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    The Impact of Mandatory IFRS Adoption on Audit Fees: Theory...
    research summary posted November 25, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 15.0 International Matters, 15.02 IFRS Changes – Impacts 
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    Title:
    The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence
    Practical Implications:

    This study should be of interest to regulators and policy makers. IFRS adoption influences audit complexity and financial reporting quality, which have countervailing effects on audit fees. On the one hand, IFRS are generally believed to be superior to local accounting standards; hence the adoption of IFRS potentially improves financial reporting quality. This reduces audit risk and thus audit fees. On the other hand, IFRS are comprehensive, fair-value oriented, and principles-based. Using them generally requires accountants and auditors to make more complex estimates and use greater professional judgment. In other words, IFRS adoption increases the complexity of audits, which can increase audit fees. Our results suggest that, on average, the effect of audit complexity dominates the effect of improvement in financial reporting quality, leading to an overall increase in audit fees in the post-IFRS period. Moreover, our cross-country analysis sheds light on how the institutional features of different countries, including legal environments and characteristics of pre-IFRS domestic accounting standards, affect the audit fee increase associated with IFRS adoption.

    For more information on this study, please contact Xiaohong Liu.

    Citation:

    Kim, J.-B., X. Liu, and L. Zheng. 2012. The impact of mandatory IFRS adoption on audit fees: Theory and evidence. The Accounting Review 87 (6): 2061-2094.

    Keywords:
    IFRS adoption, audit fees, audit complexity, reporting quality, legal regime
    Purpose of the Study:

    This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fees. Over 100 countries now require or permit IFRS reporting for domestically listed companies. Recent academic research mainly focuses on the economic benefits of adopting IFRS. Very few studies directly examine the costs associated with IFRS adoption. A survey conducted by the Institute of Chartered Accountants in England and Wales revealed that EU companies ranked increases in audit fees as one of their largest IFRS-related costs. This study aims to provide systematic evidence on the cost side of mandatory IFRS adoption, with a focus on audit fees. Specifically, we examine changes in external audit fees from 2004 to 2008 to determine whether the EU decision to mandate IFRS increased the fees paid to auditors. In addition, we investigate how the institutional features of different countries affect the audit fee increase associated with IFRS adoption. These institutional factors include (i) the increase in audit complexity arising from IFRS adoption, (ii) the change in financial reporting quality brought about by IFRS adoption, and (iii) the strength of a country’s legal regime. The findings of this study provide insights into the channels through which IFRS adoption impacts audit fees.

    Design/Method/ Approach:

    We examine audit fee changes from the pre-IFRS adoption period to the post-IFRS adoption period during 2004–2008. We employ a difference-in-difference design to control for the general trend or changes in the economic environment unrelated to IFRS adoption. Specifically, we use IFRS adopter firms from EU countries as the treatment sample and the non-adopter firms from non-EU OECD (Organization for Economic Co-operation and Development) countries as the control sample.

    Findings:
    • IFRS adoption causes an increase in audit fees. The audit fee increase is on average 5.44 percent greater for the adopter firms, compared with that for the non-adopter firms in our control sample.
    • The IFRS-related audit fee increase is positively related to the increase in audit complexity brought about by IFRS adoption.
    • The IFRS-related audit fee increase is negatively related to the improvement in financial reporting quality brought about by IFRS adoption.
    • The IFRS-related audit fee increase is negatively related to the strength of a country’s legal regime. 
    Category:
    Engagement Management, International Matters
    Sub-category:
    Audit Fees & Fee Negotiations, IFRS Changes – Impacts