Critique 1

Article Reviewed: M. Barth, W. Landsman, and M. Lang, 2008, “International

Accounting Standards and Accounting Quality”, Journal of Accounting Research, Vol.
46, No. 3, pp. 467- 498.

Name: Yefeng Zhang

Student number: N9344144

1
The purpose of the article “International Accounting Standards and Accounting
Quality” by Barth et al. was to examine a relationship between International
Accounting Standards(IAS) and accounting quality. The research question is
whether application of ISA is associated with higher accounting quality. The
authors proposed two hypotheses. The first hypothesis was a firm adopt IAS
may bring higher accounting quality than firms that adopt domestic standards.
The second hypothesis was a firm applying IAS may generate improvement in
accounting quality between the pre- and postadoption periods.

The article firstly explained why does apply IAS increase accounting quality.
This is because IAS restricting management’s opportunistic discretion result in
accounting earnings that are more reflective of a firm’s underlying economics
and, therefore, are of higher accounting quality. However, from my personal
perspective, a goal of the IAS is to develop an internationally acceptable
financial reporting standards. The IAS itself is principle-based standards. Due
to the more flexibility than rules- based standards, the IAS gives companies
greater opportunity to manage earnings, thereby it can also decrease
accounting quality. Secondly, the quality of IAS may lower than some states
local standards. Mandating the use of IAS may reduce available choices of
some local standards which may better reflect the business situation. Hence,
the IAS is a better standard but not the best.

The derivation of accounting quality in this article is measured by three

accounting metrics, earnings management, timely loss recognition and value
relevance. From the Table 3(P.490) the research indicated that, during the
postadoption period, IAS firms have fewer earnings management, more timely
loss recognition and more value relevance of accounting amounts than non-
IAS firms, but there was no significant difference in accounting quality in the
preadoption period (Table 4, P.492). The problem is whether these three
metrics can represent good accounting quality. I believe the reduction of
earnings management cannot indicate the increase in accounting quality. Ngo

2
(2008) stated that earnings management is not a fraud, it only undermines the
fairness of the financial statements but does not undermine the authenticity of
the financial statements. Since the events and transactions are taking place
and are not fabricated. On the other hand, earnings management plays a
positive role in reducing contract costs, tax planning and rational allocation of
social resources. Hence, the metrics to judge the accounting quality need to
be considered.

I also think there have model misspecification problems in this article.

Because the dependent variable, accounting quality, can be affected by other
factors than IAS, such as the economic environment. Bharath et al. (2008)
stated that accounting quality is improving worldwide. Therefore, improvement
in accounting quality after companies adopt IAS could be same if companies
do not adopt IAS.

In conclusion, this article expounds the relationship between IAS and

accounting quality. Research evidence indicated that, during the postadoption
period, firms applying IAS will have higher accounting quality. However, during
the preadoption period, IAS and NIAS firms exhibit no significant differences
in accounting quality. The limitation of this study is the negligence of other
reasons can affect accounting quality. Such as firms’ incentives and
economic. Hence, the research model need to be re-evaluated.

3
 References

Bharath, S. T., Sunder, J., & Sunder, S. V. (2008). Accounting quality and debt
contracting. The Accounting Review, 83(1), 1-28. 10.2308/accr.2008.83.1.1

M. Barth, W. Landsman, and M. Lang, 2008, “International Accounting

Standards and Accounting Quality”, Journal of Accounting Research, Vol. 46,
No. 3, pp. 467- 498.

Ngo, P. (2008, ). VeraSun's quarter earnings surprise, management plays up

cost advantages of scale. Ethanol & Biodiesel News