Does Mandatory IFRS Adoption Affect Audit Hours and the Effectiveness to Constrain Earnings Management? Evidence from Italy

Auditing: A Journal of Practice & Theory, Forthcoming; doi: 10.2308/AJPT-18-061

50 Pages Posted: 9 Jun 2021

See all articles by Stefano Azzali

Stefano Azzali

University of Parma - Dipartimento di Economia

Tatiana Mazza

University of Parma - Dipartimento di Scienze Economiche e Aziendali

Kenneth John Reichelt

Louisiana State University, Baton Rouge - Department of Accounting

Dechun Wang

Texas A&M University

Date Written: May 3, 2021

Abstract

We examine the effect IFRS adoption has had on audit effort and the effectiveness of greater audit effort on constraining earnings management. While prior studies have examined the costs of IFRS adoption, it is unclear whether IFRS adoption affects audit effort and whether extra audit effort results in higher audit quality. We find that following Italy’s adoption of IFRS, audit hours (but not the hourly rate) increased, suggesting that audit effort (in audit hours) increased following IFRS adoption. We then examine whether more audit hours are associated with improved audit quality in the IFRS regime. Consistent with prior literature, we find that more audit effort is associated with lower abnormal accruals in the period before IFRS adoption. Interestingly, after Italy adopted IFRS, abnormal accruals are lower, but audit hours were less associated with lower abnormal accruals, implying that more audit hours are needed to constrain earnings management. Collectively, our empirical analysis suggests that while audit effort increased with mandatory IFRS adoption, the effectiveness of audit effort to constrain earnings management decreased.

Keywords: IFRS, Audit hours, Audit Effort, Earnings Quality, Audit Quality

Suggested Citation

Azzali, Stefano and Mazza, Tatiana and Reichelt, Kenneth John and Wang, Dechun, Does Mandatory IFRS Adoption Affect Audit Hours and the Effectiveness to Constrain Earnings Management? Evidence from Italy (May 3, 2021). Auditing: A Journal of Practice & Theory, Forthcoming; doi: 10.2308/AJPT-18-061, Available at SSRN: https://ssrn.com/abstract=3857258 or http://dx.doi.org/10.2139/ssrn.3857258

Stefano Azzali

University of Parma - Dipartimento di Economia ( email )

Via Kennedy 6
Parma, Parma 43100
Italy

Tatiana Mazza

University of Parma - Dipartimento di Scienze Economiche e Aziendali ( email )

via Kennedy 6
Parma, 43125
Italy

Kenneth John Reichelt (Contact Author)

Louisiana State University, Baton Rouge - Department of Accounting ( email )

2821 Business Education Complex
Baton Rouge, LA 70803
United States
225-578-6233 (Phone)

Dechun Wang

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States

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