This paper examines systematic differences in earnings management by counties
belonging in the European Union where accounting standardization is of highly importance.
An explanation is proposed for these differences based on corruption levels existing in
individual countries. Earnings management is expected to be higher in more corrupted
countries since insiders might be more prone to exercise incentives to mask corporate
performance. The findings are consistent with this prediction and suggest that the quality of
financial reporting and audit is dependent on a multi-set of factors related to corruption.
Moreover the impact of IFRS application is explored in order to verify if earnings
management is reduced in the post adoption period. The evidence is inconclusive on the
positive role of international accounting standards in reducing the level of earnings
management. Policy implications and suggestions for further research are offered.
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