ASSESSING THE EFFECTS OF MANDATORY IFRS ADOPTION ON ACCOUNTING QUALITY: AN EMPIRICAL ANALYSIS IN GCC COUNTRIES

Abstract

This study aims to examine the impact of mandatory adoption and application of International Financial Reporting Standards (IFRS) on the quality of financial reports for a selected sample of firms from the Gulf Cooperation Council region. To measure the quality of financial reports, three main aspects were used: earnings management, earnings power, and income smoothing. To measure income smoothing, various measures were used, which included the weak relationship between accruals and operating cash flows, lower volatility of net income relative to cash flow, and variability of residual income. Earnings power was also used to measure the quality of earnings, which was based on various measures, including the timing of loss recognition and expected maturity size. On the other hand, the likelihood of surpassing or meeting earnings thresholds was used as a measure of earnings management. The findings showed a relationship between the implementation of IFRS and income smoothing, which was based on a weak relationship between accruals and cash flows, lower income volatility, and variability of residual income. On the other hand, the findings showed an increase in aggressive accrual reporting and slower loss recognition, which indicate a decline in the quality of financial reports. However, there was no evidence of an increase in surpassing or meeting earnings thresholds due to the mandatory adoption of IFRS. Although the findings did not show a consistent trend, it can be noted that there was a significant decline in the quality of financial reports after the mandatory adoption of IFRS.