time period of
2005. In specific, in 2005-2006 the Total Accrual is bigger than that of the 2003-2004
period (-0.037313>-0.045337), which shows an attempt of firms to use positive accruals
for the EM practice. These results show again that accruals tend to increase in order for
managers to show bigger earnings.
4.2 Non-Discretionary Accruals regression results
As we said in the methodology part, we have to find the a, b and c parameters of Non-
Discretionary Accruals by using the Ordinary Least Squares regression method from
Eviews 7. In table 3, the values of our parameters can be found.
NDA = a x(1/At-1) + b x(ΔRevi,t) + c x(PPEi,t)
Variable Coefficient Std. Error t-Statistic Prob.
X1 -715.049 11.02815 -64.83852 0
X2 -2.50E-01 3.50E-02 -7.14118 0
X3 1.38E-01 3.52E-02 3.924927 0.0002
R-squared 0.894589 Mean dependent var -0.202146
0.894107 S.D. dependent var 1.193761
S.E. of regression 0.150492 Akaike info criterion -0.906068
Sum squared resid 1.449466 Schwarz criterion -0.80735
Log likelihood 33.35327 Hannan-Quinn criter. -0.867005
As can be seen from the p-values, the probabilities of all variables are less than 0.05
which indicates that all variables are statistically significant. Furthermore, R2
which indicates that almost 89 per cent of the dependent variable can be explained by
independent variables, in our case more specifically, 89% of the Total Accruals can be
explained by the reciprocality of the Assets, changes in revenues and Property, Plant,
Equipment. From the actual, fitted and residual graph (Figure 2) below, it can be seen
how our model fitted the sample data and the remaining 11% of the Total Accruals is the
Table 4. Statistical Characteristics of Parameters: a, b, c
Table 5. Statistical information for a, b and c parameters
So our estimated parameters are a= -715.049, b= -0.250076, c=0.137988. In order to
examine the coefficients we would say that reciprocal of the one period lagged Assets are
negatively correlated with Total Accruals. A change in revenues also negatively affects
Total Accruals, while Property, Plant, Equipment positively affects the Total Accruals.
Since we divided the right side of the equation by At-1 to reduce heteroscedasticity, it is a
useful to check our residuals for heteroscedasticity (Table 5) in order to see if we have
achieved our goal. There are a lot of tests that can be performed to check for
heteroscedasticity. But the widespread one is the White Test (see Appendix A, Table E).
The null and alternative hypotheses are
H0: There is no heteroscedasticity
H1: H0 is false. There is heteroscedasticity
It is obvious that probability of F(6,60)=0.0 is less than 0.05 (see Appendix A, Table E),
so we reject the null hypothesis and conclude that there is heteroscedasticity problem in
5 10 15 20 25 30 35 40 45 50 55 60 65
Residual Actual Fitted
Fig. 2: Actual, Fitted and Residual Graph
the residual. If we look at the probability of t-statistics ( )
(see Appendix A, Table E), are statistically significant, meaning that if we
would include those variables to the model we wouldn’t have a heteroscedasticity problem.
However heteroscedasticity doesn’t create complications as it doesn’t affect the estimated
parameters so parameters. So parameters a, b and c are unbiased, the only item
heteroscedasticity affects, is the variance of the estimated parameters (and hence standard
errors, t-values). It is common to have a heteroscedasticity problem in cross-sectional data
and this does not affect our results.
4.3 Descriptive statistics for Discretionary Accruals
Discretionary Accruals are the part of Total Accruals that are easy for managers to change
in order to meet their target. By saying that, we mean that our sample should have non-
zero Discretionary Accruals values.
DA 2003-2004 DA 2005-2006
Mean 0.030379 0.038403
Median -0.004848 0.004683
Maximum 0.952637 0.475596
Minimum -0.518003 -0.59246
Std. Dev. 0.205251 0.202168
Skewness 1.508753 0.178544
Kurtosis 8.187439 3.58521
Jarque-Bera 100.5415 1.312034
Probability 0 0.518914
Sum 2.035421 2.57303
Sum Sq. Dev. 2.780443 2.697554
Descriptive statistics for the Discretionary Accruals were calculated (Table 6). It is
obvious that the magnitudes of discretionary accruals, obtained from the table above,
appear more realistic than that of Total accruals. The reason is that Discretionary Acruals
are not biased by the Non-Discretionary Accruals, as we have to subtract them from total
accruals to find a more appropriate measure (DA= TA-NDA).
Table 6. Discretionary Accruals Descriptive Statistics pre and post IFRS adoption
While the Total Accruals are negative, we find that Discretionary Accruals are totally
different. In particular the average Discretionary Accruals are positive, but in absolute
terms their magnitudes are smaller than that of Total Accruals before the IFRS adoption
(2003-2004: 0.030379 < |-0.045337|) and after the IFRS adoption the average magnitudes
of Discretionary ones is slightly bigger than that of Total Accruals in 2005-2006
(0.038403 > |-0.037313|). Thus, it appears that smaller earnings increasing DA are
followed by larger TA, which is probably larger due to the NDA existence.
From the Probability of Jarque-Bera it is realised that in none of the periods, Discretionary
Accruals are normally distributed. Since their skewness is greater than zero in all periods,
the distribution plots are right skewed. In all periods it holds that median is smaller than
the mean (-0.004848 < 0.030379 and 0.004683 < 0.038403 for 2003-04 and 2005-06
periods respectively). So the distribution plots are indeed right skewed and more data are
located on the right side of the average (Figure 3 and Figure 4).
-1 0 1 2 3 4 5 6 7 8 9 10 11
Graph 5. Discretionary Accruals Frequency Histogram for 2003-2004 period
As the table 7 illustrates, there is no significant difference between the two time periods
(pre and post IFRS adoption periods regarding their magnitudes). To be more specific,
after the adoption of IFRS the discretionary accruals mean (0.038403) is increasing, when
compared to the pre adoption mean (0.030379). At the same time, the standard deviation
is ranging at the same level for both periods. What is interesting in these numbers is that
our sample has higher discretionary accruals values in the post IFRS adoption period than
before the adoption. Undoubtedly this shows that rising earnings management techniques
have been used by the managers.
Another indication of the ascending EM techniques is the aggregate sum of Discretionary
Accruals. Actually, before the IFRS adoption (2005) the sum of the Discretionary
Accruals magnitudes is equal to 2.035421 whereas after the adoption there is an increase
for the sum of Discretionary Accruals magnitudes to 2.697554. This measure confirms
that the same situations exist in our sample, as the statistic average shows. However, the
percentage increase can be calculated more easily and is equal to 32% overall. Therefore,
we can recognize a 32% increase in the use of Discretionary Accruals as a method for
If the change in accruals is measured in isolation, we would say that managers are making
income by increasing accrual decisions. Nonetheless, it would be helpful to see the table
of quartiles (Table 7) in order to indicate how this works. The 25% indicates that even the
-1 0 1 2 3 4 5 6 7 8 9 10 11 12
Graph 6. Discretionary Accruals Frequency Histogram for 2005-2006 period
companies’ managers that used income decreasing accruals decisions (Q1=-0.088265)
have made an attempt to change their technique and approach the zero value.
However, Q3 shows that managers (approximately 17) who prior to the IFRS adoption
would use increasing accrual decision, after the IFRS implementation have increased their
accrual practice even more, so as to show larger income. In particular, it is clear from the
table that for the 2003-2004 period approximately half of the observations have negative
discretionary accruals, while for the 2005-2006 period this variable is only negative for
one quarter of our sample. This obviously indicates that firms are active practitioners in
the use of EM as the magnitudes of accruals are “far away” from the zero value.
Ultimately, managers like to play that ‘financial numbers game’ by using either positive
or negative accruals accounting in order to meet their expectations.
DA 2003-2004 DA 2005-2006
Lower (25) quartile -0.088265 -0.080186
Median -0.004848 0.004683
Upper(75) quartile 0.090488 0.113564
In agreement with our outcome, Kaplan (1985) said that alterations in accruals might
depend on financial conditions of the firm. For instance, if Non-Discretionary Accruals
are a function of income, then the negative change may be due to changes in Non-
Discretionary Accruals and not Discretionary ones.
4.4 Change in Discretionary Accruals
The table below illustrates how many companies changed their decreasing accrual
practice to increasing accrual practice and opposite.
Table 7. Discretionary Accruals Quartiles pre and post IFRS adoption
Differences between discretionary accruals before and after IFRS
Positive DA 29 37
Negative DA 38 30
The table above proves how many firms of our FTSE100 sample have used increasing and
decreasing accrual techniques. In the 2003-2004 time period more companies used
decreasing accruals in order to manage their earnings but this totally changed after the
IFRS implementation. It is noteworthy that after the IFRS implementation more
companies tend to use increasing accrual decisions (56% of our sample). Especially, 8
firms (out of 67) have altered their EM technique in order to show bigger income rather
than show lower income for a future purpose. These results (Table 8) supplement the
outcomes we exacted from descriptive statistics in Table 6 and help us conclude that after
the IFRS adoption firms desire to show better financial results.
4.5 Discussion of results
After the obligatory implementation of IFRS in the chosen FTSE100 sample, the results
that have been found show that Discretionary Accruals have increased. These results seem
to support the view that principles-based accounting standards leave more opportunities
for earnings management (Callao and Jarne, 2010). Nelson (2003) believes that new
accounting standards, for instance IFRS in the EU, seem to be principles-based as they do
not have ‘’plenty’’ of time to include rules. In addition, the transition from a rule-based
system to a principles one brings many significant changes in the business world that can
affect not only the results, but also the whole economy.
Table 8. DA differences pre and post IFRS-firms
Even though, it is not correct to say that accounting standards with principles can easily
create EM, Nelson (2003) examines the problem from two perspectives: constraint and
communication. For the first perspective, he believes that principles-based standards and
rules-based standards are information biased, which means that there are motives for
earnings manipulation. Regarding the ‘’communication’’ perspective he said that rules
could be inferred in an awkward way and each additional rule is too complicated to be
adopted in an appropriate way. Consequently, this is the reason that principles and rules
can easily be applied in the interest of better financial results.
Moreover, these rules are trying to align the differences that exist between multinational
companies from all over the world by creating a common language. As we have realized a
new common accounting language can lead to other complications that are known as
earnings manipulations. No matter if the country is based on common law, like the UK,
and its priority is the protection of investors, the IFRS cannot guarantee the transparency
of the financial numbers. This is apparent from our existing research with the chosen
FTSE 100 sample. Therefore, we can easily conclude that managers try to exploit certain
gaps in the principles or rules in order to achieve a desired result.
Another logical explanation for the increase in EM is that bigger companies implement
more manipulation techniques because of the agency theory. This means that the larger
the firm the bigger the gap between management and shareholders, stakeholders. In
addition, bigger firms have more motives to manage earnings as they are more visible
than small ones (Watts and Zimmerman, 1990).
We have already mentioned that Healy (1985) states that there is evidence when the
accrual mechanisms are connected to managers’ motivation. We can easily speculate that
in our sample, when looking at the revenue annual growth before and after the IFRS
adoption. Especially, there is a positive correlation between Discretionary Accruals and
annual growth of revenues in the 2005-2006 period. This may indicate that managers
manipulate earnings, probably within the limits available, for self-fulfilment purposes.
Moreover, the results of this study are in agreement with those found in the study of
Tandeloo and Vanstraelen (2005). In particular, the current study found that the
magnitude of Discretionary Accruals has increased significantly after the IFRS adoption.
Hence, these findings further support the idea that IFRS adoption does not necessarily
mean lower EM or better accounting quality. There are also similarities between the
attitudes expressed by the current study and those described by Goncharov and
Zimmerman (2006) who found that IFRS involves more EM that domestic standards.
The findings of the current study do not support the previous literature that discusses the
IFRS benefits. In other words, it is difficult to correlate our results with the theory that
supports IFRS as a system of transparency. Some authors, as an example Ewert and
Wagenhofer (2005) said that IFRS lessen managers’ discretion and avoid opportunistic
behavior and advance accounting quality. It is obvious that our findings differ from many
published studies that corroborate the concept of IFRS “excellence”.
However, we already said in literature review that EM is categorised in three parts. First,
the EM then accounting fraud and thirdly the legal use of accounting discretion. Therefore,
it is believed that the difference is based on the managers’ motive (Deschow and Skinner,
2000) and it would sometimes be unfair to judge their real intentions. Additionally, having
a small sample size, caution must be applied and results should be interpreted carefully.
The topic of EM deserves further research as it is one of the most doubtful not only in a
theoretical level but also in its research. This occurs because authors have not concluded
yet whether EM is regarded as being legal or illegal method. It is therefore likely that
accounting standards are important for the quality of accounting information and for
determining the difference between legal and illegal. However, we should not undervalue
the importance of other factors such as firms’ characteristics, auditing role, managers’
incentives and countries’ policies or rules. Many suggestions are discussed at the
5.1 Summary of Findings
The main aim of this dissertation was to discuss, contributing to the debate that exist on
the field of accounting, if the IFRS adoption has had an impact on the quality of financial
reporting and disclosure, and to assess the magnitude of the impact (and on what
direction) on the EM.
A review of the existing literature reveals that the IFRS did not have a positive impact on
the accounting quality, as there is no indication that the new accounting system decreased
the EM. On the contrary, some experimental literature refers that after the adoption of
IFRS, firms are more involved with the management of earnings. This suggests that the
introduction of the IFRS has led to an opportunistic behaviour by firms’ managers.
EM can be explained by a variety of definitions, as it lacks a specific and common
definition in the literature. There are several negative aspects associated to the
manipulation of financial information to the level that the disclosure of such information,
when managed, does not serve its purpose, which is to provide to the investors and other
stakeholders with the essential information to support their investment decisions or
improve the accounting quality. However, the management of earnings does not receive as
importance as it should in the academic world because it is difficult to detect.
The EM and the associated management of information, performed by managers, are
motivated by the performance review of managers. In many cases, managers are based on
their performance and on the financial outcome of their management. Thus, the
management of earnings allows companies to display a better condition for the firm, and
therefore they indicate that the management performance has been effective.
An important technique is used for the management of earnings is the use of accruals.
This technique is based on the discretion of accruals to manage the performance of the
firm when exercising the profitability in many firms’ stocks. Furthermore, as previously
mentioned this is also strongly linked to bonus contracts. This means a lot about the
linkage between managers’ bonuses and firm’s performance.
In order to pursue such research aim, this dissertation has used a methodology held by the
events studies. Data was collected for the period between 2003 and 2006 (with the
exception of the period between 2004 and 2005, when the IFRS were introduced). The
analysis was presented based on a sample of 67 UK firms, listed in the FTSE 100 (London
Stock Exchange index). The selection of the sample was done for two main reasons. The
first one was to guarantee access to data more easily, and the second one was to include in
the sample a majority of large firms, as there are certain requirements for firms to become
listed in the FTSE 100. This research strategy had an important assumption – that larger
companies are more likely to practice EM due to their better financial knowledge and
ability of proficient executives.
The empirical models used in this dissertation were inspired in the literature. One of the
models was the Healy Model (1985) where the Total Accruals were estimated with a
number of variables (current assets change; current liabilities change; cash and cash
equivalents change; long term debt change; expenses in depreciation and amortization;
and the 1 year lagged total assets). The second model, which has been object of regression
– the Jones Model (1991) – considered, for independent variables, the change in the
increase in 1 year lagged revenues; the 1 year lagged total assets; and the gross property,
plant and equipment.
A variety of statistical methods was employed to the data and the results were presented in
line with these statistical procedures. However, in this chapter, in order to summarise and
discuss the findings, the evidence will be presented on a more general manner.
The empirical evidence found in this dissertation suggests that after the introduction of the
IFRS there has been an increase in the Revenue. In particular this revenue was deflated for
the period 2005-2006, and it is likely that the inflation effect may explain part of this
The analysis of the regression estimation resulted in some findings. The first one is that
the model seems to be statistically significant and robust (despite some problems of
heteroscedaticity but they did not affect the overall quality of the model). The regression
equation has also showed that the total accruals are negatively influenced by the
reciprocal 1 year lagged assets and the changes in the revenue.
An analysis of the impact of the introduction of the IFRS has also emerged an important
finding that the discretionary accruals have increased, and this provides an indication that
the IFRS have increased the opportunity for managers to manipulate the data. This finding
raises a very important question that can be seen as paradox: although the IFRS were
introduced in order to resolve some problems associated to the convergence of the
financial reporting, and to increase the transparency of financial information (in order to
guarantee that a wider audience can use such data internationally) it has raised other
problems that put the initial objective, i.e. it has created an effect that compromises the
feasibility of the financial information.
The literature review provided in this dissertation has shown some contradictory evidence
and results. However, the majority of the findings presented in this dissertation seem to be
coherent with part of such literature, confirming our findings.
5.2 Limitations and further research opportunities
This dissertation and empirical research also presents a number of limitations. Although a
link between the earnings management and the incentives of managers in manipulating
information has been made, no evidence was presented in what concerns these managers.
Although this approach to the issue would require a different methodological design, it
would be important to understand to what extent some managers are more willing to
manipulate information and practice earnings management. In addition, the practice of
earnings management may also differ across industries based on the assumptions that
certain industries, where the competition is high, managers are more inclined to perform
One important limitation, in the present study, is that the companies of the sample have
disclosed their annual reports under IFRS not only in 2005 but also in the year of 2006.
Specifically, there are some firms that have started using IFRS in the first months of 2006.
Therefore, this might create complications to our research because many companies that
disclosed in 2006 have not had the time to adapt to the new accounting standards, thus
make it hard for us to find proper results.
Furthermore, this dissertation that it has been based on the FTSE 100, based on the
assumption that EM is more likely to be found in larger companies than in medium sized
companies. However, an exploratory analysis to the differences of the EM across different
types of companies could reveal important information. In addition, the basis of this
dissertation has been organized in companies where there is a separation between
ownership and management. In the cases where management is conducted by the owner,
the motivation of management may significantly differ, and therefore, different
mechanisms in EM could be found. Therefore, this dissertation raises some questions for
further research and, apparently, the size and the type of management may be important
determinants for understanding the motivations and the forms of EM.
In addition, the formulas that are used in bibliography have many gaps owing to
limitations and biases that clearly exist. It would be fruitful then, to further study the topic
of EM by including more variables than the usual ones (that extracting from balance
sheets). In other words, new variables such as managers’ intention and auditing role
would be valuable on examining the increase of EM. The problem is that is hard enough
to quantify these two variables in a short paper and mix them with the balance sheet
variables. In short, there are too many researchers that have already used numerous
models for that purpose but they do not take into account qualitative data. This
methodological approach would require to collect data on the characteristics of the
managers and to identify what particular characteristics can be more relevant to explain
EM. In addition, and in order to gain in-depth the issue, a qualitative research approach
would allow to better understand the real motivations of managers who manipulate
information, the forms and mechanisms used for such manipulation; how it is seen by
shareholders and stakeholders; what barriers they face or how it is seen in the world of
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