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The Role of International Financial Reporting Standards in Accounting Quality: Evidence from the European Union


  • We would like to thank participants of research seminar of University of Glasgow, Tsinghua University, University of South Australia, China Accounting and Finance Review International Symposium 2009, and Richard Morris for their useful comments and suggestions. Particularly, insightful comments and suggestions from two anonymous reviewers and the editorial support from Professor Frederick D.S. Choi, the Journal Editor, are highly appreciated. In addition, Huifa Chen and Yihong Jiang acknowledge financial support from the grants of National Natural Science Foundation of China (NSFC, No. 70872067), Major Project of Key Research Institute of Humanities and Social Science of the Ministry of Education, People's Republic of China (No. 08JJD630005), Phase III of “211” Project of Shanghai University of Finance and Economics, People's Republic of China, and Project of Key Discipline of Accounting of Shanghai Maritime University, People's Republic of China. Qingliang Tang acknowledges financial support from the Accounting & Finance Association of Australia and New Zealand for the project.


Previous studies on the effect of International Financial Reporting Standards (IFRS) on accounting quality often have difficulties to control for confounding factors on accounting quality. As a result, the observed changes in accounting quality could not be attributed mainly to IFRS. We use a unique research setting to address this issue by comparing the accounting quality of publicly listed companies in 15 member states of the European Union (EU) before and after the full adoption of IFRS in 2005. We use five indicators as proxies for accounting quality. We find that the majority of accounting quality indicators improved after IFRS adoption in the EU. That is, there is less of managing earnings toward a target, a lower magnitude of absolute discretionary accruals, and higher accruals quality. But our results also show that firms engage in more earnings smoothing and recognize large losses in a less timely manner in post-IFRS periods. In addition, we examine the effects of institutional variables on financial reporting quality. Our contribution to the literature is that we show the improved accounting quality is attributable to IFRS, rather than changes in managerial incentives, institutional features of capital markets, and general business environment, etc.