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The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence

Posted: 4 Jan 2010 Last revised: 7 Sep 2012

Jeong-Bon Kim

University of Waterloo

Xiaohong Liu

The University of Hong Kong

Liu Zheng

The University of Hong Kong - Faculty of Business and Economics

Date Written: March 31, 2012

Abstract

This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fees. We first build an analytical audit fee model to analyze the impact on audit fees of the change in both audit complexity and financial reporting quality brought about by IFRS adoption. We then test the model’s predictions using audit fee data from European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fees. We also find that the IFRS-related audit fee premium increases with the increase in audit complexity brought about by IFRS adoption, and decreases with the improvement in financial reporting quality arising from IFRS adoption. Finally, we find some evidence that the IFRS-related audit fee premium is lower in countries with stronger legal regimes. Our results are robust to a variety of sensitivity checks.

Keywords: IFRS adoption, audit fees, audit complexity, reporting quality, legal regime

JEL Classification: M41, M49, M44

Suggested Citation

Kim, Jeong-Bon and Liu, Xiaohong and Zheng, Liu, The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence (March 31, 2012). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1530776 or http://dx.doi.org/10.2139/ssrn.1530776

Jeong-Bon Kim

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
1-519-888-4567 (Phone)
1-519-888-7562 (Fax)

Xiaohong Liu (Contact Author)

The University of Hong Kong ( email )

School of Business
The University of Hong Kong
Hong Kong

Liu Zheng

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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