Following the blind? Database coding policies and the case of IFRS noncompliance

Abstract

Abstract We present a case illustrating the pitfalls of insufficient disclosure of commercial databases' coding policies. We replicate the finding in the literature that a nontrivial percentage of firms mandated to adopt IFRS ignore this obligation. Specifically, Pownall and Wieczynska (2018, Contemporary Accounting Research , 35 (2), 1029–1066) report more than 3,000 cases, or 10% of all mandated firms in the European Union. When using primary data sources (applicable local regulations and firms' annual reports), we find that noncompliance with IFRS adoption is nonexistent in the one‐to‐one replication using the same firm‐year observations. We attribute the prior misperception to the commercial database's insufficient disclosure of a misleading coding policy of the consolidation item. We also show that no other data provider correctly captures consolidation status, which determines whether firms must report under IFRS. In response to this gap, we showcase the application of bidirectional encoder representations from transformers (BERT) models for extracting the consolidation status and offer guidance for coding IFRS‐mandated firms. Our article underscores the need to exercise caution when using secondary data sources