The "Big" Consequences of IFRS: How and When Does the Adoption of IFRS Benefit Global Accounting Firms? Public
Wieczynska, Maria (2013)
Abstract
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 9III. Hypotheses Development 13
Auditor Switching and IFRS Adoption 13 The Timing of Auditor Replacements 19 Regulatory Regime 20IV. Research design 23
V. Sample characteristics and results 29
Sample Characteristics 29 Results for H1 and H2 34 Results for H3 and H4 36VI. Supplemental analyses 39
Additional Explanatory Variables 39Audit 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 46IFRS Adoption 46
Regulatory Environment 46
Alternative Model Specification 48Big Four vs. Global Six 48
Post-IFRS Years 48
Year and Country Fixed Effects 49
Audit Expertise and Accounting Quality 50Industry Expertise 50
IFRS Expertise 51
Accounting Quality 53
VII. Conclusions 56
VIII. References 58
LIST OF TABLES
TABLE 1: Variable Definitions 65 TABLE 2: Sample Selection 67TABLE 3: Audit Firms, Auditor Replacements and IFRS adoption 68
Panel A: Auditor Replacements per Year 68Panel 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 70Panel 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 79Panel 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
APPENDIX APPENDIX: UK AUDIT FIRMS' ANALYSIS 96Audit 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
APPENDIX REFERENCES 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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