The Role of National Culture in International Financial Reporting Standards Adoption

Prior research shows that the development of national accounting systems follows different patterns in different countries over the world. This was recently supported by the staggered manner in which countries adopt IFRS. Extant evidence shows that IFRS adoption decisions at the country level are determined by institutional and economic factors. In this context, cultural factors have not been considered. This paper examines the relationship between five cultural dimensions and countries’ decisions to adopt International Financial Reporting Standards (IFRS) around the world during the period 2003-2014. We find that countries with higher levels of uncertainty avoidance are more likely to adopt IFRS. Additionally, they are more likely to commit to early adoption largely on a mandatory rather than voluntary basis. On the other hand, countries with higher values of masculinity are more likely to adopt IFRS early, but the extent (whether voluntary or mandatory adoption) of adoption is not significantly related to masculinity. Finally, we show that countries with higher power distance (long-term orientation) are more (less) likely to adopt IFRS on a mandatory basis. The results are in line with Gray’s theory of cultural influence and suggest that differences in national culture had a significant role in countries’ reaction to the introduction of IFRS as a set of unified accounting standards targeting the harmonization of accounting standards adopted across different jurisdictions.     

IFRS adoption in China and foreign institutional investments

We examine the effectiveness of China’s IFRS adoption from the perspective of an important set of financial report users, foreign institutional investors. We find that foreign institutional investment does not increase after China’s IFRS adoption, and some evidence that it actually declines, particularly among firms with weaker incentives to credibly implement IFRS, or with greater ability to manipulate IFRS’s fair value provisions. We also find that the association between earnings and returns generally declines after IFRS adoption, consistent with reduced earnings quality. In addition, we find that foreign institutional investors’ returns decrease after China’s IFRS adoption. Finally, the decline in foreign institutional investment is greater among investors from countries with weak institutions that have also adopted IFRS. Taken together, our evidence suggests that the weak institutional infrastructure in China’s transitional economy impairs IFRS’s intended goal of attracting institutional investment through improved financial reporting quality. Further, financial information users’ home country institutions and IFRS adoption experience affect the effectiveness of IFRS adoption.     

A review of the IFRS adoption literature

This paper reviews the literature on the effects of International Financial Reporting Standards (IFRS) adoption. It aims to provide a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing. In addition, we also present discussion of studies that focus on specific attributes of IFRS, and also provide detailed discussion of research design choices and empirical issues researchers face when evaluating IFRS adoption effects. We broadly summarize the development of the IFRS literature as follows: The majority of early studies paint IFRS as bringing significant benefits to adopting firms and countries in terms of (i) improved transparency, (ii) lower costs of capital, (iii) improved cross-country investments, (iv) better comparability of financial reports, and (v) increased following by foreign analysts. However, these documented benefits tended to vary significantly across firms and countries. More recent studies now attribute at least some of the earlier documented benefits to factors other than adoption of new accounting standards per se, such as enforcement changes. Other recent studies examining the effects of IFRS on the inclusion of accounting numbers in formal contracts point out that IFRS has lowered the contractibility of accounting numbers. Finally, we observe substantial variation in empirical designs across papers which makes it difficult to reconcile differences in their conclusions.     

Reply to the Discussion Note on the “The Effect of IFRS Adoption Conditional Upon the Level of Pre-adoption Divergence”

Pathak (2014) has raised both conceptual and methodological questions about Cai, Rahman, and Courtenay (2014). In this reply, we attempt to address the questions. The discussion arising from these questions suggests that IFRS adoption and the implications of IFRS are complex issues. Cai et al. (2014) try to illustrate that IFRS adoption is not a single-step solution. It has various stages. Some countries take gradual steps towards IFRS adoption and others embrace IFRS in one big step. Cai et al. (2014) also explain that IFRS adoption is associated with other institutional arrangements within a country. The issue of the manner in which IFRS is adopted across countries needs further investigation to better assess the country level impediments of IFRS adoption and how IFRS adoption affects market efficiency.     

International Financial Reporting Standards,institutional infrastructures,and implied cost of equity capital around the world

Using a sample of 21,608 firm-years from 34 countries during 1998–2004, this study evaluates the impact of voluntary adoption of the International Financial Reporting Standards (IFRS) on a firm’s implied cost of equity capital. We find that the implied cost of equity capital is significantly lower for the full IFRS adopters than for the non-adopters even after controlling for potential self-selection bias and firm-specific and country-level factors that are known to affect the implied cost of capital. This result holds irrespective of institutional infrastructure determining a country’s governance and enforcement mechanisms. We also find that the implied cost of equity capital decreases with the efficacy of institutional infrastructure. Moreover, we provide evidence that the cost of capital-reducing effect of IFRS adoption is greater when IFRS adopters are from countries with weak institutional infrastructures than when they are from countries with strong infrastructures. The above results are robust to a battery of sensitivity checks.     

The global institutionalization of financial reporting: The case of the United Arab Emirates

Almost 100 countries have agreed to adopt or work towards convergence with the International Accounting Standards Board's international financial reporting standards (IFRS). Applying an institutional theory framework at a nation state level, and using publicly available data about the emerging economy of the United Arab Emirates (UAE) as a case, this paper identifies some of the global coercive, normative and mimetic pressures which have contributed to this widespread adoption. The challenge for emerging economies such as that of the UAE is whether the reality of IFRS implementation can match the image of IFRS adoption.     

Have Canada,Japan and Switzerland Adopted IFRS?

Although many countries have passed laws to require the use of ‘IFRS as issued by the IASB’ for certain types of financial reporting, that is not the typical approach to adoption of IFRS (International Financial Reporting Standards) in major developed countries. This paper uses Australia and Pakistan as examples of minor and major adjustments to the content of IFRS. Then it uses Canada as an example of restricted scope of mandatory application of IFRS. This is compared to extensive voluntary adoption in Switzerland and increasing voluntary adoption in Japan. The paper asks what ‘adoption’ means in the context of Canada, Japan and Switzerland. Finally, the paper looks at how companies in many countries limit the potential value of international comparability by not affirming compliance with ‘IFRS as issued by the IASB’ even when they achieve it.     

Adopting International Financial Reporting Standards for Small and Medium‐sized Enterprises

Diverse complications and controversial issues in the adoption of International Financial Reporting Standards (IFRS) for Small and Medium‐sized Enterprises (SMEs) have been reported by many jurisdictions, prompting them not to adopt this set of standards. Conversely many jurisdictions have adopted or are in the process of adopting IFRS for SMEs. This study considers the impetus for successfully achieving accounting convergence with IFRS for SMEs in those jurisdictions. The possible transition issues that may arise when countries adopt IFRS for SMEs are also highlighted. Furthermore, to provide pioneering evidence on the problems accountants encounter when applying IFRS for SMEs, we conduct a survey on accounting practitioners in Fiji – an early adopter of this set of standards. Both the insights provided on the process of embracing IFRS for SMEs in Fiji and the opinions elicited from accountants highlight new dimensions to the inherent problems in IFRS for SMEs. Scant attention has been given to this issue so far; hence the empirical evidence provided by our study informs not only the global convergence of SME accounting but also the quality of the current suite of IFRS for SMEs.     

The Effect of IFRS Adoption Conditional Upon the Level of Pre-adoption Divergence

Prior studies on whether or not International Financial Reporting Standards (IFRS) adoption improves earnings quality have found mixed results. We note that some of the countries that have adopted IFRS had national accounting standards similar to IFRS prior to adopting IFRS, while others had national accounting standards divergent from IFRS. We examine the effects of IFRS adoption by taking into account the level of divergence prior to the adoption of IFRS. We find that countries experience a greater drop in earnings management when they have a higher level of divergence from IFRS prior to IFRS adoption. More specifically, high divergence countries with higher levels of enforcement benefit the most followed by high divergence countries with lower levels of enforcement. Lower divergence countries with higher levels of enforcement do not significantly benefit from IFRS adoption. Lower divergence countries with lower levels of enforcement do not benefit from IFRS adoption at all. Our results support the contention that countries with lower quality local accounting standards prior to IFRS adoption benefit more from IFRS adoption.     

Influence of transnational economic alliances on the IFRS convergence decision in India—Institutional perspectives

This study contributes to the literature on global governance by highlighting the importance of not losing sight of the nation state as an important player in the transnational governance arena. Specifically, literature on global (accounting) regulation devotes a great deal of attention to the roles of organisations and agencies with transnational remit (such as global standard setters, donor agencies) while often downplaying the significant impacts of the more traditional cross- country links forged through economic relationships and resource dependencies between national and transnational institutional fields. This was specially noted in the case of the indirect influences of the US’s decision to delay IFRS convergence. While being interpreted as an indirect source of influence, such a decision played a very significant role on the convergence negotiations in India. The study shows how the US influence was channelled through Japan with which India has significant trade and economic relations and, most importantly, holds a joint forum specifically to discuss convergence issues. The consequences of India’s links with countries such as US and Japan in the decision-making process provide a vivid indication of the important roles of cross-governmental relationships in the global governance arena, and also question the position of transnational organisations as pervasive powers in such governance. The study’s findings clearly demonstrate that the pursuit of full IFRS convergence strongly favoured by the transnational forces was invariably challenged in the Indian context by the influences of powerful nation states advocating a more cautious approach.     

Layering of IFRS and Dual Institutionality of Accounting Standards in Belarus

There is an ongoing debate about the applicability and efficacy of International Financial Reporting Standards (IFRS) adoption in countries with diverse institutional infrastructures. We examine financial reporting in Belarus and factors that are shaping its development. In Belarus, IFRS has been adopted through layering where it is an additional requirement to the existing reporting specified by the national accounting regulations. We explore how global standards were transposed and function in a highly specific institutional context. Based on an examination of reporting in the banking sector, we conclude that different objectives of IFRS and local reporting contribute to dual institutionality of standards where differing formats target the needs of diverse users. Thus, adoption through layering is unlikely to contribute to convergence between different reporting standards used for different purposes, and parallel reporting is expected to persist. By examining financial reporting practices in Belarus, we provide insights for practitioners, regulators, and standard-setters on implementation of IFRS in countries with similar heavy state involvement, and still using local regulations and traditions in parallel with IFRS.     

Convergence in accounting standards: Insights from academicians and practitioners

The efficiency and competitiveness of global capital markets depends on the ability of financial statement preparers to communicate effectively with investors through financial reports. Despite the global movement to adopt IFRS, US adoption of IFRS is still uncertain. To assess potential for convergence, this study compares perspectives of academicians and practitioners regarding convergence to a set of global accounting standards. The majority of respondents believe that effective convergence to a set of globally accepted accounting standards would be beneficial to preparers, users, auditors, analysts, and standard setters. Convergence in accounting standards can require extensive and possibly costly changes to the standard-setting infrastructure and enforcement process in the US and other countries, and will also require proper training for management, auditors, and investors.     

The Effect of Mandatory IFRS Adoption on Financial Analysts’ Information Environment

This paper examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) by the European Union on financial analysts’ information environment. To control for the effect of confounding concurrent events, we use a control sample of firms that had already voluntarily adopted IFRS at least two years prior to the mandatory adoption date. We find that analysts’ absolute forecast errors and forecast dispersion decrease relative to this control sample only for those mandatory IFRS adopters domiciled in countries with both strong enforcement regimes and domestic accounting standards that differ significantly from IFRS. Furthermore, for mandatory adopters domiciled in countries with both weak enforcement regimes and domestic accounting standards that differ significantly from IFRS, we find that forecast errors and dispersion decrease more for firms with stronger incentives for transparent financial reporting. These results highlight the important roles of enforcement regimes and firm‐level reporting incentives in determining the impact of mandatory IFRS adoption.     

The Development of Accounting Regulation in Iraq and the IFRS Adoption Decision: An Institutional Perspective

This paper reviews the historical development of accounting regulation in Iraq and analyzes, from an institutional perspective, both the decision to adopt International Financial Reporting Standards (IFRS), and the factors likely to impact the expansion of IFRS application beyond listed companies. We find that all three forms of institutional isomorphism (coercive, mimetic, and normative) explain the initial decision to adopt IFRS. The most significant force in the decision to adopt IFRS is coercive pressure, from western forces following the fall of the Ba'ath regime, and from international aid organizations. Further, we find that the accounting system in Iraq is likely to be further advanced due to mimetic and normative pressures from Iraq's trade partners, multinational corporations, and the accounting profession. The paper concludes with a discussion of lessons that can assist other developing nations, and in particular countries in the Middle East in their decision to adopt IFRS. It is important that IFRS adoption is accompanied by reform to governance and investor protection regimes, together with investment in education and training to support ongoing implementation. Otherwise, IFRS adoption may be perceived as merely symbolic.     

Adoption of the International Financial Reporting Standards by Greek non-listed companies: The role of coercive and hegemonic pressures

In this paper, we examine the motivations for preparers in Greek non-listed companies to adopt International Financial Reporting Standards (IFRS). Previous literature has focused on listed companies and assessed the effect of IFRS on market efficiency to justify its adoption. Using data from a cross-sectional survey and from interviews with senior managers, our analysis indicates that the motivations to adopt IFRS in Greece are not primarily related to the technical competence of the standards. We draw insights from literature on institutional theory and hegemony based on the Selections from the Prison Notebooks of Gramsci, and show that the decision to comply with IFRS can also be motivated by coercive and hegemonic pressures, which are exerted by powerful institutional constituents as they interact with organisations’ strategic interests at the international and national level. The adoption of IFRS is driven predominantly by the pressures exerted by parent companies on their subsidiaries and by the legal requirements of the state, but also through borrowing and debt-contracting requirements as enforced by civil society actors, such as financial institutions. This mobilisation of power plays a pivotal role in supporting the establishment of IFRS among non-listed companies.     

Mandatory IFRS Adoption and the Contractual Usefulness of Accounting Information in Executive Compensation

We examine how the mandatory adoption of International Financial Reporting Standards (IFRS) in continental Europe affects the contractual usefulness of accounting information in executive compensation, as reflected in pay‐performance sensitivity (PPS) and relative performance evaluation (RPE). The empirical evidence indicates a weak increase in accounting‐based PPS in the post‐adoption period, primarily driven by countries with large differences between IFRS and their previously adopted local accounting standards. We also document a significant increase in accounting‐based RPE using foreign peers after the adoption. Additional analysis shows that the increase in RPE is greater for firms with more foreign sales, and for those with lower availability of domestic peers of comparable size. The overall results are consistent with the compensation committees in those countries perceiving earnings after IFRS adoption to be of higher quality and comparability. Our paper highlights an important benefit of IFRS largely ignored by the literature, that is, the higher earnings quality and comparability brought by the adoption of IFRS facilitate executive compensation contracting.     

The effects of International Financial Reporting Standards,auditing and legal enforcement on tax evasion: Evidence from 37 African countries

This study examines the significance of International Financial Reporting Standards (IFRS), audting and legal enforcement on tax evasion for a group of 37 African countries for the period 2008–2017. These countries were subsequently regrouped into subsamples of four clusters. Three-stage least square regression was used for the analysis. The results indicate that there is a negative and significant relationship between IFRS and tax evasion in some clusters (i.e., early IFRS adopters and strong legal enforcers). The other clusters (late IFRS adopters and weak legal enforcers) have a similar sign of coefficient though statistically insignificant. Moreover, evidence suggests that adoption and application of IFRS lead to improved financial reporting quality and lessen tax evasion in some African jurisdictions. Additionally, legal enforcement is found to be statistically significant in relation to tax evasion in two clusters (i.e., early IFRS adopters and strong legal enforcers). Some African countries are slow or ineffective in adopting and implementing IFRS, which by itself cannot improve tax compliance. IFRS can only achieve its objective when there is strong legal enforcement (e.g., control of corruption, rule of law, effective regulatory framework, voice and accountability, strong monitoring, and auditing to promote transparency). More evidently, in contrast to weak legal enforcers, countries with strong legal enforcement have high IFRS compliance, which can strengthen auditing and reporting standards and hence, improve tax compliance.     

Information friction and investor home bias: A perspective on the effect of global IFRS adoption on the extent of equity home bias

This paper provides a perspective on the effect of IFRS adoption on the tendency of investors to under-invest in foreign equities. We consider explanations for the equity home bias described in prior research and discuss research relevant to the informational consequences of global adoption of IFRS. Specifically, we evaluate whether IFRS adoption reduces information processing costs or decreases investor uncertainty about either the quality of financial reporting or the distribution of future cash flows. We predict that the effect of any reduction in information processing costs from the adoption of IFRS is likely to be small relative to the effects of other determinants of home bias such as the strength of investor protection mechanisms in foreign countries, behavioral biases toward familiar equities, and informational advantages related to geographical proximity. We argue that the quality of the information that investors have (or perceive they have) decreases with distance, conclude that global IFRS adoption is unlikely to affect home bias, and propose avenues for future research.     

Examining dual accounting systems in Europe

After adoption of International Financial Reporting Standards (IFRS) for consolidated financial statements by European-listed companies, a number of European countries still require the use of local standards in the preparation of legal entity financial statements. This study investigates whether this requirement can be explained by a low demand for high-quality financial reporting and an orientation of accounting toward the fulfilment of regulatory needs in these countries. Specifically, using accounting quality as an indicator of the focus of accounting on capital providers' needs, we compare accounting quality between countries permitting and prohibiting the use of IFRS in individual financial statements. Consistent with our expectations, we find that countries requiring the use of local standards in the preparation of legal entity financial statements exhibit a significantly lower level of accounting quality, both prior to and after IFRS adoption. We interpret these results as evidence that these countries have local standards more oriented toward the satisfaction of regulatory needs, rather than investors' needs. Furthermore, since differences in accounting quality persist after the implementation of IFRS, results suggest that firms in these countries face a lower demand for high-quality financial reporting.     

The impact of IFRS adoption on the value relevance of book value and earnings

In this study, we investigate the impact of IFRS adoption in Europe and Australia on the relevance of book value and earnings for equity valuation. Using a sample of 3488 firms that initially adopted International Financial Reporting Standards (IFRS) in 2005, we are able to compare the figures originally reported for the 2004 fiscal years to the IFRS figures that were provided in 2005 as the 2004 IFRS comparative figures. As part of the inquiry, we introduce a cross-product term, equal to the product of EPS and BVPS, into the traditional linear pricing models. The estimated coefficient on the cross-product term is statistically significant and negative, as theory suggests in the presence of important nonlinearities. Further, there is increased non-linearity in the data subsequent to IFRS adoption, with the increase being most pronounced for firms in Common Law countries. With non-linear effects controlled for, there is no observed change in price relevance for firms in either Code Law or Common Law countries, contradicting the results from the linear pricing models. The results also suggest that the distribution of measurement errors becomes more similar across Code Law and Common Law countries after the adoption of IFRS, removing one difference between these groups. Thus, IFRS enhances comparability, an inference that would not be possible had we confined the analysis only to linear pricing models.