The “Big” Consequences of IFRS: How and When Does the Adoption of IFRS Benefit Global Accounting Firms?

Abstract

I investigate how the adoption of International Financial Reporting Standards (IFRS) affects audit markets. Specifically, I examine the effect of IFRS adoption on the likelihood and direction of auditor switching in a sample of firms from five European Union countries: the United Kingdom, Germany, Spain, Italy, and Poland during the period from 1998 through 2010. I hypothesize that IFRS adoption creates an expert advantage for global audit firms (i.e., Big 4 audit firms, Grant Thornton, and BDO) during a regime shift in reporting standards. I find that clients are more likely to switch from small to global audit firms in the year of IFRS adoption. I also hypothesize that the strength of a country's regulatory regime affects the likelihood of auditor replacement around IFRS adoption. I find that firms listed in countries with high-quality regulation and enforcement are significantly more likely to switch from small to global audit firms in the year of IFRS adoption (with the odds of the switch almost doubled when compared to non-adoption years). In weaker regulatory regimes, IFRS adoption is not associated with an increase in auditor switching. Additional tests provide evidence that global audit firms' advantage stems from their perceived IFRS expertise. Finally, the results confirm that not only Big 4, but also Grant Thornton and BDO, benefit from IFRS adoption.

Gender‐diverse audit partners and audit fee premium: The case of mandatory joint audit

“…However, increased use of fair values and dense disclosures have made financial statements highly complex and unmanageably large (KPMG, ). Wieczynska () shows that IFRS implementation results in an expert advantage for global accounting firms. Its adoption has increased the probability of switching from a small audit firm to a global audit firm for client firms that are listed under a strong regulatory regime.…”

Deviations from the Mandatory Adoption of IFRS in the European Union: Implementation, Enforcement, Incentives, and Compliance

“…As a diagnostic, we control for auditor type in our logistic regressions. Our general inferences do not change when we include an indicator variable for the Big 4 or global 6 (Wieczynska ) audit firms. The coefficient associated with Big 4 is significant only in the sample of all years, while global 6 is significant in and 2009 as well.…”

“…Thus, having a global 6 auditor seems to be at least marginally related to the choice of financial reporting standards. However, we cannot claim the direction of causality here since, as shown by Wieczynska (), firms are more likely to switch to global 6 auditors in the year they are adopting IFRS and not before they switch reporting standards.…”

“…If countries that allow multiple accounting standards before 2005 are more tolerant of non‐adoption of IFRS after it became mandatory, we expect this variable to be positively related to non‐adoption. However, if the cost of IFRS adoption is lower in countries where other firms already follow IFRS and auditors are prepared to audit IFRS financial statements (Wieczynska ), we expect this variable to be negatively related to non‐adoption…”

“…DeAngelo () suggests that big auditors provide higher quality auditing than non‐big auditors. Wieczynska () shows that strong‐enforcement country firms switching to IFRS are more likely to switch from small to global audit firms. If auditors refuse to risk their reputations to audit non‐compliant firms, we expect firms using big auditors during the mandatory‐IFRS period to be less likely to report using local GAAP.…”