International Accounting Standards and Accounting Quality

TLDR

IAS application embodies the combined effects of standards, interpretation, enforcement, and litigation within the financial reporting system. The study investigates whether adopting International Accounting Standards is linked to higher accounting quality. Across 21 countries, firms adopting IAS exhibit less earnings management, more timely loss recognition, and higher value relevance of accounting amounts than matched firms using non‑US standards, and they improve in accounting quality from pre‑ to post‑adoption, with these gains not attributable to prior differences or economic incentives.

Abstract

We examine whether application of International Accounting Standards is associated with higher accounting quality. The application of IAS reflects the combined effects of features of the financial reporting system, including standards, their interpretation, enforcement, and litigation. We find that firms applying IAS from 21 countries generally evidence less earnings management, more timely loss recognition, and more value relevance of accounting amounts than do a matched sample of firms applying non-US domestic standards. Differences in accounting quality between the two groups of firms in the period before the IAS firms adopt IAS do not account for the post-adoption differences. We also find that firms applying IAS generally evidence an improvement in accounting quality between the pre- and post-adoption periods. Although we cannot be sure that our findings are attributable to the change in the financial reporting system rather than to changes in firms' incentives and the economic environment, we include research design features to mitigate the effects of both.