Does Mandatory IFRS Adoption Impact Audit Fees? Theory and Evidence

This study examines the impact of IFRS adoption on audit fee. We first build an analytical audit fee model to develop empirical hypotheses. We then test our hypotheses using audit fee data from 14 European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fee, which suggests that the increase in audit task complexity associated with IFRS adoption is the driving force for the audit fee change. Furthermore, we find that the IFRS-related audit fee premium increases with the extent of the accounting differences between a country’s former local GAAP and IFRS, decreases with the improvement in financial reporting quality brought about by IFRS adoption, and decreases with the strength of a country’s legal regime. These results provide useful insights into the audit fee effect of IFRS adoption, and how this effect varies with the institutional features of different countries.