The Impact of IFRS on the Amount of Audit Fees: The Case of the Large French Listed Companies

Introduction Listed companies in the European Union were required to use International Accounting Standards issued by the International Accounting Standards Board (IASB) from 1 January 2005 (Regulation (EC) No 1606/2002 of the European Parliament and the Council). Listed French groups on European regulated markets were then required to present their consolidated accounts using the International Financial Reporting Standards (IFRS) from 1 January 2005. For this reason, several agents (accountants, audit firms, consulting firms, financial specialists .) faced the dilemma of changing their accounting model, and they were involved in this operation of change. Haller (2002) argues that the IFRS enforcement in Europe relies heavily on external auditors. Indeed, accounting standards are an important basis that auditors use to issue audit opinions, so any change in accounting standards will affect directly the working base of auditors and, in turn, the audit fees (Zhu and Sun 2012). So, this study investigates how a change of accounting standards (IFRS instead of French accounting standards) affects audit fees. Thus, the research question is as follows: Did audit fees increase during the period of transition to IFRS (2004-2005)? This study is motivated from the complexity issue of IFRS adoption that has become a major concern among the preparers of financial statements, directors and auditors (Yaacob and Che-Ahmad 2012). The sample used in this paper is a panel of 69 French firms over a period of six years (2002-2007). Data was gathered from the SBF 250 index. After elimination for missing data, foreign companies, inactive companies or companies in the financial and real estate sector, the ending panel only consists of 69 firms per year, or 414 firm year observations. Results show that audit fees clearly increased during the period of transition to IFRS (2004-2005), but this significant increase in audit fees is not found during the post-IFRS period (2006-2007). These results provide evidence towards the complexity of the adoption of IFRS in France. They also give auditors from other French firms or from other capital markets an idea about the adjustments of audit fees needed when pricing their services related to an audit of accounting information prepared with IFRS. This study contributes to the literature as follows. Although many listed companies in France have already adopted IFRS, the effects of IFRS adoption on audit fees in the French context have not largely been studied. Evidence from France will complement the audit fees literature and the existing international studies regarding the economic impacts of IFRS adoption. Section 2 shows some differences existing between French accounting rules and IFRS applicable at 2005. Section 3 presents theoretically the link between IFRS and audit fees. Section 4 reviews literature and develops the hypotheses. Section 5 discusses the research design. Section 6 presents the empirical results, and section 7 concludes the paper. French Accounting Rules Compared with IFRS It is clear that the cost of adoption of IFRS will increase with the gap existing between the local Generally Accepted Accounting Principles (GAAP) and International Accounting Standards and practices. So, it is important to present the significant differences between the French accounting standards and IFRS. MARKET-BASED VERSUS STAKEHOLDERS AND TAX-BASED REPORTING French firms will have to change their conception of financial statements, which are almost completely based upon tax. So, providing more information to investors (and not to tax authorities) is the core of the new international GAAP, IFRS. PRINCIPLES-BASED VERSUS RULES-BASED As accounting is only considered to be a branch of the Law in France, the approach of IFRS, which does not show "what must be done, but what should be done," is totally incompatible with the French legal approach. …