Do Big 4 audits affect conditional conservatism under IFRS? International Evidence

38 Pages Posted: 8 Jan 2020 Last revised: 2 Feb 2022

See all articles by Henry Jarva

Henry Jarva

Hanken School of Economics

Suman Lodh

Middlesex University; University of Bergamo - Department of Economics

Monomita Nandy

Brunel University London

Hannu Ojala

University of Eastern Finland; Aalto University - School of Business

Date Written: February 1, 2022

Abstract

This paper examines whether Big 4 audits affect conditional conservatism around the world under mandatory IFRS regime. We use a broad sample of firms required to follow IFRS in their financial reporting from 22 countries over the period 2005-2020. We hypothesize that clients of Big 4 auditors are more conditionally conservative than clients of non-Big 4 auditors under mandatory IFRS. We document a significant "Big 4 effect" on timely loss recognition, consistent with our expectations. However, time series and cross-country analysis reveal that the Big 4 effect is far from universal. Specifically, we only document the Big 4 effect in three sample years and only in two countries (Luxembourg and the UK). Overall, our findings suggest that conditional conservatism remains strong under the IFRS reporting regime, but there are signs of the demise of the Big 4 effect. These findings have implications for investors, standard-setting bodies, and corporate governance.

Keywords: asymmetric timeliness, conditional conservatism, international accounting, financial reporting quality

JEL Classification: F30, G15, M41, M42

Suggested Citation

Jarva, Henry and Lodh, Suman and Nandy, Monomita and Ojala, Hannu, Do Big 4 audits affect conditional conservatism under IFRS? International Evidence (February 1, 2022). Available at SSRN: https://ssrn.com/abstract=3505282 or http://dx.doi.org/10.2139/ssrn.3505282

Henry Jarva (Contact Author)

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

Suman Lodh

Middlesex University ( email )

The Burroughs
London, NW4 4BT
United Kingdom

HOME PAGE: http://www.mdx.ac.uk/about-us/our-people/staff-directory/lodh-suman

University of Bergamo - Department of Economics ( email )

Piazza Rosate 2
I-24100 Bergamo, 24127
Italy

Monomita Nandy

Brunel University London ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Hannu Ojala

University of Eastern Finland ( email )

Yliopistonranta 1
Kuopio, 70210
Finland
+358443290604 (Phone)

Aalto University - School of Business ( email )

P.O. Box 21210
Helsinki, 00101
Finland

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