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«Doi:10.11640/tjar.3.2013.01 Online First Version Some Observations on Research on the Benefits to Nations of Adopting IFRS Philip Brown Australian ...»

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Corporate governance is another confounding factor. Corporate governance at country and firm levels influences many decisions such as the firm’s disclosure policy, its financial policy, the quality of its accounting numbers, and its choice of auditor; and furthermore, corporate governance influences the properties of analysts’ forecasts, as well as the firm’s cost of capital (Brown, Beekes and Verhoeven (2011)). While those who research corporate governance also have major hurdles to face, such as how to accommodate regulation and enforcement, we can expect the two literatures—on corporate governance and on financial accounting standards—to be more closely tied in the years ahead.

5.2. Enforcement

Nobes (2013), in an update of his 2006 paper in the same journal, examined several issues that explain systematic differences in the way IFRS are applied across countries. Among them are different national implementations of IFRS; variations in language; 17 and optional treatments permitted under IFRS that allow previous cross-country differences in usage to continue after IFRS have been adopted. Beyond these national differences are differences in a firm’s level of compliance with the standards that have been promulgated.

An effective, independent audit function plays a key role in establishing the credibility and reliability of accounting reports, and in attesting to the correctness of the statement that a company’s financial statements “comply with IFRS”. Auditors with a high level of skill and expertise, who are independent, are crucial to guiding their clients in the correct interpretation and implementation of IFRS. “Auditing the auditors” is likewise important, to ensure they fulfil their tasks. We should observe that there have been major developments in international auditing standards in recent years and they may need to be accommodated in our research designs.

Second, there is a demand for effective compliance monitoring and enforcement. In one study based on more than 100,000 firm-year observations drawn from 32 countries between 2000 and 2006, Cai, Rahman and Courtenay (2008) found that the extent of earnings management was declining over time and that it was less prevalent in countries with a stronger enforcement process. In another large cross-country study, Houqe, van Zijl, Dunstan and Karim (2012) found earnings quality had improved in countries with stronger investor 17 McGregor (2012) has commented: “I recall one member of an IASC delegation, after complaining about a proposed wording, commenting that their delegation is not too concerned ‘because they will fix it in the translation’. Although said in jest, this highlights the forces that were at play in the early years of international standard setting.” (p. 226).

protection, including enforcement, after they had adopted IFRS. They extracted country-level ratings from the 2008 edition of The Financial Development Report of the World Economic Forum and their measures covered the enforcement of securities law and accounting standards, judicial independence, and the protection of the rights of minority shareholders.

Their sample comprised more than 100,000 firm-year observations from 46 countries between 1998 and 2007.

There is a disconcerting inconsistency between the original aims of those who led the development of international accounting standards in the early days18 and the finding that the benefits reported to have followed the adoption of IFRS have not extended to “low enforcement countries”. We could take a long term view and implicitly reject the short horizon used in so many studies to measure benefits; or we could believe either that the “founding fathers” of international accounting standards worked on a false premise, or that those who committed countries to adopting international standards “got it all wrong”.

Another possibility is that studies have been hampered by noisy measures of the extent of a country’s enforcement of accounting standards. Perhaps better measures, focused on enforcement of accounting standards in particular rather than on enforcement of the law more generally, could be developed. That question was taken up by Brown, Preiato and Tarca (2013), who developed separate measures of (1) the “quality” of public company audits and (2) the degree of accounting enforcement activity by regulators in 51 countries. In a second paper (Preiato, Brown and Tarca (2013)) they used the accuracy of analysts’ consensus earnings forecasts, and disagreement among analysts with respect to their earnings forecasts, to compare the reliability of their proxies with five other enforcement proxies used in the accounting research literature. Preiato, Brown and Tarca concluded that their more focused measures may be useful “when seeking to distinguish between countries according to the strength of their enforcement of accounting requirements” (Abstract).

5.3. Learning

Learning, manifest in progressive improvement over time, is a common finding. To illustrate, Carlin, Finch and Ford (2007) reported that, initially, there was substantial non-compliance in the early post-IFRS reports of some large Australian listed companies. When faced by complicated change in the environment, people do not fully adjust their behaviour overnight.

With respect to IFRS-adoption, standard setters, companies and those who give guidance to them, auditors, shareholders, security analysts and other users of financial statements, and regulators, can all take a significant amount of time to adapt to the new standards, where the amount of time would depend on the nature and extent of the difference between “previousWarren McGregor, who for 10 years was a member of the IASB and for the previous 17 years was a staff member of the IASC, puts it this way: “Notwithstanding the IASC’s objective, in the early years its role became one of developing standards for countries that either did not have a capacity to develop their own national standards or were in the formative stages of developing such a capacity” (McGregor (2012), p. 226).





GAAP” and IFRS, and the extent of training and technical support available to those affected.19 So another improvement would be to model learning over time by those who are involved with IFRS.

It will not be easy to allow for learning. Accounting standards themselves are not static: new standards are being introduced and existing standards revised frequently. Researchers, especially users of panel data, would do well to accommodate the standard setters’ “shocks” to IFRS and the process of subsequent learning by affected parties. Choosing the most appropriate time period to use when estimating the benefits from adopting IFRS involves a difficult trade-off: between one long enough to allow the effects to percolate through the system but short enough to exclude confounding factors. It reminds me of the choice of estimation period when fitting the Market Model to historical data: the longer the time period, the greater the number of data points and, other things equal, the greater the precision with which the coefficients are estimated. However, the longer the time period the more likely it is that other things are not equal, and that the true values of coefficients in the Market Model have changed. The choices have similarities although the choice of the optimal estimation period when modelling learning about a new standard is more complicated because researchers prefer to gain the first mover advantage. They may lose that advantage if they wait longer for the changes to take effect.

While others have also commented on the likelihood that short horizon studies may understate the benefits of adopting a new set of accounting standards, for example Loyeung, Matolcsy, Weber and Wells (2011), I am aware of only one working paper (Brown, Seow and Tarca (2013)) that attempts to model learning explicitly; and the test for learning in that paper is based on a single attribute, namely transparency as revealed in the timeliness of price discovery.20 We found, for a sample of mandatory IFRS adopters in France, Italy and Spain (countries with more to learn) and in Australia, Sweden and the UK (countries with relatively less to learn), evidence over the period 2002-2010 that firms did become progressively more transparent following IFRS adoption. We also found that companies which, before the changeover from local GAAP to IFRS, appeared to have more to learn were taking longer.

However, this paper is only a first step in trying to understand a highly complex process.

5.4. Scope of questions investigated

Many of the potential benefits from adopting IFRS are still to be researched. Examples are the influence of IFRS on the depth of professional skills, accounting education, labour market mobility, business opportunities for financial institutions and professional accounting firms, and better outcomes resulting from improved compliance monitoring and enforcement that 19 Learning in organizations depends on a variety of factors, for example “organizational ‘forgetting,’ employee turnover, transfer of knowledge from other products and other organizations, and economies of scale” (Argote and Epple (1990)).

20 “Timeliness of price discovery” is used as defined by Beekes and Brown (2007): “Price discovery is the process whereby value-relevant, private information becomes impounded or reflected in a stock's publicly-observable market price.

The timeliness of price discovery refers to how quickly that process takes effect” (Abstract).

have gone hand-in-hand with the adoption of IFRS. Again, to the best of my knowledge there has been little progress on some of these issues since I first raised them about three years ago.

Studies of the benefits of IFRS tend to be biased towards large companies because electronic databases do not cover the whole economy. While that sample bias is not without its methodological advantages, because there is less concern about the “quality” of corporate governance and compliance rates are higher among larger firms, it does have a disadvantage in that we know relatively little of the costs and benefits of IFRS usage by the millions of smaller listed and unlisted companies, and public sector organisations, that have adopted IFRS in some form.

The fact that only some firms chose to adopt IFRS when they could do so is a simple reminder that not all firms should be expected to benefit to the same extent from a change in accounting standards, such as the adoption of IFRS. Consistent with this observation and based on the experience of voluntary adopters in Germany, Christensen, Lee and Walker (2007) predicted and found evidence of cross-sectional variation in equity market returns consistent with their predictions for UK firms that were required to adopt IFRS in 2005. Taking a different line of approach to the same issue of diversity in the effects on companies of a switch to IFRS, Brüggemann, Hitz and Sellhorn (2013) argued in a review paper that, consistent with the literature on accounting policy choice, IFRS can materially affect contractual outcomes, which presents a number of research opportunities. Apart from these potential lines of further enquiry, we should note that developments in information systems technology, including the growing use of XBRL, have undoubtedly reduced the direct cost of producing reports under multiple reporting regimes and, as well, the cost of translating financial statements from one reporting regime to another.

Finally, what about the influence of historical and socio-economic factors? Everyone seems to agree that they play a role in determining the extent of the costs and benefits from adopting international accounting standards, but how big is that role,21 what form does it take, and how does it affect the time taken for any benefits to materialise?

6. Concluding remarks

Many benefits from adopting IFRS have been claimed, especially in the form of greater comparability and higher “quality” accounting numbers, a richer information environment for financial analysts, easier access by companies to international sources of finance and by financial institutions to international investment opportunities, deeper and more efficient public equity markets, and a lower cost of capital. The wide range of these studies presents us with two challenges: first, to reconcile conflicting findings, since the benefits are often 21A number of studies have related aspects of culture to the adoption of international accounting standards, for example McKinnon and Harrison (1985), Ding, Jeanjean and Stolowy (2005), Askary, Yazdifar and Askarany (2008), Archambault and Archambault (2009), and Clements, Neill and Stovall (2010).

disputed; and second, to expand the scope of our research to cover other important yet neglected areas.

That said, we must be aware that the accounting world has moved on: IFRS continue to spread among sovereign nations, which itself is evidence that influential and hopefully knowledgeable decision-makers see a net benefit. It is likely that the growth in specialised IFRS studies has peaked and that, in the future, IFRS studies will be focused more narrowly on particular accounting standards and thereby become more closely tied into the wider financial accounting literature. The research designs of IFRS studies should also evolve to accommodate, explicitly, simultaneous developments in corporate governance and regulatory oversight.

References AHMED, A. S., NEEL, M. and WANG, E. 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research forthcoming.

ALBU, N. and ALBU, C. N. 2012. International Financial Reporting Standards in an emerging economy:

Lessons from Romania. Australian Accounting Review 63 (2): 341-352.

AMIHUD, Y. 2002. Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets 5 (1): 31-56.

ARCHAMBAULT, J. J. and ARCHAMBAULT, M. E. 2009. An analysis of social factors influencing the adoption of International Financial Reporting Standards. Journal for Global Business Advancement 2 (1-2): 38ARGOTE, L. and EPPLE, D. 1990. Learning curves in manufacturing. Science 247 (4945): 920-924.

ASKARY, S., YAZDIFAR, H. and ASKARANY, D. 2008. Culture and accounting practices in Turkey. International Journal of Accounting, Auditing and Performance Evaluation 5 (1): 66-88.

AUSSENEGG, W., INWINKL, P. and SCHNEIDER, G. T. 2008. Earnings management and local vs. international



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