Critical Analysis Of Managerial Financial Reporting Incentives And Accounting Quality Essay.

Critical analysis with associated recommendations of a given financial accounting concept(s), issue(s), and/or problem(s) written and published in an accounting journal

You are required to prepare a written report and to critically analyse a selected (one) Article published in an accounting journal or from other sources of an academic accounting literature. Examples of these sources are given below. Much of the literature that will be useful to you was published in the first few years of the 21st century.

1. The article examines the role of the managerial financial reporting incentives on the accounting quality changes with the adoption of International Financial Reporting Standards (IFRS). The research considers a case study of Germany in which the voluntary of the IFRS was permissible before its observance became compulsory. The aim of the research was to find out whether the management had any incentives in consideration of observance of the IFRS. The research assessed the level of accounting quality through several measures that include value relevance, loss recognition in a timely manner and earnings management. The study concluded that improvements in the accounting quality were more prevalent when organizations engaged in voluntary adaptation regarding the incentives. In addition, it was observed that the firms that resist the adoption of the IFRS have high debt leverage as well as a high number of insider shareholders which have been related to low incentives for further comprehensive accounting standards. Generally, incentives are regarded higher than accounting standards when it comes to determine accounting quality. It may therefore be needless to suggest that accounting standards have a positive impact on the accounting quality (Christensen and Zeng, 2015, 35).

The introduction provides an overview of the relationship between accounting standards and accounting quality. The study documents research which have shown that voluntary IFRS adoption leads to improvement in the level of accounting quality. The researchers therefore identified a gap in the studies regarding involuntary adaptation of the IFRS. They consider the state in Germany since it had a 7-year period before which the IFRS became mandatory. The study found out that since the firms had no previous incentive, they opted not to consider the IFRS adaptation until they were made obligatory. The study its scope by differentiating the circumstances in countries that do or not allow a voluntary adaptation of the IFRS. For the purposes of the study, quality financial statements were the determinants of the quality financial standards.  The main argument for the study is that the incentives for firms which chose to engage in the IFRS after it was made compulsory are bound to remain constant compared to that of the firms that engaged in voluntary adoption. The selection of German as a case study was due to the presence of sufficient time frame which allowed for comparable results (Christensen and Zeng, 2015. 40).

In relation to literature review done prior to the study, some of the findings were indeed consistent to previous research on the subject matter in which a voluntary adoption leads to decreased earnings management and loss recognition in a timely manner. However, there was no evidence of the document improvement with mandatory adoption. The IFRS, though considered to have higher quality reporting standards are not effective in promoting improved accounting quality unless they are accompanied with incentives for its adoption. This conclusion was explained through the inability of the IFRS in restricting ability of the firms to manage their earnings due to the firm specific features that limits its control. Also, the firms may just provide the impression that they follow the IFRS and that the IFRS may not provide any incentives with regard to the measures provided (Christensen and Zeng, 2015, 59).

Literature Review

Strengths

First, the article has clearly outlined its scope of study by identifying the gap in the concerned literature concerning accounting standards and accounting quality. The problem identified is researchable since the data can be gathered from several firms in Germany that fall into the two categories of voluntary adoption and mandatory registered.

The literature review has tried to demonstrate how the overall concept and hypothesis was formulated by considering previous research on the subject matter and identifying their conclusions. The review has been segmented according to sections that identifies the main ideas in the research in terms of units of measure for accounting quality, the relationship between the units of measure and the accounting standards, the institutional set up pf Germany in affecting the adoption and the role of incentives in accounting quality. The study offers a critical analysis of the articles considered by comparing the ideas and conclusions presented. The literature review does assist in the formulation of the hypotheses that influence the study. The hypothesis considered are testable since one can consider the state of accounting quality before and after incentives are provided or the perception of incentives to the firms.

The study does provide a rationale for all the measurements used to determine accounting quality as well as their purpose in the study. The article tries to discuss the validity of the measures used by presenting the value of coefficients for the variables. The study identifies some of the control measures used to limit the amount of deviation from the study that includes the nature of the firms under consideration. The descriptive nature of the study was appropriate in testing the behaviour of firms and the quality of the financial statements based on the presence of incentives. The study provides appropriate descriptive statistics of the variables under consideration. Also, the study uses tables and graphs in its presentation of data that enables easier comprehension of the findings. In addition, the data in the tables are further elaborated in the text. The hypothesis identified was thoroughly tested through the consideration of its constituent variables and effect on the accounting quality. The study offers practical implications for the research by stating that making IFRS observance obligatory may not influence the quality of financial statements with the absence of incentives. In addition, they affirm that accounting standards are dominated by incentives at the firm level despite the institutional framework put in place.

Methodology

Weaknesses

The article fails to provide sufficient background in relation to the problem that necessitated the study. It does not also discuss the educational significance of the study and the problem identified. Most of the sources considered are secondary with little or no consideration for primary sources. It would have been important to consider the IFRS standards as well as other financial standards that determine accounting quality. The literature review does not provide a summary of the literature considered, its conclusions and implications for the concerned problem.

While the hypothesis is stated, the study does not identify the specific questions that can test the hypothesis identified. Regarding the sample, the size and features of the sample are not clearly described. Also, the methods for which the sample was selected are not identified which does not indicate the unbiased nature of the selected sample. The procedures are not sufficiently detailed to allow for replication of the study. Also, the control procedures are not adequately described to validate the study. The research was not able to account for any variables that they were unable to control for as well. The results were discussed but were not related to the original hypothesis or in comparison to the previous research in the literature review. The researches do not make any considerations for future action regarding the findings nor do they present recommendations for future research on the topic.

Implications to the Accounting Profession

This study reveals that presence of incentives is necessary to the impact that accounting standards have on the accounting quality. One major implication is that firms consider what they can gain from a required accounting standard instead of looking at how the accounting standards benefits their accounting records. It is the goal of the firm to maximize profits and therefore any other concern apart from that must have a good backing to which they can consider changing their accounting standards (Soderstrom and Sun, 2005). Also, it is important to note that regulators have little or no impact on the quality of financial statements especially if they offer no value to the concerned firms since the firms can find ways in which they can tick mark compliance without affecting quality. Further, the study reveals that auditors may have to look more keenly into the firm’s books despite the management attesting to the compliance to IFRS.

Relevance to the Unit

The study is relevant to the unit since it identifies the nature of financial statements in relation to the accounting standards adopted either in a mandatory or voluntary manner. It outlines some of the measures for which the quality of financial statements can be evaluated. In addition, the observance that the IFRS is held to a greater standard compared to the other local standards form a backbone to which all financial statements can be based against.

Recommendation and Conclusion

Overall, the article well highlighted the impact of incentives on the quality of financial statements. The measures considered for the study were of relevance and adequate in relation to the research design. It is however necessary that the article documented the samples size, how the sample was obtained and any control procedures that were followed (Schipper, 2005, 110).

The article has industry relevance about what regulators can do to promote the proper application of accounting standards by providing sufficient incentives to the firms it is meant to target. This move may involve an analysis of some of the issues of importance to firms when considering which accounting standards to apply in their financial statements.

References:

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption? European Accounting Review, 24(1), pp.31-61.

Schipper, K., 2005. The introduction of International Accounting Standards in Europe: Implications for international convergence. European Accounting Review, 14(1), pp.101-126.

Soderstrom, N.S. and Sun, K.J., 2007. IFRS adoption and accounting quality: a review. European Accounting Review, 16(4), pp.675-702.