Costs of Mandatory IFRS: Evidence of Reduced Accrual Reliability

Abstract

This study investigates the impact of mandatory adoption of International Financial Reporting Standards (IFRS) on accrual reliability (Richardson et al. 2005). Using a large sample of Australian firm years drawn from before and after the mandatory adoption of IFRS, we find that accrual reliability declined significantly after mandatory IFRS implementation. Working capital, non-current operating, and financing accruals all contribute to this decline. We also find that brand name audit firms (i.e., the Big four) are able to significantly attenuate any decrease in accrual reliability during the post-IFRS period. Our results contrast with evidence identifying benefits of mandatory IFRS such as increased value relevance, but are consistent with at least some degree of trade-off between relevance and reliability. Such trade-offs seem to have been largely ignored in prior examinations of the impact of mandatory IFRS.

Keywords: IFRS, accrual reliability, audit quality

JEL Classification: M40, M41, G15