International Financial Reporting Standards and sales manipulation in failed firms

Purpose: I examine whether sales manipulation in failed firms that adopted the In- ternational Financial Reporting Standards (IFRS) differ from that of failed firms that did not. This inquiry is motivated by a paucity of research on the consequences of IFRS reporting for failed firms given the recent changes in accounting standards affecting revenue recognition and normal levels of cash flows.

Design/methodology/approach: Using a sample of United Kingdom (UK) firms that declared bankruptcy between 2006 and 2016, I apply regression analysis and a difference-in-differences approach to assess whether firms that adopted IFRS and failed display a significant difference in abnormal levels of cash flows given the level of revenue.

Findings: The results show that IFRS adopters exhibit earnings management as opposed to non-adopters by implementing real operating actions. The results show that failed firms adopting IFRS generally have negative abnormal cash flows given their reported levels of sales while this is not the case for non-adopters.

Originality/value: I explore the reason for these observations by analysing the set- ting of the UK Generally Accepted Accounting Principles (GAAP) and IFRS. The contribution of this study is that it demonstrates that while failed firms have been reported to manage earnings, this appears to persist with IFRS-failed firms when compared to non-IFRS-failed firms. This suggests that IFRS standards may inad- vertently facilitate failed firms that adopt IFRS in exploring real earnings management avenues, particularly concerning sales manipulation, in contrast to non-IFRS- failed firms.