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An Empirical Investigation of Multinational Firms'Compliance with International Accounting Standards
Samir M. El-Gazzar, Philip M. Finn and Rudy JacobPace University, New York, NY, USA
Key Words: International Accounting Standards; Cross-border trade; Harmonization; Voluntary
disclosure
Abstract: Over the years, the number of firms acknowledging adherence to International
Accounting Standards (IAS) in the presentation of their financial statements has increased
steadily. Since adherence to IAS is not mandatory, the questions are who are these firms, what are
their characteristics, and why are they voluntarily complying with IAS. This study examines the
underlying motivations and characteristics of firms complying with IAS. This examination is of
special interest to the International Accounting Standards Committee (IASC) for assessing the
merits of mandating IAS by multinational firms. It also helps accounting researchers in
understanding the disclosure behavior of multinationals. Our results indicate that the magnitude
of a firm's foreign operations, its financing policy, membership of certain geographical and trade
blocks in the European Union (EU), and multiple listing on foreign stock exchanges are
significantly associated with multinationals' compliance with IAS.
This paper examines the characteristics of multinational firms complying with Interna-
tional Accounting Standards (IAS). IAS are not mandatory, yet many multinational firms
are voluntarily complying with the standards. The findings of this study should not only
enhance our understanding of why firms are motivated to adhere to IAS, but also provides
us with the merits of mandating IAS instead of allowing discretionary adoption by firms.
The economic forces of international trade and finance made evident a need to
overcome the obstacles created by widely divergent systems of financial reporting and
their nationalistic antecedents. Expanding firm activities into foreign markets increases
the number of users of its financial statements and disclosures. Users in foreign (host)
countries prefer financial statements and disclosures that are comparable to locally
prepared statements in terms of accounting standards and scope of disclosure. Financial
statements prepared in accordance with local GAAP might have to: (i) be restated in
The International Journal of Accounting, Vol. 34, No. 2, pp. 239± 248 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright # 1999 University of Illinois
Direct all correspondence to: Samir M. El-Gazzar, Pace University, Lubin School of Business, One Pace Plaza,
New York, NY 10038, USA; E-mail: selgazzar@pace.edu. Samir El-Gazzar is also associated with Tanta
University in Egypt.
The InternationalJournal ofAccounting
accordance with host country GAAP, as is the case in the United States;1 (ii) provide for
a reconciliation between host country and the local country GAAP; or (iii) adopt a set of
accounting rules that are universally acceptable, such as IAS. For example, when
Daimler Benz of Germany wanted to obtain equity financing and have their shares
traded on the New York Stock Exchange (NYSE), they had to comply with the listing
requirements of the Securities and Exchange Commission (SEC), which require
compliance with United States GAAP.
In the absence of a universally acceptable set of accounting standards and disclosures, a
firm wishing to list its securities on multiple stock exchanges would conceivably produce
multiple financial statements to comply with the securities laws and host country GAAP of
each respective country in which its shares wished to be listed. This could be a very costly
process to the firm and confusing to the financial markets, and may lead to a sub-optimal
resource allocation for both the firm and local markets.
To overcome this and similar type of problems of dealing in an international
environment, the accountancy bodies of nine countries founded and formed the Interna-
tional Accounting Standards Committee (IASC) in 1973. The IASC formulates and
publishes in the public interest accounting standards to be observed in the presentation
of financial statements and to promote their worldwide acceptance and observance. While
not empowered with any enforcement provisions, the members agreed to support the
standards and use their best efforts to ensure that published financial statements comply
with the standards. They further agree to persuade governments, stock exchanges, and
other bodies to support the IASC's standards.
In 1987, a global body of securities regulatory agencies and security exchanges formed
the International Organization of Securities Commissions and Similar Organizations
(IOSCO) to, among other things, cooperate toward ensuring better regulation of security
markets, and establish standards and an effective surveillance of international security
transactions. In this regard, they joined the IASC consultative group and agreed that they
would enforce compliance with international accounting standards if the number of
allowable options included in acceptable IAS standards were reduced and other standards
were strengthened.2
The IOSCO has promulgated a list of core accounting issues that must be included in
IAS in order for IOSCO to endorse the pronouncements for use by issuers in cross-border
financing. A `̀ work plan'' has been devised by the IASC with scheduled completion of
all projects by 1999. The conclusion of this collaboration could result in statements
prepared in accordance with IAS being acceptable for most foreign stock exchanges,
thereby eliminating the current need to produce multiple financial statements to comply
with each country's individualistic requirements (Nottle, 1993). Not only will this
eventually reduce the cost and confusion associated with different reporting requirements,
it will likely increase substantially the amount of cross-border financing and stock
exchange listings.
The efforts of the institutions mentioned above would hopefully result in a uniform
solution to the problem in the long run. Meanwhile, multinational firms are currently
coping with the problem on a cost-benefits basis. As economies become more and more
inter-dependent, compliance with IAS, as a solution, seems to be growing and, thus,
warrants investigation since IAS are not mandatory. Understanding the characteristics and
240 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 34, No. 2, 1999
motivations of this subset of multinationals would help in assessing the potential outcome
of mandating IAS for multinational firms.
The results of this study help provide some insight into why firms have voluntarily
elected to adopt IAS. It would appear that firms voluntarily complying with IAS are
those wishing to obtain exposure to new markets, obtaining foreign debt and equity
capital, improving customer recognition, or looking to reduce political costs. Their
motivation seems to be driven by a demand for financial information that is prepared in
accordance with a more universally recognized set of accounting standards than those
prepared in accordance with local accounting standards. In an efficient global market, if
the inherent reliability and timeliness of accounting information is questionable, investors
and creditors will impose higher costs of financing on companies providing mis-
information. Mandatory compliance with IAS could lead to more cost effective and
efficient markets through reduced costs of compliance and analysis. It would also
enhance cross border financing and trade as well as provide a means to better
understand foreign firm credit worthiness.
DETERMINANTS OF MULTINATIONAL FIRMS' COMPLIANCE WITH IAS
Although cross-border financing and listing on foreign stock exchanges are significant
reasons for some firms to voluntarily adopt IAS, they are not the only reasons. We
hypothesize that firms are motivated to comply with IAS as a response to their ope-rating
and financing environment. This environment includes among other things: (i) interna-
tional market dependency; and (ii) regional or geographical organization membership.3
International Market Dependency
Multinational firms compete for international resources such as customers for their
products, capital for growth and expansion, and materials and technology. Prior
research (e.g., Zarzeski, 1996) argues and concludes that firms competing for foreign
resources tend to expand their financial and accounting disclosure as bonding for
resource providers. This expanded disclosure is assumed to reduce resource providers'
uncertainty about transactions with the firm and, in turn, enable the firm to obtain
resources at lower costs. Verrecchia (1983), in an analytical description of capital
markets, shows that traders are unable to interpret withheld information of a firm as
good or bad, in comparison to the firm's competitors. Indeed, traders are likely to
discount the value of the firm, thereby encouraging more transparent disclosure
practices.
Compliance with IAS is a form of expanded disclosure aimed at satisfying the needs of
the foreign user of the firm's financial statements. Financial disclosures prepared in
compliance with IAS can facilitate comparison across firms of different nationalities as
well as being indicative of more reliability. Therefore, compliance with IAS reduces the
risks to international users of financial statements. Moreover, reducing the uncertainty of
resource providers through compliance with IAS makes the firm more attractive to
resource providers and, therefore, helps the firm in obtaining international resources at
reasonable costs.
An Empirical Investigation of Multinational Firms' Compliance with IAS 241
Distribution Markets
Firms that derive a significant part of their revenues (or manufacturing operations)
from foreign markets tend to develop international policies with respect to investing,
marketing, financing, and disclosure. To serve their trading partners in multiple foreign
markets while minimizing service costs, multinational firms may find adherence to IAS
a more appro-priate disclosure policy that may help reduce chances for misunderstand-
ing and misinter-pretations, thereby strengthening confidence (Wyatt, 1997). In addi-
tion, there have been suggestions that indirect benefits accrue from foreign stock
listings that include increasing publicity about the firm and a reduction of possible
political costs (Gray and Roberts, 1994). For example, increased publicity that results
from foreign listing might change per-ceptions that a firm is more serious about its
commitment to a country thereby encouraging sales to customers who cherish the
stability of local and long-term relationships.
H1: Firms with higher percentage of total revenue derived from foreign sales (FS)
are more motivated to adhere to IAS in their financial statements. This implies
a positive correlation between the percentage of FS and the likelihood of a
firm's adherence to IAS.
Access to Foreign Capital Markets
Multinational firms invest in different foreign countries. Parallel to their multinational
investment policy, is the tendency to raise capital from different foreign markets. Raising
capital from foreign markets helps multinational firms in two areas: (i) raising capital at
lower costs; and (ii) achieving hedges against fluctuations in foreign currencies.
However, capital suppliers in host countries generally demand more reliable and
comparable financial information to assess the foreign investee's worthiness. In fact,
many stock exchanges require foreign firms wishing to list their securities to conform
financial statements to local accounting principles and financial disclosure or to comply
with IAS. Faced with additional risks and uncertainties in procuring competitive
resources, it is likely that multinational enterprises adhere to IAS to satisfy foreign
capital market information needs.
In this study, we use two measures of multinational firms' desire to access foreign
capital markets: the number of firm foreign stock exchanges that the firm is listed on and
the debt to equity ratio (DE). We anticipate that firms with listings on multiple foreign
stock exchanges are more motivated to adhere to IAS as a common disclosure
requirement to satisfy the information needs of multiple foreign capital-suppliers.
H2: Firms with listings on multiple foreign stock exchanges are more motivated to
adhere to IAS. This suggests a positive correlation between the number of
foreign stock exchanges (EX) a firm is listed on and its likelihood of
adherence to IAS.
242 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 34, No. 2, 1999
Prior research suggests that capital structure of multinational companies is dependent
on both local and international economic forces (Sekely and Collins, 1988). For instance,
Zarzeski (1996) argues that companies with high debt ratios tend to share more private
information with their creditors because of well developed banking relationships and
interlocking corporate ownerships. In contrast, companies with low levels of debt
financing tend to depend heavily on equity financing, which could encourage investor
demand for information. Since adherence to IAS can be considered as a form of
expanded disclosure, we hypothesize the following:
H3: Firms with lower debt ratios tend to adhere to IAS. This suggests a negative
correlation between debt financing and adherence to IAS.
Geographical and Trade Blocks Membership
Recently, the European Union (EU) has decided to investigate the use of IAS for
consolidated financial statements of members seeking cross-border financing and listings
rather than develop these standards through its Directive process. In addition, some
countries (i.e., Italy) have adopted IAS in cases where their own accounting standards
are silent. Therefore, we anticipate that firms in countries that are members of EU are
more likely to comply with IAS.
H4: Firms of EU countries (EU) are more likely to adhere to IAS. This suggests
a positive correlation between EU membership and adherence to IAS.
RESEARCH DESIGN
Sample and Data
We relied on two sources for identifying the sample and obtaining the data for
tests: (i) the IASC Secretariat, who provided their list of `̀ Companies Disclosing
that Their Financial Statements Conform with International Accounting Standards'';
and (ii) the Worldscope4 database for obtaining the variables of interest in this
study. The IASC Secretariat's list revealed 221 firms as complying with IAS. This
sample was then screened against the Worldscope database for data availability. Of
the original 221 firms, only 153 were found on the Worldscope database. Of these,
only 87 firms had sufficient information of the above-mentioned variables to be
included in the experimental sample. For inferential purposes, a control sample of
87 matched firms were selected from non-IASC conforming firms appearing in the
Worldscope database. Matching was done on the basis of a firm's similar market
capitalization and similar two digit SIC code to the firms identified in the
experimental sample.
Data was collected for each variable of each experimental and control firm for the most
recent three years as reported in the Worldscope database. Three years of data rather than 1
year were selected to be more representative of a firm's longitudinal characteristics
An Empirical Investigation of Multinational Firms' Compliance with IAS 243
and to eschew inferences that might occur from any unusual or abnormal data of a single
year.
Model
Two statistical procedures are used: (i) the non-parametric Wilcoxon test is used to
analyze the characteristics of IAS firms in comparison to those of non-IAS firms; and (ii)
the Logit regression model to test the relationship between a firm's compliance with IAS
and the hypothesized explanatory variables. Under the Logit model, the odds of a firm's
compliance with IAS is described by the conditional ratio of: P(Gj /Xj)/(1ÿP(Gj /Xj)),
where P(Gj /Xj) is the probability of being a member of G given Xj. The log±linear
function of this probability can be expressed as follows (see Mensah, 1984; Maddala,
1991):
Log�Pj=1ÿ Pj� � A0 � A1�Log Xj1� � . . .� AK�Log Xjk�;
where:
Pj=probability of firm j adherence to IAS,
Xjk=the explanatory variables of firm j.
The empirical variables used in this model are defined as follows:
Pj=the compliance status of firm j to IAS, and it takes one if firm j adhered to IAS
and zero, otherwise;
X1=the percentage of foreign sales to total sales of firm j (FSj);
X 2=the number of foreign stock exchanges where firm j is listed (EXj);
X 3=the debt to equity ratio of firm j (DEj);
X4=a dummy variable representing membership in the European Union (EUj). EUj
takes one if the firm belongs to EU and zero, otherwise;
A0 and Ak=the intercept and coefficients estimates, respectively.
In order to assure that the results of Logit regression were not affected by outlying
observations, a regression by ranks is also performed.
ANALYSIS OF RESULTS
Summary Statistics
Table 1 presents summary statistics about the characteristics for both the experimental
and control samples. Table 1 reveals that the experimental sample (firms complying with
IAS) has higher FS, lower DE, higher percentage of firms belonging to the EU, and is
listed on more exchanges (EX). Table 1 also shows that the experimental sample has lower
return on equity (ROE). At first glance, the comparative direction of ROE seems contrary
to expectations. However, this variable reflects both underlying economic phenomenon
244 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 34, No. 2, 1999
and differences in accounting practices. For example, complying firms have, on average,
lower debt financing, which suggests lower financial risk and thus, ceteris paribus, lower
cost of equity capital. In addition, compliance with IAS might produce more conservative
measures of earnings, since uniformity embedded in IAS practices reduces managerial
discretion in income measurement.
It should be noted that some of the variables have outlying observations as evidenced
by the values in the minimum and maximum columns of Table 1. To minimize the effect of
these outliers on the regression results, a regression on ranks technique (Cheng et al.,
1992) is also employed.
Nonparametric Wilcoxon Tests
Table 2 presents the Wilcoxon non-parametric tests of differences between the two
samples, IAS firms and non-IAS firms. The results confirm that IAS firms are statistically
different from the non-IAS firms in terms of FS, belonging to the EU, multiple exchange
listings (EX), the ROE, and debt financing (DE). While FS, membership of EU, and ROE
are significant at the 0.01 level or less, exchange listings, DE, and total assets are still
significant at 0.028, 0.10, and 0.08 level, respectively.
These results are consistent with our expectations. That is, IAS sample have more
foreign markets, are listed on more exchanges, and have more firms belonging to EU. The
results also suggest that complying firms employ more equity financing, relative to non-
IAS firms.
Table 1. Summary Statistics of Variables
Variable Mean Standard deviation Minimum Maximum
IAS Firms
LTA 14.6543 1.6874 10.6439 19.1766
ROE 11.8082 11.7352 0.0100 68.0700
DE 1.0902 1.2769 0.0100 9.9529
FS 49.9838 30.1053 0.0000 97.9300
EX 2.4201 1.1272 1.0000 4.0000
EU 0.4138 0.4954 0.0000 1.0000
Non-IAS Firms
LTA 14.2167 1.7433 9.7457 17.8846
ROE 17.7863 18.2727 0.0100 105.6600
DE 1.5152 2.9687 0.0200 14.0000
FS 28.0512 26.0855 0.0000 93.1000
EX 2.0690 1.2556 1.0000 4.0000
EU 0.2069 0.4074 0.0000 1.0000
LTA = Log of Total Assets; ROE = Return on Equity; DE = Debt to Equity Ratio; FS = Foreign Sales to Total Sales;
EX = Number of Stock Exchanges Listed; EU = Percentage of Sample Firms Members of European Union.
An Empirical Investigation of Multinational Firms' Compliance with IAS 245
Regression Results
Table 3 presents the results of the Logistic procedure. The overall model indicates a
concordance of 80.3%. All of the hypothesized independent variables are significant and
their parameters are in the predicted direction. The most significant variable is FS, percent
of foreign sales. Other significant variables include DE, number of foreign stock exchange
listings (EX), and membership in the EU. These results support the hypotheses previously
set forth.
To investigate whether the results from the Logistic procedure were influenced by
extreme values of the variables, we performed an OLS regression on ranks. The results of
this regression support those of the Logistic procedure.5
CONCLUSIONS AND RECOMMENDATIONS
This paper provides an analysis of why some international firms voluntarily comply with
IAS. A number of hypotheses were introduced, including the desire to access foreign
capital markets, the scope of international operations, and membership of some world or
regional unions or business treaties. The results support these hypotheses indicating that
firms are motivated to voluntarily adopt IAS in order to enhance their exposure to foreign
markets, to improve customer recognition, to secure foreign capital, and reduce political
costs of doing business abroad.
Table 2. Wilcoxon Non-Parametric Test Results of the Comparison Between IAS-Firms and Non-IASFirms
Variable Mean (IAS Firms) Mean (Non- IAS Firms) Z-Statistic Probability >Z
LTA 14.65 14.22 1.71 0.080
ROE 11.81% 17.79% 2.67 0.007
DE 1.09 1.52 1.63 0.100
FS 49.9% 28.1% 4.82 0.000
EX 2.43 2.07 2.20 0.028
EU 0.41 0.21 2.94 0.003
LTA = Log of Total Assets; ROE = Return on Equity; DE = Debt to Equity Ratio; FS = Foreign Sales to Total Sales;
EX = Number of Stock Exchanges Listed; EU = Percentage of Sample Firms Members of European Union.
Table 3. Logistic Results of the Relationship Between Firms' Compliance with IAS and theHypothesized Variables: Yj=A0+A1(DEj)+A2(FSj)+A3(EXj)+A4(EUj)+ej
Variable Parameter estimate Wald Chi-Square P>Chi-square
Intercept ÿ0.349 0.038 0.844
DE ÿ0.147 2.508 0.056
FS 0.029 16.487 0.000
EX 0.382 3.861 0.025
EU 0.887 4.178 0.020
Concordant = 80.3%. DE = Debt to Equity Ratio; FS = Foreign Sales to Total Sales; EX = Number of Stock Exchanges Listed;
EU = Percentage of Sample Firms Members of European Union.
246 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 34, No. 2, 1999
As more firms voluntarily adopt IAS it will become self-evident that the market will
place significant value on the adoption of a universally accepted set of accounting
standards and thereby decrease the uncertainty previously associated with attempts to
universalize accounting standards. The benefits derived from following universally
accepted IAS would include a reduction in the costs associated with financial analysis
and disclosure thereby resulting in more efficient capital markets. This, in turn, would
enhance cross border financing and trade.
Some have argued that total accounting harmonization is difficult since accounting
practices appear to be culture-driven. However, the results of this empirical study are
significant because they suggest that firms operating in the international markets are more
likely to voluntary disclose higher levels of investor-oriented information. Indeed, the
evidence in this paper suggests that firms' accounting disclosure policies are influenced by
the harmonizing and encompassing effects of world culture and market forces. Further,
international dependency may force firms to be so transparent in their reporting require-
ments that institutionalized harmonization of accounting principles/practices for multi-
national firms may be totally unnecessary if one believes that accounting principles and
practices can be harmonized on their own by the `̀ invisible hand'' of free market forces.
Compliance with IASC Standards is strictly voluntary. Nevertheless, support for the IASC
and its Standards is increasingly apparent around the world. Indeed, the accounting
profession may not be too far away from a set of acceptable `̀ world class'' accounting
principles. Further analysis is required to impound more demographic, cultural and
environmental factors.
NOTES
1. The reconciliation requirement has been cited as a major factor for discouraging foreign firms to
offer securities in the US market (Cochrane, 1992).
2. Opponents of IAS have argued that adoption of IAS will hurt investors because of their
perceived lowering of standards when compared to many host countries' standards. Harris
(1995), however, shows that reconciliation between revised IAS and US GAAP was quite small.
3. Other environmental factors have been analyzed in Adhikari and Tondkar (1992).
4. Worldscope is a database of information on over 10,000 international corporations published by
Disclosure.
5. In the OLS regression on ranks, FS is positive and significant at the 0.00 level, indicating that the
higher the firm's percentage of FS, the more likely the firm will comply with IAS. Exchange
listing (EX) is also positive and significant at the 0.03 level, supporting the hypothesis that
compliance with IAS is positively correlated with multiple exchange listings. Similar conclusion
can be made for EU membership.
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