Impact of IFRS adoption on audit pricing: evidence from audit hours and unit audit price in the Korean audit market

Abstract

We investigate the impact of IFRS adoption on audit fee components, namely audit hours and unit audit price. We find that IFRS adoption increases audit hours but decreases unit audit price, which indicates audit firms cannot charge extra audit fees for their additional effort in a competitive audit market. Further, the IFRS-related audit fee increase depends on the client's bargaining power and audit risk. We thus suggest that the economic burden caused by IFRS adoption cannot be generalised for audit clients, because a competitive audit market imposes an informal limit on audit pricing.

55 years of Abacus: Evolution of Research Streams and Future Research Directions

“…As such, the literature published by Abacus forms part of a broader academic debate that seeks to inform the standard‐setting activities of the IASB internationally. For instance, recent publications across the Asia–Pacific accounting journals have not just focused on IFRS in Australia (Goodwin et al ., 2020; Miah et al ., 2020; Wang et al ., 2019) but numerous other jurisdictions, such as Canada (Mnif and Znazen, 2020), Spain (Fullana et al ., 2019), the Middle East (e.g., Mardini et al ., 2019; Sharairi, 2020), Korea (Kang et al ., 2020; Lee et al ., 2020), China (Natoli et al ., 2020), Vietnam (Nguyen et al ., 2020; Nguyen and Rahman, 2019), and other emerging market settings in Africa, including Ethiopia and Ghana (Coffie and Bei, 2019; Degos et al ., 2019; Wagaw et al ., 2019). A significant amount of literature has also examined IFRS adoption as it impacts different companies and their investments—for example, literature has examined IFRS adoption in the context of small to medium enterprises (SMEs) (Warren et al ., 2019) and foreign direct investments (Golubeva, 2019).…”

The effect of the rules- versus principles-based accounting standards on opinion shopping

“…If so, then our question is whether the acceptance of OS clients will depend on the client importance when litigation risk increases after the IFRS adoption. Kang et al (2021) find that IFRS brings about an increase in audit hours and audit fees but a decrease in unit audit price in the Korean audit market, and the latter is observed only for important clients. Unless auditors can fully charge extra audit fees to important clients for their additional effort, it suggests that when client firms exploit the flexibility of IFRS and seek to shop audit opinions, auditors are not likely to reject the offer by important clients in anticipation of the greater economic benefits exceeding the potential litigation costs.…”

“…These results strongly support that the OS attempts of client firms under IFRS are more Accounting standards on opinion shopping successful when they are economically important to the audit firm. In addition, Kang et al (2021) argue and find that non-Big 4 auditors have fewer clientele compared with Big 4 auditors in Korea and conclude that most non-Big 4 clients are likely to be considered important, with superior bargaining power, which is not the case for Big 4 clients. Thus, we can also repeat the analysis of H3 for the subsamples of Big 4 versus non-Big 4 clients, suggesting that the test results of Panel A, Table 6 support both our H2a and H3a.…”

“…This Korean setting provides several advantages for examining the effect of the change in accounting standards on OS. First, in Korea, all IFRS standards are adopted at the same time in 2011, which is opposed to “a convergence approach” wherein a country accepts individual standards step-by-step to bridge the gap between IFRS and the local GAAP (Kang et al , 2021). This provides an ideal setting to observe the impact of an external regulatory change on both audit firms and their clients (Seo, 2016).…”

“…Second, we extend the literature on the effect of IFRS on auditing. While related studies have mostly focused on the change in audit fees or audit quality after the IFRS adoption (Kim et al , 2012; De George et al , 2013; Kang et al , 2021), we investigate its effect on auditor choice. Based on the countervailing forces between client firms and auditors about the effect of IFRS on OS, we find that IFRS leads to more successful OS in the Korean audit market.…”