European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.6, No.3, 2014 92 The Effects Of Mandatory IAS/IFRS Regulation On The Properties Of Earnings’ Quality In Australia And Europe Bahloul Jaweher *1 , Ben Arab Mounira *2 1 (Accounting and Finance Department/ISG Tunis/ Tunisia) 2 (Accounting and Finance Department/ISG Tunis/ Tunisia) * E-mail of the corresponding author: bahloul.jaweher@gmail.com Abstract The aim of this study is to investigate the impact of International Financial Reporting Standards (IFRS) on earnings’ quality. More specifically, this paper aims at verifying whether the IFRS regulation produces better earnings’ quality than local GAAP regulation for listed companies in 17 countries from Australia and Europe. For this purpose, we empirically investigate basic sets of earnings’ quality attributes to provide evidence of the consequences of mandatory IFRS adoption. We focus on value relevance, predictability, persistence, timeliness, timely loss recognition, smoothing, earnings toward target and accruals quality. We include controls for factors that prior research identifies as associated with firms’ earnings’ quality like growth, leverage, size and audit quality. Through a dataset covering 1,901 firms from 2001 to 2010, we find mixed evidence of an increase in earnings’ quality. More specifically, we get evidence supporting that ‘ceteris paribus’, the mandatory IAS/IFRS adoption improves the predictability of cash flows and future earnings, the persistence and the timeliness. As well, the results suggest that net income is less manipulated toward target and less smoothing under IAS/IFRS regulation. Nevertheless, we find that net income is better associated with the market value of equity under local GAAP regulation. Furthermore, evidence from the pre-IFRS and post-IFRS periods suggest that IFRS earnings are not more conservative than earnings based on local GAAP regulation. Likewise, the quality of accruals is better in local GAAP regulation. Taken together, our results are unable to support systematic evidence that IFRS results enhance earnings attributes quality for mandatory adopters. Overall, these findings maintain several evidence of accounting quality improvement following the IFRS implementation and highlight the importance of accountings standards for financial reporting quality. Keywords: Earnings quality, IAS/IFRS regulation, financial statement presentation 1. Introduction Since 2001, more or less 120 countries have required or permitted the use of IAS/IFRS standards by publicly listed companies (IASB, 2012). As well, the subject of IFRS 1 quality receives additional attention and is the center of debate for investors, regulators and researchers. Empirical studies on IFRS adoption have become more and more imperative in accounting literature. The IFRS standards, issued by the International Accounting Standards Board (IASB) are strongly affected by the shareholder-oriented Anglo-Saxon accounting model (Balsari and al., 2010; Devalle and al., 2010; Gastón and al. 2010; Manganaris and al., 2011) and tilted toward a common-law sight of financial reporting. IFRS standards, which are often described as principle-based 2 system (Carmona and Trombetta, 2008; Chen and al. 2010; Atwood and al., 2011; Sun and al. 2011; Lin and al., 2012; IASB, 2012; Dimitropoulos and al., 2013) are intended to ensure a high degree of transparency of financial statements, to get better corporate transparency and to enhance the usefulness 3 of financial reporting. The purposes are to meet the needs of a wide range of users 4 in making economic decisions and to contribute to a better functioning of the financial markets. As well, several empirical and survey-based articles have examined the success of this new regulation. They widely support the hypothesis that IFRS standards emphasize the effectiveness of accounting numbers. Though, this view was not 1 The expression IFRS is used all over this study to submit to the body of standards issued by the International Accounting Standards Board, and those in-force International Accounting Standards (IASs) issued by the IASB’s precursor Accounting Standards Committee. 2 As Carmona and Trombetta (2008) argue: “principles-based standards refer to fundamental understandings that inform transactions and economic events. Under a principles-based system, these understandings dominate any other rule established in the standard”. This might suggest that IFRS have more accounting freedom and leaves more room for interpretation. Thus, principle-based standards engage more professional judgment and their value depends on how preparers react to the greater flexibility surrounded in those standards. 3 The IASB conceptual framework (2010) defines the notion of usefulness as follows: “If financial information is to be useful, it must be relevant (ie must have predictive value and confirmatory value, based on the nature or magnitude, or both, of the item to which the information relates in the context of an individual entity’s financial report) and faithfully represents what it purports to represent (ie information must be complete, neutral and free from error). The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable”. 4 More specifically, the purposes are to meet the needs of investors. The IASB explains this election by the fact that “Many existing and potential investors, lenders and other creditors cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports for much of the financial information they need. Consequently, they are the primary users to whom general purpose financial reports are directed”.