Deviations from the Mandatory Adoption of IFRS in the European Union: Implementation, Enforcement, Incentives, and Compliance
Social Science Research Network
In this paper, we evaluate the common assertion that EU firms began using IFRS by 2005 when the EU formally adopted IFRS. We find that although the incidence of firms using local (or some other) GAAP has declined between 2005 and 2009, it is still nontrivial. For instance, by 2009 the incidence of non-IFRS financial statements was still in excess of 17% (42% of which were fully consolidated). We estimate a model of the non-adoption of IFRS as a function of proxies for EU-wide and
... c implementation of the IFRS regulation, countryspecific enforcement mechanisms, and firm-specific reporting incentives. We find that being traded in EU-regulated markets, preparing fully consolidated financial statements, and having a more diversified corporate structure are positively associated with the likelihood of using IFRS, and using US GAAP in the preceding year is significantly negatively associated with adopting IFRS. We find little evidence that country-specific enforcement is associated with IFRS adoption during our time period. Finally, we find that several reporting incentives proxies are associated with adopting IFRS, such as being large and closely-held with wider analyst following. We interpret our results to mean that many EU firms do not use IFRS; that firms exploited definitions, exemptions, and deferrals in the regulation to avoid adopting IFRS; and that firms responded to their reporting incentives in making the decision to adopt IFRS. Deviations from the Mandatory Adoption of IFRS in the European Union: Implementation, Enforcement, Incentives, and Compliance enforcement mechanisms, and expected to be stronger enforcers of rigorous application of IFRS, creating both greater likelihood of enforcement and higher costs associated with adoption (see Christensen, Hail, and Leuz 2011) . Firms in these environments may have adopted strategies to avoid adopting IFRS other than disregard for the regulation, such as delisting, avoiding consolidation, or moving to a non-EU country (see Vulcheva 2012 and Brüggemann, Hitz, and Selhorn 2011). Finally, our proxies for firm-specific reporting incentives are mostly significant in the predicted direction. We find that being large and closely-held with wider analyst following was associated with adopting IFRS, both when the regulation was initially imposed (2005) and in subsequent years (2007 and 2009), and being listed in the US is significantly associated with not adopting IFRS in all three subsamples. Leverage is significantly associated with using IFRS in 2009, but not in 2005 and 2007. We interpret our results to mean that many EU firms do not use IFRS; that firms exploited definitions, exemptions, and deferrals in the regulation to avoid adopting IFRS; and that firms responded to their reporting incentives in making the decision to adopt IFRS. We believe our results are important for investors and researchers making assumptions about European firms' choice of GAAP, to EU regulators in evaluating the efficacy of the mandatory imposition of IFRS, and to the US standardsetting community as we consider whether and how to adopt IFRS in the US. This paper is organized as follows: section two describes the EU adoption of IFRS, including regulation, monitoring, and enforcement, reviews the literature, and develops hypotheses. Section three describes the initial sample of EU publicly traded firms and their use of IFRS vs. some other GAAP. Section four presents data, empirical design, comparison of adopters and non-adopters, and results of hypothesis tests. Section five reports on diagnostics and extensions, and section six provides a summary and conclusions. Lang, M., J. Raedy, and Yetman. 2003. How representative are cross-listed firms? An analysis of firm and accounting quality.