IFRS Consequences on Accounting Conservatism in Europe: Do Auditor Incentives Matter?

52 Pages Posted: 4 Feb 2011 Last revised: 5 Oct 2015

Charles Piot

Univ. Grenoble Alpes; French National Center for Scientific Research (CNRS) - Centre de Recherches Appliquées à la Gestion (CERAG)

Pascal Dumontier

University of Grenoble; French National Center for Scientific Research (CNRS) - Centre de Recherches Appliquées à la Gestion (CERAG)

Rémi Janin

University of Grenoble and CERAG-CNRS

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Date Written: October 2015

Abstract

We investigate the way auditor characteristics (i.e., reputation and industry specialization) interact on the consequences of mandatory IFRS adoption in Europe in terms of accounting conservatism. Indeed, a mandatory adoption setting may control for firm-level reporting incentives when gauging the effects of a change in accounting standards. However, companies still have some flexibility in their choice of auditor, and the later has a significant say on the accounting policy. We use a dataset of European firms adopting IFRS in 2005 in response to the IAS Regulation (2,973 unique firms) and observed between 2001 and 2008. The main findings are that: (1) the decrease in conditional conservatism (as proxied by the asymmetric timeliness of bad vs. good news), also evidenced in other studies (Ahmed et al., 2013; André et al., 2013) is attributable to Big 4-audited companies; (2) correlatively, unconditional conservatism is higher under IFRS in the presence of a Big 4 auditor; and (3) none of these moderating effects occur when considering auditor industry specialization metrics. We conclude that Big 4 auditors placed more emphasis on auditor risk incentives in the IFRS adoption context, by influencing overly conservative accounting practices in response to the new and uncertain accounting environment, with detrimental effects on earnings quality.

Keywords: Mandatory IFRS adoption; Conservatism; Big 4; industry specialization; Europe

JEL Classification: M48, M41, M42

Suggested Citation

Piot, Charles and Dumontier, Pascal and Janin, Rémi, IFRS Consequences on Accounting Conservatism in Europe: Do Auditor Incentives Matter? (October 2015). Available at SSRN: https://ssrn.com/abstract=1754504 or http://dx.doi.org/10.2139/ssrn.1754504

Charles Piot (Contact Author)

Univ. Grenoble Alpes ( email )

Grenoble Cedex 9, F-38040
France

French National Center for Scientific Research (CNRS) - Centre de Recherches Appliquées à la Gestion (CERAG)

150 rue de la Chimie, BP47
Grenoble Cedex 9, 38040
France

Pascal Dumontier

University of Grenoble ( email )

Grenoble
France

French National Center for Scientific Research (CNRS) - Centre de Recherches Appliquées à la Gestion (CERAG)

150 rue de la Chimie, BP47
Grenoble Cedex 9, 38040
France

Rémi Janin

University of Grenoble and CERAG-CNRS ( email )

IUT2, Place de Verdun
Grenoble, 38000
France

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