Why Do Firms Produce Erroneous IFRS Financial Statements?

Abstract

Given voiced concerns with the alleged complexity of IFRS, this paper investigates determinants of material errors in IFRS financial statements. For a matched sample of firms censured by the German DPR/BaFin enforcement mechanism for producing erroneous IFRS financial statements, we investigate the role of intentional and unintentional factors determining the likelihood of errors. In line with the previous literature, we find that the presence of opportunistic motives is conducive to erroneous accounting, while governance quality decreases the likelihood that firms prepare compliant financial statements. However, we find no evidence that other unintentional factors pertaining to financial reporting expertise, firm complexity, and financial accounting resources, impair IFRS reporting quality. These findings are robust for a broad variety of specifications and measures. The results of this paper are important for regulators and standard setters, as they suggest that low quality of IFRS financial statements cannot be attributed to firms being unable to cope with new and complex standards.

Keywords: Enforcement, IFRS, accounting quality, restatements, regulation, Germany

JEL Classification: M41