The purpose of this study is to identify the characteristics that could explain the preparedness of 48 listed Tunisian companies to adopt International Financial Reporting Standards in 2008.
Many characteristics have been cited in the literature to explain preparedness of companies to adopt IFRS.
In this paper, the following characteristics have been selected: Company size, commercial internationalization, auditor type, indebtedness, foreign participation in the equity of the company and the rate of profitability.
Our results indicate that commercial internationalization and auditor type are significantly and positively associated with the level of preparedness to adopt IFRS.
1-Introduction
How prepared were firms for reporting under international financial reporting standards (IFRS)? This question featured in the public domain lending up to the changeover date of January 1, 2005, probably because the IFRS were expected to have a significant effect on firms' financial reporting systems (Goodwin et al.,2008).
With the growing internationalization of economic trade and the globalization of businesses and financial markets, financial information prepared according to a national accounting system may no longer satisfy the needs of users whose decisions are more and more international in scope (Mhedhbi & Zeghal, 2006).
These developments require new thinking by companies, investors, creditors, and auditors about what financial information companies publish and how best to communicate it (Street,2002).
Interpretation and understanding of financial information at the international level hindered by a multitude of factors, including the diversity of the accounting principles and rules governing the preparation of reports (Lainez et al., 2007).
Differences in accounting procedures among countries complicate the comparison of financial statements presented by companies from two or more countries (Murphy,1999).
Therefore, the corporate financial reporting should be relevant and reliable to satisfy the needs of the users of this information.
According to the literature, the use of the international accounting standards would enhance the comparability of financial statements and make them more reliable (Aljifri & khasharmeh, 2006).
Kathryn (2005) documented that about 100 countries, starting from 2005, have adopted IFRS. However, many other countries throughout the world have not adopted these standards.
Although there has been widespread voluntary adoption of IFRS by multinational corporations, a feature of international accounting practice over the past decade has been that the level of preparedness to adopt IFRS has varied widely between companies and countries (Guerreiro et al., 2008).
The major aim of this study is to identify the characteristics of the listed companies in Tunisia that were better prepared to adopt IFRS.
Our research may be relevant to international regulators, standard setters and governments, it can help them to know and understand characteristics of the companies which are prepared to adopt IFRS.
In what follows, we first present a review of previous studies in section 2. We then describe our research hypotheses in section 3. We provide the methodology in section 4. Multivariate analysis and results in section 5, and our conclusion in section 6.
2- Literature Review
Over the years, the number of firms acknowledging adherence to international accounting standards (IAS) in the presentation of their financial statements has increased steadily (El-Gazzar et al.,1999).
The adoption of international accounting standards (IAS) has been suggested as an appropriate accounting system to facilitate economic growth (Joshi & Ramadhan, 2002).
Several developing countries have adopted the standards issued by the international accounting standards board (IASB) for the preparation of purpose financial statements in their respective jurisdictions (Bowrin, 2007).
Several studies have determined the characteristics of companies which have adopted international accounting standards voluntarily.
This studies uses univariate and multivariate analysis techniques in which adoption of IFRS is defined as a dummy dependent variable, the characteristics of companies adopting IFRS are the independent variables.
Al-Basteki (1995) examined the characteristics of 15 Bahraini companies that have adopted IAS and 11 companies that have not adopted these standards for the period 1986-1991.
The characteristics examined were the influence of the external auditor, industry type, firm size, commercial internationalization and the influence of credit providers. The results of his study indicate that the influence of the external auditor is significantly associated with the adoption of IFRS.
Murphy (1999) examines firm specific characteristics of Swiss companies that have voluntarily elected to prepare financial reports using International accounting standards (IAS). The variables tested were foreign sales activity, foreign stock exchange listings, debt/ equity ratio, market value, size and audit firm.
The foreign activity variable, percent of foreign exchange listings and percent of foreign sales were found to be statistically significant.
Dumontier and Raffournier (1998) examine a sample of 82 companies listed on the Swiss stock exchange that apply national standards and 51 that apply IFRS on 1994. The characteristics examined were financial internationalization, commercial internationalization, ownership diffusion, leverage, capital intensity, profitability and auditor type.
Dumontier and Raffournier (1998) provide evidence of an association between company size and financial internationalization with the decision of adoption of IFRS.
El-Gazzar et al.(1999) are analyzed the characteristics of 87 world companies that apply IFRS and 87 world companies that do not apply IFRS. The characteristics examined are financial internationalization, commercial internationalization, leverage and EU member. They found that financial internationalization and EU member are positively and significantly associated with the adoption of IFRS.
Affes et Callimaci (2007) identified the determinants of early adoption on a sample of 106 German and Australian firms. The results indicate that size, capital intensiveness, ownership dispersion and the abnormal growth of total assets increase the likelihood of early adoption.
Guerreiro et al.(2008) studied the preparedness to adopt IFRS that was exhibited by listed Portuguese companies in August 2003. They found that the level of preparedness was significantly associated with company size, commercial internationalization, auditor type and profitability.
3-Hypotheses to examine
3-1 Company size
Cooke (1989) suggests that company size is significantly associated with the level of disclosure.
According to Guerreiro et al. (2008), company size is an influential factor in determining preparedness to adopt IFRS.
Guerreiro et al.(2008) suggest also that to reduce political costs, larger companies will be anxious to ensure that the accounting values disclosed in their financial statements are credible. One way of engendering such credibility is by preparing financial statements in accord with IFRS.
Murphy (1999) reported that larger firms may have the financial resources required to implement a new set of standards. Smaller firms might find that the benefits derived from using IASC standards might not offset the funds required to purchase software, hire consultants or train personnel.
Thus, we expect a positive relationship between firm size and preparedness of companies to adopt IFRS.
3-2 Commercial internationalization
According to El-Gazzar et al.(1999) 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.
Companies with higher levels of foreign activity might be required to report to a broader range of constituents. Thus, one set of variables which might influence a company's choice to adopt IASC standards might be the level of foreign activity.
According to Guerreiro et al.(2008), companies whose revenues are earned largely in international markets should find the adoption of IFRS will help them to enhance the accuracy with which their financial statements are interpreted internationally.
Thus, we expect a positive relationship between commercial internationalization and preparedness of companies to adopt IFRS.
3-3 Rate of profitability
Watts and Zimmerman (1986) argue that political costs are higher for larger companies. Companies with a high rate of profitability adopt IFRS to signal to capital markets that profits are determined reliably (Affes & Callimaci, 2007; Guerreiro et al., 2008).
Thus, we expect a positive relationship between rate of profitability and preparedness of companies to adopt IFRS.
3-4 Auditor type
Al-Basteki (1995) suggests that the influence of the external auditor is a major factor in influencing the voluntary adoption of international financial reporting standards (IFRS). He examined the role of big-six accounting firms in the adoption of IFRS. He considers that the international accounting firms was an aptitude and an experience that allow to apply IFRS in preparing the annuals reports.
According to Guerreiro et al.(2008) international accounting firms are a major role in the accounting convergence process, these firms are represented prominently in the IASB structure and have supported IASB activities strongly. They are well placed to influence their clients accounting policy choices and procedures.
Thus, we expect that companies audited by the big-four accounting firms are more likely to adopt IFRS.
4-5 Leverage
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, with encourage investor demand for information.
Murphy (1999) argue that companies exhibiting lower debt to equity ratios, and greater reliance on share issues for their external finance, have a greater tendency to apply IFRS.
Thus, we expect a negative relationship between leverage and preparedness of companies to adopt IFRS.
4- Methodology
4-1 Sample and data sources
Our study is based on a sample of all Tunisian listed companies (48 financial institutions and others) on the Tunisian Stock Exchange in 2008,
Empirical data were collected by means of a questionnaire survey that was addressed to the 48 companies. Thirty-two questionnaires were returned and processed.
The other data were collected from published annual reports of Tunisian companies and data presented on the Tunisian Stock Exchange website.
4-2 The study's variables
In this section, we present definitions and measurements of the dependent and independent variables.
4-2-1 Independent variables
Company size (SIZE): This variable is measured by the natural logarithm of total assets.
Commercial internationalization (INC): This variable represents the degree of commercial internationalization of sample companies. This variable is measured by the ratio of foreign income to total income.
Rate of profitability (ROE) : This variable is measured by the ratio of net income to total equity
Auditor type (AUD): This acts as a dummy variable. It takes a value of one if the auditor is a big 4 firm and zero otherwise.
Leverage (DEBT): This variable is measured the ratio of total debt to total assets.
4-2-2 Dependant variable
PREP: preparedness of companies to adopt IFRS
We measured the level of preparedness of each company by analyzing responses to the following five questions:
Q1-Which core of standards is used currently by the company?
National standards
National standards and IAS
National standards and IFRS
Q2-Has the company assessed the impact of IFRS?
No
In progress
Yes
Q3-Has the company initiated the process to convert to IFRS?
No
In progress
Yes
Q4-Did the assessment process comprise:
Changes to the financial statements values?
Financial reporting system changes?
The scope of new training to be provided to management and staff?
Costs involved?
Reactions of analysts and investors?
Q5-Did the conversion process comprise:
Preparing the financial reporting system?
Training accounting and finance department staff?
Preparing additional accounting information?
Other procedures?
The measure of dependant variable (PREP) draws upon the answers to the five questions (summarized in the following table)
The frequency counts of the responses of each company to each of the five questions allow us to estimate the degree of preparedness of each company to adopt IFRS.
4-2-3 Determination of the dependant variable
We used covariance structural equation modeling (SEM) techniques in the AMOS (version 16). SEM is a set of statistical techniques used to define, fit and test structural relationships between observed variables and one or more latent variables.
We define Q1, Q2, Q3, Q4 and Q5 (the responses to the five questions of the questionnaire) as the observed variables and PREP the latent variable of the structural equation model.
Using structural equation model, we began by assessing the different degree of preparedness of sample companies to adopt IFRS.
Q1, Q2, Q3, Q4 and Q5 (observed variables): The responses to the five questions of the questionnaire.
e1, e2, e3, e4 and e5: Parameters of the model
Observed variables are represented by rectangles, the latent variable by ellipse and parameters by circles (This is the standard representation used by AMOS software.
T-test
We used T-test to verify that Q1, Q2, Q3, Q4 and Q5 are valid indicators of the latent variables PREP.
The results indicate that every t value are significant p<0,05, thus the indicator variables Q1, Q2, Q3, Q4 and Q5 are valid indicators of the latent variables PREP;
Chi-Square Test
Chi-square = 7,853
Degree of liberty = 5
p= 0,165
The non-significant Chi-square (p= 0,165) indicates that the model fits the data well.
The estimation of the structural equation model allows us to determine the parameters correlation matrix. (e1, e2, e3, e4 and e5).
The degree of preparation of each company was determined as follow:
PREPi =Q1ie1+Q2ie2+Q3ie3+Q4ie4+Q5ie5
i: presents the company
Q1, Q2, Q3, Q4 and Q5 (observed variables): The responses to the five questions of the questionnaire.
e1, e2, e3, e4 and e5: Parameters of the model
4-2-4 Model (Guerreiro et al., 2008)
PREPi= α0+α1INCi+α2AUDi+ α3ROEi+ α4DEBTi+ α5SIZEi+ εi
i: presents the company
α0 , α1 , α2 , α3 , α4 and α5 : The coefficients estimates
εi: the margin of error
5-Multivariate analysis
5-1- Kruskal-Wallis test
Kruskal-Wallis test was used to compare the averages of the independent variables ( SIZE, INC, ROE, AUD and DEBT)
This test revealed significant difference between sample companies in term of commercial internationalization (INC).
The other variables (SIZE, ROE, AUD, DEBT) were not significantly different between the companies for values of p › 0,05.
Before assessing the model we will proceed with an analysis of the correlations between the different incidental variables in order to detect an eventual multicollinearity among them.
Correlations between explanatory variables appear in Table 5. Three of the correlations exceed 0, 3 and all three are significantly correlated at the level of 1%: SIZE is positively correlated both with DEBT and with AUD; and INC is positively correlated with AUD.
Since the collinearity problem is overcome if the correlated variables do not belong to the same regression model, the specified model was divided into Model A and Model B as follows:
Model A: PREPI= α0+α1INC+α2AUD+ α3ROE + εI
Model B: PREPI= α0+α1INC+ α2DEBT+ α3SIZE+ εI
Table 6 reports the results of the logistic regression, illustrating several conclusions that can be drawn.
For model A, the independent variables explain 20% of the variation in PREP.
Two characteristics are significant explanatory of the dependant variable: INC (p= 0,032), and AUD (p= 0,077).
Both regression coefficients have a positive sign, indicating that companies with a high degree of commercial internationalization and companies audited by a big-4 firm exhibit a greater level of preparedness to adopt IFRS.
This results is in line with previous studies that have shown that the degree of preparedness to adopt IFRS is positively and significantly influenced by the degree of commercial internationalization (Dumontier et Raffournier, 1998; Murphy, 1999; El-Gazzar et al., 1999; Guerreiro et al., 2008) and the audit type ( Al-Basteki,1995 ; Guerreiro et al., 2008 ; Dumontier et Raffournier, 1998; Murphy, 1999).
For model B, the independent variables explain 11% of the variation in PREP.
One characteristic is significant explanatory of the dependant variable: INC (p= 0,133).
None of the results adduced evidence of a significant relationship between PREP and SIZE or between PREP and ROE or between PREP and DEBT.
These findings are consistent with prior research that indicates that there is no significant relationship between the degree of preparedness of the company to adopt IFRS and leverage (Guerreiro et al., 2008 ; Dumontier et Raffournier, 1998; Murphy, 1999) and rate of profitability(Dumontier et Raffournier, 1998).
6- Conclusions and implications
Over the past two decades the international community has been very interested in developing and implementing international accounting standards. But the adoption of these standards by developing countries has not received the same level of attention and thus the same level of preparedness.
The main objective of this study is to identify the characteristics of the listed companies in Tunisia that were better prepared to adopt IFRS.
Ordinal regression analysis yielded evidence consistent with hypotheses H2 and H4: that is companies with a high degree of commercial internationalization and companies audited by a big-4 firm are more prepared to adopt IFRS.
None of the analysis adduced evidence of a significant relationship between the level of preparedness to adopt IFRS and the size of company (H1) or between the level of preparedness to adopt IFRS and rate of profitability (H3) or between PREP and leverage (H5).
These results are in line with previous that have shown that the adoption of IFRS is affected by the degree of commercial internationalization (Murphy, 1999) and auditor type (Guerreiro et al., 2008).
Our results are potentially important for accounting regulating bodies, national and international standard setting agencies and the accounting profession because they provide a better understanding of the company characteristics that have been associated with the adoption of IFRS.
Future research might be directed to investigating the impact of other characteristics on the preparedness of Tunisian companies to adopt IFRS.
