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A comparative analysis of U.S. GAAP versus IAS: The effects of discretionary accruals, R&D, and deferred tax expense on earnings management
Lee J Yao,
Loyola University New Orleans
Siew H Chan, Washington State University
ABSTRACT. This study is to examine whether the rule-based U.S. GAAP and the principle-based IAS provide different opportunities for earnings management (EM). Management can use strategic management decisions to smooth income that may or may not maximize the firm’s value under either the rule-based or principle-based accounting standard. Comparisons of accounting standards across different markets and countries are difficult. We control for this problem in our study via the unique feature of dual listing in the current German Frankfurt Stock Exchange. Our findings suggest that EM via R&D expenditure is lower for the U.S. GAAP firms. The U.S. GAAP firms did not have a higher tendency to smooth income via discretionary accruals. Contrary to our prediction, the IAS firms smooth income to a higher degree via deferred tax expense. The statistical evidence is inadequate for concluding whether the rule-based U.S. GAAP firms have more flexibility in EM compared to the principle-based IAS firms.
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