Measuring quality of reported earnings’ response to corporate governance reforms in Russia

Purpose - An important objective of corporate governance reforms is to increase transparency. The purpose of this paper is to investigate whether this objective of corporate governance reforms of 2002 was achieved in Russia. Design/methodology/approach - This paper utilizes the data collected from UBS Brunswick's “Russian Equity Guides” published during 1999‐2004, and companies’ annual reports. The modified accrual model of Jones presented by Dechowet al.is used to ascertain the quality of reported earnings of 91 Russian listed companies during the pre‐ and post‐ reform periods. Findings - This research paper shows that the quality of earnings – measured as the inverse of absolute discretionary accruals – is not affected by the 2002 reforms in Russia. Therefore, one of the most important objectives of bringing transparency in the Russian corporate sector was not successfully achieved. Instead, this paper finds that adoption of international financial reporting standards (IAS/USGAAP) by Russian listed companies improved the transparency of corporate disclosures irrespective of the reforms. Moreover, the need for large capital investments after the Russian financial crisis of 1998 was depicted by maintaining large pools of accruals by Russian listed companies. Finally, the results show ferrous metal and telecom sector companies have generally lower quality of earnings than other sectors. Research limitations/implications - This paper builds on the previous accounting literature by studying the determinants of the quality of reported earnings in one of the most interesting emerging economies. The study re‐emphasizes the importance of legal and regulatory framework in determining the level of corporate transparency in emerging economies. The results obtained here are insightful for future accounting research and policy makers in assessing the potential pros and cons of regulatory reforms. However, the paper does not judge or comment on the quality and enforcement of the prescribed reforms. The results describe the trend of the accounting quality in Russia during the analysis period only. Originality/value - This is one of the first studies on Russian listed firms testing the impacts of the most important of all reforms introduced in Russia since the fall of the USSR. This extends the knowledge not only for academics and investors but for Russian policy makers in particular and for corporate regulators in other emerging markets in general.