IFRS Consequences on Accounting Conservatism within Europe

Abstract:     
We investigate the effects of mandatory IFRS adoption in the EU on accounting conservatism, an essential feature of earnings quality, and the way large audit firms (Big 4) interact with it. We use an extensive database of more than 5,000 IFRS adopters from 22 EU countries, observed over 2001-2008. The main findings are that: 1) conditional conservatism, as proxied by the asymmetric timeliness of bad vs. good news, has decreased under IFRS, notably among Big 4 audits; 2) the country-level magnitude of this IFRS effect is positively associated with the distance between IFRS and pre-existing local GAAP; 3) Big 4 auditors are associated with more aggressive earnings under IFRS, with simultaneous increase (decrease) in good (bad) news timeliness; 4) the cross-country variability in timeliness metrics is significantly lower among Big 4 vs. non-Big 4 audits, whatever the reporting regime (local GAAP or IFRS); and 5) unconditional conservatism is higher under IFRS in the presence of a Big 4 auditor. Taken together, these findings suggest that the EU-wide mandatory IFRS adoption has hampered accounting quality, and then strongly challenge the one size fits all principle.

Keywords: Mandatory IFRS adoption, Earnings quality, Conservatism, Big 4 audits, European Union

JEL Classification: M48, M41, M42

working papers series