IAS/IFRS and financial reporting quality: Lessons from the European experience

This paper discusses the effects of the adoption of IAS/IFRS in Europe on the quality of financial reporting. In doing so, it adopts the perspective of stock market investors and focuses on value-relevance research. The adoption of IAS/IFRS in Europe is an example of accounting standardization among countries with different institutional frameworks and enforcement rules. This allows investigating whether, and to what extent, accounting regulation per se can affect the quality of financial reporting and leads to convergence in financial reporting. This is a key issue for standard setting purposes as IAS/IFRS have been adopted in very diverse countries all over the world, and many others are likely to adopt them in the near future.     

Measuring Country Differences in Enforcement of Accounting Standards: An Audit and Enforcement Proxy

In this paper we present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country's accounting standards. The use of a common set of standards such as International Financial Reporting Standards (IFRS) aims, in broad terms, to promote the comparability and transparency of financial statements and to improve the quality of financial reporting. However, the effectiveness of IFRS adoption may be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of outcomes from adopting IFRS use a range of legal system proxies to capture these country differences, but the proxies are deficient in that they seldom focus explicitly on factors that affect how compliance with accounting standards is promoted through external audit and the activities of independent enforcement bodies. To address this deficiency, we calculate measures of the quality of the public company auditors’ working environment (AUDIT) and the degree of accounting enforcement activity (ENFORCE) by independent enforcement bodies. We do this for 51 countries for each of the years 2002, 2005 and 2008, using publicly available data provided by the International Federation of Accountants (IFAC), the World Bank and the national securities regulators. Preliminary tests suggest our indices have additional explanatory power (over more general legal proxies) for country‐level measures of economic and market activity, financial transparency and earnings management. We expect they will prove useful to researchers and other interested parties who require country‐level measures that focus on the degree of enforcement of financial reporting practices.     

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.     

An Assessment of the Impact of IFRS Adoption on Public Sector Audit Fees and Audit Effort – Some Evidence of the Transition Costs on Changes in Reporting Regimes

While many countries have adopted International Financial Reporting Standards (IFRS) for private sector enterprises, New Zealand (NZ), Australia and the United Kingdom adopted IFRS for all sectors, including the public sector. This approach is consistent with the concept of sector‐neutral accounting standards that gained wide acceptance in NZ and Australia in the early 1990s. Although a number of studies have assessed the impact of IFRS adoption in the private sector, and the public sector has provided some evidence as to the effects of IFRS adoption on financial statements, the costs of adopting IFRS have not been examined. One measure of cost is the change in audit fees in an IFRS reporting environment. The authors examine the impact of IFRS adoption in the NZ public sector on audit fees and audit effort. They obtained data regarding audit fees and audit effort in the NZ public sector and compared the pre‐adoption year with the first year of adoption for all segments. Their results indicate a substantial increase in audit fees and audit effort in the first year of IFRS adoption for all segments, with some variation across the segments. Two sectors, local authorities and energy companies, have had significant increases in audit fees and audit effort. These findings provide some empirical evidence regarding the cost of transition to IFRS and are of interest to researchers and regulators in countries that are currently considering transitioning to IFRS or IFRS‐based International Public Sector Accounting Standards standards in reporting for the public sector.     

IFRS adoption,reporting incentives and financial reporting quality in private firms

This study examines financial reporting quality (FRQ) effects around voluntary International Financial Reporting Standards (IFRS) adoptions by German private firms across two important dimensions, earnings quality and disclosure practices. To capture differences in the motivations for IFRS adoptions, we identify four different types of IFRS adopting firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firm, which is young, fast growing and seeking access to public equity markets. Using a matched sample of private German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are only incomplete measures of FRQ, we also compare the disclosure practices of IFRS and German GAAP firms. We find that all IFRS firm types disclose significantly more information in their financial reports and show a higher propensity to publish their financial reports voluntarily on the corporate website. Our findings indicate that failure to identify earnings quality changes around IFRS adoption cannot be automatically interpreted as IFRS adoption having no effect on the FRQ of (private) firms. Collectively, our results suggest that both incentives and accounting standards shape private firms’ FRQ.     

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.     

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.     

The Impact of Mandatory International Financial Reporting Standards Adoption on Investment Efficiency: Standards,Enforcement, and Reporting Incentives

This paper investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) is followed by a decline in firms’ suboptimal investments. On average, we find that the probability of under‐investment in capital expenditure declines for firms from 23 countries requiring mandatory adoption of IFRS relative to firms from countries that do not have such requirements; meanwhile the probability of over‐investment remains unchanged. However, this real effect becomes smaller when we control for concurrent changes to the enforcement of financial reporting along with the introduction of IFRS in some countries, suggesting that the switch in standards is only one of the drivers for the observed benefits. Moreover, we find that the reduction in suboptimal investments is driven by firms with high reporting incentives to provide transparent financial reports from countries where the existing legal and enforcement systems are strong. We further show that the real effect increases with the predicted changes in accounting comparability. Finally, we find that after mandatory IFRS adoption, capital investment becomes more value‐relevant, less sensitive to the availability of free cash flows, and more responsive to growth opportunities. Our findings provide new insights into the real effects of mandatory IFRS adoption.     

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.     

Mandatory Environmental Disclosures by Companies Complying with IASs/IFRSs: The Cases of France,Germany, and the UK

This study investigates whether the adoption of a single set of accounting standards, such as IASs/IFRSs, guarantees the harmonization of accounting practices within a country and across countries, or whether differences in reporting practices persist because of dissimilarities in reporting habits and institutional settings. To this end, we investigate whether the level of environmental disclosure under IFRSs is related to the size of the reporting firm, and the strength of legal and regulatory constraints on environmental disclosures in the country where the firm is domiciled. Results indicate (1) that environmental disclosures imposed by IFRSs increase with firm size, and (2) that firms domiciled in countries with constraining environmental disclosure regulations (i.e., France and the UK) report more on environmental issues than firms domiciled in countries with weakly constraining regulations (i.e., Germany). This suggests a strong impact of national regulations on IFRS reporting. Taken as a whole, our results support the view that IFRSs are not applied consistently across firms and across countries, notably because of persistence of reporting traditions and discrepancies in national legal requirements.     

The effect of information shocks on dividend payout and dividend value relevance

We exploit the mandatory adoption of International Financial Reporting Standards (IFRS) as a source of exogenous shock to the corporate financial information environment to study the potential effect that this information shock might have on the dividend payout policy and dividend value relevance in the UK and France. We employ a difference-in-differences research design, in which our choice of the control and treatment groups is mainly based on the divergence between domestic accounting standards and IFRS, while holding institutional factors constant. The UK domestic accounting standards slightly diverge from IFRS (low-divergence firms), whereas French domestic accounting standards substantially diverge from IFRS (high-divergence firms). Nevertheless, both countries have similar institutional factors that might confound the effect of IFRS adoption. Our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason for the free cash flow problem (Jensen, 1986) and cash over-retention (Myers & Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among high-divergence firms via reduction of asymmetric information. Moreover, improving the information environment helps investors become more confident about using accounting numbers to assess firm financial performance, which causes a significant reduction in dividend value relevance among high-divergence firms.     

Countries’ adoption of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) – early empirical evidence

The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is increasingly being adopted in a number of jurisdictions. Despite the economic importance of non-publicly accountable entities, little is known about what factors influence countries' decisions to adopt IFRS for SMEs. In a unique sample of 128 countries, we find that countries that are not capable of developing their own local generally accepted accounting principles are more likely to adopt IFRS for SMEs. We also provide evidence that in jurisdictions where full IFRS have been applied to private firms, the likelihood of adoption of IFRS for SMEs increases, suggesting that jurisdictions reduce the financial reporting burden on SMEs. Moreover, in line with prior literature, there is evidence that countries with a relatively low quality of governance institutions are more likely to adopt this new set of accounting standards. The results also hold under alternative measures and different estimation approaches. Overall, our results are helpful in understanding the worldwide diffusion of IFRS for SMEs. Standard setters and regulators might consider our study in the future development of accounting harmonisation of non-publicly accountable entities.     

Evolving Connections Between Tax and Financial Reporting in Italy

We analyze the evolution of the relationship between tax and financial reporting in Italy after the mandatory introduction of International Financial Reporting Standards (IFRS) in 2005. Italy represents an interesting case study among European countries, with domestic generally accepted accounting principles (GAAP) oriented towards creditor protection and characterized by a close connection of financial and tax accounting. Unusually, the adoption of IFRS is compulsory for the unconsolidated financial statements of listed companies, but the process of alignment of domestic GAAP to IFRS, that has affected some countries, has had little effect on Italy. Thus, two accounting systems, IFRS and Italian GAAP, are used for the preparation of unconsolidated financial statements by different categories of companies and, as a consequence, two different linkages between tax and financial reporting emerge. In order to assess the degree and the direction of the book-tax linkages we use the methodology developed by Lamb, Nobes and Roberts (1998. International variations in the connections between tax and financial reporting, Accounting and Business Research, 28(3), pp. 173–188). IFRS and tax reporting show a high degree of disconnection, while Italian GAAP, in line with the accounting tradition of most continental European countries, are closely related to tax rules. The analysis points out a rapidly evolving situation, with links between accounting systems and taxation becoming tighter, mainly because of the changes in tax law introduced during the last few years.     

Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences

This paper examines the economic consequences of mandatory International Financial Reporting Standards (IFRS) reporting around the world. We analyze the effects on market liquidity, cost of capital, and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects occur prior to the official adoption date. Partitioning our sample, we find that the capital‐market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms' reporting incentives and countries' enforcement regimes for the quality of financial reporting. Comparing mandatory and voluntary adopters, we find that the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. While the former result is likely due to self‐selection, the latter result cautions us to attribute the capital‐market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting countries make concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in magnitude when we analyze them on a monthly basis, which is more likely to isolate IFRS reporting effects.     

Auditors' Affirmations of Compliance with IFRS around the World: An Exploratory Study*

It is widely believed that international financial reporting standards (IFRS) have been adopted in many countries, at least for the consolidated reporting of listed companies. However, in nearly all cases, what the rules require is some national or supranational version of IFRS. This might create problems for investor confidence and comparability. We examine what companies and auditors report concerning compliance with IFRS, focusing on the first full year of IFRS reporting by companies in the stock market indices of four major European countries and Australia. We find that, even when companies were complying with IFRS, they were generally not saying so, which seems to miss part of the point of the 35‐year project on international harmonization. In a small number of cases, auditors provided dual reports: on full IFRS in addition to the mandated reference to national GAAP where the latter corresponds with full IFRS. These cases were found only in Germany and the United Kingdom, and mainly related to companies that filed with the Securities and Exchange Commission as foreign private issuers. We propose explanations for the general lack of dual reports and for the exceptions. We call for widespread adoption of dual reporting where a plain report on IFRS is not yet possible.     

Australia's switch to international financial reporting standards: a perspective from account preparers

This study reports the findings of a structured telephone survey on adoption of international financial reporting standards (IFRS) from 60 firms drawn from among Australia's top 200 corporations. Although we find evidence of strong systematic variation in survey responses with factors such as firm size, industry background and expected impacts on financial performance, the general results indicate that many respondents have not been well prepared for the transition and are generally very sceptical about the claimed benefits of IFRS as enunciated in the government's Corporate Law Economic Reform Program. The results have implications to other international reporting jurisdictions, particularly the European Union, where adoption of IFRS is already underway.     

Commentary: IFRS – The SEC's Roadmap and the Contribution of the Academic Community

In November 2008 the US Securities and Exchange Commission issued a roadmap for the possible adoption of International Financial Reporting Standards (IFRS) by US publicly traded companies. A team of distinguished academics and practitioners discussed the issues raised by the roadmap in a panel session at the American Accounting Association meeting in San Francisco in August 2010. This commentary summarises the discussion. Potential obstacles to US adoption of IFRS include concerns about the International Accounting Standards Board's governance, and the consistency of application of IFRS in different countries around the world. Another key issue is to make sure that there is real agreement on the purpose of financial reporting, which in the US is, by law, for the protection of investors. However, research shows the capital market benefits of IFRS adoption, and at least one study shows a high degree of comparability between US GAAP and IFRS.     

Implementing IFRS: A Case Study of the Czech Republic

This empirical paper presents a study of the implementation process for International Financial Reporting Standards (IFRS) in one of the accession countries, the Czech Republic. Based upon a review of the legislation, institutional framework and context, and drawing upon recent interviews with Czech companies required to prepare IFRS accounts, auditors and institutional players in the Czech Republic, the paper highlights some of the key issues that are arising with the move to the implementation of IFRS reporting for listed group companies and other enterprises in the Czech Republic.

The paper considers the issues that arise when implementing new accounting regulations, some of which are not new and have been well covered in the literature, but others of which are particular to the implementation of IFRS reporting. The method of implementation, the scope of IFRS, particular issues with local accounting practice and IFRS, the issue of enforcement of compliance with IFRS and its relationship with audit, the link between IFRS reporting and taxation and the provision of education and training are all considered. There is also a review of the state of preparedness of local group listed entities with respect to the implementation of IFRS reporting.

There are many potentially rich areas for accounting research where the work could also inform the practice of IFRS accounting. The paper provides a contribution by highlighting how one country has moved to implement the requirement for group listed enterprises to prepare IFRS accounts and the issues that then arise for legislators, preparers and users.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Austria and Germany

Abstract

Austria and Germany share similar accounting traditions. International harmonization in both countries has mainly focused on group accounting. In contrast, single financial statements give rise to legal and tax consequences and, thus, are still tied to the traditional principles of orderly accounting. Recent regulatory changes confirmed this dual role of accounting in both countries, while moving local accounting rules closer to IFRS, although to different extents. We illustrate how recent regulations in the two countries made reference to IFRS, how IFRS was considered during the law-making process and outline major differences that remain between domestic and international accounting standards.     

International financial reporting standards and experts' perceptions of disclosure quality

From 2005, over 7,000 listed firms in the European Union and many more around the world are required to adopt International Financial Reporting Standards (IFRS). The introduction of a uniform accounting regime is expected to ensure greater comparability and transparency of financial reporting around the world. However, recent research has questioned the quality of financial statements prepared under IFRS standards, particularly in the presence of weak enforcement mechanisms and adverse reporting incentives ( Ball et al. , 2003 ). In this paper, we assess the quality of the financial statements of Austrian, German and Swiss firms which have already adopted internationally recognized standards (IFRS or U.S. GAAP). The study makes use of available disclosure quality scores extracted from detailed analyses of annual reports by reputed accounting scholars ('experts'). This work complements other contemporary research on the quality of IFRS financial statements where the properties of earnings are used as an evaluation metric ( Barth et al. , 2005 ). Our evidence shows that disclosure quality has increased significantly under IFRS in the three European countries we analyse. This result holds not only for firms which have voluntarily adopted IFRS or U.S. GAAP, but also for firms which mandatorily adopted such standards in response to the requirements of specific stock market segments. Although we cannot establish direct causality due to the inherent self-selection issues for most of our sample firms, the evidence shows that the quality of financial reports has increased significantly with the adoption of IFRS.