How Much Does IFRS Cost? IFRS Adoption and Audit Fees

Abstract

This study provides evidence of a directly observable and significant cost of International Financial Reporting Standards (IFRS) adoption, by examining the fees incurred by firms for the statutory audit of their financial statements at the time of transition. Using a comprehensive dataset of all publicly traded Australian companies, we quantify an economy-wide increase in the mean level of audit costs of 23 percent in the year of IFRS transition. We estimate an abnormal IFRS-related increase in audit costs in excess of 8 percent, beyond the normal yearly fee increases in the pre-IFRS period. Further analysis provides evidence that small firms incur disproportionately higher IFRS-related audit fees. We then survey auditors to construct a firm-specific measure of IFRS audit complexity. Empirical findings suggest that firms with greater exposure to audit complexity exhibit greater increases in compliance costs for the transition to IFRS. Given the renewed debate about whether the Securities and Exchange Commission (SEC) should mandate IFRS for U.S. firms, our results are of timely importance. Data Availability: Data are publicly available from the sources identified in the paper. Survey response data are available from the authors upon request.

Research in auditing: main themes

“…We can give as examples applying and implementing rules for nancial statement disclosure, code of ethics, regulatory authority, legal aspects concerning stakeholder protection, and legal responsibility of the companies (De George, Ferguson, & Spear, 2013;Gul, Zhou, & Zhu, 2013;Mennicken, 2008). More than tripled when compared to the last study (17.6%), comprehending the whole period and all journals.…”

A Review of the IFRS-Adoption Literature

“…It also makes it a particularly interesting setting to test the effects of IFRS on private firms and the overall economy. Examples of studies that have used the Australian setting are those by Chalmers, Clinch, and Godfrey (2011), Cheung et al (2008), De George et al (2013, Jones and Higgins (2006), and Lai et al (2013).…”

An Empirical Analysis of the Global Audit Market: International Financial Reporting Standards-Related Changes and Differences within the Big 4 Global Networks

“…While major changes in accounting regulations are likely to result in increased audit fees, the results of previous studies (e.g., Kim et al, 2012;DeGeorge et 14 Such an approach has been used in current international accounting research (e.g., Lin, Riccardi, and Wang, 2012;Barth, Landsman, Lang, and Williams, 2013). al., 2013) do not provide insights into how many years after IFRS adoption the increased audit fees persist. Other literature examines audit fees after the introduction of SOX in the United States (e.g., Ettredge, Scholz, and Li, 2007), and the results suggest that audit fees are higher for two years after the initial regulation implementation before returning to pre-SOX levels.…”

“…However, it is important to note that Kim et al (2012) are unable to utilize data specifically for audit service fees. DeGeorge et al (2013) similarly examine the change in audit fees for Australian firms surrounding mandatory IFRS adoption. Their findings suggest that audit service fees are higher in the year of IFRS adoption, firms with greater audit complexity display higher increases in audit fees surrounding IFRS adoption, and smaller clients incur disproportionately higher costs.…”

“…Large, global auditors stand to gain additional revenues if IFRS adoption takes place in the U.S. As a direct and observable outflow of resources, audit fees are one important aspect of the costs associated with IFRS adoption, and current research has found that fees increase following mandatory adoption of IFRS (Kim, Liu, and Zheng, 2012;DeGeorge, Ferguson, and Spear, 2013). However, as these studies focus only on the fixed period of mandatory IFRS adoption, it is difficult to draw inferences regarding how auditor fees may be affected by adoption of IFRS in the future.…”