Alruwaili, Talal Fawzi (2021) Impact of IFRS, ISA and Ownership Structure on Earnings Management: Evidence from Saudi Arabia. PhD thesis, Victoria University.

Abstract

Earnings management is deemed as one of the most critical issue related to financial statements. It is a creative technique companies can use to manipulate financial reports. Thus, earnings management has attracted attention from practitioners and regulators as well as accounting scholars. This practice is believed to corrupt the quality of earnings reports and to mislead financial statement users. Similar to other governments, the Saudi Government has recognised the growing importance of tackling earnings management. Earnings management practices have spread amongst firms listed in Saudi Arabia, and the incidence of these practices could be high. Saudi Arabia is attempting to diversify its resources by shifting away from its dependence on oil and increasing foreign investment. To achieve this goal, it should eliminate or at least reduce earnings management and thus improve the financial report quality of Saudi firms. Recently, the Saudi Government implemented considerable economic reforms and introduced some changes to the Saudi business environment. These reforms include adopting international accounting standards and updating corporate governance codes. Therefore, this thesis aims to investigate the role of these reforms in reducing earnings management and thus increasing the financial reporting quality. Specifically, it examines the effects of the International Financial Reporting Standards (IFRS), the International Standards on Auditing (ISA) and ownership structure on earnings management among companies listed on the Saudi stock exchange (Tadawul). The conceptual framework for this thesis was developed using agency theory. The related literature is highly inconclusive; there are no ongoing studies on the impact of the ISA on earnings management, and few studies have examined the relationship of earnings management with the IFRS, the ISA and ownership structure in Saudi Arabia. Therefore, this thesis aims to address this literature gap. Its findings may assist various stakeholders, including policymakers and investors, by informing them on Saudi companies’ earnings management levels and help them evaluate the role of the IFRS, the ISA and ownership structure in limiting earnings management. Seven hypotheses were developed to answer the following questions: (a) Does IFRS implementation influence earnings management in listed Saudi companies? (b) Does ISA implementation influence earnings management in listed Saudi companies? (c) Does ownership structure influence earnings management in listed Saudi companies? Generalised least squares regression was utilised to examine these hypotheses using data for 2014–2019 on 92 Tadawul-listed companies. The thesis findings indicate that the IFRS, institutional ownership and family ownership have significant negative effects on earnings management (discretionary accruals), implying that these factors are efficient in monitoring management, reducing earnings management and improving the financial reporting quality. These outcomes are in line with the present study’s theoretical assumptions, which are based on agency theory. In contrast, the analysis showed that ISA implementation has a positive association with earnings management, suggesting that it could increase the level of accruals earnings management. However, this thesis does not find any significant evidence of association of managerial ownership, block-holder ownership and state ownership with accruals earnings management.

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