Earnings Management in Europe Post IFRS: Do Cultural Influences Persist?

EU integration or convergence is a continuing process which is subject to the influence of many factors. For example, the use of a common currency i.e. the Euro probably is one of the major forces for change. For more details of EU practice and policies on integration, see European Commission Website on Integration at http://​ec.​europa.​ed/​ewsi/​en/​practice/​index.​cfm. For a discussion of EU integration, see Hooghe and Marks 2001 and Dinan 2005.

Despite this, there is a counter-argument that concentration of ownership suggests less information asymmetry so earnings management might be less likely. We thank one of our reviewers who pointed this out.

Earnings management is the alteration of companies’ reported accounting numbers by insiders to either mislead stakeholders or to influence contractual outcomes (Healy and Wahlen 1999).

For example, managers may use income-increasing accruals to meet earnings thresholds, while they may use income-decreasing accruals to avoid political costs from regulations.

Bartov et al. (2000) finds that cross-sectional models are better than time-series models to detect earnings management.

Although previous research (Han et al 2010) documents the influence of culture on earnings management in a setting before the widespread adoption of IFRS in the world, this result might be attributable to different accounting treatments in these countries rather than due to cultural differences. Even in the EU, there are considerable accounting differences between member states. For example, Bae et al (2008) have analyzed international GAAP accounting differences and its impact on foreign analysts. They identify 21 items that are subject to different accounting treatments between local standards and IAS in 2001, including tax accounting (item 2), lease (item 4), goodwill (item 8), fair value (item 11), and R and D (item 17). The results reveal that Finland has 15 different accounting treatments from IAS out of 21, UK has 1, Germany has 11, Netherlands has 4 and France and Italy has 12.

In our setting, the moderator, disclosure operates at a different level of analysis. Disclosure operates largely at a lower institutional level, while culture is likely operating at a higher national level. Thus, it is unlikely there is a reverse interaction from culture to the relationship between disclosure and earnings management (Andersson et al. 2014).

The Hofstede study was based on the re-analysis of an existing database of employee attitude survey scores assembled by one single MNE, the IBM Corporation, from its subsidiaries in 72 countries, between 1967 and 1973, and later expanded through replications to 75 countries and/or regions (Hofstede 2001, pp. 500–502). On the other hand, the GLOBE study is another dominant paradigm and adopted a theory-based approach, and a priori dimensions were formulated based primarily on Hofstede’s dimensions. GLOBE asked its culture questions in two formats: “in this society” and “in this organization.” One half of the respondents received the first format, the other half the second. Basically, the same items were used in both contexts, and in their analysis the GLOBE researchers labeled the answers to the first format “societal” culture and those to the second “organizational” culture. In most cases, the societal and organizational culture dimension scores were closely correlated, and in the GLOBE book they are not treated separately (House et al. 2004).