The guidance of auditors with the implementation and application of changes in IFRS in listed companies

The guidance of auditors with the implementation and

application of changes in IFRS in listed companies.

Name: Thijs Brocken

Date: 23

th

June 2014

Student number: 10002206/6287395

University of Amsterdam

Master Accountancy and Control

Supervisor: Dr. P. Kroos

~ 2 ~

1. T

ABLE OF CONTENT

Abstract ... 4 1. Introduction ... 5 1.1 Background ... 5 1.2 Research question ... 6

1.3 Motivation and contribution ... 7

1.4 Structure ... 9

2. Literature review ... 10

2.1 Introduction to IFRS ... 10

2.1.1 Shortcomings in local accounting standards ... 10

2.1.2 Objectives of IFRS ... 11

2.1.3 Characteristics of IFRS ... 11

2.2 Potential benefits of IFRS ... 12

2.2.1 Comparability ... 12 2.2.2 Accounting quality ... 12 2.2.3 Transparency ... 13 2.3 Realized benefits ... 13 2.3.1 Comparability ... 14 2.3.2 Accounting quality ... 15 2.3.3 Transparency ... 15 2.4 Implementation of IFRS... 16

2.4.1 Principle versus rule-based ... 17

2.4.2 Complexity of standards ... 18

2.4.3 Institutional environment ... 18

2.5 The function of the auditor ... 19

2.5.1 General function of the auditor ... 19

2.5.2 Guidance of auditors ... 21

3. Research Method ... 23

4. Results ... 26

4.1 Assurance and advisory services... 26

4.2 Differences between companies ... 30

4.3 Client’s in-house knowledge of IFRS ... 32

4.4 Auditor’s knowledge about IFRS ... 35

4.5 Summary ... 38

~ 3 ~

6. References ... 43 7. Appendices ... 47 7.1Appendix I ... 47 7.2 Appendix 2 ... 48 7.3 Appendix 3 ... 49 7.4 Appendix 4 ... 51 7.5 Appendix 5 ... 53 7.6 Appendix 6 ... 55 7.7 Appendix 7 ... 57

~ 4 ~

A

BSTRACT

Purpose – The purpose of this research is to examine to what extent auditors could

give advice to their client regarding to changes in IFRS-standards. Specific focus is on the independency of the auditor which could be harmed by non-audit services.

Design/methodology/approach – The paper starts with an elaborate literature review

about the implementation of IFRS in 2005 and the implications at that time. Later in the research interviews were held to get a more detailed view on the way auditors give assistance to the client by implementing new or changed IFRS-standards.

Findings –The Main finding is that the auditors do not believethe assistance given to clients harms their independency. They think clients need their assistance, because the in-house knowledge is too limited. The function of an auditor is to correct the financial statements. When a client does not have sufficient knowledge the auditor has to make surethe client is well informed about new or modified standards.

Research limitations/implications – The most important limitation is the selection of

interviewees. It might have been more representative when auditors from Deloitte and KPMG, and maybe some smaller audit firms, were added to the research. Another limitation is the focus on one side of the story. For future research it could be an option to interview internal auditors in the client’s company to get more information onthe value of guidance by auditors.

Originality/value – A lot of research has been done on the first implementation of

IFRS in 2005. However, practically no research has been done to the implementation of new or changed IFRS-standards after the first implementation. So, the originality of this research can be found in the manner it is looking towards changed IFRS-standards and the guidance of auditors to implement them correctly.

Keywords – IFRS-standards, auditor, non-audit services, independency Paper type – Research paper

~ 5 ~

1.

I

NTRODUCTION

1.1

B

ACKGROUND

In the past every specific country used to have their own set of rules regarding accounting policies. The government of each country set their own rules and their own principles. However, over the last 40 years there have been many discussions about introducing one single set of standards which should apply to every firm in the world (Thomas, 2009). In 1973 already the international accounting standards committee was formed, which has been renamed in 2001 to the IASB (Thomas, 2009). A lot of pressure to change the local GAAP of each country to one set of standards came from European regulators. In 2005 the European Union adopted the set of standards which was named

International Financial Reporting Standards. The question is why European regulators thought it was so important to get a new system with one single set of standards instead of different rules in every country. In the research of Canibano and Mora (2000) there are two reasons mentioned why it is so important to harmonize the accounting rules. The first reason mentioned by Canibano and Mora (2000) to implement one new single set of accounting standards is that this would bring the international accounting profession into line. The second reason why one new set of accounting standards would be better is that it would improve the communication between users in different countries. To conclude, there has been some evidence that introducing one set of accounting standards could harmonize international accounting.

As stated in the previous paragraph some pressure was given towards the introduction of a new system of one set of internationally accepted accounting standards. The new system which is used by European listed companies is mandatory and called IFRS. With these new applied rules, European companies do not have to conform to accounting standards from other countries to obtain for example financial resources (Jaruga et al., 2007). All European listed companies are required to use the new IFRS rules. As shown in the previous paragraph there are some benefits of implementing one set of standards which will only work when all companies in all countries reconsider their old procedures and accept a new set of rules (McCreevy, 2005).

~ 6 ~

The benefits, as defined in the first paragraph of this chapter, are beneficial for users of financial statements of companies. This is not the only group that has advantages. Before the implementation of IFRS in all European listed companies there were a lot of possible advantages for the companies themselves. The following benefits are addressed by Jaruga et al. (2007): greater comparability between financial reports for investors, greater willingness of investing across borders by investors, lower costs of capital for companies, more efficient allocation of resources and higher economic growth. What Jaruga et al. (2007) is stating is that there is enough evidence the new accounting standards are beneficial for companies and as mentioned in the preceding paragraph it is beneficial for users of financial statements too.

However, the new accounting standards did not solely have benefits for companies. One of the disadvantages for companies to implement IFRS are the costs which have to be made to implement the new rules in a proper way (Weissenberger et al., 2004). These costs have to be incurred to educate employees who are going to have to work with the new accounting standards. Weissenberger et al. (2004) mentioned that a lot of costs have to be incurred to make sure that the rules are interpreted in the same manner in all companies. The differences of interpretation of the IFRS-rules could be a problem for companies in order to adopt the rules in the right manner. When changes are made within the IFRS-rules, more problems could arise among countries, which is the main subject of this thesis.

Because of the interpretation problems, companies need some help by adopting the new accounting standards correctly. At first, companies are being advised by the auditor to implement the new standards in the correct way (Beattie et al., 2011). Because auditors are specialized in controlling the rules which are used by companies, they could help companies to use these rules in the right way. As we have seen in the previous paragraphs it is important to implement the new accounting standards in the right manner because otherwise the benefits are less feasible for both companies and users of the financial statements. In this paragraph is shown that auditors are able to supply advice to companies on how to implement IFRS. The focus in this thesis is on what guidance companies get from auditors by changes in the IFRS-rules.

1.2

R

ESEARCH QUESTION

In the past a lot of research has been done to the implementation and adaptation of the IFRS-standards in 2005. In this research however the focus is on the changes in IFRS-rules

~ 7 ~

after the implementation in 2005. The research question is therefore: to what extent do listed companies get guidance from their auditor by implementing changes in IFRS-rules?

As mentioned before this thesis is focussing on the guidance of auditors by implementing revised IFRS-standards. It is about modifications in standards after the mandatory implementation of IFRS in 2005. The research question only mention listed

companies because of the fact that it is mandatory to listed companies to use IFRS. Non-listed companies could use IFRS voluntarily but the results to this question could be different when those different kinds of companies are combined. The first reason why the results could differ between those two types of companies is the motive why they implemented IFRS. Voluntary users adopted IFRS because of competitive reasons while mandatory users were required to adopt IFRS whether they want or not (Kim and Shi, 2012). The second reason voluntary adopters will not be used is the fact that this companies already implemented the IFRS-standards before 2005 and therefore have more experience. Furthermore, these companies which implemented IFRS voluntarily are often internationally operating companies with more knowledge of the IFRS-standards (Iatridis, 2011). These differences could influence the results and therefore only mandatory IFRS-adopters are included in this research. For the research both small and large listed companies will be used to answer the research question. One of the purposes of this research is to examine whether small companies need more guidance by implementing changes in IFRS-rules rather than big companies. The specific focus of this question is on the guidance companies get from their auditor.

1.3

M

OTIVATION AND CONTRIBUTION

A lot of research has been done on the effects and the guidance on the implementation of the new accounting standards (Jermakowicz 2004, Callao et al. 2007, Paananen 2008, Jeanjean and Stolowy 2008) and the implementation in companies (Weissenberger et al. 2004, Jermakowicz and Gornik-Tomaszewski 2006 and Judge et al. 2010). All of these researches were aboutthe implementation of IFRS in 2005 when it became mandatory for all listed companies in Europe to use the standards. The main contribution of this paper is the fact that it will focus on the guidance given tothe implementation of revised IFRS-standards. As shown above, a lot of research has been done on the effects of implementing IFRS.

Jermakowicz and Gornik-Tomaszewski (2006) did some research on the implementation of IFRS in publicly listed companies in 2005. The implementation and adaptation of IFRS costs a lot of money for companies. Even though,in the same research is stated that companies do

~ 8 ~

not expect IFRS to have any benefits for them. A more important result from the study of Jermakowicz and Gornik-Tomaszewski (2006) is the fact that most companies in this research did not get enough guidance by adapting the new standards. This causes interpretation

problems and it caused a lot of challenges for companies. The same is established by Hoogendoorn (2006) who mentioned that companies which had to implement IFRS underestimated the complexity of all the new rules. Because of this underestimation of

complexity, the costs of implementing became higher than was estimated before. In this study will be examined whether the implementation guidance has become better since the first introduction of IFRS. As shown above the guidance was not sufficient duringthe introduction of IFRS. The question is now whether companies will receive help by implementing changes in IFRS-rules. The interviews that will be taken throughout this research have to clarify whether the guidance that companies now get with changes of IFRS is sufficient compared to the guidance with the introduction.

In the previous paragraph is shown that companies have incurred a lot of costs to implement IFRS in the correct way. One of the reasons it costs a lot of money to implement IFRS is that it is hard to interpret the accounting standards in the same way in all companies around the world. As Nobes (2008) mentions in his research the rules of IFRS are different in each country and sometimes for every specific company while the assumption is that all companies use the same universal accounting standards. One example is the fact that in 2005 three IFRS-rules differed from the EU-endorsed IFRS rules (Nobes, 2006). When the

assumption is that all rules are universal it is striking that the rules are not the same around the world. These findings are strengthened by a research of Kvaal and Nobes (2010) in which they did research to the differences in rules of IFRS between different countries. When reading the research of Kvaal and Nobes (2010) closely it becomes clear that there are some differences between the universal accounting standards between different countries. This research tries to clarify how audit firms take care of the fact that their client’s financial statements are comparable to financial statements of similar companies in other countries and to what extent auditors could give advice on this aspect.

~ 9 ~

1.4

S

TRUCTURE

In the next chapter there is a more elaborate view on the history of the subject of IFRS implementation. After that, in chapter three there is a detailed view on the research

methodology. In the fourth chapter the results of the interviews are presented. A discussion on these results is in chapter four as well. After the results, in chapter five is a conclusion and summary of the findings. At last in chapter five the limitations of this research are discussed.

~ 10 ~

2.

L

ITERATURE REVIEW

In this chapter a more elaborate discussion is held on the prior literature with regard to IFRS and the implementation of IFRS in listed companies. The first paragraph is about the introduction of IFRS. Which factors caused the necessity of new internationally accepted accounting standards? In the second paragraph the focus is on the potential benefits of introducing IFRS- standards. In the third paragraph is shown whether the potential benefits were realized after the first implementation of IFRS. After the benefits of IFRS in the fourth paragraph the focus will be on the implementation of IFRS. In the last paragraph the two functions of the auditor in the process of implementation is reviewed.

2.1

I

NTRODUCTION TO

IFRS

In this first paragraph of the literature review is discussed why new internationally accepted accounting standards were necessary. The first part of this paragraph is about the shortcomings of the accounting standards before the introduction of IFRS. After that an overview is given of the objectives of IFRS. In the last part of this paragraph the focus is on the characteristics of IFRS.

2.1.1SHORTCOMINGS IN LOCAL ACCOUNTING STANDARDS

As seen in the first chapter, in 1973 already the international accounting standards committee was formed to think about a new universal accounting system around the world (Thomas, 2009). When in 1993 the European Union was introduced, the demand for

international accounting standards became larger in EU-companies. The assumption was that the existence of different accounting standards in the European union caused lower quality and relevance of the information in financial statements (Ding et al., 2007). Ding et al. (2007) did some research on the real differences in accounting standards after Ashbaugh and Pincus (2001) already did some research on the decrease in quality of financial statements due to different accounting standards. The results of the study of Ashbaugh and Pincus (2001) and a more cited study of Alford et al. (1993) were negative about the different accounting

standards. The main disadvantage of different accounting standards is a decrease in the level of information of financial statements.

A new set of internationally accepted accounting standards had to solve the problem of differences between the standards of different countries. These new standards had to solve the problem of lower quality of information in financial statements in different countries. The

~ 11 ~

new IFRS-standards were introduced in 2005 and were required for each European listed company right from the moment of introduction.

2.1.2OBJECTIVES OF IFRS

As seen in the previous fragment of this paragraph there was a great need for

international accounting standards instead of local standards for each different country. The objectives of IFRS were clearly stated in the research on IFRS of Pope and McLeay (2011). The following objectives were stated:

 “There should be a single set of accounting standards; and they should be high quality, understandable and enforceable” (Pope and McLeay, 2011, p.236). The result of these objectives are financial statements which are transparent and comparable.

 “Financial statements should be oriented towards primary users who include existing and potential investors, lenders and other creditors who provide resources to the entity and who do not have contractual rights to demand information direct from reporting entities” (Pope and McLeay, 2011, p.236).

These were the main objectives of the new international accounting standards. 2.1.3CHARACTERISTICS OF IFRS

IFRS are set up as international accepted accounting standards which are used everywhere around the world (Alali and Cao, 2010). This international character of the new standards is supposed to reach the objectives stated in the previous paragraph. To make sure all countries are able to implement the new standards, the IASB created principle-based standards instead of rule-based resemblingthe former local standards (Hodgdon et al., 2011). Because IFRS is principle-based, the most aspects of the standards are based on judgements rather than on rules. The standards are principle-based because this is the most convenient way to guarantee harmony between all different local accounting standards (Alali and Cao, 2010). Due to the judgements as a base for the standards, the standards should have been less interpretive. However, the new standards are, due to the principles, harder to acquire than comparable standards which are rule-based (Wells, 2011). A problem caused by the principle-based system is the fact that local governments have changed the rules of IFRS for their own country to make it suitable for the national interests or tax-rules (Alali and Cao, 2010). In the fourth and fifth paragraph more attention is given to the issue of multi-interpretability.

~ 12 ~

2.2

P

OTENTIAL BENEFITS OF

IFRS

The previous paragraph mentions why a new set of standards was introduced and became mandatory to all listed firms in the European union. In this paragraph, a more elaborate view is given on the different potential benefits of the new set of standards. This paragraph will show which benefits were defined before the introduction of IFRS.

2.2.1COMPARABILITY

A lot of research had been done already before the introduction of IFRS to the potential benefits of it. The most important reason to most of the researchers to introduce IFRS is the better comparability of financial statements between companies in different countries. Chua and Taylor (2008) mentioned the comparability of financial statements as one of the three most important benefits. The IASB1 which introduced the IFRS-rules argued before the introduction that these new rules will result into better comparability of financial statements between different countries (IASC Foundation, Constitution 2(a)). The increased comparability is caused by the fact that each different country uses the same standards instead of their own GAAP since the beginning of 2005. What is stated by the IASB is confirmed by the article of Daske (2006) in which is stated that because of the better comparable

information and the less risky investments, the cost of debt become lower with this new rules. This lower cost of debt is an indirect benefit of the greater comparability of financial

statements between countries.

2.2.2ACCOUNTING QUALITY

The second potential benefit of the new IFRS-rules mentioned by Chua and Taylor (2008) is the improved quality of financial statements. This higher quality of financial statements causes a lot of potential other benefits to companies which use IFRS. As mentioned in the previous paragraph about comparability the cost of capital will lower (Levitt, 1998). The question is why the quality of financial statements will improve when there is one single set of standards. This question is answered by Daske (2006). In his research is stated that the new IFRS-rules require more mandatory disclosures than local GAAP’s. A second reason is that the financial statements should include more information about the measurement of the figures (Daske, 2006). The last argument provided by Daske (2006) is about the way in which figures are recognized and the way of measurement. Despite all these arguments of Daske (2006) the research of Schildbach (2004) mentions there are still

~ 13 ~

reasons why the improved quality of financial statements is questionable. Schildbach (2004) is not the only author who questions the higher quality after the introduction of IFRS. Also Soderstrom and Sun (2007) mention there are some potential problems to the accounting quality. In their research is mentioned that not only accounting standards determine

accounting quality but that legal and political systems are important factors in the accounting quality. The expectation of Soderstrom and Sun (2007) is that the accounting quality between different countries varies because of the different legal systems. In the research of Bartov et al. (2005) is found that the quality of financial statements of companies in Germany was significantly higher when the company was using international accounting standards. The main reason for this higher quality was a higher value relevance of earnings.

2.2.3TRANSPARENCY

The last potential benefit of international accepted accounting standards is a better transparency (Chua and Taylor, 2008). Transparency is important when looking at what happens in a company. The most important group of readers of financial statements is the investors (Watts and Zimmerman, 1986). Since this is the most important group, the company will make sure it will act in the best way of their shareholders. However, Ball (2012) argues that with low transparency the managers will be more likely to act in their own best interests instead of the best interests of shareholders. A high transparency will therefore take care of the fact managers will act in the best interests of their shareholders. This potential benefit is not a benefit for the company but only to the readers of financial statements and especially to investors.

In the previous paragraph the potential benefits of IFRS were presented and it has been made clear that it is unknown whether all potential benefits will be realized when IFRS is implemented. Three main benefits were identified by Chua and Taylor (2008) which are the most important potential benefits. These three benefits are better comparability, higher quality and greater transparency of financial statements.

2.3

R

EALIZED BENEFITS

In the previous paragraph three major potential benefits were mentioned. In this paragraph is shown whether these potential benefits were realized after the implementation of IFRS. In appendix one an overview is given of all realized benefits measured by different

~ 14 ~

authors. In this particular paragraph all realized benefits of different authors will be discussed and compared to each other.

2.3.1COMPARABILITY

To keep everything structured the first subject is the comparability of financial statements between different countries. In the previous paragraph was mentioned that comparability is one of the most important benefits of the new international accounting standards. The question is: did the comparability of statements increase after the

implementation of IFRS or not? The authors who wrote about the subject of comparability are disagreeing. The first paper of Callao et al. (2007) is about the comparability of financial statements in Spain. In this article is stated that the quality of local comparability became even worse after the introduction of IFRS. This implies that the implementation of IFRS causes counterproductive results. However, in another paper of Brochet et al. (2013) is stated that there was greater comparability between financial reports in the UK. The reason why the outcome of the research of Callao et al. (2007) is negative is because in this research the financial statements of IFRS-users were compared with SAS2-users. The Spanish accounting standards are much more conservative and more rule-based in comparison to the newer IFRS-standards. This fact caused the difference between the two kinds of users in Spain. As

mentioned by Callao et al. (2009) it is not that unexpected the comparability within the country decreased, because before the introduction of IFRS both kind of companies used the same Spanish accounting standards. Yet, in the article of Brochet et al. (2013) is mentioned the comparability within the country did not decrease. This was caused by the fact that the UK-standards are similar to most of the rules in the IFRS-standards. However, the main purpose of the new IFRS-standards was to increase the comparability between companies in different countries. The comparability between countries did increase and therefore one of the purposes is reached. The comparability is nevertheless not equally improved (Yip and Young, 2012). In the article of Yip and Young (2012) is mentioned that the comparability increases more when companies do have the same institutional environments. When firms do not have the same institutional environments the financial statements are still not that comparable although it would increase slightly.

2 _{SAS: Spanish accounting standards}

~ 15 ~

2.3.2ACCOUNTING QUALITY

After the comparability has been discussed above, now the focus will be on the accounting quality after the introduction of IFRS. This is an important part of the benefits of IFRS because of the effects which accounting quality could have. Accounting quality could have impact on the costs of debt for example. In the research of Paananen and Lin (2009) is stated that the accounting quality decreased after the implementation of IFRS. These

researchers found out that the earnings and the book value of equity were less value relevant after the implementation of IFRS compared to the situation before the implementation. It seems strange that the accounting quality increased between the voluntary IFRS adoption and the IAS-standards while the accounting quality decreased when IFRS became mandatory. The main reason why the accounting quality had decreased was the change in rules in IFRS

(Paananen and Lin, 2009). Also in the case of the implementation of IFRS in Sweden the accounting quality did not increase but decrease on some specific items (Paananen, 2008). The question is now whether the implementation of IFRS has improved anything? In the article of Aharony (2010) however is mentioned that the value relevance of accounting information did improve. Even as stated in the paragraph on comparability the improvement in value relevance is dependent on the institutional environment. A reason why the value relevance is higher in the research of Aharony (2010) in comparison with the articles of Paananen (2008 and 2009) could be that this research was done at a later moment. As mentioned by Paananen and Lin (2009) the decrease in accounting quality could have been caused by the change of rules. This change of rules has the biggest effect when companies had to change from local standards to the new international standards. Appendix 1 shows which effects IFRS had on particular quality aspects. In this appendix is shown that earnings

management for example stayed stable or increased after the implementation of IFRS. So, the accounting quality did not increase with the implementation of international accounting standards.

2.3.3TRANSPARENCY

In the first two fragments of this paragraph is mentioned that the effects of the introduction of IFRS were not that positive. The last identified potential benefit is transparency. In this part will be discussed whether there are some positive effects on transparency. Because this benefit is of less importance than the other two benefits there has been done less research on this subject. In the study of Aksu (2006) is mentioned that the

~ 16 ~

transparency of financial statements of companies which use IFRS is higher and so the value of these statements is higher to investors. Besides this the transparency of voluntary adopters of IFRS is even higher (Aksu, 2006). In the article of Daske et al. (2008) is also stated that adopters of IFRS give a signal to investors their financial statements are more transparent than others. In the same article is mentioned that the higher transparency causes increasing growth expectations which is very positive for firms. Investors are more likely to invest in these firms and therefore there is more money available (Daske et al., 2008). The reason why investors want to invest more in a company with greater transparency is the fact that managers are less able to act only in their own interests (Lambert, 2001).

In this paragraph an overview is given of the realized benefits of IFRS after the introduction. It is shown that not all potential benefits which were identified before the introduction of IFRS were actually realized. In the first part is shown that the comparability did not become any better than before the introduction of IFRS. In the second part is stated that the accounting quality did not become better either. In the last part is shown that the transparency did become greater after the introduction of IFRS. The most important reason for the negative effects of the implementation of IFRS is the fact that all rules are new and hard to implement. The authors mentioned that results will change when IFRS are used for a longer time. Another reason is the difference in institutional environments which is hard to solve.

2.4

I

MPLEMENTATION OF

IFRS

In this paragraph there will be a more elaborate discussion about the introduction of IFRS in companies. In the research of Jermakowicz and Gornek-Tomaszweski (2006) the major challenges by implementing IFRS were stated. The following table shows which were the major challenges.

~ 17 ~

Figure 1: Table of major challenges faced by companies

In this paragraph not all challenges will be discussed elaborately but the biggest issues will. From this figure it is possible to conclude that the main issue is the complexity of IFRS. This means that guidance of auditors is necessary for a correct implementation of the

standards. The guidance of auditors will be discussed more elaborately in the fifth paragraph but first the biggest implementation issues are discussed.

2.4.1PRINCIPLE VERSUS RULE-BASED

The first difference between most local GAAP’s and the new international accounting standards IFRS is where standards are based on. Most local accounting standards were rule-based while IFRS is principle-rule-based (Carmona and Trombetta, 2008). Principle-rule-based

standards means that there are some fundamental understandings which dominate the rules in the standard. For companies, a principle-based system is more difficult to implement because there are no rules on how to account exactly, but a company has to follow specific principles. So when a company does not contravene the principles, the chosen manner of accounting is correct (Carmona and Trombetta, 2008). Because there are a lot of principles in the IFRS-system to guide companies with their accounting choice the rules are accepted all over the world (Ding et al., 2005). To structure all the principles to a good system there are some strict rules (Benston et al. 2006). This system however has been one of the issues for companies by implementing IFRS. As mentioned by Hoogendoorn (2006) the diversity in interpretation of the new standards has caused problems. As stated above, the principles in the IFRSs are multi-interpretable and therefore hard to implement in the correct way by companies. A solution to this problem could be a more specific guidance on how to implement these rules in

~ 18 ~

the same way as the competitors (Hoogendoorn, 2006). When the implementation of the principles differs with different companies the comparability of the financial statements will only become worse.

2.4.2COMPLEXITY OF STANDARDS

Based on the before mentioned facts about IFRS, the implementation should not have been that difficult for companies. The principle-based system was meant to make it easier for companies to implement the new IFRS-standards. Yet, a lot of companies faced problems by implementing the new standards. In the article of Hoogendoorn (2006) the complexity of the standards is one of the most important issues for companies to deal with. The costs made to implement the new international accounting standards are called transition costs (Hail et al., 2010). The new accounting standards require new accounting systems and new processes within companies. Also the internal control procedures have to be documented differently (Hail et al., 2010). In the first year of using IFRS the costs will be the highest for a company. In this year all the above named systems have to be adopted to a correct working system under IFRS. Beside the new systems which have to be used, the employees need some training to work with the new standards. After that, the company has to make sure that all investors and stakeholders understand the new way of accounting in their financial statements (Hail et al., 2010). To solve these problems companies could hire external professionals like auditors and consultants. The next problem which is mentioned by Hoogendoorn (2006) is that the auditor becomes too deeply involved in the process of implementing IFRS that the independency of the auditor becomes weaker. Another problem of the complexity is a lack of time for companies to implement IFRS correctly (Jaruga et al., 2007). In this article is

mentioned that the companies underestimated the complexities of the new standards and began too late with implementing the new standards. So, the transition costs are high at the moment of first implementation of IFRS. After the first implementation the costs will decrease.

2.4.3INSTITUTIONAL ENVIRONMENT

As mentioned by Hoogendoorn (2006) one of the biggest issues with the first

mandatory implementation of IFRS is the difference in interpretation and use of the standards. One of the problems why the standards were interpreted differently is the way in which companies solve interpretation problems of the standards (Hail et al., 2010). In this article is stated when a company is making judgement calls the standards were compared with their

~ 19 ~

own old local GAAP. Due to this issue of interpreting the standards the comparability did not become as good as was thought before the introduction of IFRS. As mentioned by Nobes (2006) the differences between the way in which the standards are used in different countries could be explained because of financial and tax reasons for a company. These tax reasons, for example, are caused by the fact that the governments of countries want other ways of

accounting besides IFRS. This causes that the IFRS-rules will be interpreted like the local standards. Due to this reason the IFRS-standards were influenced by local governments.

As seen in the last few paragraphs there were a lot of problems faced by companies by implementing IFRS for the first time. The first big issue is the fact that the new standards are principle-based instead of rule-based. The second major problem is the complexity of the new standards which is partly caused by the fact the standards are principle-based. The last issue is the one of institutional environments. In the next paragraph some more attention is taken to the guidance of auditors to solve these problems.

2.5

T

HE FUNCTION OF THE AUDITOR

In this paragraph, which is more focused on the research question of this thesis, the guidance of auditors will be discussed very detailed. This paragraph is meaningful for this thesis because the problems and guidance faced by the first introduction of IFRS are a helpful guide to compose the questions for the interviews. First the general function of the auditor is discussed. After the general function there is some attention given to the non-audit services by auditors.

2.5.1GENERAL FUNCTION OF THE AUDITOR

The first aspect to discuss is the general function of an auditor. An auditor has two main tasks. The first is to find breaches in the financial statements of the clients and the second is to report that breach or give an unqualified report when everything is true and fair. In short, an auditor has to be competent to find breaches and independent to report these breaches. The quality of the auditor to find the breaches in a company is widely discussed by different auditors. One of the most important papers is the research of DeAngelo (1981) in which is mentioned that the size of the audit firm influences the audit quality. One of the reasons for this higher quality is more expertise because a large audit firm has more employees. Another determinant of audit quality is the tenure of the audit partner or audit firm. The perception of investors is that a company which is audited by the same auditor for a

~ 20 ~

longer period of time has higher quality financial statements than companies which are audited by an auditor for only a few years (Ghosh and Moon, 2005). The last important determinant for audit quality is industry expertise. This aspect is related to the first quality aspect which is the size of the auditor firm. When an audit firm has some industry specialists the assumed quality of the audit is higher (Craswell et al., 1995). This is because of the fact that industry specialists exactly know were the major problems arise in the financial

statements. So, as shown above there are a lot of determinants for audit quality.

Now the auditor independence will be discussed. The first item, which has been discussed many times over the last few years, is again the auditor tenure as stated as one of the determinants of audit quality. One of the issues with longer auditor tenure is the fact that the auditor knows the managers of the company he or she is working for. This could cause that the auditor will do the audit in the best interests of the manager of the company which affects the independency of the auditor (Geiger and Raghunandan, 2002). Another issue which is more important for this specific research is the effect of non-audit services on auditor independence. The assumption is that the independency of an auditor impairs when the

auditor does non-audit services besides the normal audit services. An auditor gets firm-specific knowledge when non-audit services are done. This firm-firm-specific knowledge could lead to higher quality of the audit but to less independency and therefore lower audit quality according to users of the financial statements. The assumption is that the independence is harmed when the auditor provides advisory services besides the normal assurance-services. There has been done a lot of research to this specific issue of decreasing independence when providing non-audit services. In 1999 Craswell (1999) reported that there is no significant evidence that non-audit services impair the independence of the auditor. In 2007 Ianniello (2012) found that there is evidence that when there is a larger part of the audit fees derived from non-audit services the auditor is more likely to give an unqualified opinion with an emphasis of matter paragraph. However, there is no indication of impaired independence. In the article of Quick and Warming-Rasmussen (2009) is found that there is evidence the investors perceive that independence of an auditor is lower when non-audit services were provided. Yet, not all researchers have found a negative association between non-audit fees and independence, the Sarbanes-Oxley act of 2002 realized a ban on non-audit services (Kinney et al., 2004).

~ 21 ~

2.5.2GUIDANCE OF AUDITORS

In the previous paragraph the assurance role of the auditor, which is the most

important function of an auditor, has been discussed. Another function of an auditor is to give guidance to companies how to implement new rules or how to interpret principles or

standards. In this paragraph a more elaborate view is given on this function of the auditor. This advising role of the auditor is important for this thesis because of the guidance auditors could give by implementing new or modified standards.

In the article of O’Keefe et al. (1994) is discussed which client characteristics have effect on the auditor effort. One of the client characteristics which influences the auditor effort is the size of the client’s company. There is a positive relationship between the hours an auditor spends with a client and the size of that client (O’Keefe et al., 1994). The second characteristic of a client which causes an increase in audit effort is when a client has high risks. When the client business risk is high, the auditor will spend more time on this audit and so the audit effort will increase. One of the reasons more time is spend on an audit in a risky firm is the fact that from prior research became clear the risky firms more often misrepresent their financial position (Palmrose, 1987). A third reason why audit effort will increase is when a company is publicly held. This increase in audit effort is caused by the fact that auditors are sued more often by audits of such publicly held companies (St. Pierre, 1983). A reason why the audit effort could decrease is when a client has a reliable internal control system (O’Keefe et al., 1994). Another reason for decreasing audit effort is the learning effect. When an auditor has audited the same company for many years it is easier for him to know where the mistakes are made in the financial statements. This learning effect is however industry related (Turpen, 1990). So the learning effect is different for different industries and in some industries there is no decrease in audit effort at all.

The effort the auditor puts in the audit depends on client characteristics. The choice of an auditor depends on the characteristics of the auditor. In the article of Beattie and Fearnley (1995) is discussed which characteristics are important in the process of choosing an auditor. The following eight characteristics are important by choosing an auditor: reputation/quality, acceptability to third parties, value for money, ability to provide non-audit services, small audit firm, specialist industry knowledge, non-big six large audit firm and geographical proximity (Beattie and Fearnley, 1994, p.237). One of the most unexpected results of the

~ 22 ~

research of Beattie and Fearnley (1994) is that the audit fee is totally unimportant for companies. More importantly for this thesis is the fact that, unless it is not one of the most important characteristics, the willingness of the auditor to offer guidance on accounting principles is on place 11 of the 29 characteristics. Together with the important characteristic, the ability to provide non-audit services, this suggests that by choosing an auditor it is important that an auditor wants to provide advisory services.

Now that it is clear that auditors are chosen on their ability to provide non-audit services and their willingness to offer guidance on accounting principles, it is important to know whether the auditor puts more effort in an audit when new standards have to be

implemented. The article of Vieru and Schadewitz (2010) is about the audit fees and therefore the audit effort during accounting changes. In this case the accounting change is the change from local GAAP, which in this article of Vieru and Schadewitz (2010) is the Finnish local GAAP, to IFRS. Following the article of Patel et al. (2009) during accounting changes the auditor is the non-audit consultancy service provider for audit clients. With non-audit

services could be meant accounting assistance, advisory services or tax consulting (Vieru and Schadewitz, 2010). With a change from an old to a new standard there is more client risk and the auditor needs more time for the audit which is reflected in higher audit fees. Non-audit fees become higher in times of changing accounting standards because of the extra accounting assistance given by the auditor. When the new accounting standards differ a lot from the former accounting standards the non-audit fees become higher than when the new accounting standards are similar to the old standards. The main conclusion of Vieru and Schadewitz (2010), which is supported by the article of De George (2013), is that the change in standards affects the height of audit fees. The main reasons which cause these higher fees are the greater complexity of the client and the higher risk associated with the transition to the new IFRS-standards. The largest part of the increase in audit fees is caused by non-audit fees. Due to this fact it can be concluded that advisory services are a major part of transition costs.

~ 23 ~

3.

R

ESEARCH

M

ETHOD

The general function of the auditor is to give an opinion on the financial statements and the second function is the advisory function to provide assistance to the client to report correctly. These non-audit services could exist of assistance with implementing new standards or with interpretation issues of standards. In this research the focus is on the guidance with implementing new or modified standards. The specific purpose is to examine to what extent auditors give guidance to clients by implementing changes in IFRS-standards. The focus will be on the differences of assistance given between clients of different size or in variant

industries.

As already mentioned in the first chapter of this research, interviews were held to get a clear view on the guidance given by auditors with implementing changes in standards. There has been done very little research to the subject of implementation of modified IFRS.

Regarding to the guidance of auditors with implementing new or modified standards no research has been done. For this reason it is impossible to test theories and therefore the purpose of this research is to create new theories. For creating theories the best way of doing research is doing a case study. In this specific case, interviews were held with auditors of EY and PwC. All these auditors are the auditor of listed companies which are required to use IFRS. Three of the interviewees are partners and one of those is an IFRS-specialist.

Remaining is an IFRS-specialist which is senior manager and a senior associate. In total the interview is held with five auditors. Interviews were held with employees with different functions because it is interesting to know whether a partner thinks different about guidance compared to an associate. IFRS-specialists are interesting for this research because their function is to make sure that all IFRS-issues, of the clients of the company they work for, will be solved. Interviews were used to create new theories and to get a trustworthy answer to the research question and solve a number of potential problems, which could be faced with other research methods, covered by Barnball (1994). An interview has the potential to solve the problem of poor responses which is a common problem with questionnaire surveys (Austin, 1981). The second reason why interviews are the best method for this research is that with an interview the attitudes, values and beliefs about the guidance could get explored (Smith, 1992). The third reason is the higher comparability of the answers because every auditor answers each question (Bailey, 1987). The last benefit of interviews is the fact that it is

~ 24 ~

ensured that the interviewee answers the question by him or her selves (Bailey, 1987). For this research is chosen to use semi-structured interviews. The benefits of semi-structured

interviews compared to structured interviews is that the questions could be matched with the interviewees (Gugiu and Rodriquez-Campos, 2007). In the article of Barnball (1994) are mentioned several benefits of semi-structured interviews as well in comparison to structured interviews. As mentioned before, semi-structured interviews allows the interviewer to get more clarification on interesting answers (Hutchinson & Skodal Wilson, 1992). Another benefit is that the interviewer can get more complete and valuable information by asking more questions (Bailey, 1987) and that inconsistencies could be clarified by improvised questions (Barnball, 1994). Semi-structured interviews are chosen for this research because of the differences between clients and the variance in functions of the auditors. As mentioned before it is important to ask additional questions when some interesting issues are introduced by the interviewee. The last reason for choosing semi-structured interviews is the importance of detailed answers. Because of the additional questions which could be asked, more detailed answers can be obtained.

The main themes of the questions of the semi-structured interviews are the following: the amount of guidance given to clients, the differences in needs of guidance between a variety of clients, the in-house knowledge of IFRSs of clients and the international meetings of auditors to make sure that the standards are interpreted the same across Europe and that auditors stay well-informed on changes in the standards. These issues are all related to the advisory function of an auditor. Another important question is going to be about the independency of the auditor by giving guidance to the client. The following list are some important questions to the interviewees:

 What percentage of time do you guide the clients by implementing or interpreting standards compared to total audit time?

 To what extent does the advisory function of the auditor harm the independency?

 Does the assistance really differ between clients?

 What are characteristics of companies which need more assistance?

 Do employees of companies have sufficient knowledge about the IFRSs?

~ 25 ~

 What does an auditor do to make sure that standards are interpreted identically around the world?

These questions are part of the questionnaire. The complete questionnaire is included in appendix two. The questionnaire was send in advance to the interviewees via e-mail so that the interviewees could prepare answers to the questions to give more detailed answers. The average time spend on the interviews is half an hour to an hour. All answers were recorded on paper by the interviewer. The complete answers are included in the appendix too. The

~ 26 ~

4.

R

ESULTS

As seen in the previous chapter, semi-structured interviews were held to get an understandable and comprehensive view on the way auditors could help their clients with implementing changes in IFRS-standards. In this chapter the results of the interviews and the main theories of the literature review will be compared. In the case of unexpected answers in comparison with the literature review, some extra literature will be added with reasons why the answer of the interviewee could be the answer. This fourth chapter is divided into five paragraphs. The first paragraph is about the distribution of the audit time between assurance services and advisory services. In relation to the time distribution, the independency of the auditor is an important issue. The second paragraph is about the variances between companies with extent to the amount of guidance they need. The third paragraph is about the presence of knowledge of IFRSs in the client’s company. The fourth paragraph is the way in which auditors stay informed about changes and interpretation of standards across Europe. In the fifth and last paragraph a short summary will be given of all paragraphs.

4.1

A

SSURANCE AND ADVISORY SERVICES

In this first paragraph of the results the focus is on the time distribution between the general assurance function and the advisory function of the auditor. In relation to this, the independence of the auditor is an issue that was frequently discussed in researches on the work of auditors. The answers of the interviews give the possibility to examine in what ways auditors take care of their independent position. Before the elaborate discussion on

safeguarding the independent status of the auditor it has to become clear how much of the audit time is spend on advisory services. The first question which is discussed here is: how much of the total audit time is spend on advising and supporting the client versus the time spend on the real assurance services?

“It is hard to give one clear-cut answer to this question because I have two types of clients. The first type of clients are the assurance-clients. The second type of clients are the clients where I only do advisory services.” (Interviewee A3)

From this answer it became clear that it was needed to define the question more

clearly. The total time spend on advisory services when the auditor does no assurance services for that specific client is no useful information. When the client is just an advisory client it is

~ 27 ~

obvious that the auditor spends all his time on advisory services. More interesting is the time which is spend on advisory services in the case of an assurance client.

“It is impossible to give a precise percentage of time used for giving advice to the client, because all clients are different. Important to know is that it is not real advisory but more controlling, and when accounting methods differ in comparison with competitive companies the auditor could suggest to use the same method as competitors do.”(Interviewee A)

“Approximately 10 percent of the time PwC is working for a specific client PwC is controlling proposals about new implemented standards or giving advice or trainings about new or modified standards.”(Interviewee C4

)

“We give advice at little as possible, especially in companies of public interest because we are not the advisory auditor.”(Interviewee D5

)

“The time spend on giving suggestions is different with each client. Large listed companies do often need less guidance in relation to smaller companies. It is therefore hard to say which percentage of time is spend on giving guidance.”(Interviewee E6

)

An important part of the answer of interviewee A is that when the client is an assurance client, and the general function of the auditor is therefore to control the financial statements, the auditor will not give advice but is more likely to suggest something. The main reason of just suggesting to use another accounting method than the method the client did use, is because the independency of the auditor could be harmed when real advice is given. The answer of Interviewee C indicates the part of time spent on giving trainings and controlling proposals made by the company on how to implement modified IFRS-standards. Interviewee D stated that the assurance auditor spends as little time as possible on giving advice.

Especially in the case of companies of public interest the rules of giving advice are really strict. Therefore the auditor will suggest the company to hire an advisory auditor when they have problems with IFRS-standards. In comparison to the previous answer quoted of interviewee A and C, they mentioned something very important.

“As an auditor I will never do the work which has to be done in the company

internally (when it is either an assurance or advisory client) but I will only suggest another

4 _{Interviewee C is a partner of PwC} 5

Interviewee D is a senior associate of PwC

~ 28 ~

accounting method when I think this method is better to use or more broadly accepted and understood by investors.”(Interviewee A)

“When a new or modified IFRS-standard is coming the client has to set up a white paper. In this white paper is stated in which way the client is going to use and interpret the new standard. This white paper is audited by the auditor and when it is approved the client can implement the new standard.”(Interviewee C)

“With the initial talk with the client the main modifications in standards of the coming year are discussed. The client has to change the financial statements by their selves. The only function of the auditor in this case is making the client aware of changes in the

standards.”(Interviewee D)

As mentioned by interviewee A the main function of the auditor is to suggest another accounting method when the auditor thinks the used method is not the best method available for that specific client. After the suggestion of the auditor and possibly the discussion with the client, the client has to change all financial statements by themselves and after the change the auditor will audit the statements again. Interviewee C mentions in his answer that the clients have to set up a white paper. In this white paper all changes caused by the new or modified standard are mentioned. The auditor will audit the accounting methods used by the client. When everything is approved by the auditor this white paper could be used by the client to implement the standards correctly. The white paper is meant to guarantee that the client will use the correct method to account when a new standard is implemented. From the quote could be derived that real advice is not given by assurance auditors. The only advice given is some suggestions to improve the comparability with other companies or suggestions about

alternative methods of accounting allowed by the standards.

As seen in the answers of the interviewees, apart from interviewee C, it is hard to determine what percentage of the total audit time is spend on advising or giving suggestions to the client. The following quote is from interviewee A about the time spend with the client.

“Almost 52 weeks a year an auditor is working at the client’s office to audit the quarter results of the company. When the audit team has their doubts about the accounting method the IFRS-specialist is asked to help and discuss with the client why the specific accounting method was chosen.”(Interviewee A)

The auditor will only be present the entire year when there is no possibility the complete audit can be done at the end of the year. Besides that it is more efficient for the

~ 29 ~

company when they only have to change the results of one quarter instead of the results of the entire year when the auditor does not accept the accounting method. From this quote it is possible to conclude that advice is only given when the audit team has their doubts about the used method. It is clear now that the advisory function of an auditor is only a small part of the time an auditor is working for a client. Only interviewee C gave an indication of the time spend on advising the client. He spend only 10 percent of his time to advice the client. Now it is time to get a more detailed answer on the question whether the independency is harmed by the advisory services of the auditor.

In the fifth paragraph of the literature review the two values of an auditor were mentioned. One of these values is the independence of the auditor to report a breach when found (DeAngelo, 1981). The assumption is that the independence is harmed when the auditor provides advisory services besides the normal assurance-services. It was shown that with the introduction of COSO a ban was created on the provision of non-audit services. Since it is important for an auditor to give some guidance when a client needs this, it is important to know in what way the auditor will retain his independency towards the client. The question to the interviewees was therefore: do you think that giving guidance harms the independence of the auditor? When yes, what do you do to prevent this? When no, why do you think it does not harm the independence?

“I think the independence of the auditor is not harmed when advice is given to the client. The auditor has to form an opinion about the financial statements. When the auditor thinks the statements could be better he will discuss this with the client. When everything is correct the auditor will give his signature.”(Interviewee A)

“When the auditor just sends newsletters when new IFRSs are released the

independency is not harmed. The client has to hire an advisory auditor when they need more information and advice on specific standards.”(Interviewee B7

)

“The independency is not harmed by providing suggestions about the accounting methods. Clients have to come up with a white paper with their ideas on how to implement new standards and the function of the auditor is to audit these ideas. When the auditor disagrees with the chosen accounting methods the client has to change their ideas. This does not harm the independency of the auditor.”(Interviewee C)

~ 30 ~

As already mentioned in an earlier quote of interviewee A the function of the auditor is not to guide or give advice to a client but to control the client. When the auditor finds

something in the financial statements he does not agree with, the auditor will give some suggestions how to improve the financial statements. It would have been peculiar when the auditor first says that there are some mistakes in the statements but does not give any suggestions on how to improve it. All quotes mentioned in this research conclude that the independency is not harmed when the auditor gives some suggestions about alternative ways of accounting. In the literature review has been shown already that most researchers

concluded the independency is not harmed. It is important to keep clear that the main function of the auditor is to control the financial statements.

“The main function of the auditor is to provide an audit on the financial statements of the client. When some accounting methods are incorrect or less efficient than alternative methods the function of the auditor is to give his or her opinion about these accounting methods. When the client agrees with the auditor the client has to work out an alternative standard.”(Interviewee E)

So the auditor wants to solve all mistakes in the financial statements by giving his opinion and suggestions to the company. The company has to change the financial statements and after that most of the time an unqualified opinion is given.

“The auditor only shows the right direction to the client or compares audit methods with competitors of the company, but will never give a binding advice.” (Interviewee A)

Following the answers of all interviewees, the most important thing to remember for an auditor is: never give real advice to an assurance client. In general could be concluded that auditors think giving some advice does not harm the independency. This is caused by the fact that they think an auditor should give suggestions about alternative accounting methods when needed. It is not real advice but more leading the client in the right direction.

4.2

D

IFFERENCES BETWEEN COMPANIES

In this second paragraph the focus is on the differences between several companies or specific industries with respect to the guidance given by the auditor. What are the aspects why companies or industries differ from others? This question will be answered in this paragraph. The question that was asked to the interviewees is the following: what are aspects of

~ 31 ~

“The size of the company is the most important aspect in the difference in need for guidance.”(Interviewee A)

“The complexity of the company, and thus the need for guidance, is dependent from a few things. Does the company face complex contracts, does the company have financial instruments and does the company have to report impairments and goodwill?”(Interviewee B)

So the size of the company is an important aspect to distinguish whether a company needs a lot of guidance or needs no guidance at all. The explanation why the size of the company is so important is the following:

“Larger companies do have a more complex organisation and therefore more complex situations with respect to the IFRSs. When a company faces more complex issues the guidance of the auditor is needed more often.”(Interviewee A)

Interviewee A experiences as IFRS-specialist that larger companies do need guidance more often than smaller companies. On one hand it is straightforward that larger companies faces more complex situations which cannot be solved without the guidance of an auditor. On the other hand it is remarkable that larger companies need more guidance because larger companies do have staff with more financial expertise because they have more employees in comparison to smaller companies. Although the statements of interviewee A are clear and understandable, interviewee B thinks the demand for guidance is caused by other facts.

“Small companies do not necessarily need less guidance than bigger companies. Companies with a lot of complex balance sheet items do need more often guidance from the auditor. This could be either small and large companies.”(Interviewee B)

“Both the size and the quantity of balance sheet items which are difficult to report for are important in the question which company needs the most guidance.”(Interviewee D)

Interviewee A and B do have a different opinion about the importance of the size of the company. Interviewee B and D mention that the difference exist because of the quantity of difficult balance sheet items. When a company does have a lot of these difficult items a lot of guidance is needed from the auditor. It does not matter whether a company is small or large. Interviewee D stated that the size of the company is an aspect in the need of guidance but does not have that much influence on the need. To make this discussion about the need for guidance more difficult the following answer was given by interviewee C.

~ 32 ~

“There is no difference in need for guidance between companies. It could be the case this is caused by the fact all my clients are large listed companies with a lot of

IFRS-specialists in-house.”(Interviewee C)

Two different reasons for different need of guidance were mentioned. The last view is that there is no specific difference between the need of guidance between companies.

Interviewee C mentions this is caused by the same size of all his clients and the in-house IFRS-specialists.

Now we know it is unclear whether there are differences between different types of companies it is interesting to know whether there are significant differences between several industries with respect to the need of guidance by implementing new standards.

“The most diverging industry is the industry of financial institutes. There are special audit teams to control those firms. Besides that there are some special IFRS-specialists for accounting issues within financial institutes.”(Interviewee A)

“Financial institutes have to follow up more rules and standards and are therefore more complex than non-financial institutes. Not only preparing the financial statements is more difficult but also the audit of the financial statements is more complex.”(Interviewee E)

The industry which needs the most guidance by implementing and using

IFRS-standards is the industry of banks, insurance companies and pension funds. This answer is not that remarkable when all audit companies have special audit teams for this financial

institutions. When financial institutions did not differ from “normal” companies there were no special audit teams or IFRS-specialists. The reason mentioned by interviewee A why financial institutions need extra guidance is that there were some changes in IFRS-standards which are mainly used by financial institutions. Now there are some changes in IFRS-standards on revenue recognition coming that mainly have an effect on financial statements of telecom providers which will need extra guidance of their auditors.

“There is no difference in need for guidance between different industries. Companies need more guidance when a new standard has an effect on their financial statements. This is most of the time industry-related, so financial institutions could be at one time and telecom provides another.”(Interviewee B)

4.3

C

LIENT

’

S IN

-

HOUSE KNOWLEDGE OF

IFRS

In the last two paragraphs is shown that most companies often need guidance from the auditor to implement or use IFRSs. In this paragraph it will become clear whether there is

~ 33 ~

enough knowledge about the reporting standards within the companies. In this paragraph also some attention is given to the use of guidance from auditors. When do companies need extra assistance of the auditor and in which situations does the company manage the IFRS-issues by their selves?

“80 % of the basic knowledge of IFRS-standards is available in the companies. While one year after the introduction the auditor had to guide companies with

everything.”(Interviewee A)

“The knowledge of IFRS standards of clients is too low in my opinion. And I have seen no improvement in the last years. Maybe the biggest problem of clients is

idleness.”(Interviewee B)

“In general the knowledge of employees of my clients is sufficient but the knowledge of IFRS is very personal. The one employee knows everything about IFRS while the other only understands the basic standards.”(Interviewee D)

The main problem mentioned in the first quote is the fact that companies had a lot of problems with the first implementation of the IFRSs in 2005. In the literature review was already stated the same by Hoogendoorn (2006), Gornek-Tomaszweski (2006) and Jaruga et al. (2007). Interviewee A remarked that in the last years the knowledge about IFRSs increased rapidly within the companies and there was less guidance needed. Interviewee B however mentioned that the expertise around IFRS is too low. Companies think it is easier to let the auditor do the work. When something is reported incorrectly the auditor will announce it. Interviewee D thinks the knowledge of employees differs very much. So it is not possible to speak of a company but you have to speak about employees of the client. It is about working together and using the same systems in the whole company. This could go wrong when the knowledge of one employee is much greater than another employee’s knowledge about IFRS. To conclude, there is a great difference between the opinions of the interviewees but both interviewee A and interviewee B think companies will never be able to solve all IFRS problems by themselves. Interviewee D thinks it depends on the manner in which is worked together in the company. Interviewee A stated the following reasons why companies do not have IFRS-specialists.

“It is too expensive for companies to have in-house IFRS-specialists and therefore the IFRS-specialists of auditor firms are hired to solve the problems. An extra benefit of external