IFRS adoption/reporting and auditor fees: the conditional effect of audit firm size and tenure

Abstract

Purpose - This paper aims to investigate the impact of International Financial Reporting Standards (IFRS) adoption on audit and non-audit fees in the UK setting. The study investigates whether UK firms adopting IFRS for the first time or reporting under IFRS, in general, are being charged higher audit and non-audit fees and whether this impact is conditional on audit firm size and tenure. Design/methodology/approach - Using empirical data for UK listed firms from 2003-2007, the paper uses a regression model that explains audit and non-audit fees by independent variables measuring auditors’ and auditees’ characteristics including IFRS adoption and reporting. Additional regressions with interaction terms were performed to test the hypothetical conditional impact of auditor size and audit firm tenure on the above-mentioned association. Findings - Audit and non-audit fees increase significantly for companies adopting IFRS for the first time and this increase is persistent during later years. In addition, results suggest that both Big four and non-Big four auditors charge higher audit and non-audit fees to their clients adopting or reporting under IFRS in a similar manner. Furthermore, findings indicate that audit firms increase audit and non-audit fees for old and new clients using IFRS which suggests no low-balling effect is detected. Research limitations/implications - Results reported in this study provide insights to regulators in jurisdictions similar to the UK regarding the cost of IFRS adoption which includes higher audit and non-audit fees imposed by both Big four and non-Big four audit firms. In addition, this study argues, to some extent, against the notion that auditors may charge lower fees in the early years of the audit engagement to win new audit clients. Originality/value - To the best of the knowledge, the findings are unique at two levels. First, the paper provides evidence on the cost of using IFRS in the UK jurisdiction which was not explored by previous research. Second, the paper investigates the potential conditional effect of auditor size and audit tenure on the association between IFRS adoption and auditors’ fees.