Reconsideration of IFRS adoption, and audit fees : evidence from UK private firms

Hsu, Yu-Lin and Chen, Ni-Yun (2023) Reconsideration of IFRS adoption, and audit fees : evidence from UK private firms. The International Journal of Accounting. ISSN 2213-3933 (https://doi.org/10.1142/S1094406024500033)

[thumbnail of Hsu-Chen-IJA-2023-Reconsideration-of-IFRS-adoption-and-audit-fees] Text. Filename: Hsu_Chen_IJA_2023_Reconsideration_of_IFRS_adoption_and_audit_fees.pdf
Accepted Author Manuscript
Restricted to Repository staff only until 25 July 2024.
License: Strathprints license 1.0
Download (1MB) | Request a copy

Abstract

The research problem: This paper examines whether firms’ decision to switch from IFRS to new Generally Accepted Accounting Practice in the UK (New UK GAAP) affects their audit fees. Motivation: New UK GAAP was introduced by the UK regulator to enhance the comparability of financial reports and to reduce high financial reporting costs associated with IFRS. We aim to provide evidence on whether reduced frameworks of International Financial Reporting Standards (IFRS), like the New UK GAAP, may be a more cost-effective option. Furthermore, very few studies analyze the impact of abandoning IFRS on audit fees and they find inconsistent results using public firm data. We aim to extend current literature by providing private firm data. The test hypotheses: H1a: The switch from IFRS to New UK GAAP is not associated with audit fees. H1b: The switch from IFRS to New UK GAAP is associated with audit fees. H2: The association between the switch from IFRS to New UK GAAP and audit fees is different between larger and smaller firms. Target population: Accounting regulators, managers, and auditors. Adopted methodology: Regression analyses, difference-in-differences (DID) analyses, various matching methods for robustness and analyses of firms’ financial reports. Analyses: Using UK private (i.e., non-listed) firm data for the period 2014–2019, we examine the impact of switching from IFRS to New UK GAAP on audit fees. The data for regression and DID analyses were obtained from the FAME database. We also download the financial reports of two firms from Companies House to analyze the differences in their reports before and after the switch to New UK GAAP. Findings: We find that firms’ decision to switch from IFRS to New UK GAAP significantly reduces their audit fees, with larger firms experiencing an additional reduction in their audit fees following the switch. Through examining real examples of firms’ financial reports, we find consistent evidence that firms turning away from IFRS did take advantage of the disclosure exemptions contained within New UK GAAP, resulting in reduced disclosure which may explain the reduced audit fees. Overall, our findings suggest that using full IFRS may still be burdensome for sampled firms that previously voluntarily adopted IFRS. The findings also imply that an accounting standard that is consistent with IFRS but requires less disclosure, such as New UK GAAP or the IFRS for Small and Medium-sized Entities, may be welcomed by practitioners and represent a useful alternative for standard setters.

CORE (COnnecting REpositories)