Diffusion theory, transnational antecedents and International Standards on Auditing adoption around the world

• Published date: 01 April 2022
• Author: Ibrahim K. Elmghaamez,Mohamed H. Elmagrhi
• Date: 01 April 2022
• DOI: http://doi.org/10.1111/ijau.12273

ORIGINAL ARTICLE

Diffusion theory, transnational antecedents and International

Standards on Auditing adoption around the world

Ibrahim K. Elmghaamez

1,2

| Mohamed H. Elmagrhi

3

1

School of Economics, Finance and

Accounting, Coventry Business School,

Coventry University, Coventry, UK

2

Faculty of Economics and Political Sciences,

Accounting Department, University of Tripoli,

Libya

3

Hawkes Centre for Empirical Finance,

Department of Accounting and Finance,

School of Management, Swansea University,

Swansea, UK

Correspondence

Ibrahim K. Elmghaamez, School of Economics,

Finance and Accounting, Coventry Business

School, Coventry University, Coventry CV1

5ED, UK.

Email: ibrahim.elmghaamez@coventry.ac.uk

This paper investigates the impact of four key transnational factors (i.e., cultural, edu-

cational, legal and political factors) on the diffusion and early adoption of Interna-

tional Standards on Auditing (ISAs). Using data for 162 countries over 1995–2014

(i.e., 3240 observations) and drawing on distinctive insights from diffusion theory, we

found that common law countries tend to adopt ISAs faster than civil law countries.

Our findings also show that vigorous legal enforcement and shareholder protection

regimes promote the early adoption of ISAs, whereas robust judicial efficiency sys-

tems constrain the early adoption of ISAs. In addition, our results show that higher lit-

eracy rates and educational attainment simulate the earlier diffusion of ISAs. We also

find that higher levels of individualism and uncertainty avoidance, but low levels of

power distance cultural values, boost the early adoption of ISAs. Finally, our results

report that countries with strong political stability and control of corruption tend to

adopt ISAs faster than those with solid government effectiveness.

KEYWORDS

auditing history, auditing standards, cultural dimensions, diffusion theory, educational factors,

legal factors, political factors, regulation

1|INTRODUCTION

Following the recent global financial scandals, international bodies

such as the World Bank and the International Organization of Securi-

ties Commissions have applied significant pressure to encourage many

countries worldwide to adopt the International Standards on Auditing

(ISAs) (Wong, 2004). Specifically, it has been argued that poor national

auditing standards have partially contributed to the recent financial

scandals in many countries worldwide (Haapamäki & Sihvonen, 2019;

Monfardini & von Maravic, 2019). Additionally, the need for adopting

ISAs has recently increased as a result of the rapid growth of financial

markets, as well as the increasing pressure from multinational corpo-

rations and foreign investors to adopt good practices that improve the

accuracy, comparability and reliability of the disclosed information

(Boolaky & Omoteso, 2016; Boolaky & Soobaroyen, 2017; Krishnan &

Zhang, 2019). Further, the adoption of ISAs can bring various eco-

nomic benefits to countries and companies by integrating capital mar-

kets internationally and facilitating the work of accountants and

auditors, hence reducing auditing costs (Zaidi & Huerta, 2014).

Consequently, many countries have adopted ISAs around the world at

different times. For example, and as shown in Appendix A, although

only six countries adopted ISAs in 1995, by 2014, the figure had dra-

matically increased to over 100 countries.

Despite the substantial growth and the increasing importance of

adopting ISAs, there is a surprising lack of studies investigating the

antecedents of ISAs adoption around the world (Boolaky &

O'Leary, 2012; Boolaky & Omoteso, 2016; Boolaky &

Soobaroyen, 2014, 2017; Elmghaamez, 2019). It is important to take a

combination of cultural, legal and political factors into account when

applying insights from institutional theory to explain ISAs adoption.

This is because the behaviour and beliefs of organisations to respond

to such new standards can be affected by their social/cultural and

legal forces (Greve & Argote, 2015). As will be explained further

below, previous studies have mainly investigated some institutional/

markets factors. Their findings may have poor generalisability due to

missing a combination of these crucial factors in their studies. Due to

these limitations, there have been several recent calls to conduct fur-

ther research on issues relating to ISAs adoption (e.g., Coram

Received: 16 March 2020 Revised: 29 November 2021 Accepted: 28 December 2021

DOI: 10.1111/ijau.12273

212 © 2022 John Wiley & Sons Ltd Int J Audit. 2022;26:212–239.wileyonlinelibrary.com/journal/ijau

et al., 2021; Haapamäki & Sihvonen, 2019; Monfardini & von

Maravic, 2019). Therefore, this study directly responds to such calls

by examining the key transnational antecedents of the worldwide dif-

fusion of ISAs. Notably, this research investigates the impact of four

critical transnational antecedents, namely, cultural, educational, legal

and political factors, on the diffusion and early adoption of ISAs

worldwide. This study, therefore, seeks to address the following

research questions empirically:

•Do the legal, political, cultural and educational national anteced-

ents influence the diffusion of ISAs?

•To what extent do the legal, political, cultural and educational

national antecedents influence the early adoption of ISAs?

Theoretically, some prior studies have been descriptive, by not

employing any theoretical framework to explain the diffusion of ISAs

(Fakhfakh et al., 2008; Roussey, 1996), whereas others primarily relied

on insights from institutional theory or Gray cultural theory to explain

the diffusion of ISAs (Boolaky, 2011; Boolaky et al., 2013; Boolaky &

Cooper, 2015; Boolaky & O'Leary, 2011; Boolaky & Omoteso, 2016;

Boolaky & Soobaroyen, 2017). However, and given that the adoption

of accounting innovations can vary among countries based on the

adopter-specific characteristics and the time of adoption

(Rogers, 2003), we rely on the diffusion of innovation (DOI) theory to

develop our hypotheses and interpret our findings. Noticeably, previ-

ous studies have mainly applied DOI to explain the rapid diffusion of

management accounting innovations (Jackson & Lapsley, 2003;

Sisaye & Birnberg, 2010; Tucker & Lowe, 2014) and to illustrate Inter-

national Financial Reporting Standards (IFRS) adoption (Dayyala

et al., 2020; El-Helaly et al., 2020; Elmghaamez et al., 2022). To the

best of our knowledge, very few empirical studies have employed

DOI theory to explain the diffusion and early adoption of ISAs

(Elmghaamez et al., 2020). Further, and following prior studies

(e.g., Boolaky & Cooper, 2015; Boolaky & Soobaroyen, 2017), we also

employ institutional theory to explain the extent to which institutional

factors (i.e., cultural, educational, legal and political transnational ante-

cedents) can impact the adoption of ISAs. We, therefore, integrate

DOI theory with institutional theory to better understand the extent

to which cultural, educational, legal and political transnational ante-

cedents can influence the diffusion and early adoption of ISAs.

Empirically, significant attention has been devoted by scholars to

investigate institutional antecedents that can influence the diffusion

of accounting innovations, including the adoption of corporate gover-

nance codes (Elmghaamez, 2021; Zattoni & Cuomo, 2008), corporate

social responsibility practices (Ntim & Soobaroyen, 2013) and compli-

ance with IFRS (Alon & Dwyer, 2014; de Lima et al., 2018; Houqe,

van Zijl, et al., 2012; Judge et al., 2010). Few studies, however, have

investigated the transnational antecedents of ISAs adoption

(e.g., Boolaky & O'Leary, 2012; Boolaky & Omoteso, 2016; Boolaky &

Soobaroyen, 2017). These few ISAs studies are impaired in that

(i) they have only investigated a small number of institutional legal fac-

tors (i.e., legal origin or investor protection rights) and educational fac-

tors (i.e., educational attainment), and (ii) they have included a small

number of countries in their analysis, and this consequently may limit

the generalisability of their findings (Haapamäki & Sihvonen, 2019).

Further, and despite increasing suggestions that committing to high-

quality standards is more beneficial in achieving long-term goals

(e.g., promoting investors' confidence in the credibility of financial

reports) (Levitt, 1998), most of previous studies have been conducted

over a short period of time (Boolaky & O'Leary, 2012; Boolaky &

Omoteso, 2016; Boolaky & Soobaroyen, 2017). Arguably, these weak-

nesses, together, can impair the current understanding of the extent

to which legal, political, cultural and educational institutional factors

can influence the diffusion and early adoption of ISAs. Therefore, our

study contributes to the extant literature not only by using different

proxies but also by examining the impact of a large number of institu-

tional factors, which have not widely been studied in the previous

auditing literature (i.e., cultural, educational, legal and political factors)

on the diffusion and early adoption of ISAs. Further, our study con-

tributes to the extant literature by using one of the most extensive

data sets to date relating to 162 countries over 20 years (i.e., 3240

country-year observations), by using insights from both institutional

and DOI theories to understand better the influence of these factors

on ISAs adoption.

1

Our findings reveal that countries with English common legal ori-

gin and strong shareholder protection rights tend to adopt ISAs earlier

than those countries with civil law legal systems and weak share-

holder protection rights. Surprisingly, we find that countries with solid

legal enforcement are more prone to adopt ISAs earlier than those

countries with solid judicial efficiency. Similarly, our findings indicate

that countries with strong political stability and control of corruption

tend to adopt ISAs faster than those with substantial government

effectiveness. Our results also show that countries with Anglo-Saxon

culture values (i.e., characterised by high levels of individualism, low

levels of power distance and uncertainty avoidance) tend to adopt

ISAs more quickly than those countries with continental European cul-

tural values (i.e., characterised by high levels of power distance and

uncertainty avoidance and low levels of the individualism culture

values).

The rest of this paper is organised as follows. The following

section provides historical background about the development of ISAs

and discusses the global events that increased the need for adopting

ISAs. The third section reviews the theoretical framework, which

includes insights from DOI and institutional theories. The fourth

section offers a review of the previous empirical literature. The fifth

section outlines the research design and methodology employed in

this study. The sixth section discusses the empirical results and find-

ings obtained from this research. The final section summarises the

study's main conclusion, which is drawn from the empirical evidence.

2|ISAs ADOPTION AND

TRANSNATIONAL FACTORS

ISAs are professional standards issued by the International Auditing

and Assurance Standards Board (IAASB) to enhance transparency and

ELMGHAAMEZ AND ELMAGRHI 213