Why Do Firms Produce Erroneous IFRS Financial Statements?


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Abstract

Given voiced concerns with the alleged complexity of IFRS, this paper investigates determinants of material errors in mandated IFRS financial statements. For a matched sample of firms censured by the German enforcement mechanism for producing deficient IFRS financial statements, we investigate the role of opportunistic motives, financial reporting expertise and resources, and governance quality. We find that, as predicted, the presence of opportunistic motives is conducive to erroneous accounting, while governance quality increases the probability that firms prepare compliant financial statements. In contrast, we find no evidence that unintentional factors pertaining to accounting expertise and resources shape reporting quality. The results of this paper are important for regulators and standard setters, as they suggest that material errors in mandated IFRS financial statements cannot be attributed to firms being unable to cope with the new and complex standards, but are due to earnings management incentives and weak controls.

 
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Paolo Perego
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