Assessing the Extent of Compliance with International Accounting Standards

INTRODUCTION The major objective of this study is to assess the extent of compliance with IAS by companies domiciled in three European countries. Specifically, this study's sample includes firms from France, Sweden, and Switzerland that have moved away from domestic financial accounting standards toward some level of compliance with International Accounting Standards (1) (IAS). This sample firms' financial statements are examined to ascertain the extent of compliance with IAS. Compliance as measured in this case speaks volumes about the degree to which management keeps up with IAS requirements, while providing some insight into whether management is truly interested in financial reporting transparency. For firms in many countries, the adoption of IAS represents a significant change in the orientation of their financial reporting system. Whereas IAS exemplify standards that focus on the decision-making needs of capital market participants--particularly investors and creditors--the domestic generally accepted accounting principles (GAAP) of the companies switching to IAS are often heavily influenced by tax legislation and/or governmental macroeconomic policy considerations. Consequently, the change to IAS ordinarily results in financial reports that contain greater transparency relative to domestic GAAP reports. Financial reports prepared under IAS are more suited to the needs of capital market participants because these numbers and notes are generated using a set of accounting method choices that are more restrictive than are those under domestic GAAP (Ashbaugh and Pincus 2001). Additionally, IASB's conceptual framework is patterned after the written frameworks in Australia, Canada, and the United States--all which refer to investors and creditors (rather than tax authorities or governmental agencies) as primary users of financial statements (Cairns, 2001). There are several motives for studying companies domiciled in France, Sweden, and Switzerland. First, many companies from these countries were claiming to have adopted IAS by the late 1990s. On November 1, 1998, the IASC listed 460 total firms as complying with IAS and over one-fourth of this total (128 firms) were domiciled in these three countries. Second, because the move from the domestic GAAP of these three countries to International Accounting Standards represents more than just a trivial change in reporting systems, the variability in compliance results may make for more interesting follow-up studies. As a contrast, Canadian GAAP and IAS are so closely aligned that finding significant noncompliance on the part of Canadian firms switching from domestic GAAP to IAS is less likely. Finally, capital market information necessary to test hypotheses in follow-up studies regarding, for example, cost of capital effects of greater transparency (e.g., Botosan, 1997), is more prevalent than it would be from a number of other countries where IAS adoption is more recent (e.g., Kuwait, Slovenia, Malta, Croatia). Financial statements prepared according to IAS are intended to provide transparent, comparable information to capital market participants and other external users making a variety of economic decisions, whereas the financial reporting of countries such as France, Sweden, and Switzerland has historically either paralleled tax accounting and/or has been designed to demonstrate conformance with a national economic plan (Gernon and Meek, 2001). Dumontier and Raffournier (1998) report that, for example, Swiss accounting is characterized by low disclosure requirements, few and permissive accounting standards, and a high degree of tolerance for income smoothing (p. 217). Ashbaugh and Pincus (2001) also provide empirical confirmation that the French, Swedish, and Swiss accounting measurement and disclosure requirements differ substantially from IAS during the period of this study. The remainder of the study is organized into the following sections: Section II describes the background need for a study of this nature. …

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