This paper aims to investigate the association between International Financial Reporting Standards (IFRS) effort due to higher levels of material adjustments and audit fees. In addition, this paper tests whether these associations differ between industry specialist auditors and non-specialist auditors.
The authors measure IFRS effort by using differences between local GAAP and IFRS. More specifically, they measure the differences in the balances of accounts that are prepared under IFRS as opposed to the previously used Australian Accounting Standards Board (AASB) standards. They posit that higher material adjustments and more risk to fair presentation of financial statements require additional accounting and auditing effort (“IFRS effort”).
The authors find that audit fees are higher when accounting standards are more material and complex at an aggregate level. Nevertheless, not all standards are equally complex and/or material and not all individual standards contribute to higher audit fees. In addition, the results show that the positive association between IFRS effort and audit fees is more pronounced when firms are audited by city-level industry specialists than by non-industry specialists.
Overall, the results are consistent with the prediction of increasing audit fees for firms requiring higher levels of IFRS effort compared to firms requiring lower levels of IFRS effort. The results contribute to the understanding that not all IFRS are equally complex and, thereby, the standards require different levels of auditor effort. Isolating specific standards based on materiality/risk levels is informative to standard setters for standard setting, standard implementation and post-implementation review of standards.
