Earnings manipulation in transition to IFRS in the pharmaceutical and energy industries - the Hungarian case
Earnings manipulation in transition to IFRS in the pharmaceutical and energy industries - the Hungarian case

Summary/Abstract: Driven by the need to diversify financing channels and the incentives arising from globalization, the inevitable transition to international accounting systems may provide companies opportunities for accounting manipulation. The main objective of our study is to investigate whether the transition to IFRS significantly affects the reliability of financial statements of pharmaceutical and energy companies operating in Hungary. For this purpose, two econometric models were applied: firstly, a binary logistic regression-based analysis of the Beneish M-Score values, and secondly, a modified Jones model based on a linear regression estimation of discretionary accruals. The research findings showed no clear significant relationship for the Beneish M-score values. However, application of the Jones model to the financial statements that companies prepared for the same year according to different standards revealed a negative shift in the deviation of discretionary accruals from their normal value. This was observed in the energy sector among the companies transitioning to IFRS, which suggests a greater use of cost accounting opportunities by industry players. Nevertheless, these modelling results can only indirectly support the potential investor concerns about the change in accounting systems and they do not diminish the importance of the potential institutional incentives and benefits of the transition.

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