International Financial Reporting Standards are standards issued by the International Accounting Standards Board. They are a set of rules which would apply to financial reporting equally by public companies worldwide (Ball, 2006).
Many researches discussed the benefits of IFRS. Brown (2011) found that the adoption of IFRS eliminates barriers to cross-border investing, the accounting quality and financial reporting quality has enhanced, improved comparability of financial statements, and the usefulness and value relevance increase in some cases. Based on previous findings, it can be assumed that there is a strong relationship between compliance to IFRS and accounting transparency. Some researchers have highlighted this relationship, for example Daske and Gebhardt (2006) believe that the adoption of IFRS has increased the quality of financial reporting. They also think that there is a positive relationship among firm size, transparency, public subsidiaries, and independent board membership. The implementation of IFRS and corporate governance has a positive impact on the transparency of financial statements and disclosures.
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IFRS reporting increases transparency which could improve the quality of financial reporting. The increased transparency promised by IFRS could increase the efficiency of contracting between managers and shareholders and causes managers to act more in the interests of shareholders (Ball, 2006). Due to successive accounting frauds such as Enron scandal, corporate accounting transparency has been at issue all over the world (Hwang et al., 2008)
Researchers have studied the conceptual model of transparency in accounting which evolves around three concepts; accuracy, clarity, and disclosures. While Hwang et al. (2008) discussed the factors in measuring accounting information transparency; timeliness, completeness, consistency, relevance, understandability. Ideally speaking, compliance to the International Financial Reporting Standards can increase the transparency of reporting and thus, minimise earnings management.
During the period between the late 90s and the beginning of the 21st century a series of corporate accounting scandals occurred. Usually, earnings management was the core if these scandals (Goncharov, 2005).
There are several definitions for the term earnings management. One of the most used definitions is "Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers." (Healy and Wahlen, 1999, p.365).
Another definition is offered by Schipper (1989, p.92) who states that "By earnings management I really mean disclosure management in the sense of a purposeful intervention in the external financial reporting process, with a view to obtaining private gain for shareholders or managers".
Kaplan (2001, p.30) expresses that "If earnings management is considered unethical by financial statement users, then managers' and companies' reputations may suffer and companies' credibility in the financial markets may be damaged".
Beneish (2001) stated that most of the evidence of earnings management depends on the company's performance; earnings management is most likely to be present when a company's performance is either unusually good or unusually bad.
Earnings management and Transparency
Many studies examine the effect of reporting transparency on users' ability to detect earnings management. Generally, these studies report that more transparent disclosures lead to greater detection of earnings management. Less transparent disclosure formats are often chosen by managers; this suggests that managers believe that limiting some users' ability to detect earnings management leads to some benefits (Hunton et al., 2006)
Hirst et al. (2004) mentions that managers' frequent pushing efforts for the option to use less transparent reporting formats provides indirect evidence that they think that the benefits and costs of earnings management are affected by disclosure transparency.
Methods for estimating earnings management:
Researchers use three approaches to evaluate the existence of earnings management. The first approach focuses on specific accruals such as the provision for bad debt, or on accruals in specific sectors, such as the claim loss reserve in the insurance industry. The second approach studies aggregate accruals and uses regression models to calculate expected and unexpected accruals. The third approach investigates discontinuities in the distribution of earnings (Beneish, 2001).
Van Tendeloo and Vanstraelen (2005) did a research in Germany that showed that the adoption of IFRS seems to increase the magnitude of discretionary accruals instead of imposing a significant constraint on earnings management. Their results also suggest that companies that have adopted IFRS engage more in earnings smoothing, although this effect is reduced significantly when the company has a Big 4 auditor.
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Al-Omari (2010) mentioned that Jordan has adopted the full version of IFRS without any modifications. Laws were issued by the government, arrangements with organizations were established, and councils were created to ensure compliance with regulations. However, when IFRS was introduced in Jordan, several obstacles became evident. Some aspects of the Jordanian environment had made it slightly difficult to achieve complete compliance with the IASB standards. This problem is not faced only by Jordan but also by other Middle-Eastern countries. Despite the awareness of these problems, there has been no evidence of refusal to the adoption of IFRS in Jordan.
Rationale and context of the study
The mining and extracting sector is a vital sector in Jordan. In light of the global economic crises and the Jordanian dept for the World Bank, It is crucial to invest in our natural resources, among which is the mining and extracting sector, which represent an important portion of our national income. However, many doubts have been raised over the transparency of such investment. Over the past three years, local media in Jordan have attacked this sector and questioned their liability, as a result two major companies within this sector ended up in courts. Although legal judgment has not reached a verdict yet, indictment list includes a fall play of the financial records. Hypothetically, all companies in Jordan including mining and extracting companies should have adopted the IFRS and complied fully with the governmental regulations regarding this matter, where it is supposedly increase the transparency and decrease earning management. Therefore, this study intends to provide reliable data regarding the impact of compliance to IFRS on earning management and transparency within mining and extracting companies in Jordan.
Importance of the study:
An extensive review of literature within published research in Jordan did not reveal empirical studies concerning the impact of IFRS compliance on transparency and earnings management; therefore data extracted from this study may set the baseline for future research.
Aim of the study:
The aim of this research project is to examine whether full compliance versus partial compliance with IFRS in mining and extracting companies in Jordan affects their transparency and earnings management.
This research project intends to provide an answer for the following questions:
Does partial compliance with IFRS in mining and extracting companies in Jordan affect reporting quality and therefore increase the scope for earnings management?
Does partial compliance with IFRS in mining and extracting companies in Jordan affect reporting transparency?
How do directors of accounting in mining and extracting companies describe the relationship between compliance with IFRS and transparency of their reporting?
What actions do directors of accounting use to improve reporting transparency?
To calculate earnings management for mining and extracting companies.
To examine the effect on earnings management between companies who are fully complied with IFRS and companies who are partially complied with IFRS.
To compare and contrast IFRS compliance between mining and extracting companies (Full compliance versus partial compliance).
To examine the effect on reporting transparency between companies who are fully complied with IFRS and companies who are partially complied with IFRS.
To examine respondents' perceptions (accountants, internal auditor, etc) regarding the relationship between compliance with IFRS to transparency and earning management.
To explore the views of accounting directors regarding the relationship between compliance with IFRS to transparency and earnings management.
To detail actions that accounting directors take to ensure transparency of their reporting.
To detail obstacles and problems, if any, encountered by accounting directors to achieve reporting transparency.
To provide scientific data for future researchers regarding the impact of full compliance with IFRS on transparency and earnings management in mining and extracting companies in Jordan.
Quantitative research proposal
Hypothesis 1: The partial compliance with IFRS in mining and extracting companies negatively impacts reporting quality because it increases the scope for earnings management.
Hypothesis 2: The partial compliance with IFRS in mining and extracting companies negatively impacts reporting transparency.
The Sampling Method:
The population of the study consists of fourteen mining and extracting companies that are listed in the Amman Stock Exchange. Due to the small size of the population, all companies will be included in this study.
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Note: Mining and extracting companies which are not listed in the Amman Stock Exchange were excluded from the population because the main purpose of earnings management is to mislead stakeholders. Therefore, companies which do not have shares for the public (stakeholders) were excluded.
Data will be drawn from the accounting department in each of the fourteen companies (including the chief executive officer, accountant manager, accountants, and internal auditor).
Design of the study:
In this survey study, two procedures will be used to collect data.
Published annual reports for each company for the years 2011-2013.
To calculate earnings management, the researcher will obtain annual reports for the 14 companies and analyze them .Previous researches have suggested three methods for calculating earnings management. However, in this study the estimation of discretionary accruals will be utilised using the following equation as suggested by Callao and Jarne (2010):
"where TAit are the total accruals booked by firm i in period t; âˆ†SALESit is the variation in the sales of firm i in year t compared to year t - 1; âˆ†RECit is the variation in the accounts receivable of firm i in year t compared to year t - 1; PPEit is the total property, plant and equipment of firm i in year t; BMit is the book-to-market ratio of firm i in year t; CFOit is the current operating cash flows of firm i in year t and eit is the error term for firm i in period t. Ait-1 represents the total assets of firm i in period t âˆ’ 1." Callao and Jarne (2010, p.167)
A questionnaire will be designed to gather data.
Based on a review of literature, the researcher will write down suitable items to measure transparency, and will incorporate International Financial Reporting Standards (IFRS) it the questionnaire.
This questionnaire will include two parts; the first part is designed to gather data regarding the status of each company in terms of compliance to the international financial reporting standards (Full versus partial compliance). All international financial reporting standards will be included in the questionnaire.
The second part is designed to measure participants' opinions and actions in terms of transparency. The final draft of the questionnaire will be distributed to a penal of experts to check for face validity. Reliability coefficients will be calculated as well.
The researcher will visit each company and will meet with the respondents; chief executive officer, accountant manager, accountants, and the internal auditor in each company whom will be asked to fill the two parts of the questionnaire.
Respondents will be instructed to rate their company's compliance to IFRS on a Likert scale from 1-5, where 1 represents no compliance, 2- 3 represent partial compliance, and 4 - 5 represent full compliance. In the second part of the questionnaire, respondents will also be asked to rate their opinions and actions regarding transparency on a Likert scale from 1-5, where 1= strongly disagree, 2= disagree, 3= uncertain, 4= agree, and 5= strongly agree.
Finally the questionnaires will include demographic information such as the company's name and respondents' job title.
An example of items included in first part of the questionnaire is presented in the table below:
IFRS 2: Share-Based Payments
IFRS 4: Insurance Contracts
IFRS 6: Exploration for and Evaluation of Mineral Resources
IFRS10: Consolidated Financial Statements
IFRS 12: Disclosure of Interests in Other Entities
The second part of the questionnaire will include items representing participants' opinions and actions in terms of transparency. A sample of items is represented in table below:
The information presented in our disclosures is accurate.
The accountant data represented in our disclosures are easy to understand.
Our financial reports provide relevant information to help stakeholders make right decisions regarding their shares in the company.
Our financial reports provide information that helps stakeholders to assess the expected risks that the company faces.
Our financial reports provide accurate information that can be easily used for future predictions of the company's performance.
Our accounting information is generated according to consistent accounting standards.
All returned questionnaires will be coded, entered on an Excel spreadsheet and analysed using SPSS. Means and standard deviation will be calculated. Based on the obtained means, companies within this study will be divided into two groups (fully complied with IFRS and partially complied).
To test the first hypothesis of this study, which stated: "The partial compliance with IFRS in mining and extracting companies negatively impacts reporting quality because it increases the scope for earnings management"; means for both groups of companies (fully complied and partially complied with IFRS) will be obtained, means for the calculated values of earning management for both groups (fully complied and partially complied with IFRS) will be obtained. A t-test inferential statistic will be used to compare means.
To test the second hypothesis, which stated: "The partial compliance with IFRS in mining and extracting companies negatively impacts reporting transparency"; means for both groups of companies (fully complied and partially complied with IFRS) will be obtained; means for the transparency will be obtained from the responses of participants to the second part of the questionnaire. A t-test inferential statistic will be used to compare means.
Results obtained from this study will be presented in tables and graphs.
Results obtained from this study will be presented in tables and graphs.
Qualitative research proposal
The researcher will conduct a phenomenological study to investigate various reactions and perceptions of the accounting directors regarding
A target sample consisting of each director of accounting from all fourteen companies will be interviewed for the purpose of this research. This particular sample is chosen to validate or disconfirm preliminary findings of quantitative data concerning full or partial compliance with IFRS. The reason behind selecting these particular participants is that most critical accounting decisions, including decisions related to abide by the standards are the responsibility of the director of accounting.
Data collection method
Each director of accounting will be contacted individually by the researcher to schedule an in-depth interview with him/her. The researcher will meet with each participant upon scheduled appointments for in-depth interviews. During the interview, the researcher will take notes and all interviews will be tape recorded.
*inspection of annual reports
The purpose of this interview is to gain insight on how companies apply IFRS
All interviews will be scripted and will be analysed using the coding technique. (This process could be done either manually or by computer) where codes are considered labels for assigning meaning to chunks of data. The researcher will try to capture succinctly the major idea the major idea brought out by the sentences or paragraphs gathered by the participant.
Coding is an analytical process through which data are fractured, conceptualised, and integrated to form theory