Does Mandatory Adoption of IFRS Improve Accounting Quality? Preliminary Evidence* ANWER S. AHMED, Texas A&M University MICHAEL NEEL, University of Houston DECHUN WANG, Texas A&M University 1. Introduction We provide evidence on the preliminary effects of mandatory adoption of International Financial Reporting Standards (IFRS) on accounting quality for a relatively broad set of firms from 20 countries that adopted IFRS in 2005 relative to a benchmark group of firms from countries that did not adopt IFRS matched on the strength of legal enforcement, industry, size, book-to-market, and accounting performance. Understanding the effects of mandatory adoption on properties of accounting numbers is of potential interest to stan- dard-setters and securities regulators in countries that are considering IFRS adoption as well as in countries that have already adopted IFRS. Furthermore, evidence on this ques- tion is of particular importance to the IASB because it can help the board evaluate whether its stated objective of improving accounting quality is being accomplished (see IASC 1989; Barth 2008). Finally, analysts, investors, and other users may also find it useful to understand the effects of IFRS adoption on accounting quality to potentially reassess how they use accounting numbers. The effects of mandatory IFRS adoption on accounting quality critically depend upon whether IFRS are of higher or lower quality than domestic GAAP and how they affect the efficacy of enforcement mechanisms. By a higher quality standard we mean a standard that either reduces managerial discretion over accounting choices or inherently disallows smoothing or overstatement of earnings. If IFRS are of higher quality than domestic GAAP, and they are appropriately enforced, then we expect mandatory adoption of IFRS to improve accounting quality. On the other hand, if IFRS are of lower quality than domestic GAAP or if they weaken enforcement (e.g., because of increased discretion or flexibility), then we would expect them to reduce accounting quality. Thus, the impact of IFRS on accounting quality is an empirical question. We study the effects of mandatory IFRS adoption on three groups of accounting quality metrics: income smoothing, reporting aggressiveness, and earnings management to meet or beat a target. While there is no agreed-upon definition of accounting qual- ity, these measures are related to faithful representation of the underlying economics which is broadly accepted by standard-setters, regulators, practitioners, and users, as well as by academics, as an important feature of high-quality accounting [see for exam- ple, FASB (2008), SEC (2000), Knutson and Napolitano (1998), Healy and Wahlen * Accepted by Michael Welker. We thank Bill Kross, Christian Leuz, Stan Markov, Tom Omer, Stephen Penman, Ray Pfeiffer, Senyo Tse, Connie Weaver, Mike Welker (the ad hoc editor), Chris Wolfe, Anne Thompson, two anonymous reviewers, and workshop participants at SUNY Buffalo, University of Texas at Dallas, University of Texas at San Antonio, Texas A & M University, and the 2010 AAA Annual Meeting for helpful comments or discussion. Professors Ahmed and Wang gratefully acknowledge funding from the Mays Business School. Professor Neel acknowledges funding from the C.T. Bauer College of Business. Contemporary Accounting Research Vol. XX No. X (X X) pp. 1–30 © CAAA doi:10.1111/j.1911-3846.2012.01193.x