Does XBRL adoption eliminate misclassification of income statement items?

Abstract

Purpose

The financial world of today is evolving at a rate that can be challenging to keep up with and comprehend due to developments in information and communication technology. When compared to a conventional disclosure, the eXtensible Business Reporting Language (XBRL), which was named one of the top ten accounting technologies, has a clear advantage in reducing information asymmetry by providing interactive data disclosure. This study aims to examine whether forcing companies to adopt XBRL would cause them to prefer misclassifying income statement items as an alternative to more risky earnings management methods.

Design/methodology/approach

The study sample includes nonfinancial UAE companies listed on Dubai Financial Market and Abu Dhabi Securities Exchange from 2012 to 2019. Fixed effect and system General Method of Moments regressions were used to analyze the study data.

Findings

The study found that XBRL reporting resulted in lowering the quality of financial reporting as companies have a higher tendency to misclassify income statement items as earnings management mechanism.

Practical implications

The findings of this research can be used by stakeholders and practitioners in the UAE to better understand whether the use of XBRL is linked to the engagement of financial reporting manipulative practices. The findings of this study also inform policymakers and regulators about the consequences of companies formally adopting digital disclosure language in an effort to improve the quality of their reporting. Besides, the results offer guidance to regulators considering imposing XBRL usage regulations.

Originality/value

Limited number of studies have tested the association between XBRL mandatory adoption and misclassification of income statement items as an earnings management tool in the Gulf Cooperation Council region.

Citation

Sanad, Z. (2024), "Does XBRL adoption eliminate misclassification of income statement items?", Journal of Financial Reporting and Accounting, Vol. 22 No. 2, pp. 433-449. https://doi.org/10.1108/JFRA-03-2023-0147