Determinants of IFRS compliance in Africa: analysis of stakeholder attributes

• DOI: https://doi.org/10.1108/IJAIM-09-2018-0110
• Published date: 07 October 2019
• Date: 07 October 2019
• Pages: 573-599
• Author: Vincent Tawiah,Pran Boolaky
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Determinants of IFRS compliance

in Africa: analysis of

stakeholder attributes

Vincent Tawiah

Department of Accounting, Finance and Economics, Griffith University,

Gold Coast, Australia, and

Pran Boolaky

Department of Accounting, Finance and Economics, Griffith University,

Nathan, Australia

Abstract

Purpose –This paper aims to examine the driversof companies’compliance with International Financial

ReportingStandards (IFRS) using the stakeholdersalience theory.

Design/methodology/approach –The authors have used panel data from205 companies to examine

the IFRS compliance level across 13 African countries. This study has also established the relationship

between stakeholders’attributes and firms’compliancewith IFRS.

Findings –On IFRS compliance,the authors found that the average compliance scoreamong the companies

over the period was 73.09 per cent,with a minimum score of 62.86 per cent and a maximum of 85.61 per cent.

The authors found a significantpositive association between audit committee competenceand compliance, as

well as among chartered accountantson board. There is less compliance with the latest standards, such as

IFRS 3, 7 and 13. Also, IAS 17, 19, 36 and 37 are problematic across the sample.The authors also found that

compliancehas been increasing over the years.

Practical implications –For companies, this study provides empirical evidence on the importance of

having chartered accountants’corporate boards, as well as competentaudit committees involved in ensuring

high compliance with IFRS. The findings also provide valuable information for professional accounting

organizationson the role of their members (charteredaccountants) in the effectiveness of IFRS compliance.

Originality/value –This study complementsand updates prior studies on IFRS compliancewith findings

from Africa, a region that has been neglected in the literature. It provides empirical evidence on the

importanceof chartered accountants sitting on corporateboards in ensuring high compliancewith IFRS.

Keywords Africa, IFRS, Compliance, Stakeholder salience

Paper type Research paper

1. Introduction

The high speed of accounting harmonization makes International Financial Reporting

Standards (IFRS) an unstoppablephenomenon, yet concerns have been raised as to whether

countries’claims of IFRS adoption has being translated accurately into their financial

statements (Ball,2016;Nobes,2013, 2011).

Based on positive accounting theory (Wattsand Zimmerman, 1986), prior studies by Al-

Mutawaa and Hewaidy (2010),Al-Shammari et al. (2008),Alsaeed (2006) and Karim and

Ahmed (2005) have provided evidence of the relationship between firm characteristics and

compliance level. However, these studies ignore the fact that companies can be forced to

adopt IFRS, but its compliance rests in the hands of management who act according to the

directions of the stakeholders involved. We argue that compliance with IFRS at the firm

Determinants

of IFRS

compliance

573

Received20 September 2018

Revised24 November 2018

15December 2018

Accepted15 January 2019

InternationalJournal of

Accounting& Information

Management

Vol.27 No. 4, 2019

pp. 573-599

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-09-2018-0110

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

level is more related to how stakeholders “influence companies”reporting activities than

firm-specific characteristics. This connection is highly relevant in African countries where

the stock market is not efficient to reflect external reporting.Hence, only some stakeholders

may be interested in the company’s accounting practices because of power, legitimacy or

urgency.

Africa provides unique settingsand motivation for this research because of the following

features. It is the host of emerging countries that have been beset by low compliance with

global standards (Word Bank ROSC, 2019;Nobes, 2011) given its weak institutional and

enforcement framework (Bova and Perera, 2012). Also, Africa is mostly neglected in prior

research. Essentially, becauseof its low economic growth, the stock market is not central to

the development ofmost African countries (Nnadi and Soobaroyen, 2015).

As argued by Gordon et al. (2012) and Nnadi and Soobaroyen (2015), companies in

developing economies have different ownership, financing and governance structure

compared to those in developed ones (LaPortaet al.,1999). Contrary to companies in Europe,

the Americas and other partsof the world where ownership is dispersed among many active

minority shareholders, ownership in most African companies is dominated by blocks and

internal holdings. The few external holders are not active participants on the exchanges.

African firms heavily depend on finance outside stock exchanges and are more likely to

respond to factors outside the capitalmarket (Ntim, 2013). This feature contrasts with most

companies outside Africa,which usually secure funding on stock exchanges.

Consequently, there can be heterogeneity in compliance with IFRS. Thus, these features

allow us to answer the distinct question: What are the drivers of IFRS compliance outside

the capital market theories?We argue that because most African companies’source finance

outside the capital market, their level of compliance and associated factors will differ from

prior studies on Europe, America and Asia. Thus, African companies will not necessarily

comply with IFRS fordirect benefit in the capital, as opined in existing literature.

Another point of difference in our study is the incorporation of adoption timing. The

differences in adoption years allowus to examine the impact of years of IFRS experience on

the level of compliance. Arguably, how long a country has been using IFRS is likely to

impact compliance level; for example, the longer the years, the higher the compliance level.

Prior studies have not consideredit despite this strong relationship.

To achieve our objective of examining determinants of IFRS compliance outside the

capital market theories, we useda sample of 205 companies across 13 Africancountries. We

also established the relationship between stakeholders’attributes and a firm’s compliance

with IFRS through the stakeholder salience theory. In this study, we defined IFRS-adopted

countries as countries that mandatorily require all listed companies to report per IFRS as

issued by IASB.

The average compliance score among the companies over the period was 70.94 per cent

(73.09 per cent), with a minimum score of 58.59 per cent (62.86 per cent) and maximum of

83.55 per cent (85.61 per cent). Our results show that there is a significant positive

association between audit committee competence (ACC) and compliance, as well as among

chartered accountants on boards (AOB). On the contrary, there is an inverse relationship

between ownership concentration(OWN) and compliance level.

These findings provide incremental contributions and depart from prior literature in

three ways. First, the study has incorporatedthe aspect of harmonization over time, which is

lacking in prior studies. Thus, the study used panel data instead of single-year data.

Arguably, compliance disclosure increases over time (Hassan et al., 2006;Peng et al.,2008).

Hence the three-year period analyzes provide an original contribution on how developing

countries are growing with IFRS, which has been a persistant question from policymakers

IJAIM

27,4

574