Do accounting standards matter? A study about how enforcement can affect accounting

Abstract

Background and Problem discussion: In 2005 it became mandatory for all companies listed on stock exchanges within the EU to follow IFRS in their consolidated financial statements. This study examines whether companies better adopt the same accounting rules when it is presented in another context, i.e. when the standard is emitted by the IASB and enforced by the EU instead of the previous Swedish standard setting body. According to previous research mandatory adoption of IFRS has decreased earnings management level for French companies. Purpose: Our aim is to see if Swedish companies have changed their reporting of provisions after the mandatory adoption of IFRS in 2005, even though the content of the standard has not been changed. We want to establish whether mandatory adoption of IFRS contribute to a reduction of big bath accounting in terms of larger negative provisions in the year of an Executive change, negative results or extra large gains. Methodology: The thesis is based on a quantitative study and includes 223 companies. The data is collected from annual reports and the years tested are 2002-2010. Analysis and conclusion: Our result presents the existence of big bath accounting regarding provisions in Swedish companies. The study concludes that the mandatory adoption of IFRS by Swedish companies in 2005 contributes to the reduction of big bath accounting when it comes to larger negative provisions in the year of a CEO change, a negative result and an extra large gain. An important aspect is the fact that the content of the standard for provisions has not been changed during 2002-2010. However, the application of the standard has changed. One main reason might be that the accounting procedures came into greater focus when the EU decided to implement IFRS. Another reason might be the enforcement factor, both in regards to stronger legal enforcement in 2005 and the awareness of an evolving enforcement organization within the EU. According to our study, the big bath phenomenon has decreased in Sweden after the mandatory adoption of IFRS, which implies higher accounting quality.