Developments in Earnings Management Practices in the IFRS Perspective: An Application in a Public Company

Developments in Earnings Management Practices in the IFRS Perspective: An Application in a Public Company

Oguzhan Carikci (Suleyman Demirel University, Turkey) and Mahmut Sami Ozturk (Suleyman Demirel University, Turkey)
DOI: 10.4018/978-1-5225-7817-8.ch013

Abstract

Financial statements are an important tool when it comes to determining the level of success of a company's management and setting its market value. Nevertheless, company managers may sometimes try to reflect the company's financial results differently. Strategic methods, used by the company to deliberately change the earnings they gain by using the flexibility provided by the accounting system, are called earnings management practices. This chapter examines the examples of a public company that is traded on the Istanbul Stock Exchange for the purpose of determining earnings management practices under International Financial Reporting Standards (IFRS). Given the results of the study, it is possible to say from the earnings management practices that the company only benefited from those in the legal framework.
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Background

When studies on earnings management under the IFRS are examined in the literature, several stand out. In Callao and others’ (2007) paper, the adaption of IFRS, and the effect on the comparability and relevance of financial reporting in Spain, are studied. Jeanjean and Stolowy (2008) made an exploratory analysis of earnings management before and after IFRS adoption. Barth and others (2008) mentioned earnings management according to International Accounting Standards (IAS). Callao and Jarne (2010) investigated the effect of IFRS to earnings management in the European Union. Rudra and Bhattacharjee (2012) explored whether or not IFRS influences earnings management in India. According to Tort’s study (2013), the earnings management is clarified under IFRS. Hastuti and others (2016) examined the effect of IFRS on the real earnings management and internal control structure as a moderating variable. Rathke and others (2016) analyzed the level of earnings management in Latin America after the adoption of the IFRS and the role of cross-listing in the United States. Phetruen (2016) examines the effect of IFRS and the Sarbanes-Oxley Act (SOX)-like regulations on earnings management in East Asian countries.

When related studies in the literature are searched, it appears that the number of studies that include earnings management practices with numeral examples, according to IFRS in companies, is small. This study includes earnings management practices in a company subject to IFRS applications. In practice, applications are shown numerically and a better understanding of earnings management practices is provided. Therefore, it is considered that this study will contribute to the literature significantly.

Key Terms in this Chapter

Assets: Values that can be converted into cash and used to realize the activities of the enterprise.

Revenue: Income that an enterprise has from business activities.

Income Statement: A financial statement indicating the results of the operations of the enterprise.

Liabilities: Balance sheet component that shows how the assets are obtained.

Profit Distribution: Profit distribution obtained from business to the partners.

Balance Sheet: A financial statement containing the assets that the entity owns and the liabilities that show how assets are acquired.

Profit: Positive difference that is generated as a result of the deduction of expense from income.

Loss: Negative difference that is generated as a result of the deduction of expense from income.

Expense: Monetary amount of goods and services consumed to obtain benefit.

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