Influence of Accounting Standards on the Level of Earnings Management

Previous studies have shown that accounting standards influence the level of earnings management. Tighter accounting standards regime restricts managements discretion to manipulate accruals, and at the same time, induce more costly real earnings management activities. A variety of mechanisms has been used by Governments and markets to reduce earnings management. The most important are accounting standards, auditing and enforcement, as well as disclosure requirements in financial markets.

Do Accounting Standards influence the Level of Earnings ManagementEvidence from Germany

The Research Do Accounting Standards influence the Level of Earnings ManagementEvidence from Germany was cconducted by Igor Goncharov (Assistant Professor of Accounting at the University of Amsterdam Business School) and Jochen Zimmermann (Professor of Accounting at the University of Bremen) to find out whether accounting standards influence the level of earnings management or not. In the research, German firms were allowed to present consolidated accounts prepared under German GAAP, IAS (international accounting Standards) or US GAAP. It analyzed German listed companies for the years 1996 to 2002 and found out a substantial amount of earnings management. The article analyzed whether the level of earnings management differs between the accounting standards.

Results: It was found out, while the manipulation under both German GAAP and IAS was more or less the same, levels of earnings management was considerably lower for the firms that reported their results under US GAAP. This was consistent with an interpretation that a different amount of accounting choices embedded in different accounting standards influenced the level of earnings management. The accounting standards provided different accounting choices, and therefore

their application resulted in different earnings quality. As every choice of accounting standards has its costs and these costs increase with the frequency accounting choice is exercised, earnings management is expected to be more widely spread under lax regimes that leave sufficient space for making judgments.

Conclusion of the research: A lower level of earnings management in US GAAP indicated that US GAAP mitigated more effectively against earnings management than German GAAP or IAS. US GAAP seemed to perform better than IAS when institutional factors and economic incentives were the same. So there is an influence of accounting standards on the level of earning management as evidenced in the research.