Measuring Country Differences in Enforcement of Accounting Standards: An Audit and Enforcement Proxy

52 Pages Posted: 25 Feb 2014

See all articles by Philip R. Brown

Philip R. Brown

UWA Business School, M250; Financial Research Network (FIRN)

John P. Preiato

The University of Western Australia

Ann Tarca

University of Western Australia

Multiple version iconThere are 2 versions of this paper

Date Written: January/February 2014

Abstract

In this paper we present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country's accounting standards. The use of a common set of standards such as International Financial Reporting Standards (IFRS) aims, in broad terms, to promote the comparability and transparency of financial statements and to improve the quality of financial reporting. However, the effectiveness of IFRS adoption may be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of outcomes from adopting IFRS use a range of legal system proxies to capture these country differences, but the proxies are deficient in that they seldom focus explicitly on factors that affect how compliance with accounting standards is promoted through external audit and the activities of independent enforcement bodies. To address this deficiency, we calculate measures of the quality of the public company auditors’ working environment (AUDIT) and the degree of accounting enforcement activity (ENFORCE) by independent enforcement bodies. We do this for 51 countries for each of the years 2002, 2005 and 2008, using publicly available data provided by the International Federation of Accountants (IFAC), the World Bank and the national securities regulators. Preliminary tests suggest our indices have additional explanatory power (over more general legal proxies) for country‐level measures of economic and market activity, financial transparency and earnings management. We expect they will prove useful to researchers and other interested parties who require country‐level measures that focus on the degree of enforcement of financial reporting practices.

Keywords: security market regulation, external audit, IFRS, compliance, enforcement, accounting quality

Suggested Citation

Brown, Philip R. and Preiato, John P. and Tarca, Ann, Measuring Country Differences in Enforcement of Accounting Standards: An Audit and Enforcement Proxy (January/February 2014). Journal of Business Finance & Accounting, Vol. 41, Issue 1-2, pp. 1-52, 2014. Available at SSRN: https://ssrn.com/abstract=2400808 or http://dx.doi.org/10.1111/jbfa.12066

Philip R. Brown

UWA Business School, M250 ( email )

Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

John P. Preiato

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

Ann Tarca

University of Western Australia ( email )

Business School
35 Stirling Highway
Crawley WA 6009
Australia
+61 8 6488 3868 (Phone)
+61 8 6488 1047 (Fax)

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