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

A review of the IFRS adoption literature

“…The authors measure changes in regulatory levels using the changes in these scores from the pre-to post-IFRS periods. Brown, Preiato, and Tarca (2014) There are also concerns surrounding the current proxies for the accounting effects of IFRS adoption.…”

What drives the comparability effect of mandatory IFRS adoption?

“…While the main focus of our study is on firm-level determinants, and thus we use an identification strategy that allows us to use country-level fixed effects to control for country-level determinants of comparability, we also explore whether country-level differences in enforcement have an impact on the comparability effect of mandatory IFRS adoption. To do so, we estimate a variant of model (6) which does not include country and peer-country fixed effects 21 but includes proxies for levels (BPT_ENF_SCORE) and changes ((BPT_ENF_SCORE)) in reporting enforcement based on Brown et al [2013] and interacts these proxies with the treatment effect of IFRS 21 We drop country fixed effects from the analysis to allow the country-level main effect of enforcement to manifest itself in the data. The fact that enforcement effects are only sizeable once country-level fixed effects are omitted from the analysis indicates that we are unable to separate a potentially moderating effect of enforcement on the comparability effect of IFRS from other unobservable country-level effects on comparability.…”

“…Table 7 reports the results. We use all observations from the base sample for which we are able to obtain earnings announcement data from I/B/E/S and the data 22 Because the enforcement change indicator introduced by is not available for all countries in our sample, we proxy for enforcement levels using the measure developed by Brown et al (2013) and construct an enforcement change indicator based on their data in the spirit of . However, using the substantive enforcement change indicator by yields qualitatively similar results albeit for a smaller set of countries.…”

The standard-setters’ toolkit: can principles prevail over bright lines?

“…They share linguistic, cultural, and legal backgrounds, along with the Anglo-Saxon accounting model. 17 Using the 2005 scores from Brown et al (2014), our four countries on average differ by 1 on quality of audit environment and by 0.5 on enforcement of accounting standards, as compared with average differences of 8.43 and 7.80, respectively, among the other 47 sample countries. 18 We believe it would be difficult to find four countries with less variation in the non-accounting traits likely to affect accounting choices.…”

“…Our chosen countries are also among the strongest enforcement regimes in the world, with the highest 2005 enforcement scores among the 51 sample countries in Brown et al (2014). Choosing the world's strongest enforcement regimes should reduce the risk that preparers and auditors fail to heed standards.…”