The Impact of COVID-19 Pandemic and IFRS Adoption on Earnings Quality: Malaysian Evidence

Abstract

The coronavirus (COVID-19) pandemic is regarded as the world's most serious health, economic, and social crisis. Therefore, managers play an important role in ensuring the survival of their business, and their discretion in financial reporting during a crisis becomes an interesting area to study. Meanwhile, the adoption of the International Financial Reporting Standard (IFRS) is anticipated to enhance the accuracy of earnings reported in financial statements. As a result, the objective of this study is to investigate the relationship between IFRS adoption and the impact of COVID-19 on earnings quality among Malaysian public listed companies. This study used two measures of earnings management: Accrual Earnings Management (AEM) and Real Earnings Management (REM). The sample of this study covers the period after the implementation of MFRS 111 for Construction companies in the year 2012 until the latest COVID-19 outbreak up to the year 2021. This study discovered that earnings management decreases after the adoption of IFRS, indicating that earnings management activities have been mitigated. However, the results also demonstrate that that earnings management figures are significant during the COVID-19 outbreak. Furthermore, the findings show that board composition and firm characteristics have an impact on firms' decisions to manage their earnings, whether on an accrual or real earnings management basis.