The impact of International Financial Reporting Standards (IFRS) adoption and IFRS renouncement on audit fees: The case of Switzerland

• Date: 01 November 2018
• DOI: http://doi.org/10.1111/ijau.12139
• Author: Bernard Raffournier,Alain Schatt
• Published date: 01 November 2018

SPECIAL ISSUE ARTICLES

The impact of International Financial Reporting Standards

(IFRS) adoption and IFRS renouncement on audit fees:

The case of Switzerland

Bernard Raffournier

1

|Alain Schatt

2

1

GSEM, University of Geneva, Geneva,

Switzerland

2

HEC Lausanne, University of Lausanne,

Lausanne, Switzerland

Correspondence

Alain Schatt, HEC Lausanne, University of

Lausanne, 1015 Lausanne, Vaud, Switzerland.

Email: alain.schatt@unil.ch

Several studies have shown that International Financial Reporting Standards (IFRS)

adoption is associated with higher audit fees. We provide additional evidence on this

issue by analyzing the Swiss context, which is particularly suitable for two reasons.

First, it allows a better estimation of the impact of IFRS adoption on audit fees

because the choice of accounting standards (IFRS, US generally accepted accounting

principles [GAAPs] or Swiss GAAPs) is left to companies. Accordingly, comparisons

can be made within the same institutional context. Second, it is also possible to mea-

sure the impact of IFRS renouncement on audit fees because Swiss companies follow-

ing IFRS can switch back to Swiss GAAPs at any time. Based on a hand‐collected

database including 1,651 firm‐year observations over 15 years, we show that, with

the exception of very large companies, firms using IFRS pay higher audit fees. We also

find that firms switching to IFRS incur additional audit fees in the year preceding the

change. By contrast, the return to local GAAPs does not result in lower audit fees,

which confirms the stickiness of audit fees reported by several prior studies.

KEYWORDS

Audit fees, IFRS adoption, IFRS renouncement, Swiss GAAP

1|INTRODUCTION

Since the mandatory adoption of International Financial Reporting

Standards (IFRS) in the European Union (EU) in 2005, many empirical

studies have tried to identify the benefits and costs of this change

for companies and investors. The main conclusion that can be drawn

from these studies is that some benefits have resulted from IFRS

adoption, especially in terms of the transparency and comparability

of financial statements, even though these benefits seem highly vari-

able from one company to another and among countries (Ahmed,

Chalmers, & Khlif, 2013; Brown, 2011; Brüggemann, Hitz, & Thorsten,

2011; Institute of Chartered Accountants in England and Wales

[ICAEW], 2015; Raffournier, 2014).

Regarding the costs of IFRS adoption, however, the evidence is

limited. According to a report by the ICAEW (2007), the cost of prepar-

ing IFRS consolidated financial statements represents 0.05–0.31% of

turnover in the adoption year and 0.008–0.06% of turnover in the

following years. Small companies bear proportionately greater costs

due to the lack of internal resources that leads them to rely upon exter-

nal advice to implement IFRS. Concerning the impact on audit cost, 67%

of auditors recognize that they charge additional fees for the audit of

the transition financial statements and the restatement of prior periods.

Thus, it is not surprising that preparers of financial statements rank audit

cost as one of the largest direct costs related to IFRS adoption.

In the academic literature, some studies have already analyzed the

impact of IFRS adoption on audit fees. Griffin, Lont, and Sun (2009)

document an increase in audit fees over the period 2002–2006 in

New Zealand. After considering several possible events that might

explain this trend, the authors conclude that higher audit fees are

related to IFRS adoption. Higgins, Lont, and Scott (2016) extend the

analysis to a longer period and show that the increase is persistent

and not limited to the adoption year. Similar results have been

obtained in Australia (De George, Ferguson, & Spear, 2013), Jordan

(Abu Risheh & Al‐Saeed, 2014), and China (Lin & Yen, 2016).

Received: 2 September 2017 Revised: 20 July 2018 Accepted: 24 July 2018

DOI: 10.1111/ijau.12139

Int J Audit. 2018;22:345–359. © 2018 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/ijau 345