In this paper, we investigate whether there is a change of real earnings management for firms facing pressures of the new technology implementation of eXtensible Business Reporting Language (XBRL). We find that real earnings management increases after the implementation of XBRL in China, especially under the dual regulation of XBRL policies from two regulators (China Securities Regulation Committee and Ministry of Finance). Given the long term detrimental effect of real earnings management on firm value, this could be unexpected consequences of XBRL technology in emerging market. Furthermore, state-owned enterprises and non-state-owned enterprises behave differently under the dual regulation of XBRL policies.
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Availability of data and material
All the financial data in this paper are obtained from the CSMAR database.
China Securities Regulation Committee (CSRC) has begun to implement XBRL since 2004, while Ministry of Finance (MOF) has also enforced its own XBRL regulation since 2010.
The China Securities Regulation Committee (CSRC) and the Ministry of Finance (MOF) are two parallel subordinate units under the State Council. CSRC is responsible for overseeing the financial market, including the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE), and keeping the financial market operating regularly. MOF establishes and amends accounting standards and related regulations.
The twelve accounting firms include Big Four (KPMG, Ernst & Young (EY), Deloitte and PricewaterhouseCoopers (PwC)) and eight other big local accounting firms such as WUYIGE, Crowe Horwath, Pan-China, Grant Thornton, Shu Lun Pan, ShineWing, RSM China, and Da Hua (see Appendix 1).
In 1998, Hoffman initiated the idea of using XML (eXtensible Markup Language) in financial information disclosures, constructed the framework and designed XFRML (eXtensible Financial Reporting Markup Language). AICPA invested in Hoffman’s project in 1999 and officially renamed XFRML as XBRL(Hoffman et al. 1999).
According to Roychowdhury (2006), normal CFO is a linear function of sales and change in sales, and the abnormal cash flow from operations (R_CFO) is the residual from the function. Discretionary expenses are a function of lagged sales, and the abnormal discretionary expense (R_DISC) is the residual from the regression model. Production costs are defined as the sum of COGS and change in inventory during the year. We model production costs as a linear function of contemporaneous sales, change in sales and change in lagged sales, and then abnormal production cost (R_PRODC) is the residual from this model. Following the CSRC’s industry classification scheme, we use the one-digit code for the sectors and require at least 10 observations in an industry-year to estimate each regression and estimate the abnormal level of each component in REM. If a firm wants to manipulate earnings upward, it will choose to adopt a loose credit policy to boost revenue but decrease cash flow, manipulate various expenses downward or increase the production level to share the fixed cost so as to reduce unit cost.
The major advantage of a one-group pre- and post-test design is that it allows us to use adopters as their own control group to evaluate post-adoption effects. This design is commonly used when the majority of publicly traded companies undergo an event (e.g., ERP adoption, SOX Sect. 404 compliance), making a matched-pair design less effective (Bathala and Carlson 1995).
We have the 1st year available financial data starting from 1998 in CSMAR database. Our other control variables start from 1999, because we use change analysis to calculate abnormal discretionary accruals following Dechow and Dichev model.
There are several differences between CSRC and MOF XBRL standards and disclosure: (1) language of element name and label link base, (2) specification edition, and (3) platform type-in and unique submission software. For details, please refer to Appendix 2.
For detailed information on the XBRL implementing process of MOF, please refer to Appendix 3.
SURE can combine the estimation results (parameter estimates and associated (co)variance matrices) and store under namelist into one parameter vector and simultaneous (co)variance matrix of the sandwich/robust type. Typical applications of SURE is to test whether coefficients vary between groups.
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We gratefully acknowledge the funding provided by the National Natural Science Foundation of China (NSFC-71672009, 71972011) and Rutgers School of Business Camden summer research grant.
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All the authors acknowledge that there is no conflict of interest to influence the work.
We use Stata as the software to conduct the data processing and empirical tests in this paper.
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Appendix 1: Big12 accounting firms designated by MOF
|No.||Name of accounting firms|
|1||Shu Lun Pan Certified Public Accountants Co., LTD|
|2||Pan-China Certified Public Accountants Co., LTD|
|3||Da Hua Certified Public Accountants Co., LTD|
|4||ShineWing Certified Public Accountants Co., LTD|
|5||Crowe Horwath China Certified Public Accountants Co., LTD|
|6||Grant Thornton China Certified Public Accountants Co., LTD|
|7||RSM China Certified Public Accountants Co., LTD|
|8||WUYIGE Certified Public Accountants Co., LTD|
|9||PwC China Certified Public Accountants Co., LTD|
|10||Deloitte China Certified Public Accountants Co., LTD|
|11||KPMG China Certified Public Accountants Co., LTD|
|12||Ernst & Young China Certified Public Accountants Co., LTD|
Appendix 2: The XBRL implementation steps of MOF regulations
|Act No.||Date||Fiscal Year||XBRL implementation steps|
1. The first batch of enterprises: thirteen central SOEs implement XBRL under the direct supervision of MOF and receive professional technical support.|
2. Big 12 accounting firms (see Appendix A) receive professional software and begin assisting all of their clients in submitting XBRL instances through CPA management system.
[Starting from fiscal year ending December 31, 2010]
The second batch of local SOEs from 14 provinces implement XBRL. Each province selects at least 5 local SOEs under the supervision of the local financial department. Each local financial department collects XBRL instances and submits them to MOF.|
[Starting from fiscal year ending December 31, 2011]
XBRL implementation for central SOEs is extended to include China National Offshore Oil Corporation and China Mobile Communications Corporation.|
[Starting from fiscal year ending December 31, 2011]
The third batch of local SOEs from the rest 16 provinces implement XBRL. Each province selects at least 3 local SOEs under the supervision of the local financial department. Each local financial department collects XBRL instances and submits them to MOF.|
[Starting from fiscal year ending December 31, 2012]
Appendix 3: The difference betweeen CSRC and MOF XBRL taxonomy and submission
|Item||China Securities Regulation Committee (CSRC)||Ministry of Finance (MOF)|
|Namespace||Non-open space||Open space, http://XBRL.mof.gov.cn|
|Language of Element Name/Label Linkbase||
Chinese, Pinyin and English
xml:lang = ”en” xlink:type = ”resource” xlink:label = ”clcid-pt_ZiChanFuZhaiBiao_lbl” > Balance Sheet </label>
<!–17: 流动资产合计– > <element name = ”LiuDongZiChanHeJi” type = ”XBRLi:monetaryItemType” substitutionGroup = ”XBRLi:item” nillable = ”true” id = ”clcid-pt_LiuDongZiChanHeJi” XBRLi:periodType = ”instant”/>
Chinese and English
xml:lang = ”zh” xlink:type = ”resource” xlink:label = ”label_AccountingTreatmentOfBusinessPurchased” id = ”label_AccountingTreatmentOfBusinessPurchased” > 分入业务的处理 </link:label>
xml:lang = ”en” xlink:type = ”resource” xlink:label = ”label_AccountsPayablesRatioOfTotalAccountsPayable”
XBRL 2.1 Edition (Submitted to XBRL International)|
Some papers point out that the edition actually used by SSE is different from what it disclosed and submitted to XBRL International.
|XBRL 2.1 Edition|
|Submission||Both SSE and SZSE have their own platforms for listed firms to extract and input key information to generate XBRL instances. However, the XBRL instances are unavailable for firms and individual investors; they are disclosed to the public only as visual charts and tables.||Big12 clients are provided with unique software designed by MOF.|
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Chen, S., Guo, J., Liu, Q. et al. The impact of XBRL on real earnings management: unexpected consequences of the XBRL implementation in China. Rev Quant Finan Acc 56, 479–504 (2021). https://doi.org/10.1007/s11156-020-00900-1
- Real earnings management
- Risk aversion