بررسی مدیریت سود واقعی و تعهدی: یک تجزیه و تحلیل بین المللی از مبانی قانونی تحت IFRS Examination of real and accrual earnings management: A cross-country analysis of legal origin under IFRS

1. Introduction International financial reporting standards (IFRS) are the most common financial reporting language enhancing the worldwide harmonization of accounting standards for more than one hundred and forty countries. Although IFRS adoption is incremental in an international context, the courses of adoption for many adopting countries differ primarily for the legal origin depending on whether the adopting country is a ‘common’ or a ‘code’ law country. Differences in legal tradition(origin) might lead to the deterioration of financial information quality due to diverse accounting and reporting practices. Therefore, present study attempts to examine the expected discrepancies for the financial information quality through scrutinizing earnings management (EM) for IFRS countries under different legal origins. The EM process for the two legal origins is scrutinized for accrual earnings management (AEM) and real earnings management (REM) due to the distinctions of the two legal traditions for financial reporting, accounting quality, and managerial behavior for earnings (Kothari, 2000). Specifically, in line with the previous research, to measure a shift in EM from AEM to REM, the study examines the effects of enforcement intensity (Evans, Houston, Peters, & Pratt, 2015) and IFRS (Ho, Liao, & Taylor, 2015) as the two financial quality measures. The legal origin of a country may affect the principles of institutions and accounting practices that relate to the quality of financial information. IFRS are a set of common law-oriented high-quality accounting standards (Ball, 2006) in which institutional and accounting practices rely more on market activities and financial disclosure than code law legal system does (Ball, Kothari, & Robin, 2000). However, recent trends indicate that the code law countries are the dominant IFRS adopters and have institutional settings and preferences that differ from those of common law countries. Common law institutional practices favor public disclosure, which increases the quality of financial information; code law institutional practices foster communication between managers and stakeholders (Ball, Kothari, et al., 2000). The dissimilarities between these two legal origins may remain in practice, and changes in accounting applications may require additional time for post-IFRS adoption (Barth, Landsman, Lang, & Williams, 2012; Soderstrom & Sun, 2007). On the other hand, differences in IFRS applications might occur because of a lack of IFRS knowledge and because of opportunistic managerial behaviors (Ball, Robin, & Shuang Wu, 2003). In other words, “IFRS adoption does not necessarily mean IFRS-type accounting practices,” as indicated by Chen and Zhang (2010). In addition, the code law institutional settings associated with the political influence of stakeholder groups on accounting applications (Ball, Robin, & Shuang Wu, 2000) might encourage opportunistic accounting behavior through managerial discretionary expenses (Ball, Kothari, et al., 2000). Therefore, this study scrutinizes: i) discretionary expenses under code and common law legal origins to examine whether managers, employing REM, manipulate earnings through operating activities, in line with Roychowdhury (2006), and ii) the differences between AEM and REM behaviors under IFRS for different legal systems.