Does Mandatory IFRS Adoption Impact Audit Fees?: Theory and Evidence

Abstract

This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fee. We first build an analytical audit fee model to analyze the impact on audit fee of the change in both audit complexity and financial reporting quality brought about by IFRS adoption. We then develop our hypotheses based on the model’s predictions, and test the hypotheses using audit fee data from European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fees. We also find that the IFRS-related audit fee premium increases with the increase in audit complexity brought about by IFRS adoption, and decreases with the improvement in financial reporting quality arising from IFRS adoption. Finally, we find some evidence that the IFRS-related audit fee premium is lower in countries with strong legal regimes. Our results are robust to a variety of sensitivity checks.