In fact, MIT Sloan School of Management Associate Professor of Accounting Joseph Weber – along with a trio of researchers from the University of Technology, Sydney – did just that. The group studied the IFRS transition experience of 280 companies, excluding trusts and REITs, that made up the Australian S&P. They looked for links between errors made during the transition, and the firm’s CFO, auditor and debt monitoring. The results can be found in their study, “.”
Across the 280 companies, the scope of IRFS errors ranged from $10,000 to nearly $500 million. More than half – 142 companies – overstated an earnings number. About the same number had errors in their reporting of stock-based compensation.
The biggest surprise to Joseph Weber, the MIT associate professor and one of the authors? “The number of firms with errors.” At the same time, Weber notes that the way in which Australia made the transition may have contributed to the number of mistakes. Australia took a “big bang” approach to IFRS adoption, the study authors say. That is, companies weren’t allowed to use IFRS before the adoption year, which began with financial years starting on or after January 2004. Then, for financial years starting on or after January, 2005, firms were required to use IFRS. The results could differ in countries that allow voluntary adoption.
The study authors found that “certain CFO characteristics, auditor characteristics and the timing of adoption all are associated with IFRS adoption errors.”
Among the major examples of such errors:
* Firms whose CFOs also are CPAs or Chartered Accountants were less likely to have an IFRS transition error. Conversely, firms with CFOs holding other degrees, such as MBAs or LLM (Master of Laws) were more likely to have IFRS adoption errors. Clearly, and perhaps not surprisingly, advanced accounting expertise helps minimize errors during the transition to IFRS.
* At the same time, firms with CFOs who have been in place for longer periods also experienced fewer errors.
* Firms that worked with one of the Big 4 audit firms (Deloitte, Ernst & Young, KPMG and PwC) were more likely to have IFRS transition errors. However, the authors note that these firms probably have more complicated accounting structures than firms that work with smaller accounting companies. That alone could lead to more mistakes.
* In looking at auditor tenure, the results indicate a U-shaped relationship. Firms that had recently hired new auditors, as well those whose auditors had been in place for a while, were likely to experience more mistakes.
* Finally, firms that made the transition to IFRS earlier (due to earlier fiscal year-ends) were more likely to experience errors.
* Errors were less likely among larger firms. Thus, while their accounting structures typically are more complicated, they also have access to expertise that smaller firms might not.
Finally, the researchers found that mistakes made during the transition to IFRS have a bottom line impact, as they led to increases in the bid/ask spread of the firms’ shares, as well as increases in audit fees in the period following the transition.
As U.S. companies and their CFOs look ahead to IFRS implementation, they can learn from the experiences of companies that already have made the shift, Weber notes. For starters, CFOs that made their way up the corporate ladder from outside the accounting function will want to look into additional training.
In addition, firms will want to check whether their outside audit team has international experience. “It will be helpful, as well,” Weber says.