Have financial analysts forecasts became more accurate after the mandatory adoption of IFRS in Saudi Arabia?
Abstract : This paper will examine the impact of the mandatory adoption since 2017 of International Financial Reporting Standards (IFRS) on the ability of financial analysts to forecast earnings accurately in Saudi Arabia during the period 20142019. Specifically, the research will investigate whether mandatory IFRS adoption has improvements in the ability of analysts to forecast earnings (as a result, decrease in error and dispersion). The methodology will involve the use of the regression on a panel data model with temporal dummy variables in order to test the two hypotheses formulated for the study. The study will only consist of (37) non-financial listed Saudi public companies. The findings will provide evidence of whether improvements in earnings quality of Saudi listed firms after the collective requirement to adopt IFRS have been experienced. The study contributes to the debate on the desirability of the experienced current trends towards one global set of accounting standards.
1.1. Introduction
The business environment in which corporations operate is becoming increasingly dynamic and global in nature. Organizations now engage into various kinds of transactions with clients and suppliers that are across the border. As a result, the accounting regulations and practices have geared, as a fast-growing profession, toward globalization. In this globalized era, local accounting standards are becoming rare and International Financial Reporting Standards (IFRSs) are gaining more presence across the world. International Financial Reporting Standards (IFRS) are a set of accounting standards issued by an independent, not-for-profit organization named the International Accounting Standards Board (IASB).
The purpose of accounting is to translate the economic events of an entity into a final product that is useful for decision makers. Accounting standards regulate how transactions and other economic events are to be recognized, measured, presented and disclosed in the body or the notes of financial statements. In 2012, a transition plan to adopt IFRSs instead of the local Saudi accounting standards was approved by the Saudi Organization for Certified Public Accountants (SOCPA) to be implemented in several stages beginning in 2017 for entities listed in the Saudi market and 2018 for unlisted Small and medium entities (IFRS for SMEs). This movement has been supported by the Saudi Capital Market Authority (CMA) which requires all listed companies to present their financial statements in accordance with regulations and decisions of SOCPA.
This transformation has been based on a number of alleged benefits and outcomes. The adoption of IFRS is considered a key factor for attracting foreign investments to invest in the Saudi financial market (Mulhim, 2018). In addition, foreign researches report that applying international accounting standards might help support international mergers and acquisitions, and increase comparability with other global markets (Cai & Wong, 2010). IFRS also help attract foreign direct investments and provides international standards that allow preparing unified financial statements for multinational companies, which encourages the openness of domestic financial markets and an increase in foreign investment (Alkhtani, 2012 and DeFond, Hu, Hung, & Li, 2011). However, reducing cost of issuing accounting standard, as well as, as the cost to users of financial statements in utilizing these financial statements are foremost empirical questions (Daske, Hail, Leuz and Verdi, 2008). To date, the results of empirical tests have been disputed between reduced and non-reduced capital costs (Sayumwe & Francoeur, 2017). In addition, there are some reported major obstacles to implement IFRS effectively that may reduce the realized benefits such as a shortage of qualified accountants, high reliance on Big 4 accounting firms, and a lack of research (Nurunnabi, 2018).
The most allegedly important characteristic of international accounting standards is its comprehensiveness in term of its coverage of transactions and events that affect the financial position of the company and the results of its business operation as they cover issues that Saudi standards have not been exposed to. IFRS provides international standards that allow preparing unified financial statements for multinational companies which contribute to globalization of the business world. However, the more countries adopted the standards issued by International accounting Standards board (IASB) as their mandatory accounting standards, the higher become the debate about the benefits of implementing one set of standards internationally. A major part of that debate is about whether the application of IFRS would realize improvements in the functioning of capital markets and reduction in information asymmetry.
1.2. The Research Problem
Although overall findings support the enhancements in analysts’ information environment after IFRS adoption, several studies are documenting the deterioration of information environment post-IFRS adoption. While IFRS set of standards might aid in ensuring transparency, faithful presentation and comparability of the output of such translation, and providing a standardized international framework for how public companies prepare their financial statements (Ball, 2006); The financial statements under IFRS Standards, however, require more judgment from the preparers since IFRS are constructed to be principle based compared to Saudi GAAP which not necessarily always emphasize substance over form due to being rule based standards. Accounting standards with different approaches are likely to lead to different outcome in shaping the preparation and presentation of financial information and in what should be disclosed.
In addition, there are two Saudi Accounting Standards that do not conform with IFRS; one of them is accounting for zakat and taxable income (Nurunnabi, 2015). There is a tendency that culture and religion are major factors that contribute to shaping external practices. consequently, in Islamic society, cultural beliefs and religious lifestyles influence all aspects in life including accounting regulations and practices (Maali & Napier, 2010). As a general statement, accounting is required to be integrated within the religious foundations and most importantly accounting for zakat (Afifuddin & Siti-Nabiha, 2010). As a result, IFRS standards, more specifically Financial Accounting Standard No. 9, were modified by SAMA and then SOCPA for the accounting of zakat and income tax. A question arises about whether this modification has an impact on financial analysts forecast accuracy and dispersion.
Since IFRS standards, allegedly, aim to both increase comparability and transparency by decreasing the information gap between the providers of capital and the people to whom they have entrusted their money. A question arises about the magnitude of which financial analysts forecast accuracy differs between the post-adoption of the international financial reporting standards compared to the previous Saudi GAAP period. This study aims to investigate whether financial analysts forecast accuracy differs between the pre- and post-adoption of the international financial reporting standards (IFRS) in Saudi Arabia. In particular, this study seeks to examine whether the accounting disclosure system in the post-IFRS period have positively aided analysts in forecasting future earnings of listed firms.
1.2.2 Research Questions
Based upon above arguments, this study aims to provide empirical evidence on the relationship between the mandatory adoption of IFRS in Saudi Arabia and the accuracy of financial analysts forecasts, Accordingly, the study research questions are stated as follow:
Q1: Have financial analysts forecasts became more accurate after the mandatory adoption of IFRS in Saudi Arabia?
Q2: Have the dispersion of financial analysts forecasts decreases after the mandatory adoption of IFRS in Saudi Arabia?
