IFRS adoption/reporting and auditor fees: the conditional effect of audit firm size and tenure

• DOI: https://doi.org/10.1108/IJAIM-09-2019-0107
• Pages: 639-666
• Published date: 28 April 2020
• Date: 28 April 2020
• Author: Medhat N. El Guindy,Nadia Sbei Trabelsi
• Subject Matter: Accounting/accountancy,Accounting & Finance

IFRS adoption/reporting and

auditor fees: the conditional ef‌fect

of audit f‌irm size and tenure

Medhat N. El Guindy

Department of Accounting and Finance, American University in Dubai,

Dubai, United Arab Emirates and Department of Accounting,

Tanta University, Tanta, Egypt, and

Nadia Sbei Trabelsi

Department of Accounting and Finance, American University in Dubai,

Dubai, United Arab Emirates

Abstract

Purpose –This paper aims to investigatethe impact of International Financial Reporting Standards(IFRS)

adoption on audit and non-audit fees in the UK setting. The study investigates whether UK f‌irmsadopting

IFRS for the f‌irst time or reporting under IFRS, in general, are being charged higheraudit and non-audit fees

and whetherthis impact is conditional on audit f‌irm size and tenure.

Design/methodology/approach –Using empirical data for UK listed f‌irms from 2003-2007,the paper

uses a regressionmodel that explains audit and non-audit fees by independentvariables measuring auditors’

and auditees’characteristicsincluding IFRS adoption and reporting. Additionalregressions with interaction

terms were performed to testthe hypothetical conditional impact of auditor size and audit f‌irm tenureon the

above-mentionedassociation.

Findings –Audit and non-audit fees increasesignif‌icantly for companies adopting IFRS for the f‌irst time

and this increase is persistent during later years.In addition, results suggest that both Big four and non-Big

four auditors charge higher audit and non-auditfees to their clients adopting or reporting under IFRS in a

similar manner. Furthermore,f‌indings indicate that audit f‌irms increase auditand non-audit fees for old and

new clientsusing IFRS which suggests no low-balling effect is detected.

Research limitations/implications –Results reported in this study provide insights to regulators in

jurisdictions similar to the UK regarding the cost of IFRS adoption which includes higher audit and non-audit fees

imposedbybothBigfourandnon-Bigfourauditf‌irms. In addition, this study argues, to some extent, against the

notion that auditors may charge lower fees in the early years of the audit engagement to win new audit clients.

Originality/value –To the best of the knowledge, the f‌indings are unique at two levels.First, the paper

provides evidence on the cost of using IFRS in the UK jurisdiction which was not explored by previous

research. Second,the paper investigates the potential conditionaleffect of auditor size and audit tenure on the

associationbetween IFRS adoption and auditors’fees.

Keywords IFRS, Audit fees, Non-audit fees, Audit f‌irm tenure, Low-balling, IFRS adoption,

Audit f‌irm size

Paper type Research paper

1. Introduction

International Financial Reporting Standards (IFRS) aim at developing a single set of high-

quality global accounting standards that bring transparency, accountability and eff‌iciency

to f‌inancial markets around the world. IFRS are now mandatory in more than 140

jurisdictions, with many others permitting their use (IFRS, 2019). The adoption of IFRS in

IFRS adoption/

reporting and

auditor fees

639

Received15 September 2019

Revised8 January 2020

4 February2020

17March 2020

Accepted26 March 2020

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 4, 2020

pp. 639-666

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-09-2019-0107

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

https://www.emerald.com/insight/1834-7649.htm

European countries (EC16/06/2002)has raised a lot of concerns for accounting and auditing

research regarding the potential costs and benef‌its of such adoption. For instance, several

studies tested the impact of IFRS adoption on f‌inancial reporting quality (Isaboke, 2019;

Capkun and Collins, 2018;Bassemir and Novotny-Farkas, 2018;Dayanandan, 2016;El

Guindy, 2014;Ahmed et al.,2013;Liu et al.,2011;Jeanjean and Stolowy, 2008;Soderstrom

and Sun, 2007) while other studies tested the cost of IFRSadoption (Christensen et al., 2007;

Daske, 2006;Daske et al.,2008;De George et al., 2012;Lepone and Wong, 2018). This study

adds to this body of knowledge throughtesting the impact of such a transition on audit and

non-audit fees in the UK as one of the main costsof IFRS adoption.

The purpose of this paper is to empiricallytest the impact of using IFRS on each of audit

and non-audit fees in the UK setting. IFRS adoption in the UK provides an interesting

setting for our empiricalanalysis for the following reasons. First, IFRS adoption in the UK is

mandatory for group f‌irms listed in the London stock exchange’smainmarketfor

accounting periods starting January 1, 2005 and voluntary for other f‌irms at the same date.

However, it became mandatory for f‌irms listed in the alternative investment market (AIM)

since January 1, 2007. This setting allows for parallel reporting under the two sets of

accounting standards for the periods from 2005 to 2007 where some f‌irms are reporting

under UK Generally Accepted Accounting Principles (GAAP) and other f‌irms switched to

IFRS. Consequently, it is feasible to test the impact of IFRS in the year of adoption and in

subsequent periods in comparison to localGAAP. Second, non-audit services in the UK are

not only permitted but also f‌irms are required to disclose non-audit fees data in details

unlike many other countries where non-audit services are prohibited or disclosure is not

mandatory. Therefore, it became possible to test whether using IFRS might lead to some

additional non-audit services compared to UK GAAP. Finally, the UK setting provides a

setting of a common lawcountry similar to the USA where results can be used by regulators

to assess one of the main costsof IFRS adoption.

Prior literature provides severalempirical studies analyzing the cost of IFRS adoption in

different countriessuch as New Zealand (Griff‌inet al., 2009;Houqe, 2017), Malaysia(Yaacob

and Che-Ahmad, 2012), China (Lin and Yen, 2016;Shan et al., 2016), Finland (Vieru and

Schadewitz, 2010), Jordan (Abu Risheh and Al-Saeed, 2014), Korea (Jung et al.,2016) and

Australia (De George et al.,2012;Morris et al.,2013). This study has several motivations.

First, most prior studies document empirical evidence of increased audit fees in the year of

IFRS adoption. However, to the best of our knowledge, none of the previous studies tested

the UK setting as one of the importantcommon law countries with strong law enforcement.

In addition, most priorstudies tested audit fees before and after IFRS adoption. However,we

argue whether this increase in fees is persistent or only evident in the f‌irst year. Therefore,

we conduct our tests using two IFRS variables,namely, IFRS adoption, which indicates the

f‌irst year of using IFRS only and IFRS reporting, which includes all accounting periods in

which the company is using IFRSfor f‌inancial reporting.

Second, Brochet et al. (2013) argue that despite accounting standards in the UK had

already been very similar to IFRS prior to the mandatoryadoption in 2005, they investigate

the improvement in information comparability following IFRS adoption. They found that

the mandatory adoption of IFRS reduces insiders’abnormal returns following insiders’

equity purchases. Therefore, the evidence provided by Brochet et al. (2013) suggests that

even f‌irms having domestic standards similar to IFRS can benef‌it from IFRS adoption.

However, this raises concerns regarding the cost of IFRS adoption in such countries and

whether auditors will charge higher fees because of such adoption. Houqe (2018) considers

that accounting researchon IFRS adoption has examined much more the quality of f‌inancial

IJAIM

28,4

640