SELECCIÓN DE FUENTE DE ENERGÍA

The adoption of IFRS by nations world-wide has substantially increased over the years,

particularly in the ASEAN region with most of the countries (except Laos and Vietnam)

adopted IFRS. Malaysia, one of the countries in this region, began the process of

convergence with IFRS in 2005 and achieved full IFRS convergence in 2012. The MASB

began the process of participating in the harmonisation movement even before 2005. Of the

IFRS convergence ASEAN countries, among which are Indonesia, Singapore and Thailand,

Malaysia was the first to achieve full convergence with IFRS. This country’s unique process of transition to full IFRS provided the motivation to investigate the impact of full

convergence with IFRS on the companies listed on Bursa Malaysia. Specifically, this study

focused on two aspects of IFRS issues: the changes in financial statements and financial

ratios, and the impact of IFRS on the quality of financial reporting.

IFRS is perceived as a set of higher quality accounting standards that promotes transparency

and accountability in financial reporting, which leads to the improvement of financial and

capital markets (Ball 2006; Damant 2006; Alali & Cao 2010). The adoption of IFRS will

increase investors’ confidence in the quality of financial reporting. In particular, Gordon, Loeb and Zhu (2012) documented that IFRS countries with developing economies received

more foreign investments than did the developed economies. Malaysia has a developing

economy and high FDI, which makes this country an appropriate subject for this research.

The effectiveness of IFRS adoption in improving the quality of financial reporting may be

affected by the extent to which preparers are willing to comply with the accounting standards

and the motivation of the enforcers to ensure compliance with regulated accounting standards

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poor compliance with accounting regulations (Ball, Robin & Wu 2003; Muniandy & Ali

2012). These characteristics may reduce the effectiveness of full IFRS convergence in

improving the quality of financial reporting.

This study applied agency theory and signalling theory to explain how the full convergence

with IFRS influences the financial reporting of companies listed on Bursa Malaysia. Agency

theory predicts that the full convergence with IFRS acts as a bonding mechanism on the

managements of listed companies to restrict the manipulation of financial figures. This

restriction reduces information asymmetry (i.e. the information disclosed in financial

statements) between the managements of the listed companies and the users of financial

statements. Signalling theory predicts the full convergence with IFRS signals that the

financial statements prepared by Malaysian listed companies are with higher quality.

Therefore, these two theories suggest that full IFRS convergence can improve the quality of

financial reporting.

This thesis first determined the impact of full IFRS convergence on financial statements and

financial ratios of companies listed on Bursa Malaysia. Based on a sample of 373 companies

listed on Bursa Malaysia (excluded those in the finance sector), the study has found

significant differences between financial figures and financial ratios reported under IFRS and

under local GAAP. In particular, the study found that listed companies reported greater debts

during the period of close alignment with IFRS (i.e. 2009-2011) and reported greater profits

during the full convergence period (i.e. 2012-2014). The study also found that the reported

revenue decreased during both the three years before and the three years after full IFRS

convergence. These significant changes in financial statements and financial ratios suggest

that there is a change in the quality of financial reporting, which leads to the second research

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To determine the impact on the quality of financial reporting, this study observed changes in

earnings management using discretionary accruals that are measured with the Jones (1991)

model and the modified version of this model. Based on the final sample of 372 listed

companies, this study found that the earnings management activities decreased in the first two

years of full IFRS convergence, but substantially increased in the third year. This finding

suggests that full IFRS convergence is effective in the short term, but not in the longer term.

The comparison of the changes in earnings management between the early years of close

alignment with IFRS (i.e. 2006-2009) reported in Adibah Wan Ismail et al. (2013) and the

later years (i.e. 2009-2011) reported in this study also confirmed that IFRS implementation is

effective in the short term, but not in the long run.

The third research objective was to determine whether the Big 4 auditors are more effective

in restricting the earnings management than are the non-Big 4 auditors during the full

convergence period. The results as presented in chapter 6 indicate that there was no

significant difference in audit quality between Big 4 and non-Big 4 firms during the three

years before full convergence, despite the increase in earnings management. The results also

indicated that Big 4 auditors are more effective in restricting earnings management than non-

Big 4 after the full convergence only when the earnings management increased substantially

in the third year. These results suggest that Big 4 auditors in Malaysia are more likely to

provide greater audit quality when greater quality accounting standards are implemented.

The findings of this thesis have indicated whether full IFRS convergence in Malaysia has

achieved its purpose in improving the quality of financial reporting. This information is

important to the accounting standards-setting bodies, in particular the IASB and MASB. The

results indicated that full IFRS convergence is effective in restricting earnings management,

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implementation is effective only in reducing earnings management in the short term. This

finding signals to the Malaysian accounting regulators the importance of strengthening the

enforcement of IFRS implementation so that managements have less incentive to manipulate

earnings management. Nonetheless, the Big 4 auditors are more effective in restricting

earnings management during the full convergence period than during the close alignment

period. This finding is beneficial for investors as it gives them more confidence in the

financial statements prepared by companies that are audited by Big 4 audit firms. The

findings of this thesis can also provide some guidance to neighbouring countries that are still

undergoing the convergence process. In particular, these countries will be aware that IFRS

full convergence improves the quality of financial reporting but this benefit may not sustain

in longer-term. These countries may seek effective method to strengthen the companies in

complying with accounting standards.

7.1Limitations of the study

The results of this study are subject to three limitations. First, this study selected companies

listed on Bursa Malaysia that have implemented IFRS (non-TE companies) and that do not

belong to the finance sector. This sector was excluded from research because it is regulated

separately under the Banking and Financial Institution Act of 1989 (Abdul Rahman &

Haneem Mohamed Ali 2006) and has a different working capital structure than those of other

sectors (Klein 2002). Listed companies that are defined as TE are allowed by the MASB to

defer their IFRS implementation until 2018.

Second, this study focused on one of the earnings management measurements, that is, the

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several other earnings management measurements such as earnings smoothing, managing

earnings towards small positive earnings, and abnormal working capital accruals.

Third, this study examined the three years before and the three years after full IFRS

convergence. The MASB began the alignment of national accounting standards with IFRS in

2005; however, the period of interest chosen for this research study was from 2009. The

possible impact on financial statements and financial ratios during 2005-2009 is not captured.

Nonetheless, Adibah Wan Ismail et al. (2013) have provided some insight on the quality of

financial reporting during the earlier periods of close alignment with IFRS and found

improvement on the quality of financial reporting.

7.2Suggestions for future research

This thesis has determined whether the full convergence of IFRS has improved the quality of

financial reporting. In particular, this study focused on the discretionary accruals which are

one of the earnings management proxies. Future research could consider examining the

changes in earnings management using other indicators, such as earnings smoothing and

managing earnings towards small positive earnings (Barth, Langsman & Lang 2008). The

investigation of more earnings management proxies will provide a stronger indication of

whether the quality of the reported earnings has improved. Future research could also

consider financial sectors and TE entities to determine whether the impact of IFRS adoption

in these two sectors is similar to those examined in this study.

As this study has been conducted only on Malaysia from the ASEAN region, further research