The impact of audit committee financial expertise on de facto use of IFRS: does external auditor’s size matter?

• Published date: 03 September 2020
• Pages: 1243-1263
• DOI: https://doi.org/10.1108/CG-12-2019-0390
• Date: 03 September 2020
• Author: Ahmed Atef Oussii,Mohamed Faker Klibi
• Subject Matter: Strategy,Corporate governance

The impact of audit committee financial

expertise on de facto use of IFRS: does

external auditor’s size matter?

Ahmed Atef Oussii and Mohamed Faker Klibi

Abstract

Purpose –De facto use of International Financial Reporting Standards (IFRS) is a particular form of

voluntary compliance with International Accounting Standards(IAS). It is practiced when an enterprise

uses a number (and not all) of international standards as a complement to overcome the unachieved

nature of local generallyaccepted accounting principles. Thepurpose of this paper is to analyze, at first,

whether the financialexpertise of Tunisian audit committee’s members is associatedwith de facto use of

IFRS. Second, it explores to what extent andin what direction this association evolves when the factor

auditor’ssize is introduced as a moderator variable.

Design/methodology/approach –Data spanning a seven-year period (2012–2018) was hand-

collected for a sample of 497 firm-year observations. Further, regression analysis was used to test the

study’shypothesis.

Findings –Findings show that the proportion of financial experts who sit on the audit committee is

positively associated with the de facto use of IFRS. Besides, the association between audit committee

members’ financial expertise and the voluntary use of IFRS is more pronounced when the company is

auditedby at leastone BIG 4 audit firm.

Practical implications –The paper’s findings have implications for regulatory bodies and standards

setters who are concerned with the functioning of the audit committee, especially when it comes to

enhancing the quality of the financial statements. The results also shed light on the role of financial

expertson the audit committee and Big 4 auditorsto enforce the de facto use of IFRS.

Originality/value –The findings of this study contain an importantmessage for the drift toward national

de jure convergencewith IAS.

Keywords Developing economies, Audit committee financial expertise, De facto use of IFRS,

External auditor’s size

Paper type Research paper

1. Introduction

In recent years, the accounting standardization process has received a great deal of

attention from scholars and accounting professionals. While the use of International

Financial Reporting Standards (IFRS) is not yet authorized by the Tunisian standard setters,

many listed companies have chosento prepare their financial statements under a mixture of

local generally accepted accountingprinciples (GAAPs) and international standards.

The analysis of the annual reports of Tunisian listed companies shows that they use certain

International Accounting Standards (IAS) as the local standards do not seem to fully satisfy

the normative needs of those companies (Klibi, 2016). Arguments for this practice are well

documented. Ben Slama and Klibi (2017) argue that Tunisian GAAPs are incomplete and

not updated compared to IFRS. This unachieved harmonization has pushed many listed

companies to partly comply with some IFRS. This accounting practice could be part of a

Ahmed Atef Oussii is based

at IHEC Carthage,

University of Carthage,

Tunis, Tunisia.

Mohamed Faker Klibi is

based at the Laboratoire de

recherche LARIME –

ESSECT, E

´cole Supe

´rieure

des Sciences

E

´conomiques et

Commerciales de Tunis,

University of Tunis,

Montfleury, Tunisia.

Received 27 December 2019

Revised 21 May 2020

12 August 2020

Accepted 13 August 2020

The authors would like to thank

particularly Professor Gabriel

Eweje, Dr Yan Wang and the

two anonymous reviewers for

advice and guidance

throughout the revision

process.

DOI 10.1108/CG-12-2019-0390 VOL. 20 NO. 7 2020, pp. 1243-1263, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1243

strategy adopted by Tunisian companies (especially listed ones) that would allow

“conformity with the prevailing national reporting system while satisfying the requirement of

international agencies for globallyrecognized financial reporting” (Khlif et al., 2020, p. 24).

In this paper, these practices are qualified as de facto use of IFRS, which are a particular

form of voluntary use of international standards. We postulate that these practices are

intended to improve the quality of publishedfinancial information.

We argue this premise by three main reasons. First, and following the assumption of

economic development theories and the findings of past research (Ben Othman and

Kossentini, 2015;Abd-Elsalem and Weetman, 2003), we posit that the voluntary use of the

IAS/IFRS positively influences the financial reporting quality and lead to more transparency

of financial reporting by listed companies. Second, in Tunisia, the voluntary application of

some international standards is a practice that is not done “secretly.” On the contrary, listed

companies state in their annual report that they use international standards that have no

equivalent in Tunisia. Third, Klibi (2016) shows that a majority of Tunisian accounting

practitioners believe that the de facto use of IFRS is likely to improve the quality of financial

information.

This paper deals with a central question: What drives some Tunisian listed companies to

voluntarily and partially apply IFRS? Our preliminary analysis of the regulatory texts in

Tunisia (especially the Tunisian Financial Safety Act [FSA], 2005) shows that there are two

governance mechanisms whose role is related to the accounting practice of listed

companies. First, there are the audit committees whose role is to guarantee the reliability of

the financial statements. This prerogative means that the members of these committees

must have the necessary financial expertise to achieve the goal they have been given.

Second, there are the external auditors whose role is to certify the reliability of the financial

statements. In the specific case of listed companies, these two governance mechanisms

operate in a complementary manner. Indeed, Tunisian law gives audit committees the

prerogative to propose the appointment of an external auditor. Thiscomplementarity, which

is not specific to Tunisian regulations, suggests that there is an association between audit

committees’ characteristics and the partial and voluntary application of IFRS by listed

entities. Such an association could be reinforced by the characteristics of the external

auditor.

Market regulators have increasingly recognized the pivotal role of the audit committee in

ensuring the quality of financial reporting and auditing process (Ahmadi and Bouri, 2016;

Lin et al.,2008;Cohen et al., 2008;DeZoort et al.,2002). A growing stream of research has

investigated the impact of audit committee composition on financial reporting quality and

external audit process (Alzeban, 2020). While past literature suggests that audit committee

financial expertise is the primary attribute that contributes to enhanced financial reporting

(Mnif Sellami and Borgi Fendri, 2017;Garcia Sanchez et al.,2012;Bepari and Mollik, 2015;

Carcello et al., 2006;Dhaliwal et al., 2010;Krishnan and Visvanathan, 2008;Bedard et al.,

2004), limited research has investigated the association between audit committee’s

financial expertise and financialreporting quality in emerging countries. As such, we extend

this research to analyze the importance of audit committee financial experts within the

Tunisian context. Therefore, the primary objective of this study is to investigate whether the

financial expertise of the audit committee is likely to reinforce the de facto use of IFRS.

At first glance, this association may seem obvious. However, the expected results could be

counter-intuitive for two reasons. First, although a substantial amount of recent audit

committee research has investigated the association between audit committee financial

expertise and the quality of financial reporting by firms (Gebrayel et al.,2018;Abad and

Bravo, 2018;Endrawes et al.,2018;Oussii and Boulila Taktak, 2018;Sultana et al.,2015;

Abernathy et al., 2014), findings remain inconclusive. Second, in the Tunisian setting, the

audit committee (AC) oversight role of the financial reporting process could be perceived

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