The adoption of IFRS and Firms’ Earnings Management: Evidence from the UK’s FTSE 100 Index

Abstract

The aim of this study was to examine the impact that the adoption of IFRS had on AEM among the firms comprising the UK’s FTSE 100 Index over the last five years. This study had four specific objectives: (1) To investigate the extent of accruals-based earnings management (AEM) practices among FTSE 100 firms; (2) To identify the firm specific determinants that influence AEM; (3) To assess whether the adoption of IFRS has significantly reduced AEM practices; and (4) To analyse the impact of firm size, leverage, profitability and growth opportunities on earnings management practices within the context of IFRS. This study employed a quantitative research design, analysing the secondary data collected from the Thomson Eikon database for the previous five years (2019-2023). This study included all of the firms comprising the FTSE 100 Index and applied a regression model based on the literature to explore the relationship between IFRS adoption and AEM practices whilst controlling firm-specific factors such as firm size, leverage, profitability and growth opportunities. The data analysis found that there was a slight tendency among FTSE 100 firms to reduce reported earnings through accruals but there was considerable variability in the extent of AEM practices across firms. This variability reflects the diverse nature of companies within the FTSE 100. The regression model found that firm-specific factors such as size, leverage, profitability and growth opportunities did not have a statistically significant impact on AEM practices among these firms. The current study also found that the adoption of IFRS did not significantly reduce AEM practices among FTSE 100 firms. Consequently, this finding challenges the assumption that IFRS alone is sufficient to control the practice of earnings manipulation. Lastly, the findings revealed that the interaction between IFRS adoption and firm-specific factors did not have a significant influence on AEM practices. This indicates that the relationship between these variables and earnings management is complex and may be affected by other factors which were not captured by the current study’s model.