IFRS Adoption impacts on Financial Position and Earnings Management

224 Pages·2017·2.1 MB·English

by  Karen Wong

IFRS Adoption impacts on Financial Position and Earnings Management:
Evidence from Malaysia

A thesis submitted in fulfilment of the requirements for the degree of Doctor Philosophy

Karen Ling Nee Wong
B.Bus Hon (RMIT University) Australia
B.Bus Accounting (RMIT University) Australia

School of Accounting
College of Business
RMIT University
March 2018
Declaration
I certify that except where due acknowledgement has been made, the work is that of the
author alone; the work has not been submitted previously, in whole or in part, to qualify for
any other academic award; the content of the thesis is the result of work which has been
carried out since the official commencement date of the approved research program; any
editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethic
procedures and guidelines have been followed.
I acknowledge the support I have received for my research through the provision of an
Australian Government Research Training Program Scholarship.

Karen Wong
March 2018

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Acknowledgement
I would like to express my sincere gratitude to all who have encouraged me and dedicated
their time and effort to enable the completion of this thesis. First, I am thankful to my senior
supervisor, Dr Mahesh Joshi, for his guidance and supervision throughout my PhD study. He
is a great mentor with a positive attitude who showed confidence in me and constantly
motivated me to complete this study. I am also grateful to my second supervisor, Associate
Professor Prem Yapa, for his suggestions, comments and guidance. His knowledge and
research experience in the ASEAN region significantly contributed to the development of this
thesis.
Second, I am thankful to the academic and admin staffs and my fellow PhD students in the
School of Accounting at RMIT University for their support, encouragement and
companionship throughout my candidature. I have been extremely fortunate to study in this
pleasant environment with sufficient resources enabling me to conduct the research. I am
also grateful to the editor from Scribo Proofreading & Editing for the excellent editing work.
Third, I am deeply grateful to my family for their unconditional love and support throughout
my journey. I am very blessed to have had support from each of them. Finally, my deepest
gratitude goes to my God for all His blessings and all the people He has brought into my life.
He who showed me love and mercy has taught me that everything is possible through Him.

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Table of Contents

Declaration .............................................................................................................................................. i
Acknowledgement .................................................................................................................................. ii
Table of Contents ................................................................................................................................... iii
List of Tables .......................................................................................................................................... v
List of Figures ...................................................................................................................................... viii
List of Abbreviations ............................................................................................................................. ix
Peer-Reviewed Conference Publication .................................................................................................. x
Abstract ............................................................................................................................................ xi
Chapter 1 Introduction ......................................................................................................................... 1
1.1 Research aims and questions ..................................................................................................... 3
1.2 Background of IFRS and accounting standards development in Malaysia ................................ 4
1.2.1 Introduction of IFRS ........................................................................................................... 4
1.2.2 IFRS adoption by countries ................................................................................................. 6
1.2.3 ASEAN: Background and the relevance ............................................................................. 8
1.2.4 Malaysia – Background to the development of accounting standards ................................ 9
1.2.5 Accounting regulation in Malaysia ................................................................................... 14
1.2.6 Background of IFRS and development of Malaysian accounting standards..................... 18
1.3 Motivation and significance of IFRS research on Malaysia .................................................... 18
1.4 Contribution of the thesis ......................................................................................................... 20
1.5 Chapter summary ..................................................................................................................... 22
Chapter 2: Literature Review .............................................................................................................. 23
2.1 Introduction .............................................................................................................................. 23
2.2 Overview of IFRS literature ..................................................................................................... 26
2.3 Literature review on IFRS impact on financial statements and financial ratios ...................... 36
2.3.1 Impact of IFRS on financial statements and financial ratios ............................................ 37
2.3.2 Factors that affect the changes in financial statements and financial ratios ...................... 42
2.4 Literature review on IFRS impact on earnings management ................................................... 47
2.4.1 Earnings management research: Malaysian context ......................................................... 47
2.4.2 Impact of IFRS adoption on earnings management .......................................................... 52
2.5 Literature on Big 4 versus non-Big 4 and earnings management ............................................ 64
2.5.1 Variables influencing the impact of IFRS adoption on earnings management ................. 64
2.5.2 Literature review on external auditors: Big 4 versus non-Big 4 ....................................... 67
2.6 Chapter summary ..................................................................................................................... 73
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Chapter 3 Theoretical Framework ..................................................................................................... 77
3.1 Introduction .............................................................................................................................. 77
3.2 Imperfect capital market, information asymmetry and the costs of information asymmetry .. 79
3.3 Agency theory .......................................................................................................................... 85
3.4 Signalling theory ...................................................................................................................... 92
3.5 The application of both agency theory and signalling theory .................................................. 98
3.6 Chapter summary ................................................................................................................... 103
Chapter 4 Hypotheses Development ............................................................................................... 106
4.1 Introduction ............................................................................................................................ 106
4.2 Hypotheses for the impact of IFRS on financial statements and financial ratios .................. 107
4.3 Hypothesis for the impact of IFRS on earnings management ................................................ 109
4.4 Hypothesis for the association between different size of audit firms and earnings management
............................................................................................................................................ 111
4.5 Chapter summary ................................................................................................................... 113
Chapter 5 Sample Selection, Data Collection and Research Methodology ..................................... 115
5.1 Introduction ............................................................................................................................ 115
5.2 Sample selection for each research objective ........................................................................ 116
5.3 Data collection ....................................................................................................................... 119
5.4 Research methodology ........................................................................................................... 119
5.4.1 Research methodology for financial statement and financial ratios ............................... 120
5.4.2 Research methodology for earnings management .......................................................... 122
5.4.3 Research methodology for Big 4 versus non-Big 4 audit firms ...................................... 126
5.5 Chapter summary ................................................................................................................... 130
Chapter 6 Results and Discussions .................................................................................................. 132
6.1 Introduction ............................................................................................................................ 132
6.2 Results and discussions for the impact of full IFRS convergence on financial statements and
financial ratios ........................................................................................................................ 133
6.3 Results and discussions for the impact of full IFRS convergence on discretionary accruals 152
6.4 Results and discussions on the relationship between discretionary accruals and the size of
audit firms .............................................................................................................................. 163
6.5 Chapter summary ................................................................................................................... 180
Chapter 7 Conclusion ...................................................................................................................... 183
7.1 Limitations of the study ......................................................................................................... 186
7.2 Suggestions for future research .............................................................................................. 187
References ......................................................................................................................................... 189

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List of Tables

Table 1. 1: The progress of IFRS adoption/convergence in ASEAN region .......................................... 7
Table 1. 2: Accounting standards developed by MACPA .................................................................... 10

Table 2.1: The IFRS literature on Malaysia and the nature of the study .............................................. 24
Table 2.2: The IFRS literature on different issues ................................................................................ 35
Table 2.3: Main IFRS studies on financial statements and financial ratios .......................................... 41
Table 2.4: Main IFRS studies on the factors affecting the IFRS impact on financial statements and
financial ratios .........................................................................................................................
............................................................................................................................................ 45
Table 2.5: Malaysian studies on earnings management ....................................................................... 51
Table 2.6: Main IFRS studies on Earnings Management ..................................................................... 61

Table 3. 1: Application of agency theory in previous literature ............................................................ 89
Table 3. 2: Application of signalling theory in previous literature ....................................................... 96
Table 3. 3: Application of agency and signalling theories in previous literature .................................. 99

Table 5. 1: Remaining sample prior to data collection ....................................................................... 117
Table 5. 2: Final sample for financial statements and financial ratios ................................................ 117
Table 5. 3: Final sample for earnings management ............................................................................ 118
Table 5. 4: Calculation for the selected financial ratios ..................................................................... 121

Table 6. 1: Final sample of companies listed on Bursa Malaysia used for the analysis of financial
statements and financial ratios ........................................................................................ 133

Table 6.2. 1: Differences between financial statements prepared under FRS and those under MFRS
................................................................................................................................. 134
Table 6.2. 2: Differences between financial ratios prepared under FRS and those under MFRS .. 135
Table 6.2. 3: Differences in financial statements reported under FRS and MFRS for 2012 and 2013
adopters ..................................................................................................................... 138
Table 6.2. 4: Differences in financial ratios reported under FRS and MFRS for 2012 and 2013
adopters ..................................................................................................................... 139
Table 6.2. 5: Differences in financial statements reported under FRS and MFRS for small,
medium-sized and large listed companies ................................................................ 141
Table 6.2. 6: Differences in financial ratios reported under FRS and MFRS for small, medium and
large companies ........................................................................................................ 142
Table 6.2. 7: Differences in financial statements reported under FRS and MFRS for different
sectors ....................................................................................................................... 144
Table 6.2. 8: Differences in financial ratios reported under FRS and MFRS for different sectors ......
................................................................................................................................... 146
Table 6.2. 9: Differences in financial statements for three years before and three years after full
IFRS convergence ..................................................................................................... 148
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Table 6.2. 10: Differences in financial ratios for three years before and three years after full IFRS
convergence ............................................................................................................... 149

Table 6.3 1: Final sample of listed companies on Bursa Malaysia used to analyse the discretionary
accruals ....................................................................................................................... 152
Table 6.3 2: Descriptive statistics for variables used to analyse discretionary accruals ................. 153
Table 6.3 3: Results of regression analysis based on Jones (1991) model ...................................... 154
Table 6.3 4: Results of discretionary accruals, non-discretionary accruals, and total accruals based
on Jones (1991) model ................................................................................................ 155
Table 6.3 5: Results of regression analysis based on modified Jones (1991) model by Dechow,
Sloan and Sweeney (1995) .......................................................................................... 156
Table 6.3 6: Results for the discretionary accruals, non-discretionary accruals, and total accruals
based on modified Jones (1991) model by Dechow, Sloan and Sweeney (1995) ....... 157
Table 6.3 7: Results of regression analysis based on performance-matched Jones ROAт by Kothari,
Leone and Wasley (2005) ........................................................................................... 158
Table 6.3 8: Results for the discretionary accruals, non-discretionary accruals, and total accruals
based on performance-matched Jones ROAт by Kothari, Leone and Wasley (2005) 159

Table 6.4 1: Final sample of companies listed on Bursa Malaysia ................................................. 163
Table 6.4 2: Numbers and percentage of companies audited by Big 4 and non-Big 4 audit firms . 164
Table 6.4 3: Descriptive statistics for discretionary accruals .......................................................... 165
Table 6.4 4: Descriptive statistics for the four control variables (i.e. lagged TA, TL/TE, OCF/lagged
TA and ROA) .............................................................................................................. 165
Table 6.4 5: Numbers and percentage of listed companies that have unqualified, unqualified with
emphasis and qualified or disclaimer of opinions ....................................................... 166

Table 6.4.6. 1: Pearson correlation matrix for dependent variable and the four continuous control
variables (Log TA, TL/TE, OCF/lagged TA and ROA) in first year of observation .. 166
Table 6.4.6. 2: Pearson correlation matrix for dependent variable and the four continuous control
variables (Log TA, TL/TE, OCF/lagged TA and ROA) in second year of observation ...
................................................................................................................................. 167
Table 6.4.6. 3: Pearson correlation matrix for dependent variable and the four continuous control
variables (Log TA, TL/TE, OCF/lagged TA and ROA) in third year of observation . 168
Table 6.4.6. 4: Pearson correlation matrix for dependent variable and the four continuous control
variables (Log TA, TL/TE, OCF/lagged TA and ROA) in the fourth year of
observation .................................................................................................................. 169
Table 6.4.6. 5: Pearson correlation matrix for dependent variable and the four continuous control
variables (Log TA, TL/TE, OCF/lagged TA and ROA) in the fifth year of observation .
................................................................................................................................... 170
Table 6.4.6. 6: Pearson correlation matrix for dependent variable and the four continuous control
variables (Log TA, TL/TE, OCF/lagged TA and ROA) in the sixth year of observation.
................................................................................................................................... 171

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Table 6.4.7. 1: Results of regression analysis of discretionary accruals and the four continuous control
variables (Log TA, TL/TE, OCF/lagged TA and ROA) for the three years prior to full
IFRS convergence ....................................................................................................... 172
Table 6.4.7. 2: Results of regression analysis of discretionary accruals and the four continuous control
variables (Log TA, TL/TE, OCF/lagged TA and ROA) for the three years after full
IFRS convergence ....................................................................................................... 172

Table 6.4.8. 1: Results of regression analysis for the relationship between discretionary accruals and
Big 4 versus non-Big 4 in the three years prior to full IFRS convergence ................. 174
Table 6.4.8. 2: Results of regression analysis for the relationship between discretionary accruals and
Big 4 versus non-Big 4 in the three years after full IFRS convergence ...................... 174

Table 6.4.9. 1: Results of regression analyses for the relationship between discretionary accruals and
Big 4 versus non-Big 4 in the three years (Including more control variables) prior to
full IFRS convergence ................................................................................................ 176
Table 6.4.9. 2: Results of regression analyses for the relationship between discretionary accruals and
Big 4 versus non-Big 4 in the three years (Including more control variables) after full
IFRS convergence ....................................................................................................... 177

vii
List of Figures

Figure 1. 1: Regulatory framework in Malaysia ................................................................................... 15

Figure 3. 1: The principal-agent and signaller-receiver in this study.................................................... 79
Figure 3. 2: The signalling process ....................................................................................................... 92
Figure 3. 3: Application of signalling theory ...................................................................................... 102
Figure 3. 4: Application of agency and signalling theories ................................................................ 102

viii
List of Abbreviations

ASEAN Association of South East Asian Nation
FDI Foreign Direct Investment
GAAP Generally Accepted Accounting Principle
IAS International Accounting Standards
IASB International Accounting Standards Board
IFRS International Financial Reporting Standards
KLSE Kuala Lumpur Stock Exchange
MAS Malaysian Accounting Standards
MASB Malaysian Accounting Standards Board
MFRS Malaysian Financial Reporting Standards
MIA Malaysian Institute of Accountants
MICPA Malaysian Institute of Certified Public Accountants
TE Transitioning Entities

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