International accounting standards and accounting quality in code-law countries. The case of Egypt
| Published date | 08 February 2016 |
| DOI | https://doi.org/10.1108/JFRC-12-2011-0047 |
| Date | 08 February 2016 |
| Pages | 41-59 |
| Author | Ibrahim El-Sayed Ebaid |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
International accounting
standards and accounting quality
in code-law countries
The case of Egypt
Ibrahim El-Sayed Ebaid
Accounting Department, Tanta University, Tanta, Egypt
Abstract
Purpose – This study aims to examine whether the adoption of International Financial Reporting
Standards (IFRS) leads to accounting quality improvements in Egypt as a code-law country. In
particular, the study examines earnings management, the construct often used to assess accounting
quality.
Design/methodology/approach – The study compares earnings management practice for
Egyptian listed companies before (2000-2006) and after (2007-2009) the adoption of IFRS.
Findings – The ndings of the study reveal that accounting quality, as measured by earnings
management, has decreased in post-adoption period compared to pre-adoption period. IFRS are set up
to provide high-quality nancial reporting. However, this cannot be achieved solely by a regulatory
requirement to follow. The accounting system is a complementary component of the country’s overall
institutional system. Institutional improvements did not simultaneously take place by the Egyptian
government around the adoption of IFRS. The Egyptian government did not introduce a more effective
enforcement system, mandatory corporate governance regulations, investor protection mechanisms
and sufcient institutional knowledge of IFRS during that period. Thus, even if IFRS are higher quality
standards, the institutional features of Egyptian market could eliminate any improvement in
accounting quality arising from adopting IFRS.
Research/limitations/implications – The results of the study are consistent with prior research
suggesting that the adoption of IFRS, which are generally perceived to be of higher quality than
domestic standards, does not necessarily lead to higher accounting quality in code-law countries like
Egypt. The overall results indicate that incentives dominate accounting standards in determining
accounting quality in Egypt.
Originality/value – The main reason why countries adopt IFRS invariably is to improve accounting
quality. It is, therefore, of interest to ascertain if this goal has been met, especially, in code-law countries
such as Egypt.
Keywords Egypt, IFRS, Earnings management, Accounting quality
Paper type Research paper
1. Introduction
Accounting standards serve as an important infrastructure in capital markets, used as
the yardstick for investors in making investment decisions for their assessment of the
business performance and scal status of companies. Over the years, most countries
have developed a set of accounting principles that serve as a common basis for reporting
the nancial status of companies operating within their borders. These common
accounting principles are formally referred to as domestic generally accepted
The current issue and full text archive of this journal is available on Emerald Insight at:
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International
accounting
standards
41
Journalof Financial Regulation
andCompliance
Vol.24 No. 1, 2016
pp.41-59
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-12-2011-0047
accounting principles (GAAP) which, in theory, are unique to each country. Their
purpose is to provide a common and accepted standard for evaluating and comparing
the nancial status of companies. The international standard-setting process began
several decades ago as an effort by industrialized countries to create standards that
could be used by developing and smaller countries which are unable to establish their
own accounting standards. As the business world became more global, regulators,
investors, large companies and auditing companies began to realize the importance of
having common set of accounting standards. Accordingly, there has been recent
momentum for country-level adoption of International Financial Reporting Standards
(IFRS). Currently, more than 120 countries worldwide require or permit the use of IFRS
by domestic listed companies, and it is expected that this number will exceed 150 by
2012 (IASB, 2011).
As a part of reforming the accounting system to improve decision-making, attract
investment and enhance the level of condence of foreign investors in Egyptian capital
market, the Egyptian government pursued a policy of harmonization between Egyptian
Accounting Standards (EAS) and IFRS. As a result, Decree No. 243 in June 2006 of the
Minister of Investment was issued to establish 35 EAS based on International Financial
Reporting Standards IFRS (2005 version) with some minor adaptation for local
conditions. As from 2007, all listed companies in Egypt were required to comply with
this new set of EAS.
Following the recent adoption of IFRS in many regions of the world, much attention
is being given to the association between accounting standards and accounting quality.
In fact, the impact of IFRS adoption on accounting quality has given rise to substantial
controversy in recent years. The proponents argue that the use of IFRS enhances the
cross-border comparability of nancial statements, improves corporate transparency,
enables stakeholders to understand the nancial results of entities globally, increases
nancial reporting quality and, hence, facilitates the efcient access to capital
worldwide given that IFRS are more capital market oriented and more comprehensive,
especially with respect to disclosures, than most local GAAP (Bae et al., 2008;Barth
et al., 2008;Ding et al., 2007;Daske and Gebhardt, 2006). Proponents also argue that one
set of uniform accounting standards is likely to reduce the cost associated with investors
using information and, in turn, reduces information asymmetry and/or estimation risk,
leading to a lower cost of equity capital (Armstrong et al., 2010;Li, 2010;Daske, 2006).
Although a single set of capital-market oriented and comprehensive accounting
standards undoubtedly contributes to the quality and comparability of nancial
statements, there are reasons to be skeptical about the premise that mandating the use
of IFRS “alone” enhances accounting quality. The opponents of rapid movement toward
IFRS argue that IFRS are not as well-developed as at least some forms of domestic
accounting standards, especially US GAAP, and would provide managers more leeway
to engage in earnings management given that IFRS are principle-based standards not
rule-based standards (Barth et al., 2008). Therefore, IFRS are in need of improvement
before being accepted as the global standard for nancial reporting. Although
conversion to IFRS is likely to affect nancial reporting, it is only one of the
determinants of overall accounting quality. Because other determinants will continue to
differ across countries, it is possible that accounting quality will continue to differ across
countries following IFRS adoption. Prior research (Daske et al., 2008;Burgstahler et al.,
2006;Bushman and Piotroski, 2006;Ball et al., 2003;Leuz, 2003;Ball et al., 2000) shows
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