The Mandatory Introduction of IFRS as a Single Accounting Standard in the European Union and the Effect on Earnings Management

Abstract

Executive summary In this study, it was investigated whether the mandatory adoption of IFRS from 1 January 2005 by all listed companies in the European Union led to significantly lower levels of earnings management. I found that, despite the stricter character of IFRS compared to national GAAP, accruals-based earnings management has strictly increased as a consequence of the adoption of IFRS. I further found that real earnings management has strictly increased, and that, despite the fact that both manifestations of earnings management strictly increased, due to the introduction of IFRS, they are increasingly used as substitutes of one another. This indicates that management looks for alternatives to manipulate earnings when accruals-based earnings management becomes more difficult, instead of lowering their earnings management activities. I was therefore unable to establish that IFRS has been successful in restricting earnings management