Journal of Accounting in Emerging Economies

Adoption of and compliance with IFRS in developing countries: A synthesis of

theories and directions for future research
Khaled Samaha, Hichem Khlif,
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Emerging Economies, Vol. 6 Issue: 1, pp.33-49, https://doi.org/10.1108/JAEE-02-2013-0011
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Adoption of and compliance with IFRS in

developing
IFRS in developing countries countries

A synthesis of theories and directions for

future research 33
Khaled Samaha
Department of Accounting, The American University in Cairo,
Cairo, Egypt, and
Hichem Khlif
Faculty of Economics and Management of Mahdia,
University of Monastir, Sfax, Tunisia
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Abstract
Purpose – The purpose of this paper is to review a synthesis of theories and empirical studies dealing
with the adoption of and compliance with IFRS in developing countries in an attempt to provide
directions for future research.
Design/methodology/approach – The review focusses on four main streams including: first, the
motives for IFRS adoption; second, corporate characteristics and the degree of compliance with IFRS;
third, the economic consequences of IFRS adoption and finally; fourth, the use of regulation as an
enforcement mechanism to monitor compliance with IFRS. The authors review empirical studies
specifically devoted to developing countries.
Findings – Regarding the first stream relating to IFRS adoption, the macroeconomic decision of adopting
IFRS in developing countries can be justified by two main theories which are: the economic theory of
network (Katz and Shapiro, 1985) and isomorphism (DiMaggio and Powell, 1991), however, empirical
evidence in developing countries to confirm these theories is limited. Regarding the second stream relating
to corporate characteristics and the degree of compliance with IFRS, the authors find that the results are
mixed. Regarding the third stream relating to the economic consequences of IFRS adoption, it seems that
the evidence is still limited in developing countries especially with respect to the impact of IFRS adoption
on foreign direct investment, cost of equity capital and earnings management. Regarding the fourth and
final stream in relation to regulation, enforcement and compliance with IFRS, the authors find that research
is very limited. It was evidenced in the very few research studies conducted, that global disclosure
standards are optimal only if compliance is monitored and enforced by efficient institutions.
Practical implications – The author’s study attempts to provide a foundational knowledge resource
that will inform practitioners, researchers and regulators in developing countries about the relevance of the
different theories that exist in the accounting literature to explain the adoption of and compliance with IFRS.
Originality/value – Compared to developed countries, the four streams outlined remain under-
researched in developing countries. Therefore, researchers should examine these topics in developing
countries to inform practitioners, regulators and the capital market about the effects of adopting IFRS
and their relevance to developing countries. In addition, researchers should embark on identifying new
theories to explain the adoption of and compliance with IFRS in developing countries that take into
consideration the socioeconomic culture of these settings.
Keywords Developing countries, IFRS, Enforcement, Regulation, Isomorphism,
Positive accounting theory
Paper type General review
Journal of Accounting in Emerging
The authors gratefully acknowledge the constructive comments and suggestions from the Economies
Vol. 6 No. 1, 2016
anonymous referees and Professor Gerrit Sarens, the associate editor. The authors are also grateful pp. 33-49
to participants in the American Accounting Association (AAA) Annual conference – Washington, © Emerald Group Publishing Limited
2042-1168
DC, USA, 2012 – for their helpful comments and suggestions. DOI 10.1108/JAEE-02-2013-0011
 JAEE 1. Introduction
6,1 Globalization of the world economy has brought to the forefront the problems
engendered by differences in accounting reports used in many different countries. As a
result, the quest for international harmonization of accounting standards and practices
has been widely accepted as expedient and pragmatic (Chamisa, 2000; Samaha and
Stapleton, 2008; Samaha et al., 2009; Khlif and Souissi, 2010). This is congruent with
34 International Accounting Standards Board’s (IASB’s) stated aim to develop a single set
of high-quality accounting standards for all listed and other economically significant
business enterprises around the world (IASB, 1998). Following the recent globalization
waves in financial markets and the adoption of IFRS in the European community (EC),
the debate concerning the shift to IFRS and their economic consequences have been
gaining momentum ( Judge et al., 2010).
This debate is also present among policy makers and professionals in developing
countries where poor quality of financial reporting may impede their ability to attract
foreign investors, especially in their fledgling stock markets. For instance, Scott et al.
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(1976) listed the following practice problems of accounting in developing countries:

shortage of qualified accountants at all levels; accounting information is not available
or is not available in the proper form, or is received too late; accounting data are not
adequately utilized for internal management purposes; lack of legislation relating to
accounting and auditing standards and procedures; and a strong national association
of accountants is lacking.
In recent years, many developing countries have adopted IFRS ( Joshi and Ramadhan,
2002; Karim and Ahmed, 2005; Samaha and Stapleton, 2008; Al-Akra et al., 2010), despite
cognition of the view that if accounting and reporting systems are to be effective they
must reflect the context within which they function (Hopwood, 1979; Choi and Mueller,
1992; Dahawy and Samaha, 2010). Accordingly, several studies have been undertaken to
examine these questions in developing countries (Zéghal and Mhedhbi, 2006; Hassan,
2008; Türel, 2009; Ismail and Kamarudin, 2013; Elbannan, 2011; Liu et al., 2011; Gordon
et al., 2012) and developing markets (e.g. Zhou et al., 2009). In light of this, it is crucial
to understand the macroeconomic motives for the adoption of IFRS and their economic
consequences in developing countries given their specific institutional setting.
Therefore, the objectives of the current study are fourfold: first, to review the
theories and the empirical literature dealing with the motives for IFRS adoption in
developing countries; second, to review the positive accounting theories that motivate
the compliance with IFRS and the empirical literature that examines the micro-level
firm-specific determinants (i.e. corporate characteristics) behind the compliance with
IFRS in developing countries; third, to review the literature that examines the economic
consequences of IFRS adoption in developing countries; and finally, to review the
public interest theories of regulation that motivates the compliance with IFRS and the
literature that examines this topic in developing countries. By doing this, our study
attempts to provide a foundational knowledge resource that will inform practitioners,
regulators and the capital market about the effects of adopting IFRS and the relevance
of such theories to explain the adoption of and compliance with IFRS in developing
countries. To the best of our knowledge, this is the first literature review specifically
devoted to summarize IFRS empirical literature in developing countries[1].
The choice of these four streams is mainly justified by the increased interest on them
in accounting literature during the last decade (Ahmed et al., 2013). For instance,
Brüggemann et al. (2013) classify IFRS empirical literature as financial reporting effect
studies (compliance studies, accounting property studies and value relevance studies),
 capital market effect studies (direct and indirect evidence on economic consequences in IFRS in
capital markets) and macroeconomic effect studies. developing
Our literature review highlights the following points. With respect to the motives for
the macroeconomic decision of IFRS adoption, empirical evidence in developing
countries
countries is limited. Regarding the second stream relating to corporate characteristics
and the degree of compliance with IFRS, we find that the results are mixed. Concerning
the third stream relating to the economic consequences of IFRS adoption, it seems that 35
the evidence is also limited in developing countries especially with respect to the impact
of IFRS adoption on foreign direct investment, cost of equity capital and earnings
management. Regarding the fourth and final stream in relation to regulation,
enforcement and compliance with IFRS, we find that research is very limited. It was
evidenced in the very few research studies conducted, that global disclosure standards
are optimal only if compliance is monitored and enforced by efficient institutions.
This paper is organized as follows: Section 2 presents research stream 1 by reviewing
the theories and empirical studies dealing with the decision to adopt IFRS in developing
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countries. Section 3 presents research stream 2 by reviewing the theories and empirical
studies dealing with the micro-level firm-specific determinants of compliance with IFRS
in developing settings to examine the relevance of positive accounting theory to these
settings. Section 4 presents research stream 3 relating to the economic consequences of
IFRS adoption in developing economies. Section 5 presents research stream 4 by
reviewing the theories and empirical studies dealing with the role of regulation and
enforcement in relation to compliance with IFRS in developing countries. Finally,
Section 6 concludes the paper and suggests directions for future research.

2. Research stream 1: adoption of IFRS in developing countries

2.1 Theories motivating adoption of IFRS in developing countries
The macroeconomic decision to adopt IFRS in developing countries can be justified by
two main theories which are the economic theory of networks (Katz and Shapiro, 1985)
and isomorphism (DiMaggio and Powell, 1991).
2.1.1 The economic theory of networks. From the perspective of the economic theory
of networks, developing countries are likely to adopt IFRS standards if their trade
partners or countries within their geographical region are IFRS adopters (Ramanna
and Sletten, 2009). This theory considers IFRS as a product and one country has to
assess the intrinsic value of the product and the value of the product’s network
(Katz and Shapiro, 1985). If one country has a close economic relationship with other
countries that have already adopted IFRS; implementing IFRS in this developing
setting will reduce the domestic bias generally faced by foreign investors and will
facilitate multinational operations (Ramanna and Sletten, 2009). The intrinsic value of
implementing IFRS is commonly called the “autarky value of IFRS,” while the value
of the product network is named as the “synchronization value of IFRS” (Ramanna and
Sletten, 2009). An illustrative example here is for all developing markets that share
close relationships with the European countries that have adopted IFRS in 2005.
From the cost and benefit framework, one country has to adopt IFRS standards if
and only if the autarky value and the synchronization value of IFRS exceed the value of
local GAAP. According to Ramanna and Sletten (2009, p. 7) “the autarky value of IFRS
is the direct value to the adopting country from using the IASB-developed accounting
standards.” It can be classified into economic and political benefits. Economic net value
refers to the ability of one country to engender more efficient resources allocation in its
 JAEE economy when adopting new standards. The political value of local GAAP represents
6,1 the capability and the authority to control the standard setting process. Therefore,
IFRS standards are value relevant for a developing country if and only if the autarky
value (net economic and political values[2] of IFRS) and the synchronization value[3] of
IFRS exceed the value of local GAAP.
2.1.2 Isomorphism and the adoption of IFRS. According to DiMaggio and Powell
36 (1991), three types of isomorphism can be used to explain the adoption of IFRS in one
country. The first type is the coercive isomorphism which refers to the presence or
absence of institutions that can force economic actors to adopt IFRS and to align their
local accounting standards with IFRS. For instance, the International Monetary Fund
(IMF) generally provides developing countries with foreign aid with a requirement to
make financial reforms and adopt IFRS ( Judge et al., 2010). The second type is the
mimetic isomorphism which refers to the imitation of other nations viewed as more
legitimate and successful. Professional accounting organization may here exert some
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pressures to move toward IFRS (Hassan, 2008). Finally, the third type is the normative
isomorphism which refers to the level of education attainment of a country (DiMaggio
and Powell, 1991). In this regard, the percentage of the population that is educated may
also affect accounting practices and therefore the shift toward IFRS (Hassan, 2008).

2.2 Empirical evidence: theories motivating the adoption of IFRS

in developing countries
Evidence from developing markets to confirm these theories are limited. For instance,
and to the best of our knowledge, there are only two exploration of the relevance of
isomorphism in developing markets with respect to the shift to IFRS. Zéghal and
Mhedhbi (2006) consider several factors that can explain the adoption of IFRS in
developing countries including the percentage of the population that is educated, the
economic growth and the degree of external economic openness. They document that
developing countries with the highest literacy rate are more likely to adopt IFRS.
Similarly, Hassan (2008) examines the effect of IMF foreign aid, the desire of
Egyptian accountants and educational levels on the decision to move toward IFRS.
He documents that these three factors have exerted a significant influence on the switch
to IFRS which confirms the applicability of the three types of isomorphism in Egypt.
Given the fact that empirical evidence is limited in this respect, future research in
developing markets may consider such a topic to identify the causes behind the
adoption of these standards in emerging economies. In addition, empirical studies are
needed to test the economic theory of networks in developing countries that have a
close economic relationship with the EC by considering, for example the level of
multinational operations (e.g. imports and exports).

3. Research stream 2: compliance with IFRS in developing countries: the

role of micro-level firm-specific factors
3.1 Theories motivating compliance with IFRS in developing countries
Positive accounting research shows that corporate characteristics may explain the
degree of compliance with accounting standards, i.e. firms with different characteristics
will adopt different disclosure and measurement practices (Watts and Zimmerman,
1986). This may have implications for compliance with IFRS, and therefore here the
study reviews positive accounting theory. Four theories including signaling theory,
agency theory, political process theory and capital need theory are employed in the
 literature to explain the degree of compliance with IFRS in the context of developing IFRS in
countries (Karim and Ahmed, 2005; Al-Shammari et al., 2008; Samaha and Stapleton, developing
2009; Al-Akra et al., 2010; Al Mutawaa and Hewaidy, 2010; Bova and Pereira, 2012).
A brief summary of these theories is provided below.
countries
3.1.1 Agency theory. Agency theory has identified the existence of two agency
relationships (Healy and Palepu, 2001): the manager-shareholder relationship and the
shareholder-debtholder relationship. In both of these relationships, the interests of the 37
agent and principal are separated, imposing agency costs ( Jensen and Meckling, 1976). In
attempting to align the differing interests, agency (monitoring and bonding) costs are
incurred. Monitoring costs are associated with overseeing the agent’s behavior and while
initially borne by the principal, are transferred to the agent through contracting. In the
manager-shareholder relationship, monitoring costs are transferred by adjusting the
agent’s remuneration package according to the perceived level of monitoring required.
Managers’ accounting choices and disclosure of financial information has been
investigated using agency theory which posits that accounting choices and disclosure is
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used to reduce agency costs and thus information asymmetry that exists between agents
(being managers and therefore insiders) and principals (who are outside the firm and less
informed). Since compliance with IFRS may mean that a firm restricts accounting choices
and makes more disclosure, therefore the existence of agency costs may be used to
explain the attitude of companies toward compliance with IFRS.
Agency theory suggests several variables to explain the degree of compliance with
IFRS. In particular, firm size, ownership diffusion, leverage and type of auditor have
frequently been hypothesized (Karim and Ahmed, 2005; Samaha and Stapleton, 2009;
Al-Akra et al., 2010) to affect compliance with IFRS by influencing the magnitude of
agency costs.
3.1.2 Signaling theory. Signaling theory was developed by Spence (1973) to explain
behavior in the labor markets (see also Watts and Zimmerman, 1986, p. 165). However,
signaling is a general phenomenon applicable in any market with information
asymmetry (Morris, 1987). The theory shows how this asymmetry can be reduced by
the party with more information signaling it to others. Applying signaling theory to
financial disclosure suggests that managers can use financial statements to signal their
expectations and intentions. Compliance with IFRS may signal to market participants
that the firm is prepared to disclose more information, or to use more restrictive
accounting standards.
Signaling theory suggests several variables to explain the degree of compliance with
IFRS. In particular, liquidity and profitability has frequently been hypothesized to
affect compliance with IFRS by influencing the problems of information asymmetry in
the market (Karim and Ahmed, 2005; Samaha and Stapleton, 2009; Al-Akra et al., 2010).
From the discussion of agency and signaling theories it can be seen that there is
considerable overlap between the two. Indeed Morris (1987) explored whether these two
theories are consistent, equivalent or competing, by examining the necessary and
sufficient conditions for them both. Morris suggests that as the sufficient conditions for
signaling theory are consistent with those of agency theory, the two theories are
consistent. However, a necessary condition for signaling theory, informational
asymmetry, is not shared by agency theory (although it is implied), and therefore they
are not equivalent, i.e. one is not implied by the other. Morris suggests that given this
consistency between agency and signaling theory it is possible to combine them to
yield predictions about accounting choices. Indeed, he concludes “[…] the prediction of
 JAEE accounting choices can at least be improved by adding together the predictions from
6,1 each theory” (p. 52). It seems, therefore, that greater insight can be gained into why
companies comply with IFRS by drawing from both theories.
3.1.3 Political process theory. Positive accounting theory also considers the influence
of political costs (Watts and Zimmerman, 1990; Firth, 1979; Cahan, 1992). Inchausti
(1997) argues that the accounting policy of a firm, its existence and form, is determined
38 by considerations of contracting efficiency. Therefore, firms with serious agency
problems will spend more resources on contracting and monitoring than firms with
limited agency costs, and therefore, the same logic may be applied to political costs.
Political process theories suggest hypotheses about the use of accounting data to fix
prices in regulated industries, to fix tax policy or to decide policy on subsidies for
companies (Inchausti, 1997). Companies which are politically visible and subject to high
political costs, may employ financial information to avoid these risks, and also may
execute accounting changes to reduce such risks or even costs (Holthausen and
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Leftwich, 1983). Thus, companies with high political visibility and high political costs
have to improve compliance with IFRS as a form of restricted accounting choice and
expanded disclosure to reduce such risk. Therefore the existence of political costs may
be used to explain the attitude of companies toward the compliance with IFRS.
Political process theory suggests several variables to explain the degree of compliance
with IFRS. In particular, firm size and industry sector have frequently been hypothesized
(e.g. Karim and Ahmed, 2005; Samaha and Stapleton, 2009; Al-Akra et al., 2010) to affect
compliance with IFRS by influencing the magnitude of political visibility.
3.1.4 Capital need theory. Capital need theory suggests that companies desire to
raise capital as cheaply as possible. Increasing compliance with mandatory
requirements and the relative amount of voluntary compliance increases the ease by
which new capital can be raised (Marston and Shrives, 1996; Craven and Marston,
1999). Ashbaugh and Pincus (2001) argued that IFRS adoption is part of a concerted
effort by managers to satisfy the increased demand for information that typically
occurs as firms issue additional equity.
The capital need theory is employed to support the expectation that public
companies which are issuing securities will comply more than private companies
(which are in most cases closed companies). Finally, international companies are
competing for resources. The capital need theory is employed to support the
expectation that international companies will comply more than domestic companies.
Capital need theory suggests several variables to explain the degree of compliance
with IFRS. In particular, foreign listing and internationality have frequently been
hypothesized (e.g. Karim and Ahmed, 2005; Samaha and Stapleton, 2009; Al-Akra et al.,
2010) to affect compliance with IFRS by influencing the magnitude of competition
for resources.

3.2 Empirical evidence: micro-level firm-specific factors (corporate characteristics) and

compliance with IFRS
Developing countries’ studies that examine the determinants of compliance with IFRS
have considered several corporate characteristics including auditor size, leverage ratio,
profitability, corporate size, internationality and ownership dispersion.
Only six studies that seek to explain compliance with IFRS are conducted entirely in
developing countries (Karim and Ahmed, 2005; Al-Shammari et al., 2008; Samaha
and Stapleton, 2009; Al-Akra et al., 2010; Al Mutawaa and Hewaidy, 2010, Bova and
 Pereira, 2012). Compliance with IFRS is measured in all studies by a disclosure IFRS in
checklist encompassing several disclosure requirements imposed by IFRS. developing
In an Asian setting, namely Bangladesh, Karim and Ahmed (2005) examine the
determinants of IFRS compliance for a sample of 188 companies during 2002. The
countries
compliance index encompasses 411 items. Results show that the degree of compliance
with IFRS is strongly associated with auditor type (big-four vs non-big-four audit
firms) and leverage and negatively associated with corporate size. By contrast, 39
profitability is not significantly linked to IFRS compliance.
Al-Shammari et al. (2008) conduct a cross-country study to examine the
determinants of compliance with IFRS in the Gulf Co-Operation Council member
states including Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the UAE.
Compliance with IFRS is proxied by a self-constructed compliance index dealing with
14 standards. Using a sample of 137 companies during the period spanning from 1996
to 2002, they document that corporate size, leverage and multi-nationality have a
significant positive effect on IFRS compliance, while ownership dispersion is not
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significantly connected with IFRS compliance.

In Egypt, Samaha and Stapleton (2009) examine a large sample of 281 listed
companies during 2000. Although they provide evidence that having an international
audit firm is the dominant factor associated with disclosure and measurement/
presentation required by the Egyptian Accounting Standards (EASs)[4], ownership
concentration, share trading, size as measured by market capitalization and
internationality are also associated with compliance. However, the results show that
profitability, liquidity and leverage do not seem to affect the extent of compliance with
EASs and the performance of manufacturing are at par with non-manufacturing firms.
Also the performance of private sector firms is at par with public sector firms. Al-Akra
et al. (2010) examine the same topic in Jordan for a sample of 80 non-financial listed
Jordanian companies during 2004. They provide evidence that corporate size, leverage
ratio, auditor size and profitability exert a significant positive effect on IFRS
compliance, while ownership dispersion is negatively associated with the degree
of compliance with IFRS.
In Kuwait, Al Mutawaa and Hewaidy (2010) examine also the same association in
Kuwait for a sample of 121 companies during 2007. The compliance index encompasses
101 items dealing with 12 IAS. Results show that corporate size, profitability and
auditor type are significantly associated with IFRS compliance while leverage does not
exert a significant effect.
In a sub-Saharan African country, namely Kenya, Bova and Pereira (2012) examine
the determinants of IFRS compliance. Using a sample of 30 Kenyan listed companies,
they document that higher IFRS compliance is associated with the leverage ratio,
corporate size and the profitability ratio.
Out of the six developing countries’ studies reviewed above, in four cases (Karim
and Ahmed; 2005; Samaha and Stapleton, 2009; Al-Akra et al., 2010; Al Mutawaa and
Hewaidy, 2010) a significant positive relationship is found between the type of auditor
and compliance with IFRS. In four cases only size is significant in explaining
compliance with IFRS (Samaha and Stapleton, 2009; Al-Shammari et al., 2008; Bova and
Pereira, 2012; Al Mutawaa and Hewaidy, 2010). In three cases only, profitability is
significant in explaining compliance with IFRS (Al Mutawaa and Hewaidy, 2010;
Al-Akra et al., 2010; Bova and Pereira, 2012). Industry sector is not significant in any of
the studies in explaining compliance with IFRS. Leverage is significant in explaining
compliance with IFRS in only four studies (Karim and Ahmed, 2005; Al-Shammari et al.,
 JAEE 2008; Bova and Pereira, 2012; Al-Akra et al., 2010). Internationality is significant in only
6,1 one study (Al-Shammari et al., 2008). Finally, ownership diffusion is significant in only one
study (Samaha and Stapleton, 2009).
Overall, it seems that corporate size, auditor type and leverage are strongly
associated with IFRS compliance, while the association with profitability, industry
sector, internationality and ownership dispersion is mixed across studies. From
40 reviewing prior positive accounting studies in developing countries, it seems that
agency theory may be relevant to explain compliance with IFRS in general. However,
the relevance of signaling, political and capital need theories are not clear. This
conclusion can be used in future studies to form expectations on the situation in
developing countries context.
Based on these mixed results from the empirical literature summarized above, the
applicability of positive accounting theory is questionable in developing countries
characterized by a lack of transparency and specific institutional and regulatory
characteristics ( Judge et al., 2010). It should be noted here that ownership structure (e.g.
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foreign ownership) may play an important role in determining the extent of IFRS
compliance (Bova and Pereira, 2012), and therefore future empirical investigations have
to examine this issue to identify corporate governance attributes that strongly affect or
reduce the extent of compliance with IFRS.

4. Research stream 3: the economic consequences of IFRS adoption in

developing countries
Four areas of research are identified for the economic consequences of IFRS which are
IFRS and foreign direct investment; IFRS and the cost of equity capital; IFRS and value
relevance; and IFRS and earnings quality.
The first area of research suggests that the adoption of IFRS may be fruitful since it
will facilitate cross-border investments through the easy comparison of financial
statements between countries (e.g. Gordon et al., 2012; Tweedie and Seidenstein, 2005).
The second area of research suggests that there is a negative association between
IFRS adoption and cost of equity capital (Daske, 2006). For instance, Fritz Bolkestein,
the former European Commissioner for Internal Markets, posits that IFRS are
“vital because a single set of accounting standards will help reduce the cost of capital.”
The third and fourth areas of research argue that IFRS adoption may result in
increased value relevance and less earning management. For instance, Ahmed et al.
(2013) suggest that IFRS produce more relevant and faithful information compared to
local GAAP and reduce the scope for managerial discretion since they are characterized
by strong recognition rules, measurement and disclosure requirements compared to
local GAAP. This is particularly the case for local GAAP in developing markets
characterized by a poor accounting infrastructure, and an inadequate practitioner
training (Elbannan, 2011).
Empirical evidence from developing markets is not abundant. For instance, Bova
and Pereira (2012) have examined the effect of IFRS on the percentage of foreign
ownership and share turnover for a sample of 46 listed Kenyan companies spanning
2005-2007. They document that IFRS compliance is positively and significantly
associated with the percentage of foreign ownership and share turnover. Gordon et al.
(2012) examine the effect of IFRS adoption on foreign direct investment for a sample of
95 developing countries from MENA, Latin America, Asia and Sub-Saharan Africa.
They document that IFRS adoption has a significant positive effect on foreign direct
investment in these settings.
 For value relevance literature, Türel (2009) and Ismail and Kamarudin (2013) have IFRS in
examined the effect of IFRS adoption, respectively, for book value and reported developing
earnings using the price model in two developing markets, namely Turkey and
Malaysia. Findings show for Turkey that the value relevance of both book values
countries
and earnings has witnessed an improvement in the post-adoption period. By contrast,
in Malaysia, the value relevance of earnings has increased while the value relevance
of book value has decreased following the adoption of IFRS. 41
With regard to earnings quality, Liu et al. (2011) and Zhou et al. (2009) examine the
effect of IFRS adoption on discretionary accruals in China. Discretionary accruals in
these two studies are measured by the earnings variability as predicted by Barth et al.
(2008). The findings from the two studies provide evidence that such adoption has not
contributed significantly to the reduction of managerial discretion through earnings
management as they report a near zero relationship between IFRS adoption and
discretionary accruals.
The same relationship has been also examined in Egypt by Elbannan (2011)
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after the adoption of the updated EASs in 2006 which are mainly inspired by IFRS.
He documents that there is no significant decrease of earnings management for the
post-adoption period.
Overall, it seems that the evidence for the economic consequences of IFRS is still
limited in developing countries especially with respect to the impact of IFRS adoption
on foreign direct investment and the cost of equity capital. Therefore, future research
should focus on such a crucial topic to inform policy assessments of the financial
reporting and capital market effects of adopting IFRS in developing countries.

5. Research stream 4: compliance with IFRS in developing capital

markets: the role of regulation and enforcement
5.1 Regulation theories and compliance with IFRS in developing capital markets
Regulation theories are based mainly on public and private interest arguments (Taplin
et al., 2002). Public interest theories perceive regulation as a method of improving
societal welfare. In contrast, private interest theories are oriented toward appreciating
the wealth maximization strategies of certain individual interest groups (Taplin et al.,
2002, p. 175). Accounting regulation (and/or standards) is a mandatory call for the
information that preparers have not voluntarily provided (Taylor and Turley, 1986,
p. 7). They define (p. 1) accounting regulation (and/or standards) as the “imposition
of constraints upon the preparation, content and form of external financial reports by
bodies other that the preparers of the reports, or the organizations and individuals for
which the reports are prepared.”
Advocates of the mandatory approach argue that a legally backed framework of
disclosure and measurement standards is necessary because of the potential for market
failure in the supply of financial information (Saudagaran and Diga, 1997). Where
financial information possesses characteristics of a public good, a strong probability
exists that such information will be under-produced in the absence of mandatory
standards. Without adequate information, potential investors will be reluctant to
participate in the markets that are perceived to be rigged in favor of some securities.
Taplin et al. (2002) and Saudagaran and Diga (1997) argue that a voluntary or
“laissez faire” approach is not appropriate in developing capital markets because of
prevailing cultural environment and economic problems leading to an expectation that
the reliability of financial reports will not be high unless accounting regulations (and or
standards) are legally backed.
 JAEE There is evidence to suggest that in many developing countries the profession is not
6,1 in a position to regulate accounting and financial reporting effectively. In such
situations, it may not be sensible to depend on professional self-regulation (Chand,
2005). Therefore, in the public interest, the regulation of accounting by an independent
authoritative body, with the establishment of accounting principles and the supervision
of their application throughout the economy as its major tasks, deserves serious
42 consideration. Saudagaran and Diga (1997) argue that the perception of unfair
securities markets could be aggravated in developing capital markets where the level of
information asymmetry appears to be greater compared to more developed markets. If
the compliance in these countries is primarily left to individual companies supervised
by the professional bodies, there appears to be a very small probability that this
reliability can be improved. The intervention of governments through accounting and
disclosure standards may be crucial to ensure a higher reliability of financial reports,
which is vital for the expansion of a developing country’s capital market and industries
(Saudagaran and Diga, 1997). Such direct intervention is consistent with public interest
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theories of regulation as argued by Taplin et al. (2002).

In many developing countries, the enforcement role of accounting standards is a
big problem (Saudagaran and Diga, 1997; Lin and Liyan, 2001; Chen et al., 2002;
Samaha and Stapleton, 2008; Samaha et al., 2009). Lin and Liyan (2001) and Chen et al.
(2002) observed that the current problems of financial reporting by Chinese listed
companies are associated with an unsatisfactory status of rules enforcement in
practice. In this context, Lin and Liyan (2001) and Chen et al. (2002) suggested that the
mechanism for monitoring and enforcing IFRS requirements is the key player affecting
practice harmony.
In developing capital markets, Saudagaran and Diga (1997, p. 61), pointed out that
“systematic inquiry needs to be made regarding the strength of the regulatory
mechanisms, and factors limiting their effectiveness.” As Saudagaran and Diga (1997)
and Taplin et al. (2002) suggest, the enforcement stage in developing capital markets
should be given to the entity equipped with the power to enforce, which is the
government. Zeff (1988, p. 20) also supports this view when he observes that
“a government agency is in a much better position to enforce compliance with
accounting standards than is the council of a professional accounting body.”
In Saudagaran and Diga’s (1997) view, these government agencies will perform
functions similar to the SEC in the USA including formulating rules for public issuance
of securities, approving specific offers of securities and listings, and defining the overall
direction of capital market development. Conversely, as the capital markets of
developing countries reach a particular size and attain a greater number of well-trained
accounting professionals, regulators should allow the private sector, i.e. stock
exchanges and professional accounting bodies, to play a more active role in enforcing
accounting standards. However, Tay and Parker (1990, p. 75) argue that where
compliance with standards is legally required (i.e. backed), companies may not comply
if it is perceived that the consequences of non-compliance are not serious.
To sum up, IFRS are optimal only in developing countries if compliance is
monitored and enforced by efficient institutions (Healy and Palepu, 2001). Walker
(1987) suggests that the use of regulation as an enforcement mechanism to monitor
compliance and impose punishments in cases of non-compliance would improve the
implementation of accounting standards and enhance the compliance levels.
Companies do not comply with mandatory requirements unless stringent regulation
is in place. In this context, a regulation is defined as stringent “if it allows only one
 outcome, has an adequate enforcement mechanism, and sanctions for non-compliance” IFRS in
(Owusu-Ansah and Yeoh, 2005, p. 92). developing
Walker (1987) argues that accounting standard setting is futile in the absence of
enforcement. Taplin et al. (2002, p. 175) argued that without enforcement the
countries
“production of accounting rules will be nothing more than symbolic behavior unless it
is accompanied by some program for monitoring compliance with those standards, and
for imposing sanctions for non-compliance.” Saudagaran and Diga (1997, p. 61) argued 43
that “the best accounting standards are only as good as the effectiveness of the
regulatory process.”

5.2 Empirical evidence: regulation, enforcement and compliance with IFRS

Empirical evidence on the role of regulation in enhancing compliance with IFRS in
developing countries is very limited. Some researchers (Lin and Liyan, 2001; Chen et al.,
2002; Taplin et al., 2002; Samaha and Stapleton, 2008; Samaha et al., 2009) indicate that
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the higher level of harmonization with IFRS in any economy does not guarantee
corporate compliance with the requirements. They suggest that the mechanism for
enforcing IFRS requirements is a key player affecting compliance in practice.
Three recent studies dealing with this topic in emerging economies are identified in
empirical literature. For instance, Chen and Zhang (2010) document that regulatory
enforcement undertaken by Chinese government in 2001 has contributed to an
increased compliance with IFRS for a sample of 103 Chinese companies between 1999
and 2004. They suggest that “the decline in earnings difference between firms’ financial
statements under Chinese GAAP and IFRS is the result of the implementation of the
2001 policy and the audit committee which effectively control the firm’s application of
standards rather than the differences between the standards” (p. 665). More recently,
Mısırlıoğlu et al. (2013) examine the question of whether the mandatory adoption of
IFRS increases the degree of firms’ compliance with IFRS in Turkey. Their findings
show that IFRS have an impact on certain accounts but the adoption is not uniform
across accounts. They also interview the Turkish auditors to understand the factors
that may constrain the successful switch toward IFRS. In their interview, Turkish
auditors suggest the dominance of tax laws, the lack of enforcement, corporate
governance issues and inadequate management information systems are all significant
in reducing the degree of compliance with IFRS in Turkey. Finally, Santos et al. (2014)
examine the same research topic in Brazil. They document that the degree of
compliance with IFRS has witnessed an improvement after the mandatory adoption
of these standards in 2010.

6. Summary and conclusion

The present review of academic literature on the adoption of and compliance with IFRS
has indicated four research topics in connection with the switch to IFRS. These topics
includes the motives for IFRS adoption, the association between corporate
characteristics and the degree of compliance with IFRS, the economic consequences
of IFRS adoption, and finally the use of regulation as an enforcement mechanism to
monitor compliance with IFRS.
Regarding the first topic relating to IFRS adoption, the macroeconomic decision of
adopting IFRS in developing countries can be justified by two main theories which are
the economic theory of network (Katz and Shapiro, 1985) and isomorphism (DiMaggio
and Powell, 1991). Empirical evidence from developing markets does not confirm these
 JAEE theories. Therefore, future research in developing markets may consider such topic in
6,1 other countries to detect the causes behind the adoption of these standards.
Regarding the second topic relating to corporate characteristics and the degree of
compliance with IFRS, we find that the results are mixed. Overall, it seems that corporate
size, auditor type and leverage are strongly associated with IFRS compliance, while the
association with profitability, industry sector, internationality and ownership dispersion
44 is mixed across studies. Therefore, it seems that agency theory may be relevant to
explaining compliance with IFRS in developing countries. However, the relevance of
signaling, political costs and capital need theories are not clear. This conclusion can be
used in future studies to form expectations on the situation in developing countries
context. This means that the applicability of positive accounting theory is questionable in
developing countries characterized by lack of transparency and specific institutional and
regulatory characteristics ( Judge et al., 2010). It should be noted here, that ownership
structure (e.g. foreign ownership) may play an important role in determining the extent of
IFRS compliance (Bova and Pereira, 2012), and therefore future empirical investigations
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have to examine this issue to identify corporate governance attributes that strongly
affect or reduce the extent of IFRS compliance.
Regarding the third topic relating to the economic consequences of IFRS adoption,
there is a lack of evidence with regard to the effect of a country’s economic, legal and
political system on IFRS adoption in developing countries. Findings from some other
studies conducted in different developing countries suggest that the value relevance of
both earnings and book values has improved and foreign direct investment has
increased after such adoption. By contrast, IFRS adoption has not contributed to the
reduction of discretionary accruals. Overall it seems that the empirical evidence on
the economic consequences of IFRS adoption is still limited in developing countries
especially with respect to the impact on foreign direct investments and cost of equity
capital. Therefore, future research has to focus on this crucial topic to inform policy
assessments of the financial reporting and capital market effects of adopting IFRS in
developing countries.
Regarding the fourth and final topic in relation to regulation, enforcement and
compliance with IFRS, few research studies are identified. It was evidenced in these few
research studies that IFRS are optimal only if compliance is monitored and enforced by
efficient institutions. The use of regulation as an enforcement mechanism to monitor
compliance and impose punishments in cases of non-compliance would improve the
implementation of IFRS and enhance compliance levels. Companies do not comply with
mandatory requirements unless stringent regulation is in place. The presence of actual
liability in cases of non-compliance is important to insure implementation.
Compared to developed countries, these four topics remain under-researched in
developing countries. Therefore, future research avenues have to focus on these topics
in developing economies to inform regulators and capital markets about the effects of
adopting IFRS and their relevance to developing countries.
Future research should embark on identifying new theories to explain compliance
with IFRS in developing countries that take into consideration the socioeconomic
culture of these countries by integrating culture dimensions (e.g. uncertainty
avoidance, masculinity, individualism), the degree of market development and the level
of corruption. This is particularly important since the adoption of IFRS by countries
with institutional contexts different from those experienced by their Anglo-Saxon
counterparts along the flexibility of the principles-based approach may affect
the standard setting process in ways that are difficult to predict at the moment
 (Carmona and Trombetta, 2008). In addition, examining how foreign ownership and IFRS in
other governance factors affect compliance with IFRS may also represent another developing
avenue of research in developing countries. Finally, future research may also consider
the effect of specific regulations enacted (e.g. governance rules, mandatory adoption
countries
of IFRS) on the degree of compliance with IFRS by comparing the index compliance for
the pre- and post-adoption periods.
45
Notes
1. Several literature reviews have been devoted to examine the effect of IFRS adoption in
the European Community (EC) including Soderstrom and Sun (2007) and Brüggemann
et al. (2013).
2. The economic value of IFRS refers to the ability of these standards to facilitate the efficient
allocation of capital in an economy, while their political value refers to political benefits from
having local authority over standard setting process.
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3. E.g. synchronization of local GAAP with IFRS adopted by the EC if the country has a close
economic relationship with the EC.
4. Which comply in all material respects with IFRS.

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About the authors

Dr Khaled Samaha is a Tenured Associate Professor in the Department of Accounting at the
American University in Cairo (AUC). He has a PhD (Manchester Business School – UK) and an
MSc (Birmingham Business School – UK). He has taught graduate and undergraduate courses in
financial accounting, auditing, international accounting and cost accounting and has won several
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excellences in teaching awards and recently in 2012; he was awarded the AUC excellence in
teaching award. He has developed and updated several accounting courses in the new accounting
curriculum that is effective September 2009 at the American University in Cairo. Samaha is a
Certified Public Accountant (CPA) from the Egyptian Society for Accountants and Auditors
(ESAA), and is certified by the Egyptian Accounting Syndicate and the Egyptian Financial
Supervisory Authority (EFSA). He is also a Member of the American Accounting Association
(AAA), European Accounting Association (EAA) and a Fellow of the Egyptian Institute for
Public Finance and Taxes. He has extensive practical experience in the application of
International Financial Reporting Standards (IFRSs) and has recently published four papers
about convergence with IASs/IFRSs in Egypt. Samaha is currently serving as an Audit
Consultant to several companies listed on the Egyptian Stock Exchange (EGX), as well as the
Ministry of Transport. He has also served as a consultant in many missions with the World Bank
and the Bi-National Fulbright Commission (The Commission for Educational and Cultural
Exchange between the USA and Egypt). Currently, he is serving as an Audit Consultant on a
project with the Egyptian Ministry of Transport (MOT) and the government of the Italian
Republic on restructuring the Egyptian National Railways (ENR). Samaha has several papers
that are published in academic accounting journals, and are presented in academic and
practitioners conferences. He has published in the International Journal of Auditing, Journal of
International Accounting, Auditing and Taxation, International Journal of Accounting, Auditing
and Performance Evaluation, Managerial Auditing Journal, Advances in Accounting, Journal of
Applied Accounting Research, International Journal of Accounting and Information Management,
Journal of Accounting in Emerging Economies, Research in Accounting in Emerging Economies,
Corporate Ownership and Control, Corporate Governance: The International Journal of Business
in Society, International Journal of Disclosure and Governance, Afro Asian Journal of Finance
and Accounting, Journal of Current Research in Global Business, International Journal of
Accounting and Finance, and the International Journal of Management and Decision Making.
He is currently serving as a member on the editorial board of the Afro Asian Journal of Finance &
Accounting that is published by Inderscience (www.inderscience.com/browse/index.php?
journalCODE¼aajfa) – UK. Dr Khaled Samaha is the corresponding author and can be
contacted at: ksamaha@aucegypt.edu
Hichem Khlif (PhD) is an Associate Professor at the University of Economic Sciences and
Management of Mahdia, Tunisia. His research focus is on the determinants of accounting
disclosure and meta-analysis.

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1. Khaldoon Al-Htaybat. 2017. IFRS Adoption in Emerging Markets: The Case of Jordan. Australian
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