Does mandatory adoption of international financial reporting standards (IFRS/SLFRS) deter the earnings management of Sri Lankan firms?

Abstract

The aim of this study is to examine the earnings management behavior of Sri Lankan firms following mandatory adoption of International Financial Reporting Standards (IFRS/SLFRS). Especially, this study investigates whether the mandatory adoption of IFRS/SLFRS in the Sri Lanka (SL) has resulted in less earnings management for SL firms. Prior to the adoption of IFRS/ SLFRS for financial years beginning 1 January 2012, SL firms reported under Sri Lankan Accounting Standards (SLAS). Thus, this study predicted that the earnings management has decreased significantly after mandatory adoption of IFRS/SLFRS in 2012. The sample this study consists of 157 firms listed on the Colombo Stock Exchange and data were collected from financial years 2009/2010 to 2013/2014. This study uses five individual measures of earnings management relating to earnings smoothing, managing towards earnings targets. Firms are said to have reduced their earnings management if they display lower levels of earnings smoothing, less management towards earnings targets. Contrary to the prediction, the results of this study reveal that SL firms exhibit higher level of earnings smoothing after mandatory adoption of IFRS/SLFRS and thereby indicative of higher level of earnings management. However, consistent with the prediction SL firms display lower level earnings management in term of less managing towards earning targets. The level of earning management is one aspect of reporting quality of a firm. Therefore, lower level of earnings management is in turn reflects better reporting quality. Thus, these findings suggest that there is room for further improvement in order to ensure that firms consistently apply the requirement of IFRS/ SLFRS and make improvements in all aspects of reporting quality.