Do industry specialist auditors enhance financial reporting quality?: a comparative study of the mandatory adoption of IFRS in the European Union




Vega, Jose G., III

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This study investigates whether industry specialist auditors add quality to their clients' audited financial statements under the principles-based International Financial Reporting Standards (IFRS) when compared to non-specialists. It is likely that auditor experience and knowledge plays a more important role in evaluating the overall quality when principles-based IFRS standards are in effect. This study examines the effect of adopting a principles-based standard on the accounting quality of both industry specialist and non-specialist clients and whether joint EU and country industry specialist auditors add additional value relative to auditors that are deemed either EU or country industry specialists only. I also examine if the gap between local gap and IFRS affects accounting quality. The results suggest that the mandatory adoption of IFRS positively affected accounting quality among firms in the European Union countries. This positive effect is equal to between 7 to 9 percent of pre-tax earnings of non-specialist clients. The results show that Country industry specialist clients still provides high accounting quality relative to non-specialists clients in post-adoption period. The gap difference in accounting quality between the country industry specials and non-specialist is decreased from the pre-and post-adoption period. However, the EU industry specialist clients experience a positive effect with the adoption of IFRS. The results suggest that countries with different level of GAAP difference experience different effect on accounting quality with the mandatory adoption of IFRS. While countries with small gap differences benefit from the adoption of IFRS, the EU industry specialist model suggests that countries with large GAAP difference experience the greatest benefit. The results further find that different classification of industry specialist provides different levels of accounting quality. Country only industry specialist clients provide the highest level of accounting quality. EU and country and EU only clients experience positive effects with the mandatory adoption of IFRS and provide similar accounting quality as non-specialist clients. The results of this study are highly relevant, not only in light of the recent waves of IFRS adoption, but also in light of the recent audit reforms in Europe, which include rules that address mandatory audit rotation, dual audits, and market concentration.


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Accounting quality, Audit quality, European Union, Industry specialist auditors, International accounting standards, Financial reporting, IFRS