Willem Buijink

Voluntary Adoption of Non-Local GAAP in the European Union: A Study of Determinants and Consequences

Abstract This study examines the determinants and consequences of voluntary adoption of non-local accounting principles (non-local GAAP) by firms listed and domiciled in the European Union (EU). We restrict ourselves to the two predominant internationally accepted sets of accounting standards: International Accounting Standards (IAS) and United States generally accepted accounting principles (US GAAP). We have used various sources to identify EU firms that use non-local GAAP. We examine the 1999 annual reports of all these firms, because accounting standard choices in more recent years may be affected by the announcement of the proposal by the European Commission in February 2001 to mandate IAS usage from 2005 on. The maintained hypothesis is that firms that voluntarily adopt IAS or US GAAP expect to experience net benefits from adoption. The finding that 133 non-financial firms in the EU voluntarily used non-local GAAP in 1999 suggests that the majority of listed EU firms does not expect to benefit from non-local GAAP adoption. By studying the characteristics of non-local GAAP adopters this study provides insight into the determinants of non-local GAAP adoption. We find that firms voluntarily using non-local GAAP are more likely to be listed on a US exchange, the EASDAQ exchange in Brussels, and have more geographically dispersed operations. Furthermore, they are more likely to be domiciled in a country with lower quality financial reporting and where IAS is explicitly allowed as an alternative to local GAAP. We also study whether non-local GAAP adopters have lower levels of information asymmetry, a much cited benefit of using more transparent financial reporting, than non-adopters. We examine three proxies for information asymmetry: analyst following, cost of equity capital, and uncertainty among analysts and investors (forecast dispersion and stock return volatility). We document a positive effect of non-local GAAP adoption on analyst following, but fail to find evidence of a lower cost of capital for non-local GAAP adopters. Contrary to expectations, uncertainty among analysts and investors appears to be higher for firms using IAS or US GAAP than for firms using local GAAP. However, by comparing ‘early’ and ‘late’ adopters, we find some evidence that suggests that benefits take some time to fully materialise.

Creditors' and Shareholders' Reporting Demands in Public Versus Private Firms: Evidence from Europe

In this study we investigate whether the importance of accounting information in contracting and communication with shareholders and creditors affects earnings timeliness in publicly disclosed general-purpose financial statements. To operationalize the relationship between timeliness demands and the importance of accounting information to shareholders and creditors, we compare the (asymmetry in) earnings timeliness of public firms with that of private firms. We attribute public versus private firm differences in timeliness to shareholders’ demands when a country’s institutions provide strong investor protection. Similarly, we attribute these differences to creditors’ demands when the institutions provide strong creditor protection. Our analysis of public and private firms in 13 Western European countries suggests that creditors and shareholders have different timeliness demands. In particular, we find that the public versus private firm difference in asymmetric timeliness is not associated with a country’s degree of investor protection but positively associated with a country’s degree of creditor protection. The results further suggest that shareholders demand symmetric rather than asymmetric timeliness. An important implication of our study is that general-purpose financial statements are responsive to creditors’ reporting demands, which contrasts with the idea that these — primarily private — creditors would use special-purpose reports.

Towards the establishment of an internal market for audit services within the European Union

The central issue in this paper is the creation of an internal market for audit services within the European Union (EU). It provides an analysis of the impact of differences between national auditing regulations on intra-EU trade in audit services. To that end, the paper distinguishes three forms of intra-Union crossborder trade in audit services: (1) cross-border establishment as an auditor; (2) cross-border provision of audit services; and (3) cross-border control of an audit firm. The paper also distinguishes four categories of regulation of auditing: (I) regulation of the qualification as an auditor; (II) regulation of competition between auditors or audit firms; (III) regulation of control of audit firms; and (IV) other regulations. For each of the three forms of intra-Union trade the paper indicates the importance of each of the four categories of regulation as trade barriers. For each of the three forms of trade the current level of intra-EU trade is then discussed. The paper shows that there is little such trade and argues that given the intra-EU auditor regulation differences, audit markets within the EU are still separate markets. This is of course remarkable against the background of the drive towards more market integration in the EU in general. The paper then uses insights from audit market research to suggest which forms of national audit market regulations in EU Member States should be removed to increase intra-EU trade in audit services. The paper identifies existing national regulations of the control of audit firms as the most important barrier. The paper argues that removing these (strict) regulations is the most promising route towards more intra-EU trade in audit services.