The 'Big' Consequences of IFRS: How and When Does the Adoption of IFRS Benefit Global Accounting Firms?

In this paper, I examine how audit markets are affected by the adoption of International Financial Reporting Standards (IFRS) which have been mandated in multiple countries and may soon be introduced in the United States. Specifically, I examine whether and how the probability of an audit firm replacement is affected by IFRS adoption. First, I hypothesize that IFRS adoption creates an expert advantage for global audit firms during a regime shift in reporting standards. This may lead to an increased frequency of switching from small audit firms to the global six. Second, I hypothesize that the likelihood of auditor replacement around IFRS adoption is affected by the strength of a country's regulatory regime. I test my hypotheses by examining the effect of IFRS adoption on the frequency and direction of auditor switching in the years surrounding the mandatory adoption of IFRS in five European Union countries: the United Kingdom, Germany, Spain, Italy, and Poland. First, I find that client firms are more likely to switch from small audit firms to global auditors in the year following IFRS adoption. Second, I find that firms listed in strong regulatory regimes are more likely to switch from small audit firms to global audit firms following IFRS adoption than firms listed in weak regulatory regimes. I also find that firms listed in low quality regulatory regimes are more likely to replace audit firms before IFRS adoption. With the exception of the year following IFRS adoption, I do not find that IFRS adopters are more likely to switch from small auditors to global audit firms before or after IFRS adoption. This indicates that the increase in the likelihood of switching from small auditors to global audit firms is a phenomenon associated with the year following IFRS adoption.