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Audit Reports on Financial Statements Prepared According

to IASB Standards: Empirical Evidence from the European


Union
Maria A. Garcia-Benau and Ana Zorio
Universitat de Valncia

This paper examines the audit report of 147 firms from the European Union that
prepare their financial statements in compliance with the standards developed by
the International Accounting Standards Board. Bearing in mind that the
consolidated accounts of listed companies will follow IAS from 2005 onwards, the
purpose of this paper is to provide some insight into the current outcome of the
statutory audit on this information. Interesting conclusions are drawn from this
empirical study with regard to the auditing standards applied, the wording used
and the differences observed between reports produced by auditors from the big
firms and reports from different European countries. The need to harmonise the
auditing field is discussed under the results obtained, with the final aim to
contribute to the standard-setting debate on the creation of a high quality
financial reporting system in the European Union.
Key words: Harmonisation, IASB, international accounting standards, IFAC, international
standards on auditing, audit report, European Union.

SUMMARY
The European Union has definitely embarked on a harmonisation strategy of financial
reporting based on the accounting standards issued by the International Accounting
Standards Board (IASB). Indeed, a 2002 EU Regulation requires that listed companies
prepare their consolidated information complying with International Accounting Standards
(IAS) from 2005, at the latest. However, in order to guarantee a high quality accounting
model a whole high quality infrastructure is needed, which obviously includes the auditing of
this financial information. This paper looks into the initiatives that are being considered in
this realm from the regulatory stand point. It seems that steps should be taken to harmonise
auditing standards in the European Union. In fact, policy-makers believe that the
International Standards on Auditing (ISAs) should be the reference to audit financial
information.
Since there are no agreed auditing standards to be followed in the European Union, we
decided to analyse some trends to see if they can be identified regarding the auditors
report on financial statements prepared in accordance with IASB standards. Hypotheses are
tested in three main areas: (i) whether the use of ISAs, local auditing standards or both are
related to certain factors (such as the auditor firm, the country of origin or the sector of the
company); (ii) whether there is a link between whether the auditors report states the
framework used for the preparation of the financial statements (i.e. only IAS or IAS and local
GAAP) and the audit firm; (iii) whether there is some kind of relationship between the
wording of the auditors opinion and other factors (such as the country of origin or the sector
of the company). Our sample comprises the audit reports for the year 2000 of 147 European
Union companies applying IAS. The research suggests that Big 5 firms are equally prone to
state in the auditors report that the auditing standards followed are either national,
international or both as other auditors.

Nonetheless, Big 5 firms are statistically more prone to follow only International Standards
on Auditing than other auditors. By country of origin, empirical evidence is obtained that
there seems to be a different level of propensity to follow International Standards on
Auditing, local standards of auditing or both in Austria, Germany or other countries (i.e., in
Austria, there seems to be a higher propensity to use ISAs, whereas in Germany it seems to
be a lower tendency to apply only ISAs). According to our results, the sector of the company
is not a determining factor to use of a certain kind of auditing standard. With regard to the
accounting standards followed, as stated in the auditors report, the Big 5 firms tend to state
more often compliance with IAS and local GAAP.
Regarding the auditors opinion phraseology, there seems to be different degree of
propensity to use the present fairly (PF) or true and fair view (TFV) terminology in Austria,
Germany or in other countries (a higher propensity to use the expression present fairly in
Austria and the true and fair view in Germany). Notwithstanding that, no conclusions can
be drawn on the relationship between this phraseology and the company sector.
This exploratory study provides evidence that the level of material harmonisation achieved
regarding the audit report of IAS financial information could be further increased. Indeed, it
opens up new avenues for research as the above mentioned initiatives in the formal
harmonisation debate are finally enforced.

INTRODUCTION
Many recent events highlight the interest of accounting regulators and capital markets
supervisors to take the necessary steps towards the establishment of just one set of
accounting standards to be used in the international realm. Indeed, this situation is mainly
the result of the increasing globalisation of capital markets and the subsequent need for
multinational companies to access the most developed capital markets in the world.
However, in order to guarantee the public confidence in the accounting system, global
accounting standards do need a quality infrastructure, which includes high quality standard
setting, enforcement, corporate governance and auditing of financial reporting (see SEC,
2000).
In May 2000, the International Organisation of Securities Commissions (IOSCO) completed
the assessment of 30 standards and their related interpretations issued by the International
Accounting Standards Committee (IASC, currently known as International Accounting
Standards
Board,
IASB).
In
the
subsequent
resolution,
IOSCO
encouraged its members to permit incoming multinational issuers to use the IASC standards,
i.e., the International Accounting Standards, IAS (please note that the standards issued by
the new IASB have been named International Financial Reporting Standards, IFRS) in the
preparation of their financial statements for cross-border offerings and listings,
supplemented1 where necessary to address outstanding substantive issues at a national or
regional level, or to use waivers of particular aspects, without requiring further reconciliation
under exceptional circumstances (IOSCO, 2000).
Shortly after this IOSCO resolution was approved, the European Commission issued a
Communication, in which it outlined a strategy for future financial reporting in Europe (see
European Union, 2000). Along these lines, a EU Regulation was passed in June 2002 to
introduce the IAS requirement for the consolidated accounts of European companies listed
on regulated markets (see European Union, 2002a). This requirement will come into force in
2005 and will be binding for virtually all 7,000 listed EU companies. The Regulation allows
Member
States
to
extend
this
requirement to all companies or allow compliance with IAS as an option. In this sense, the
European Union has approved amendments to the European Accounting Directives that

would remove inconsistencies of the existing Directives with IAS (see European Union,
2003a) and would address accounting by the estimated 5 million European companies that
are not subject to the IAS Accounting Regulation.
These proposed amendments are in line with the report published by the European
Commissions High-Level Group of Company Law Experts on A Modern Regulatory
Framework for Company Law in Europe (see European Union, 2002b). Regarding the
enforcement issue, the Committee of European Securities Regulators (CESR) has issued a
consultation paper on a Proposed Statement of Principles (SOP) of Enforcement of
Accounting Standards in Europe (see CESR, 2002). It points out that competent independent
administrative authorities set up by member States should have the ultimate responsibility
for enforcement of compliance of the financial information provided by the listed companies
(and those applying for listing) with the reporting framework. 2 In March 2003, the CESR
published its Standard No. 1, Enforcement of Standards on Financial Information in Europe,
which is aimed at creating a common approach to the enforcement of International
Accounting Standards (IAS) throughout the EU (see CESR, 2003).
With regard to the specific field covered by this study, i.e. auditing, the EU Committee on
Auditing (established by the Commission Communication The Statutory audit in the
European Union: the way forward in May 1998) has among its objectives to carry out an
examination of the external quality assurance systems for statutory audit, as well as an
examination of a set of core principles on audit independence and objectivity developed by
the Fdration des Experts Comptables Europens (FEE). This Committee was also set up to
undertake a review of the International Standards on Auditing (ISAs) developed by the
International Federation of Accountants (IFAC), as a benchmark for EU audit requirements.
As we show in Section 3, this seems to be the way forward.
From a European perspective, this paper looks into the current trends of the audit report on
financial information prepared according to IASB standards. Bearing in mind that the new
accounting model designed by the European Union is focused on International Accounting
Standards (IAS), we examine the auditors report of 147 European companies that are
already applying these standards nowadays. Conclusions are drawn on interesting aspects of
the material harmonisation achieved in this regard. Discussion of results is also provided
under the light of the initiatives recently proposed by the international and EU regulators,
i.e. formal harmonisation.
The remainder of this paper is organised as follows: the second section clarifies theoretical
concepts on harmonisation and looks into prior research on this realm. The third section
presents the current initiatives on auditing harmonisation of IAS financial information from a
regulators stand point, i.e. formal harmonisation. Bearing in mind these initiatives, we
analyse the auditors report of a sample of 147 European companies that are currently
applying the IASB standards. The fourth section presents the methodological approach of the
empirical
study,
the
sampling
procedure
and
the results obtained. The fifth section is devoted to the discussion of conclusions and the
implications of the findings.

PREVIOUS LITERATURE ON AUDITING HARMONISATION


First, a differentiation should be made between the concepts of harmonisation and
standardisation. As is generally accepted, standardisation is a process supposed to lead to a
global uniformity. Nonetheless, it should be noted that use of a single set of standards (i.e.
International Accounting Standards in the field of accounting or International Standards on
Auditing in the field of auditing) do not imply standardisation in the sense that several
options or alternatives might be allowed within that specific set of standards. On the other

hand, harmonisation refers to a process of increasing comparability and the avoidance of


total diversity (see Tay & Parker, 1990).
A distinction should also be made between what prior research refers to as de jure
harmonisation, or formal harmonisation, and de facto or material harmonisation. The former
term refers to harmonisation between regulations and the latter to harmonisation between
practices applied, regardless of whether such practices are affected by regulations.
Once this preliminary clarification has been made, it should be highlighted that this paper
provides an empirical analysis of some aspects related to material harmonisation, in the
sense that we look into the actual audit reports that are now produced on financial
information prepared in accordance to IAS. 3 In addition, we also look into formal
harmonisation of the audit report by means of looking into the initiatives that audit
regulators are about to undertake (or are in the process of doing so).
Prior literature on harmonisation is mainly devoted to accounting standards or practices, as
opposed to harmonisation of auditing. Hence, we present below a broad review of the
literature in this regard, i.e. accounting harmonisation, and then move on to analyse the
rather scarce empirical studies on auditing harmonisation.
Most existing research on the assessment of accounting harmonisation is focused on the
investigation of material harmonisation (see for instance Van der Tas, 1988; 1992a,b; Archer
et al., 1995; Herman & Thomas, 1995; Garca-Benau, 1995; Archer et al., 1996; Krisement,
1997; Lainez et al., 1999; McLeay et al., 1999; Caibano & Mora, 2000). With regard to
formal harmonisation of accounting, the research sets out to evaluate how regulations
change through time (i.e., time studies as in Garrido et al., 2002) or transversal studies
where several regulations from different countries are looked into (see Adhikari & Tondkar,
1992; Lanez et al., 1996; Rahman et al., 1996; DArcy, 2001).
It could be argued that research on material harmonisation has partially evaluated, in one
way or another, the impact of formal harmonisation on practice. As Rahman et al. (1996)
and Garrido et al. (2002) put it, one of the primary factors that should lead to material
harmonisation is formal harmonisation.
However, it should be noted that some studies provide a theoretical framework or empirical
evidence on the spontaneous trend to harmonisation experienced by large companies, i.e.,
the global players (see Meek & Gray, 1989; Meek et al., 1995; Taylor-Zarzeski, 1996;
Huddart et al., 1999; Caibano & Mora, 2000).
Indeed, recent research provides evidence on the existence of a direct link between formal
and material harmonisation. In this sense, Rahman et al. (2002) find that harmonisation of
accounting standards between Australia and New Zealand has increased material
harmonisation, even though firm-specific characteristics is also a determining factor in this
sense. To the contrary, Chen et al. (2002) conclude that there is no reduction in the gap
between the earnings of a Chinese company prepared in compliance with IAS or Chinese
GAAP, in spite of the fact that Chinese GAAP have been recently harmonised with IAS. The
authors find that the lingering gap in earnings may be explained by the lack of an adequate
supporting infrastructure in China, i.e. excessive earnings management and low quality
auditing.
With regard to the methodologies used by the above mentioned studies, the indexes mostly
used in the literature to assess the level of harmonisation are the I and C indexes, put
forward by Van der Tas (1988). Several authors introduce further improvements or
developments to those indexes and make their own methodological contribution to the

debate. For example, the global concentration index suggested by Garca-Benau (1995), and
the comparability index by Archer et al. (1995). In more recent years, further methodological
contributions have been made to this area of research (see Archer et al., 1996; Krisement,
1997; Morris & Parker, 1998; McLeay et al., 1999; Garrido et al., 2002).
The topic of measurement of auditing harmonisation has received less attention from
researchers. The pioneer study by Hussein et al. (1986) looked into the audit reports from 27
countries. Archer et al. (1989); Jones & Karbhari (1996) and King (1999) further documented
the differences in audit report practice among different countries.
More recently, new evidence has assessed harmonisation of the auditors report. Gangolly et
al. (2002) explore the audit report of 450 companies from 33 IFAC member countries at two
points in time, i.e., before and after ISA 13 was issued (this international standard provides
guidance on the form and content of the auditors report). They provide evidence that the
degree of material harmonisation has increased. In addition, they also document that the
formal harmonisation attained with ISA 13 has also increased, according to the answers
provided by respondents of a survey among IFAC member countries.
With regard to the auditing of financial information prepared in compliance with IASB
standards, only one study provides descriptive findings on this realm, as far as we know.
Dunn (2002) offers a broad overview of the matter and investigates the audit reports of 201
companies from around the world. The conclusions of the empirical study are focused on the
share of audits carried out by the Big Firms, by means of a methodological approach based
on percentages. Dunn, however, points out the need to further explore this issue, bearing in
mind the impetus that the harmonisation of accounting standards has received, and more
especially the role that the IASB standards are expected to play in this process. As
previously stated, a high quality financial reporting model needs not only high quality
accounting standards4 but also a high quality supporting infrastructure, which obviously
includes auditing (see SEC, 2000).
Therefore, we move now to look into the new European Union strategy on auditing
harmonisation. Indeed, the aim of the next section of the paper is to analyse more
specifically the initiatives taken from a regulatory or institutional standpoint.

INITIATIVES ON EU AUDITING HARMONISATION


Auditing standards are fundamental to providing high quality audits. Nevertheless, there are
currently, no agreed auditing standards in the European Union. Notwithstanding that, a
study undertaken by the Fdration des Experts Comptables Europens concludes that
European national standards are substantially in line with ISAs (FEE, 1998). However, a
subsequent survey showed that there is important diversity in the wordings of audit reports
among different EU countries (FEE, 2000). This argument could support the idea that a
seemingly satisfactory level of formal EU harmonisation of statutory audit does not
automatically imply a good level of material harmonisation.5
In line with the new strategy on accounting harmonisation based on IAS, there is wide
consensus that the initiative in the statutory audit realm should be based on the auditing
standards issued by the IFAC (see the Green Paper issued by the EU Maastrich Accounting
and Auditing Research Centre, MARC, 1996). In this sense, the ECOFIN council held in Oviedo
in April 2002 agreed that the EU Commission should adopt a new Communication to address
the use of the International Standards on Auditing (ISAs) for all EU audits by 2005, among
other policy priorities in the field of the statutory audit (see European Union, 2002c). Hence,
as stated in the Commission Recommendation of May 2002 Statutory Auditors

Independence in the EU: A Set of Fundamental Principles, the Commission intends to come
forward with a broader strategy on auditing which will address issues such as the use of
International Standards on Auditing (ISAs), the establishment of a public oversight on the
audit profession and the role of audit committees.
Along the same lines, FEE issued a proposal on International Standards on Auditing in the EU
(FEE, 2001). Compliance with ISAs is assumed to purport higher benefits with regard to
internal market efficiency, capital market efficiency, respect for the principle of subsidiarity
and a more efficient use of technical resources. The document puts forward that by 2005,
national auditing standards in the European Union should require auditors of financial
statements to: (a) perform audit procedures that comply with ISAs, (b) report on financial
statements in accordance with ISAs and (c) perform additional audit procedures and report
on
additional
matters
in
response
to
specific
legal,
regulatory or other needs established at a national level. No EU-wide opt outs from ISAs or
additional EU requirements are envisaged, so the FEE considers that there would be no need
to set up a European Auditing Standards Board.
Nevertheless, it stresses that the EU should play a proactive role in the consultation process
of the International Auditing and Assurance Standards Board (IAASB, formerly known as
International Auditing Practice Committee, IAPC) of the IFAC. 6 This way, the European Union
will hopefully have a greater influence on the future development of ISAs. This proposal
would be relevant not only to the audit statements prepared in accordance with IAS but also
with national GAAP, yet the FEE acknowledges that the impetus to report in accordance with
ISAs is strongest in the former case.
In fact, not only European standard-setters are aware of this need, the IFAC itself has issued
a proposal of an International Auditing Practice Statement called Reporting on Compliance
with International Financial Reporting Standards (see IFAC, 2002). The stress is put on the
fact that statements prepared in accordance with IAS must comply with all the requirements
that IAS and their interpretations impose, as per paragraphs 1019 of IAS 1 (revised 1997).
No limitation of such accounting framework is allowed in accordance with paragraph 17 of
ISA 700, which states that the opinion paragraph of the auditors report should indicate the
financial reporting framework used. Attention is also paid to compliance with more than one
reporting framework, such as IAS together with national GAAP, or to casual reference in the
notes regarding additional compliance with IAS.
Another project under consideration by the IFAC is to address the auditing of the first time
adoption of IAS (see IAASB, 2003), in parallel to the IASB Standard on First-Time Application
of IAS, IFRS 1 (see IASB, 2003).
The European Commission published a plan for improving the statutory audits throughout
the EU, since approximately two million European companies are required to audit their
annual financial statements (see European Union, 2003b). In order to implement the plan,
the 8th Directive will have to be revised and extended. The plan is divided into short- and
medium-term priorities. The short-term priorities which cover the period 20032004, include
not only, requiring ISAs for all statutory audits in the EU from 2005, but also to modernise
the 8th Directive to include principles on public oversight, external quality assurance,
auditor education and independence, code of ethics, auditing standards, disciplinary
sanctions, and the appointment and dismissal of statutory auditors. It is also envisaged to
strengthen public oversight of auditors both locally and at the EU level. As opposed to the
FEE (2001) proposal, the EU plans to set up an EU Regulatory Committee on Audit, with
power to adopt binding regulations on auditing. However, the present EU Committee on

Auditing, will be renamed the Audit Advisory Committee with representatives of Member
States and of the profession, and will only provide advice as regards the auditing realm.
The medium-term priorities are expected to be addressed during 20042006. Transparency
of audit firms and their networks will be increased through disclosure requirements. The
Commission also aims to improve disciplinary sanctions and to strengthen the role of audit
committees and internal controls. In addition, auditor independence and promotion of a code
of ethics will be reinforced so as to obtain US recognition of the equivalence of the EU
approach. Last but not least, the economic impact of auditor liability regimes in Member
States will be looked into and actions will be taken to guarantee freedom of establishment of
EU audit firms and on crossborder provision of audit services.
As a result of the above, it seems clear that there is a need to improve formal harmonisation
of auditing of financial information prepared in accordance to IASB standards. In other
words, as Rahman et al. (2002) put it, EU and international policy makers believe that
regulation harmony will lead to practice harmony and are definitely working to this end in
the field of auditing, as the above mentioned initiatives show.
From our point of view, empirical research is needed to evaluate whether actual trends can
be currently identified with regard to the auditing of financial statements prepared in
accordance to IASB standards. Therefore, the next section is devoted to analysing current
trends regarding material harmonisation of auditing of financial reporting under the IAS
framework.

EMPIRICAL STUDY
Sampling procedure
In order to identify the population of European Union companies applying IAS, previous
research on compliance with IASB standards has started the sampling procedure on the
basis provided by the list of companies using IAS that the IASB offers in its website.
Nevertheless, as the IASB itself put it, this list is not, nor does it claim to be, complete that
would be an impossible task. However, the financial statements of those companies listed
are representative of the form and content of annual financial statements prepared using IAS
as the primary basis of accounting and reporting.
Therefore, with a view to increasing the potential number of identified companies using IAS,
an initial search was carried out through the Worldscope database combining the variables
country of origin and accounting standards followed. As a result, 228 companies from the
EU15 countries using either international standards or international standards and some
EU guidelines or local standards with EU and IASC guidelines in the year 2000 where
identified. Out from these companies, five were eliminated to avoid doublecounting due to
different entries of the database for the same company. Next, this list of companies was
compared with the list that the IASB website provides on companies using IAS and 27 more
companies were added to our initial population, which comprised up to 250 companies.
The next step was to gain access to the English version of the annual reports of these
companies for the year 2000, through the internet. It was not possible to find this
information for 92 companies, mainly because the website of the company could not be
found or the annual report was not available in English. Hence, the electronic version of the
annual report in English was available for only 158 companies.
After careful reading of the annual report, 11 companies had to be deleted from the sample
because they had prepared their financial statements in compliance with local GAAP (10

companies) or USGAAP (1 company). None of these companies had been included in the
IASB list of companies.
Finally, our sample comprises 147 audit reports from European Union companies that
prepared their financial statements in accordance with IAS. Table 1 shows their countries of
origin. Given that in some EU countries IAS financial statements are not allowed to fulfil the
accounting requirements set by the local Acts, in those countries the propensity to comply
with the IASB standards is rather low. On the other hand, in countries like Austria or
Germany where IAS are allowed for national reporting purposes, the number of companies
preparing IAS financial information is rather high (see for instance the above-mentioned
IASB list of companies using IAS). This is why our sample is unevenly distributed by EU
countries. However, as presented in the next section, hypotheses relating to the country of
origin (H3 and H7) are only formulated in terms of Austria, Germany and other countries.
This is because our sample can only provide statistically valid results for these two EU
countries, given the number of observations obtained. Note that this should be simply borne
in mind as a limitation of the study, when looking at the results by country of origin.

Hypotheses
In order to analyse the current trends of the auditors report on financial information
prepared in accordance with IAS, several hypotheses are put forward, as shown below.
Contingency tables are undertaken, so that the c2 test can provide statistical evidence to
reject or accept each of the null hypotheses pointed out (Herman & Thomas, 1995; King,
1999; Caibano & Mora, 2000; Rahman et al., 2002 also use this methodology).
For a specific hypothesis, the reports with nondisclosed items are deleted from the sample
because of the requirements of the c2 test. Also, when an auditors report combines two of
the categories analysed (for instance, it has been signed by two Big 5 firms), it is considered
for each group (i.e. for both Big 5 firms). No more than 20% of the expected frequencies
obtained must be lower than five and none less than one. In some hypotheses, groups are
combined in order to comply with this requirement of the c2 test (for instance, tests focused
on the country of origin are only carried out for companies from Austria, Germany and other
countries). Some of the c 2 tests undertaken did not fulfil the requirements above. Therefore,
we performed the Fisher exact test, which provided confirming results in all the cases
analysed (see Hogg & Tanis, 2000).
According to ISA 700 (effective for audits of financial statements for periods ending on or
after 30 September, 2002 though earlier application is encouraged), the auditors report
should clearly indicate the financial reporting framework used to prepare the financial
statements (para. 17). However, the previous ISA 13 (para. 9) simply suggested that the
audit report stated the accounting framework used in the preparation of the financial
information of the company. Having said that, the auditors reports analysed for the year
2000 show that only one of them stating compliance with ISAs does not indicate the
accounting standards followed by the company (see Table 2). This indicates a high level of
voluntary compliance with this suggestion included in ISA 13.
Note that one auditors report of an audit carried out both in compliance with ISAs and local
GAAS stated an unqualified opinion on the financial statements in compliance with IAS,
even though the company itself stated in the annual report that the financial statements had
been prepared in accordance with IASB standards and local GAAP (Lectra Systemes, also
included in the IASB list of IAS companies).
Another auditors report stated that the audit had been carried out both in compliance with
ISAs and US GAAS (Schering Aktiengesellschaft). Obviously in our following analysis it was
coded as ISAs.

Auditing by a Big firm has been theorised to be a factor of compliance with IAS (Al-Basteki,
1995; Dumontier & Raffournier, 1998; Murphy, 2000). We now look into the hypothesis as to
whether Big audit firms have an incentive to follow International Standards on Auditing. In
line with the reasoning presented by Dumontier & Raffournier (1998), we could argue that
motivation for this is twofold. First, auditors reputation can be highlighted by the fact that
they apply stringent auditing standards with a global supporting infrastructure, which are
supposed to generate superior financial information with higher credibility. Second, large
international auditing firms can obtain economies of scale in worldwide application of ISAs.
An alternative explanation for Big 5 compliance with ISAs could be that these firms have
developed an expertise in this area and are interested in selling a new product to their
clients to generate additional revenues.
With regard to the wording of the auditors opinion in terms of the true and fair view (TFV)
or the present fairly (PF) phraseology, some reports express a combination of both. 7 The
assimilation
to
TFV
and/or
to
PF
has
been
made
on the grounds that, theoretically, TFV (as conceived in the UK and probably in the rest of
Europe) is more in line with the idea of compliance with the spirit of the accounting rules,
whereas PF (as conceived in the US) is more related to compliance with the letter of the
accounting rules (see Alexander & Archer, 2001).8
Hence, we formulate next four hypotheses related to the use of International Standards on
Auditing, local auditing standards or both, as stated in the auditors report.
H1: there is no link between whether the company has been audited by a Big 5 firm or not
and the audit standards followed, according to the auditors report.
H2: Any Big 5 firm is equally prone to audit financial statements according to either local
GAAS, ISAs or both.
H3: There is no link between the country of origin for the company (i.e. Austria, Germany or
other countries), and the audit standards followed, according to the auditors report.
H4: There is no link between the sector 9 of the company, and the audit standards followed,
according to the auditors report.
The second set of hypotheses test the material harmonisation achieved nowadays with
regard to whether the auditors report states the framework used for the preparation of the
financial statements for the company. Even though it is true that the accounting standards a
company is following is a matter for the company, previous research shows that auditors
might play a role in the adoption of the international accounting standards (see Al-Basteki,
1995; Dumontier & Raffournier, 1998; Murphy, 2000). This conclusion might also be derived
from the special attention that some audit firms are paying to these standards and their
promotion among their clients (see IAS of Growing Importance for US Companies, Deloitte
and Touche, 2003, or Making the Change to IAS on the PriceWaterhouseCoopers website).
We aim to shed some light on this issue also through the study of the auditors reports
included in our sample, i.e. we expect that empirical evidence might be drawn to
corroborate whether auditors might have different strategies regarding clients use of the
IASB standards as the only accounting framework or together with the local accounting
standards. Please note that IFAC (2002, para. 6) also seems to share the view that the
statutory auditors might play a role in the choice of the accounting framework used by the
company.
Therefore, we test the null hypothesis:

H5: There is no link between whether the company has been audited by a Big 5 firm or not
and the framework used in the preparation of financial statements according to the
statement made in the audit report.
H6: Any Big 5 firm is equally prone to audit financial statements according to the statement
made in the audit report on whether the company has followed either local GAAP, IAS or
both.
The third set of hypotheses test the material harmonisation achieved at present with regard
as to whether the wording of auditors opinion depends on company characteristics as the
country of origin or the industry sector in which it operates. One second limitation of our
study must be acknowledged with regard to this third set of hypotheses. The coding
procedure to identify the wording of the auditors opinion as present fairly or true and fair
view is done according to the English version of the auditors report. This is because the
approach we undertake in this study is that of an international reader of the annual
accounts, who would normally read the English version (indeed, this is why companies
translate financial information into English to reach a wider international readership).
H7: There is no link between the country of origin of the company (i.e. Austria, Germany or
other countries), and whether the auditors opinion is worded in terms of the true and fair
view or the present fairly phraseology.
H8: There is no link between the sector of the company, and whether the auditors opinion is
worded in terms of the true and fair view or the present fairly phraseology.

RESULTS
With regard to the first set of the hypotheses tested, mixed evidence has been obtained, as
we show below.
H1 cannot be rejected at the 5% significance level. The empirical evidence suggests that all
auditors (no matter if they belong to a big audit firm or not) are equally prone to state in the
auditors report that the auditing standards followed are either national, international or
both.
However, if we explore further this issue, empirical evidence points out that Big 5 firms are
more prone to follow only ISAs than other auditors, at the 5% significance level. With regard
to
H2,
the
null
hypothesis
cannot
be
rejected. No conclusion can be reached with regard to each of the Big 5 audit firms and the
auditing standards followed. There are no significant differences in the frequencies according
to the Big 5 firm and the kind of auditing standards followed.
At the 5% level, H3 is rejected. This implies that there is a significant difference in the audit
standards followed depending on whether the company is from Austria, Germany or from
other EU countries. Indeed, there seems to be a lower tendency to apply simply local
auditing standards in Austria, whereas there seems to be a lower tendency to apply simply
International Standards on Auditing in Germany, according to the evidence obtained.
At the 5% level, H4 cannot be rejected. There are no differences in the frequencies of the
kind of auditing standards applied across the different sectors analysed. In other words, the
sector of the company is not a determining factor for the use of some kind of auditing
standards, according to our results.
Next, we look into the results obtained for the second set of hypotheses tested, i.e. related
to the accounting standards followed in the preparation of the financial statements of the
company, according to the auditors report.

H5 is rejected at the 5% significance level. This empirical evidence suggests that Big 5 firms
tend to state compliance with both IAS and local GAAP more often.
H6 is rejected at the 5% significance level. This empirical evidence suggests that some Big 5
firms tend to state compliance both with IAS and local GAAP more often than others.
Exploring this issue further, it seems that PWC and KPMG state compliance both with IAS
and local GAAP (significant at the 10% level) less often than others.
Deloitte and Touche is a Big 5 firm which states the most double compliance with IAS and
local GAAP (significant at the 1% level).
Finally, the third set of hypotheses examine the wording of the auditors opinion, with the
following results.
At the 5% level, H7 is rejected. This result implies that there are different trends regarding
the wording of the auditors opinion depending on whether the company is from Austria,
Germany or from other EU countries. Indeed, there seems to be a higher tendency to use
the expression present fairly in Austria, while there seems to be a higher tendency to use
the expression true and fair view in Germany.
At the 5% level, H8 cannot be rejected. Therefore, we can conclude that there are no
differences in the frequencies of the different wording of the auditors opinion across the
different sectors analysed.

CONCLUSIONS OF THE STUDY


This study investigates current trends of the auditors report on financial information
prepared in accordance with IASB standards in the European Union. Empirical evidence is
obtained in this regard, though the results are not always conclusive.
As acknowledged, two limitations of this study must be borne in mind when looking at the
results obtained. First, the sample used is unevenly distributed among the EU countries
because in some of them (such as Germany and Austria) it is more usual that companies
prepare their financial statements according to IAS (mainly because these standards are
allowed by local Acts to fulfil legal accounting requirements), whereas in other EU countries
companies rarely comply with IASB standards (since local regulation requires compliance
with national standards). The second limitation of our study is due to the fact that we used
the English version of the auditors report, because in a context of increasing globalisation
and harmonisation, we adopted the approach of an international reader. Hence, the
translation of the auditors report into English (if it was not the original language) may have
introduced a disturbing effect in this regard, which might have had a slight effect on the
third set of hypotheses tested. Also, it should be noted that given that the analysis is carried
out according to the information provided in the auditors report, our results and conclusions
are based on what auditors say they do which may not be what they actually do.
Regarding the use of auditing standards, our empirical study suggests that Big 5 and non Big
5 auditors are equally prone to state in the auditors report that the auditing standards
followed are either national, international or both. Nonetheless, Big 5 firms are statistically
more prone to follow only International Standards on Auditing than other auditors. There
does not seem to be significant differences of behaviour among the Big 5 firms in this
regard, though. By country of origin, different trends are identified depending on whether
the company is from Austria, Germany or other countries. In fact, there seems to be a higher
propensity to follow International Standards on Auditing in Austria, whereas in Germany it
seems to be a lower tendency to apply only International Standards on Auditing. The sector

of the company is not a determining characteristic for use of a certain kind of auditing
standard, according to the evidence obtained.
With regard to the accounting standards followed, as stated in the auditors report, the Big 5
firms tend to state compliance with IAS and local GAAP more often. Indeed, KPMG and PWC
apply IAS the most, whereas Deloitte and Touche is the Big 5 firm that states both
compliance with IAS and local GAAP the most.
Regarding the auditors opinion phraseology, there seem to be different trends depending on
whether it is an Austrian or German company or belongs to another EU country. In fact, there
seems to be a higher propensity to use the expression present fairly in Austria and true
and fair view in Germany. Last but not least, no conclusions can be drawn on the
relationship between this phraseology and the company sector.
All in all, the main conclusion of this paper is that the level of material harmonisation of the
audit reports analysed does not seem to be enough to support a whole high quality
infrastructure for the accounting system. The standards applied when auditing IAS financial
statements are not always the ISAs, even though, as per our first set of hypotheses, certain
factors have been identified as making these standards more used when auditing financial
information elaborated within the IASB framework. In addition, there seems to be a trend
that Big 5 firms are more prone to audit financial statements in accordance both with
international and local GAAP than other auditors, as per our second group of hypotheses
tested. It may be the case that this is the consequence of gradual promotion of IAS among
Big 5 clients, yet further research could try and explore this further (i.e. voluntary adoption
of IAS as an additional framework for the preparation of the financial information of the
company or as a change of framework, replacing local GAAP). In this sense, IFAC (2002,
para. 6) highlights that the auditor should encourage management to prepare the financial
statements in accordance with the predominant financial reporting framework only. Finally,
the phraseology used in the auditors opinion seems to depend on the country of origin of
the company. Notwithstanding that, ISAs do not express a preference for a specific wording
(either PF or TFV, see ISA 700).
In the field of formal harmonisation, current initiatives have been reviewed with regard to
the auditing of financial information prepared in accordance with IAS. The way forward in the
European Union strategy is to promote the use of the IFAC standards on auditing in this
realm. Our study suggests that material harmonisation could increase as a result of this
initiative. Of course, numerous opportunities exist for future research in this field as the
above-mentioned initiatives are gradually enforced. Research should definitely try and
assess the enhancement of material harmonisation of auditing as formal harmonisation
increases, in order to provide empirical evidence not only in that specific aspect but also on
the link between both formal and material harmonisation. In addition, future research may
adopt a more critical approach and analyse whether what auditors say they do in the
auditors report is also what auditors actually do.

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