The "Big" Consequences of IFRS: How and When Does the Adoption of IFRS Benefit Global Accounting Firms? Open Access

Wieczynska, Maria (2013)

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In this paper, I examine how audit markets are affected by the adoption of International

Financial Reporting Standards (IFRS) which have been mandated in multiple countries and may soon be introduced in the United States. Specifically, I examine whether and how the probability of an audit firm replacement is affected by IFRS adoption. First, I hypothesize that IFRS adoption creates an expert advantage for global audit firms during a regime shift in reporting standards. This may lead to an increased frequency of switching from small audit firms to the global six. Second, I hypothesize that the likelihood of auditor replacement around IFRS adoption is affected by the strength of a country's regulatory regime. I test my hypotheses by examining the effect of IFRS adoption on the frequency and direction of auditor switching in the years surrounding the mandatory adoption of IFRS in five European Union countries: the United Kingdom, Germany, Spain, Italy, and Poland. First, I find that client firms are more likely to switch from small audit firms to global auditors in the year following IFRS adoption. Second, I find that firms listed in strong regulatory regimes are more likely to switch from small audit firms to global audit firms following IFRS adoption than firms listed in weak regulatory regimes. I also find that firms listed in low quality regulatory regimes are more likely to replace audit firms before IFRS adoption. With the exception of the year following IFRS adoption, I do not find that IFRS adopters are more likely to switch from small auditors to global audit firms before or after IFRS adoption. This indicates that the increase in the likelihood of switching from small auditors to global audit firms is a phenomenon associated with the year following IFRS adoption.

Table of Contents

I. Introduction 1

II. Literature review 7

IFRS Adoption 7 Auditor Switching 9

III. Hypotheses Development 13

Auditor Switching and IFRS Adoption 13 The Timing of Auditor Replacements 19 Regulatory Regime 20

IV. Research design 23

V. Sample characteristics and results 29

Sample Characteristics 29 Results for H1 and H2 34 Results for H3 and H4 36

VI. Supplemental analyses 39

Additional Explanatory Variables 39

Audit Fees and Audit Opinion 39

Changes in the Complexity of Operations 40 Likelihood of Bankruptcy 40 Mismatched Clients and Audit Firms 41 Characteristics of Firms Switching Auditors 43 Sample Selection 45 Variable Definitions 46

IFRS Adoption 46

Regulatory Environment 46

Alternative Model Specification 48

Big Four vs. Global Six 48

Post-IFRS Years 48

Year and Country Fixed Effects 49

Audit Expertise and Accounting Quality 50

Industry Expertise 50

IFRS Expertise 51

Accounting Quality 53

VII. Conclusions 56

VIII. References 58


TABLE 1: Variable Definitions 65 TABLE 2: Sample Selection 67

TABLE 3: Audit Firms, Auditor Replacements and IFRS adoption 68

Panel A: Auditor Replacements per Year 68

Panel B: Reporting Standards and IFRS Adoption 68

Panel C: Auditor Replacements in the Years Surrounding IFRS Adoption 69

Panel D: Global Six Audit Firms by Country 69

TABLE 4: Sample Characteristics 70

Panel A: Country and Industry Composition 70

Panel B: Regression Variables in the Initial Sample 71

Panel C: Regression Variables in the Main Regression Sample 73

Panel D: Regression Variables in the IFRS Adoption Timing Regressions 75

Panel E: Correlation Coefficients for the Main Regression Sample 77

TABLE 5: Auditor Replacements and IFRS Adoption 79

Panel A: Auditor Replacements Following IFRS Adoption 79

Panel B: Auditor Replacements before IFRS Adoption 81

TABLE 6: Regulatory Regime and Auditor Replacements around IFRS Adoption 83

Panel A: Regulatory Regime and Auditor Switching following IFRS Adoption 83

Panel B: Regulatory Regime and Auditor Switching before IFRS Adoption 85

TABLE 7: Regression Analysis with Audit Fee and Audit Opinion Variables 87

TABLE 8: Auditor-Client Mismatch and Auditor Switching around IFRS Adoption 89

TABLE 9: Summary Characteristics of Auditor Switching Firms 91

Panel A: Firms Switching Auditors 91

Panel B: Firms Switching from Small Audit Firms to Global Audit Firms 92

TABLE 10: Changes in Accounting Quality around IFRS Adoption 93

Panel A: Jones Model Residuals 93

Panel B: Dechow-Dichev Model Residuals 94

Panel C: Difference-in-differences Regression Results 95


Audit Firms' Income and Employment 96

Audit Firms' Income and Employment Data Sources 96

Audit Firms' Income and Employment Analyses and Discussion 98

The Number of Audit Firms in the UK 100

Conclusions 102


TABLE A1: Income and Employment at British Audit Firms 103

Panel A: Mandatory IFRS Adoption Year 103

Panel B: Four-Period Analysis 105

TABLE A2: The Number of Audit Firms in the UK 107

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