The Effect Of Financial Secrecy And IFRS Adoption On .

2y ago
17 Views
2 Downloads
304.77 KB
24 Pages
Last View : 22d ago
Last Download : 2m ago
Upload by : Cade Thielen
Transcription

International Journal of Innovation, Creativity and Change. www.ijicc.netVolume 5, Issue 2, Special Edition, 2019The Effect of Financial Secrecy andIFRS Adoption on Earnings Quality:A Comparative Study betweenIndonesia, Malaysia and SingaporeEvita Puspitasaria, Citra Sukmadilagab, Handiani Suciatic, Rianno Febriano Bahard,*Erlane K Ghanie, a,b,c,dUniversitas Padjadjaran Indonesia, eFaculty of AccountancyUniversiti Teknologi MARA Malaysia.aevita.puspitasari@unpad.ac.id pad.ac.id, d riannof@gmail.com,*Corresponding Author:*eerlanekg@salam.uitm.edu.myThis study examines the effect of financial secrecy and IFRS adoptionon earnings quality among three countries namely, Indonesia,Malaysia, and Singapore. This study utilizes the financial statementsof 71 companies listed on the Indonesian Stock Exchange (IDX),Bursa Malaysia and the Singapore Stock Exchange (SGX) over a 6year period, consisting of 426 observations. A regression analysis wasused to analyse the data with discretionary accruals as the earningsquality and using a secrecy index produced by the Tax JusticeNetwork as the secrecy proxy. This study uses control variables suchas investor protection, total sales, leverage, sales growth ratio, plantassets growth rate, operating cash flow, and loss for the period andindustry types as dummy variables in order to provide more robustfindings. The results of this study show that although companies inIndonesia, Malaysia, and Singapore have adopted IFRS, they producedifferent earnings quality. This study shows that the earnings qualityamong the countries is not the same. This study provides evidence thatsecrecy is an important factor influencing earnings quality. In otherwords, a higher secrecy level would lead to lower earnings quality.The findings of this study provide a new contribution to the financialreporting literature and a further understanding to academics andpractitioners about the impact of financial secrecy and IFRS adoptionon earnings quality.863

International Journal of Innovation, Creativity and Change. www.ijicc.netVolume 5, Issue 2, Special Edition, 2019Key words: earnings quality, discretionary accrual, IFRS adoption, secrecy,financial statements.IntroductionIt is generally known that different countries would have different accounting standards dueto their unique conditions such as economics view, culture, politics, and social conditions.However, voluminous business transactions coupled with globalisation have led to the needto implement one standardised international financial accounting standard in order to achievestandardisation and harmonisation that represent two important qualitative characteristics offinancial reporting. In 2001, the International Accounting Standard Board (IASB) whichconsists of four international organisations namely, the European Commissions (EC),International Organisation of Securities Commission (IOSOC) and International Federationof Accountants (IFAC), issued the International Financial Reporting Standard (IFRS). IASBaims to develop one global accounting financial reporting standard in order to increase thequality of financial reporting. The international accounting standards are expected to fulfilpublic need of information in order to increase the trust, improvement and stabilisation oflong term global finance (Pacter, 2015). To date, there are more than 120 countries that haveadopted and implemented IFRS (Deloitte, 2014).The IFRSs are developed on principle based standards instead of rule based standards withthe expectation of an increase in the quality of the financial reporting. However, studies thathave examined the impact of principle based standards have often provided mixed findings.For example: Daske and Gunther (2006) found that principle based standards elevate earningsquality. Barth, Landsman and Lang (2008) conducted a study on earnings quality before andafter IFRS adoption using 327 companies as the sample from 21 different countries. Theyfound that earnings management level decreases after IFRS adoption. They also found thatthe value relevance of accounting information has elevated and the loss was recognisedearlier after IFRS adoption. Similarly, Morais and Curto (2008) showed that incomesmoothing practices in Portuguese companies have decreased IFRS adoption. Other studieshowever, showed contrasting findings. For example: Jeanjean and Stolowly (2008) found thatearnings management activities in Australia, France, and UK for the period 2005-2006 didnot decrease after IFRS adoption. In other words, earnings management is still excessive.Other studies showed that the adoption of high accounting standards does not directlyincrease quality of accounting information (Ball, Robin and Wu, 2003; Prochazka, 2017).864

International Journal of Innovation, Creativity and Change. www.ijicc.netVolume 5, Issue 2, Special Edition, 2019Their study concluded that the incentive and motivation of the financial information preparer(management) along with auditor also influence the quality of financial information. In otherwords, there are other factors influencing financial information quality. The inconsistentfindings are presumed to be caused by the non-existence of direct measurement over thefinancial statement quality (Barth e.al, 2008; Schipper and Vincent, 2003; Cohen,Krishnamoorthy and Wright, 2004; Nicholas and Wahlen, 2004; Nilwala, Gunawardana &Fernando 2017). According to Houqe, Monem, Tareq and van Zijl (2015), it is probable thatthe implication of the IFRS implementation to the earnings quality varied in every region,depending on the culture and financial secrecy.This study aims to examine earnings quality in the relation to financial secrecy. Specifically,it aims to examine factors influencing IFRS implementation in creating qualified informationin different regions, especially Indonesia, Malaysia, and Singapore. The findings of this studyprovide a new contribution to the financial reporting literature and further understanding tothe academics and practitioners on the importance of secrecy to earnings quality. The nextsection presents the literature review in Section 2. This is followed by the research design inSection 3. Section 4 presents the results and discussion. The last section, Section 5 presentsthe summary and conclusion.Literature ReviewEarnings QualityResearch on earnings quality over the past decades has increased dramatically which ledresearchers to providing various definitions of earnings quality. These definitions varyaccording to the context used in their studies. Dechow, Ge and Schrand (2010) argued thatearnings quality is contextual as it provides different things to different users of financialreporting. The context can range from equity valuation, debt contracts, managerialcompensation and/ or to internal use. However, they defined earnings quality as ameasurement of firm performance where it reflects current operating performance, anindicator of future operating performance and accurately annuitizes the company’s intrinsicvalue. As stated in Dechow et al. (2010, p.344):“Higher quality earnings provide more information about the features of acompany’s financial performance that are relevant to a specific decision madeby a specific decision-maker”Dechow et al (2010) further defined high earnings quality as demonstrating more honesty inrepresenting features of the company's fundamental profit processes that are relevant for865

International Journal of Innovation, Creativity and Change. www.ijicc.netVolume 5, Issue 2, Special Edition, 2019certain decisions and helps predict future earnings, taking into account the stability andpersistence of earnings. Lev (1989) on the other hand, defined earnings quality as decisionusefulness that is used in the context of making decisions on equity evaluation. Dichev,Graham and Rajgopal (2012) stated that management would often view earnings are of highquality if they are sustainable with backup from actual cash flows. That is, current earningswould be considered high quality if they serve asa good guidance to the company’s long termprofit (Santi, Puspitasari & Ghani, 2017; Gideon, Puspitasari, Ghani & Gunardi, 2018;Nguyen, 2018). Earnings quality has often been underlined by the stakeholders, including theinternal and the external users of financial statement and according to Dechow et al (2010),represents the features of the fundamental process of earnings and relevance in supporting thedecision making and also the ability to predict future earnings.An analysis of earnings quality is important to assist investors to judge the congruencebetween the company’s earnings and the integrity of the financial statements. It helps theinvestors to rely on more reliable numbers. There are several ways of measuring earningsquality namely, persistence, predictability, value relevance, timeliness, and conservatism(Francis and Wang, 2008; Dechow et. al, 2010). Another form of measurement is the accrualwhich is consistent with what Dechow and Dichev (2002) defined earnings quality, themagnitude of estimation errors in accruals. In addition, Jones (1991) proposed a way ofmeasuring earnings quality by using discretionary accrual. According to Wysocki (2004) andMeuwissen, Moers, Peek and Vanstraelen (2005), the new Jones measurement of earningsquality is more appropriate to evaluate the international data. Jones (1991) explained thataccrual is the difference between cash flow and net profit (loss). It is described as a veryoperational transaction that influences the operational cash flow within on period ofaccounting.This study assesses earnings quality by using accrual quality as a proxy. The reason beingthat profits arranged on an accrual basis can actually better show the economic implicationsof existing transactions and events. However, in its preparation, profits on accrual-basedaccounting cannot be separated from estimates, assumptions, choices of accounting policiesdetermined by management considerations that contain subjectivity. Management's flexibilityis also feared to be deliberately utilized by management to manipulate earnings (earningsmanagement) because of certain motives and incentives from the management. Easley andO'hara (2004) noted that the company's accounting treatment of earnings and disclosure canaffect the company's information environment which then impacts on information risk andcost of capital.Accrual could be classified as non-discretionary and discretionary. Non-discretionary accrual866

International Journal of Innovation, Creativity and Change. www.ijicc.netVolume 5, Issue 2, Special Edition, 2019is the normal accrual which is caused by the normal condition of a company, and exists in thecompany management policy. Meanwhile, the discretionary accrual is the abnormal accrualwhich is caused by the ‘management choices’ in electing the accounting method andestimation in order to achieve certain numbers. Discretionary accrual can distort the qualityof the financial statements. That is, the higher the discretionary accrual, the lower the qualityof financial statements (Dechow et al, 2010). Dechow et al (2010) presented the mechanismto separate accruals into normal accrual and abnormal accrual. Normal accrual relates to thefundamental profit whilst abnormal accrual does not relate to the company’s fundamentalprofit. Abnormal accruals are generally used as approaches to detect the possibility ofearnings management in the company which will ultimately affect the quality of earnings.The smaller the abnormal accrual value, the better the quality of earnings. Abnormal accrualsthemselves are defined as actual accruals minus expected accruals. Abnormal accrualsthemselves are generally influenced by the manipulation of sales, depreciation and estimationof bad debt expenses.According to Jones (1991), earnings quality can be measured using discretionary accruals andthis method can detect indications that managers increase profits illegally, with largediscretionary accruals indicating a greater likelihood of opportunistic activities carried out bymanagers and higher earnings quality. While Jones measurement model is considered lesspractical for the calculation of abnormal accruals with international data, the reasoning beingthat a small sample of industries in each country makes this model less reliable and with thismethod the company can identify its own abnormal accruals (Wysocki 2004; Meuwisse et al,2005).Financial SecrecySecrecy is one of the accounting values that most influences the information presented incorporate financial reporting, especially information disclosure. Besides having a negativeeffect on earnings quality, secrecy also has a negative effect on the comparability of financialstatement. Gray (1988) states that secrecy is an accounting value that chooses to maintaininformation and does not provide disclosures about a business activity, secrecy has atendency to prevent disclosure to external parties. Radebaugh and Gray (1990) also statedthat the preference for secrecy is an activity that is consistent with strong uncertaintyavoidance that prevents disclosure to external parties, thereby reducing competition andconflicts that can reduce company security. Secrecy or financial secrecy produces somepositive effect, however there are other problems arising from financial confidentialityresulting in an increasing number of financial crimes such as fraud, tax fraud, money867

International Journal of Innovation, Creativity and Change. www.ijicc.netVolume 5, Issue 2, Special Edition, 2019laundering, and the release of a jurisdiction from international financial regulations, whichinvolve accruing wealth at the expense of the general public.The Tax Justice Network in 2015 issued a Financial Secrecy Index (FSI), which contained asecrecy index for 92 countries, where if the secrecy score is above 50 then it is said to behigh, whereas if it is equal to 50 or below it is categorized as low. Countries that have highsecrecy values tend to try and hide or not fully disclose relevant financial information (Geiger& Smith, 2010). The criteria for selecting these countries are based on the possibility of thembeing the centre of the offshore economy and the centre of the world economy. A high degreeof secrecy is deemed less transparent in reporting or disclosing financial information to localgovernment authorities, and less compliant in adhering to international standards, particularlyin combating financial crime, so high secrecy jurisdiction tends to be the key to placing fundsof illegal origin. In conducting research related to this secrecy index, the Tax Justice Networkuses several methodologies used in calculating this secrecy index namely, banking secrecy,recorded company ownership, public company accounts, country by country reporting,efficiency of tax administration, anti-money laundering, automatic information exchange andinternational transparency commitments.According to the Tax Justice Network (2015), the high secrecy jurisdictions tends to hideinformation less transparent when reporting and disclosing financial information. Further,they have less enforcement in preventing the money laundering and corruption causing higherillegal funds placement. Further, high secrecy also produces high asymmetry information tothe investors which trigger the irrelevant/incorrect decisions. Meanwhile, IASB has beendeveloping IFRS comprising of accounting methods and approaches to improve financialinformation accountability, transparency, and comparability. IFRS has been developed usingthe principle-based over the rule-based standard (Gideon et al., 2018). Hence, the use of thefair value measurement has been massively escalated. There are arguments that the use of thefair value measurement can increase the accounting information quality since it can reflect acompany’s real economic condition.International Financial Reporting Standard (IFRS)IFRS is an international standard issued by the International Accounting Standard Board(IASB). The International Accounting Standard Board (IASB), formerly called theInternational Accounting Standard Committee (IASC), is an independent institution formedto develop accounting standards. This organisation has the aim of developing and compilingaccounting standards, encouraging the use of high-quality, understandable and comparableglobal accounting standards (Choi, Frost, Carol and Meek, 1999; Sadique and Sheikh, 2013;868

International Journal of Innovation, Creativity and Change. www.ijicc.netVolume 5, Issue 2, Special Edition, 2019Hussain et al., 2018). These accounting standards are prepared by four major worldorganizations, namely the International Accounting Standard Board (IASB), the EuropeanCommission (EC), the International Organisation of Securities Commissions (IOSOC), theInternational Federation of Accountants (IFAC). Most of the contents of this standard arepart of the International Accounting Standard (IAS), which later IASB continued to developinto a new standard known as IFRS. In addition, the fair value used in the IFRS rules has theadvantage that the assets and liability posts held reflect more the actual value at the time offinancial reporting.One effort to reduce earnings management is to make corrections to accounting standards.The improvement in accounting standards currently being carried out is with the adoption ofIFRS. The purpose of the IASB establishes international accounting standards is to simplifyvarious alternative accounting policies that are permissible and can limit management policyconsiderations (management's discretion) to earnings manipulation so as to improve earningsquality and present comparable financial reports in the eyes of the international community.So far, IFRS has been used in many countries to become international accounting standards,including Europe, Japan, Hong Kong, Australia, Malaysia and Singapore, Pakistan, Russia,Turkey, South Africa and GCC countries (Cooperation Council for the Arab States of TheGulf). To date, IFRS has been used by more than 150 countries and 57% or 85% of themhave required the use of IFRS as a financial reporting standard for domestic companies orlisted companies. Most countries that are members of the G-20 have also adopted IFRS, oneof which is Indonesia.Before adopting IFRS, accounting used the historical cost basis to measure transactions (SialaBouaziz & Jarboui, 2019). Using the historical cost basis, the items in the financialstatements are measured at the cost of the transaction. The costs recorded in the financialstatements in accordance with the transaction will be the basis for reporting the size of a postfor the next period. The use of historical cost has the advantage that it can be easily provenbecause the amount is in accordance with the costs recorded during the transaction. Howeverthe disadvantage is that this value does not reflect changes in value, for example when thereis a decline or increase in value in the market due to inflation or deflation and so on. So thehistorical cost cannot reflect the value of a post at the time of reportingResearch MethodologySampleThe public listed companies on the Indonesian Stock Exchange (IDX) under the LQ-45 indexare chosen as the sample study. This study also relies on the public listed companies in theBursa Malaysia under the KLCI, and the Singapore Stock Exchange (SSE) under the Straits869

International Journal of Innovation, Creativity and Change. www.ijicc.netVolume 5, Issue 2, Special Edition, 2019Times Index. The LQ-45, KLCI, and the Straits Times Index consists of companies that arelisted in the capital market with highest market capitalization. This study only utilisedcompanies with the consideration that these companies could work as representative samplesfor the implementation of IFRS adoption in Indonesia, Malaysia and Singapore. The financialreporting quality before the IF

A Comparative Study between Indonesia, Malaysia and Singapore. Evita Puspitasari. a, . of 71 companies listed on the Indonesian Stock Exchange (IDX), Bursa Malaysia and the Singapore Stock Exchange (SGX) over a 6 year period, consisting of 426 observations. regression analysis was A

Related Documents:

May 02, 2018 · D. Program Evaluation ͟The organization has provided a description of the framework for how each program will be evaluated. The framework should include all the elements below: ͟The evaluation methods are cost-effective for the organization ͟Quantitative and qualitative data is being collected (at Basics tier, data collection must have begun)

Silat is a combative art of self-defense and survival rooted from Matay archipelago. It was traced at thé early of Langkasuka Kingdom (2nd century CE) till thé reign of Melaka (Malaysia) Sultanate era (13th century). Silat has now evolved to become part of social culture and tradition with thé appearance of a fine physical and spiritual .

Dr. Sunita Bharatwal** Dr. Pawan Garga*** Abstract Customer satisfaction is derived from thè functionalities and values, a product or Service can provide. The current study aims to segregate thè dimensions of ordine Service quality and gather insights on its impact on web shopping. The trends of purchases have

On an exceptional basis, Member States may request UNESCO to provide thé candidates with access to thé platform so they can complète thé form by themselves. Thèse requests must be addressed to esd rize unesco. or by 15 A ril 2021 UNESCO will provide thé nomineewith accessto thé platform via their émail address.

̶The leading indicator of employee engagement is based on the quality of the relationship between employee and supervisor Empower your managers! ̶Help them understand the impact on the organization ̶Share important changes, plan options, tasks, and deadlines ̶Provide key messages and talking points ̶Prepare them to answer employee questions

2. Secrecy in the Context of Open Government 41 Introduction 41 From secrecy to open government 42 Current trends in open government 46 Freedom of expression 50 Balancing secrecy, freedom of expression and open government 62 3. Overview of Current Secrecy Laws 65 Introduction 65 Duties of confidentiality and loyalty and fidelity 65

Chính Văn.- Còn đức Thế tôn thì tuệ giác cực kỳ trong sạch 8: hiện hành bất nhị 9, đạt đến vô tướng 10, đứng vào chỗ đứng của các đức Thế tôn 11, thể hiện tính bình đẳng của các Ngài, đến chỗ không còn chướng ngại 12, giáo pháp không thể khuynh đảo, tâm thức không bị cản trở, cái được

BANK SECRECY ACT, ANTI-MONEY LAUNDERING, AND OFFICE OF FOREIGN ASSETS CONTROL Section 8.1 INTRODUCTION TO THE BANK SECRECY ACT The Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970 (31 U.S.C. 5311 et seq.) is referred to as the Bank Secrecy Act (BSA). The purpose of the BSA is to require United States (U.S.)