Measuring Country Differences in Enforcement of Accounting Standards: An Audit and Enforcement Proxy

Abstract

In this paper we present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country’s accounting standards. The adoption of International Financial Reporting Standards (IFRS) aims, in broad terms, to promote the comparability and transparency of financial statements and to improve the quality of financial reporting. However, the effectiveness of IFRS adoption is believed to be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of the impact of IFRS have used a range of proxies to capture these country differences, but the proxies seldom focus explicitly on factors that affect how compliance with accounting standards is promoted through external audit and the activities of independent enforcement bodies. To address this deficiency, we calculate measures of the quality of public company audits (AUDIT) and the degree of accounting enforcement activity (ENFORCE) for 51 countries for each of the years 2002, 2005 and 2008, using publicly available data provided by the International Federation of Accountants (IFAC), the World Bank and the national securities regulators. Our aim in constructing and publishing our index is to make available, to researchers and other interested parties, country-level enforcement measures that are more obviously focused on financial reporting practices.