We present an index that can be used to distinguish between countries according to their institutional setting for the audit of financial statements and the enforcement ofcompliance with accounting standards. The pursuit of comparable financial reporting and adoption of IFRS has highlighted differences in institutional setting betweencountries that may influence the quality of IFRS reporting (Ball, 2006; Brown, 2011). The role of audit and accounting enforcement is arguably crucial to the applicationof IFRS. The IFRS Foundation’s staff has supported calls by the World Bank for an international infrastructure to support the application of IFRS, emphasizing that accounting quality is not a function of accounting standards alone (Hegarty et al., 2004;IASB, 2012). With the development of cross-country IFRS studies, researchers needeffective proxies to control for differences between countries in their institutional setting.

Our index represents a first attempt at ranking countries specifically on factors affecting the strength of audit and the level of enforcement activities relating to We present an index that can be used to distinguish between countries according to their institutional setting for the audit of financial statements and the enforcement of compliance with accounting standards. The pursuit of comparable financial reporting and adoption of IFRS has highlighted differences in institutional setting between countries that may influence the quality of IFRS reporting (Ball, 2006; Brown, 2011).

The role of audit and accounting enforcement is arguably crucial to the application of IFRS. The IFRS Foundation’s staff has supported calls by the World Bank for an

international infrastructure to support the application of IFRS, emphasising that accounting quality is not a function of accounting standards alone (Hegarty et al., 2004;IASB, 2012). With the development of cross-country IFRS studies, researchers need effective proxies to control for differences between countries in their institutional setting.

Our index represents a first attempt at ranking countries specifically on factors affecting the strength of audit and the level of enforcement activities relating to 16 has double the enforcement activity of a country scoring 8, although that is the literal interpretation of the numbers. Our aim is to provide a ranking of countries on enforcement in 3 years, using the index numbers to do so. At best, we can show how countries are positioned relative to their peers and how their position has changed over the study period. Nevertheless, our index improves on other indices by capturing, directly, differences between countries in their audit environments and enforcement of financial reporting requirements during a watershed period. Preliminary analysis supports this view.

There are many research opportunities to employ the index we present. For example, studies continue to address important questions about the consequences of adopting IFRS, often by considering the effect of the change of standards on the quality of financial statements or capital market outcomes. As another example, our index should be useful when the design of a study requires a measure of differences in the likelihood a country is monitoring compliance with accounting standards, including IFRS, and taking action on cases of non-compliance.

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IFRS stands for international financial reporting standards Its a set of accounting rules and standards that determine how accounting events should be ... View the full answer