The Unintended Consequences of IFRS Adoption on The Audit Market In Africa: An Oligopoly For The Big4

Abstract

Purpose: The perceived benefits of IFRS adoption have caused neglect in research on the possible unintended consequences of IFRS on the audit market, specifically in Africa. Motivated by this gap in the literature, we have critically evaluated whether IFRS adoption has created an oligopoly for the Big4 in terms of audit fees and auditor switching in Africa.

Design/methodology/approach: The study is based on publicly available data from 104 companies listed on the stock exchanges in 8 African countries. While we employed binary and multinomial logit regression to model auditor switching, ordinary least square was used to estimate the impact of IFRS adoption on audit fees with some diagnostics tests.

Findings: Companies are likely to replace auditors following the adoption of IFRS. Specifically, the multinomial logit regression confirms that companies are more likely to replace small audit firms with the Big4 (Small to Big -STB). The study also revealed a positive association between increases in audit fee and IFRS adoption. However, the Big4 experience significant fee increase for their services than the small audit firms.

Practical implications: These findings alert Small Medium Practitioners (SMPs) in non-IFRS countries about the potential intense competition in the audit market that can lead to the possible loss of clients to the Big4 after the adoption of IFRS. To mitigate this effect, national Professional Accountancy Organisations (PAOs) should build their local accountants through training and education to handle the complexities and continuous upgrading of IFRS. Such training is very crucial for SMP in Organization for the Harmonization of African Business Law (OHADA) countries, Ethiopia, Djibouti and other countries which are in the process of implementing IFRS.

Originality/value. This is an original study which empirically examines the impact of IFRS adoption on the audit market in Africa. It contributes to the ongoing debate on unintended consequences of IFRS adoption.