IFRS Consequences on Accounting Conservatism Within Europe: The Role of Big 4 Auditors

Abstract:     
We investigate the effects of IFRS adoption in the EU on accounting conservatism, a feature of earnings quality and contracting efficiency, and the way large audit firms (Big 4) moderate these effects. 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 for mandatory adopters; 2) the 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) unconditional conservatism is higher under IFRS in the presence of a Big 4 auditor; and 5) mandated IFRS offer a weak contribution to a better comparability of accounting earnings as observed from the timeliness perspective. Taken together, these findings suggest that the EU-wide mandatory IFRS adoption has hampered accounting quality.

Number of Pages in PDF File: 55

Keywords: Mandatory IFRS adoption, Earnings Quality, Conservatism, Big 4 Audits, European Union

JEL Classification: M48, M41, M42

working papers series