The Effect of Mandatory XBRL A

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The effect of mandatory XBRL XBRL and

IFRS adoption
and IFRS adoption and audit fees and audit fees
Evidence from the Shanghai Stock Exchange

Yuan George Shan 109
Accounting and Finance, UWA Business School,
Received 9 January 2014
The University of Western Australia, Crawley, Australia, and Revised 23 January 2015
Accepted 4 February 2015
Indrit Troshani
Business School, University of Adelaide, Adelaide, Australia
Abstract
Purpose – The purpose of this paper is to evaluate the impact of the International Financial Reporting
Standards (IFRS) and eXtensible Business Reporting Language (XBRL) on audit fees based on
evidence from listed companies operating in an emerging economy. Whilst IFRS constitute high-
quality accounting standards, XBRL represents a technology standard that can enhance the usability
of IFRS and overall financial reporting transparency.
Design/methodology/approach – Multivariate analyses are used on a sample of 1,798 firm-year
observations between 2000 and 2011 from companies listed in the Shanghai Stock Exchange that were
subject to XBRL and IFRS adoption mandates.
Findings – The main results suggest that XBRL has a main negative effect on audit fees which is
weaker for larger firms. Additionally, the authors find that IFRS increases audit fees for all companies.
Whilst this effect is positive for firms of different sizes, it is weaker for larger firms.
Research limitations/implications – Whilst the findings are applicable to the selected sample and
may or may not be generaliseable to other economies, they can provide important implications for both
regulators and companies that are undertaking IFRS convergence and XBRL implementation projects
in developing economies around the world.
Originality/value – This study offers a timely assessment of the economic consequences of IFRS and
XBRL on listed companies operating in an emerging economy, in addition to providing an important
basis upon which further research can be designed in order to extend the analysis.
Keywords China, IFRS, XBRL, Audit fees, Firm size
Paper type Research paper
1. Introduction
The global financial reporting environment has been undergoing significant changes in
the last decade. One of the key changes concerns the adoption of the International
Financial Reporting Standards (IFRS). The IFRS are principles-based standards that
are developed by the International Accounting Standards Board (IASB) to improve the
quality of accounting principles (Chen and Zhang, 2010) and represent uniform global
accounting principles which are expected to enhance financial reporting quality
(Tyrrall et al., 2007), reduce risk and cost of capital (Leuz and Verrecchia, 2000),
facilitate international investment and enhance global economic growth (Street and
Bryant, 2000; Pacter, 2001; Ball, 2006; Pickard, 2007; Chen and Zhang, 2010; Peng and
Bewley, 2010; De George et al., 2013). In addition to IFRS, other changes concern
ongoing efforts to address transparency, efficiency and accuracy problems in relation International Journal of Managerial
Finance
to financial reporting which are, at least partially, attributable to the formats in which Vol. 12 No. 2, 2016
pp. 109-135
financial reports are produced and disseminated. Existing paper and digital formats © Emerald Group Publishing Limited
1743-9132
(e.g. HTML, PDF, MS Excel) lack interchangeability in the ways in which financial data DOI 10.1108/IJMF-12-2013-0139
IJMF are collected, stored, processed, integrated, repurposed and reported. These formats
12,2 also do not offer sufficient semantics to enable the automated analysis of financial
reports, making the realisation of efficient and effective transparency and compliance
objectives expensive or even elusive (Debreceny et al., 2010).
The eXtensible Business Reporting Language (XBRL) is a data formatting standard
that enables the electronic communication of financial reports (Li et al., 2007; Rezaee,
110 2009; Troshani and Doolin, 2007; Troshani and Rao, 2007; Troshani and Lymer, 2010).
XBRL can enhance the usability of accounting standards such as IFRS (Bergeron,
2003), streamline and integrate information flows amongst heterogeneous
organisations by facilitating the exchange of financial data amongst their disparate
computer platforms and software applications. In doing so, XBRL can generate
enormous efficiencies in the business information supply chain whilst enforcing the
application of accounting standards. As a result, XBRL systems address current
financial reporting problems including transparency whilst also facilitating company
efforts to cost effectively achieve legislative compliance in relation to financial
reporting (Abdolmohammadi et al., 2002; Doolin and Troshani, 2004, 2007; Pinsker and
Li, 2008; Troshani and Lymer, 2010, 2011; Troshani et al., 2015).
Thus, IFRS and XBRL can have an important impact on auditing functions
generally and audit costs specifically. The objective of this paper is to address the
following research question:
RQ1. What is the effect of IFRS and XBRL on audit fees? Is such effect moderated
by firm size?
We focus on auditing as it constitutes an important activity in the business information
supply chain. It evaluates the accuracy and fairness of financial statements relative
to a jurisdiction’s generally accepted accounting principles (GAAP) and accounting
standards (Arens et al., 2007). As a result, auditing enhances the credibility of the firms
that produce them. This can, in turn, make it less costly for them to raise capital and
achieve investment growth (Khurana and Raman, 2004) whilst also facilitating
compliance with financial reporting legislation (Li et al., 2007; Rezaee, 2009). Drawing
on the work of De George et al. (2013), we argue that examining audit fees is useful
as it allows us to gain insight into the effect of IFRS and XBRL on the audit function
since audit fees constitute directly measurable and observable cash outflows of
audited firms.
To address our research questions we focus on listed companies in China for a
number of reasons. Since China has mandated both IFRS and XBRL use for financial
reporting for listed firms, it presents an ideal setting to investigate our research
questions (XBRLChina, 2004; Li, 2006; Peng and Bewley, 2010; IFRSChina, 2014).
Whilst China constitutes a unique setting featuring a single party political system with
extensive state ownership of business enterprises and centralised control of economy, it
also features many characteristics of emerging economies, including the desire to
attract foreign direct investment into China; list Chinese-owned companies overseas;
enhance the credibility of the accounting profession; and enhance the infrastructure
supporting efficient capital markets (Peng and Bewley, 2010). Emerging economies,
including China, anticipate that IFRS adoption constitutes a necessary condition for
modernising their economies and capital markets (Peng and Bewley, 2010). Finally,
representing the fastest emerging economy, China is having an increasing impact on
the world economy, which suggests that IFRS adoption can have important practical
implications for investors and academics alike (Peng and Bewley, 2010).
We focus on XBRL adoption in China since XBRL was mandated for use by listed XBRL and
companies in China from April 2004 (XBRLChina, 2004; KPMG, 2011), which makes IFRS adoption
China one of the early adopters of XBRL.
There are a number of studies that have investigated either IFRS or XBRL use in a
and audit fees
number of jurisdictions. For example, prior studies have examined the impact of IFRS on
auditing in Australia (De George et al., 2013), China (Wang et al., 2009; Chen and Zhang,
2010; Peng and Bewley, 2010) and European Union (Kim et al., 2012). To our best 111
knowledge, the only study that has empirically examined the impact of XBRL on
financial statement auditing is that of Shan and Troshani (2014) that focuses on the
impact of XBRL on audit fees on US listed companies during 2009-2011. We have found
no study concerning the impact of XBRL and IFRS on audit fees. Consequently, this
study fills an important gap by both extending existing literature in relation to the
economic impact of XBRL generally with a focus on a mandatory environment in an
emerging economy (Rao et al., 2013). Specifically, this study contributes by providing
evidence concerning the impact of IFRS-convergent accounting standards and XBRL on
financial reporting quality and transparency as measured by audit fees. Specifically, we
find that XBRL has a main negative effect on audit fees which is weaker for larger firms.
While XBRL is being used by listed firms in China, we also find that IFRS increases audit
fees for all companies. This effect is positive for firms of various sizes, though weaker for
larger companies. As China is not alone amongst emerging and growing economies
worldwide that are considering and adopting both IFRS and XBRL, our findings can,
thus, inform the strategies of accounting regulators internationally (Liu et al., 2011).
This study and its findings are important for many reasons. First, whilst studies
exist that have examined the impact of IFRS (Chen and Zhang, 2010; Kim et al., 2012;
De George et al., 2013) or XBRL use on audit fees (Shan and Troshani, 2014) separately,
no research has been found that examines the impact of both XBRL and IFRS on audit
fees. This is important as the use of IFRS and XBRL can have offsetting or
complementary effects. Additionally, IFRS critics argue that single standards may not
be suitable for all jurisdictions and settings, and thus, may not equally improve
financial reporting quality and transparency due to specific country differences
(Soderstrom and Sun, 2007). This suggests that assessments of IFRS/XBRL practices
need to be made on a country-by-country basis and therefore further strengthens the
motivation for this study (Nobes, 2006). Second, much of the research on audit fees to
date focuses on developed economies including the USA, Australia, Canada and Hong
Kong whilst research on emerging economies is limited. By focusing on China, this
study is also contributing by improving current understanding concerning the
determinants of audit fees in emerging economies (Wang et al., 2009). Thus, we focus on
IFRS in China since China’s national accounting standards are considered to be
substantially converged with IFRS from 2007 by all listed companies (Li, 2006; Peng
and Bewley, 2010; IFRSChina, 2014).
This paper is structured as follows. Before examining related literature and
developing our hypotheses, we discuss IFRS convergence in China. Research design is
subsequently examined before results are discussed and conclusions made.
2. IFRS convergence in China

Whilst over 100 countries have adopted IFRS for listed companies, concerns have
emerged that convergence[1] of accounting standards may not necessarily lead to
convergence of accounting practices if de facto compliance with standards is not
achieved (Street and Bryant, 2000). At least in part, these concerns stem from the fact that
IJMF the IASB has been influenced by the Anglo-American perspective of countries with
12,2 highly developed capital markets such as the UK and the USA with lesser developed
countries having been neglected (Fritz and Lammle, 2003; Chen and Zhang, 2010).
Emerging economies are of particular concern. Constituting over 80 per cent of IFRS
adopters (Deloitte, 2012), these economies may lack the necessary financial reporting
infrastructure of accountants, auditors and regulators to support IFRS compliance (Chen
112 and Zhang, 2010). Additionally, the IASB has been criticised for the lack of worldwide
enforcement mechanisms for ensuring that its standards work as expected (Ball, 2006).
China constitutes a good example of an emerging and transitional economy that is
attempting to converge Chinese GAAP with IFRS. In response to an emerging and
rapidly growing stock market and growing demand from foreign investors to invest in
Chinese stocks, and the desire for both domestic and foreign investment, the Chinese
government undertook a number of reforms to improve the quality of financial
reporting and the underlying accounting standards in China. These reforms were
conducted in 1992, 1998, 2001 and 2006, each culminating with policies which replaced
their predecessors and were widely considered to be in increasingly greater conformity
with IFRS (Chen et al., 1999, 2002). For example, inventory valuation using the lower of
cost or market value (LCM) was optional in the 1998 GAAP, but was made compulsory
in the 2001 GAAP (Chen and Zhang, 2010). Likewise, fair value accounting was not
adopted in China, until the 2006 GAAP (Peng and Bewley, 2010).
Whilst significant differences were found in 1992 and 1998 between the Chinese
GAAP and IFRS-based earnings reports (Chen et al., 2002), these differences were
significantly reduced after the 2001 reforms (Chen and Cheng, 2004). In fact, the 2001
and the 2006 compliance reform policies on accounting practices convergence were
found to have made a particular contribution in reducing the differences between the
Chinese GAAP- and the IFRS-based earnings and curbing the inconsistencies of the
application of these standards (Peng et al., 2008; Chen and Zhang, 2010; Peng and
Bewley, 2010). Chen and Zhang (2010) argue that the differences are attributed to the
lack of an effective financial reporting infrastructure, low quality of external auditing in
China, insufficient IFRS understanding by local professional accountants and
opportunistic behaviours of management (Chen and Zhang, 2010).
Nevertheless, the most recent revision of the Chinese GAAP issued in February 2006
is the first that is widely regarded to have a “substantial convergence” with IFRS which
is recognised by the IASB (IASB, 2006; Peng and Van der Laan Smith, 2010).
Accordingly, “substantial convergence” is defined to mean that principles of
recognition, measurement and reporting are applied so as to result in equivalent
financial statements whether firms apply the Chinese GAAP or IFRS standards
(Li, 2006; Peng and Bewley, 2010). Equivalence means that financial statements
prepared using the Chinese GAAP are accepted without the need of restating them in
countries that have adopted the IFRS (Peng and Bewley, 2010). Presently, equivalence
standing has been reached between China and the Hong Kong Institute of CPAs and
with the European Union whilst negotiations are underway with other countries
including Australia, Japan, Korea and Russia (Peng and Bewley, 2010; CEC, 2011).
3. Literature and hypotheses development

Theoretical underpinning
According to agency theory, the firm consists of a nexus of contracts between
principals (i.e. owners of economic resources including equity or shareholders and debt
holders) and the agents (i.e. managers who are responsible to use and control these
resources) ( Jensen and Meckling, 1976; Adams, 1994). Agency theory posits that XBRL and
principals do not have access to all available information when decisions are made by IFRS adoption
agents. This information asymmetry can create an “adverse selection” problem which
impairs a principal’s ability to determine if agents are, in fact, acting in the best
and audit fees
interests of the firm ( Jensen and Meckling, 1976). Additionally, agents may face the
“moral hazard” (Scapens, 1985) of acting against their principals’ interests whilst
attempting to maximise their own wealth (Sarens and Abdolmohammadi, 2011) which 113
can be manifested in the form of excessive use of perquisites, asset misappropriation
and enhancement of salary (Rediker and Seth, 1995). Taken together, these problems
give rise to agency costs which principals attempt to mitigate by establishing
monitoring processes such as auditing (Francis and Wilson, 1988). Additionally, whilst
agency theory suggests that highly leveraged companies are likely to disclose more
information in order to satisfy the needs of the debt holders in order to reduce investor
uncertainty and borrowing costs (Watson et al., 2002), debt holders might be concerned
about wealth transfers to shareholders (Smith and Warner, 1979) since managers may
favour the interests of the shareholders to the detriment of the debt holders (Francis
and Wilson, 1988). Consequently, debt holders include restrictive covenants in their
contracts, the presence of which can increase agency costs.
As gatekeepers, auditors attempt to protect the interests of shareholders and/or debt
holders by monitoring and verifying the actions undertaken by management through
financial reporting, internal controls and risk management (Sarens et al., 2009). In this
context, Jensen and Meckling (1976, p. 329) argue that the “existence and size of the
agency costs depend on the nature of [agent] monitoring costs […]”. Given their duty to
inspect firm accounts and financial statements, auditors also have the responsibility to
ensure that agents are acting according to the principal’s best interest which suggests
that auditing is a means for mitigating agency costs (Nikkinen and Sahlström, 2004).
Audit fees constitute “a specific and measurable agency cost” (Leventis et al., 2011,
p. 113). In fact, a reduction in audit fees signals that agency costs are reduced (Leventis
et al., 2011) and evidence exists that audit fees are affected by agency costs (Gul and
Tsui, 2001; Leventis et al., 2011). For example, auditors are likely to spend more time
inspecting managers’ activities where agency problems are suspected (Dopuch and
Simunic, 1982; Nikkinen and Sahlström, 2004; Leventis et al., 2011).
IFRS impact on audit fees

IFRS is likely to have a deep impact on a firm’s financial reporting costs (Hail et al.,
2010). Regulators and standard setters claim that use of IFRS can enhance the quality
and comparability of financial reporting worldwide suggesting that audit fees may be
reduced as a result (Kim et al., 2012; De George et al., 2013). Their argument is based on
the expectation that IFRS will improve the quality of financial reporting by way of
reducing financial misstatements, limiting opportunistic management discretion,
improving management accounting decisions and measurement, providing higher
quality disclosures reflecting a “true and fair view” of the firm’s financial and economic
conditions thereby improving compliance (Barth et al., 2008), which taken together
can reduce audit risks and audit fees (Kim et al., 2012). However, many firms that
are subject to IFRS adoption mandates have raised concerns about IFRS-compliant
financial reporting preparation and certification costs ( Jermakowicz and
Gornik-Tamaszewski, 2006). Arguably, IFRS can result in increases in audit fees
since these are determined by the complexity of audit tasks, financial reporting quality
and the country’s legal regime where audited firms operate (Kim et al., 2012). IFRS can
IJMF increase audit complexity which results in higher audit fees (De George et al., 2013) as
12,2 IFRS adoption may increase audit tasks due to the increase in “information overload”
(Choi and Mueller, 1984) as well as the cost of additional complexity that IFRS
compliance will bring about.
There are two main factors in relation to IFRS adoption that can impact on audit
fees. First, auditors undertake additional effort to become knowledgeable about the
114 new IFRS reporting regime relative to existing GAAP so that they can evaluate the
extent to which IFRS has been adequately implemented. Whilst such effort constitutes
a one-off cost, IFRS requires disclosure of additional detail (e.g. in footnotes,
management’s forecasts, and assessment of assets and liabilities) which also need to be
certified by auditors (De George et al., 2013). Second, as IFRS standards are principle
based, fair-value oriented and comprehensive, increased subjective professional
judgement and less prescriptive guidance in accounting measurement and estimates is
expected (KPMG, 2007; Deloitte, 2008; Diehl, 2010) which can increase the potential for
errors and subsequently the audit effort required to manage increased risk in terms of
increased probability of material misstatements and the associated litigation risk
(De George et al., 2013).
These factors can jointly contribute to increase compliance uncertainty by firms, as
well as the auditors’ risk assessment of these firms. Auditors’ efforts are likely to
increase, as a result, if they are to protect their reputation capital (De George et al.,
2013). In fact, a study reporting the experience of IFRS adopters in France found that
first time IFRS adopting French firms were perceived to signal an increase in the
quality of financial statements (Cormier et al., 2009). Yet in another study, earnings
management pervasiveness was found to have increased rather than declined after
IFRS was introduced in France ( Jeanjean and Stolowy, 2008). In fact, some evidence
has already been reported that audit fees increased after IFRS was adopted (Vieru and
Schadewitz, 2010).
Additionally, IFRS adopters may incur audit costs to different extents which is, at
least in part, affected by their size. This is suggested as IFRS adoption costs vary
across firms of different sizes. For example, a survey carried out in relation to the
mandatory adoption of IFRS in the EU indicates that IFRS transition costs are expected
to add up to 0.31 per cent of revenues for small firms (less than US$700 million in sales)
and up to 0.05 per cent of revenues for larger firms (ICAEW, 2007). IFRS reporting
costs are “likely to have a fixed component, making certain reports or disclosures
particularly burdensome for smaller firms” (Hail et al., 2010, p. 3).
Thus, arguably as IFRS can result in improved reporting quality, audit fees are
expected to be reduced. However, IFRS also increases audit complexity which can
increase audit fees. The impact of IFRS on audit fees will therefore be determined by
which of these opposite pressures dominates (Kim et al., 2012). Hence we hypothesise:
H1. Ceteris paribus, audit fees are affected by the interactive effects of IFRS and firm
size.
XBRL impact on audit fees
We argue that auditing of financial statements can be facilitated by increased financial
reporting transparency which can be enhanced by XBRL. Whilst transparency
represents the extent to which a company provides complete and fair disclosure of
clear, relevant, reliable and timely information about its business activities (Arens et al.,
2007; Roohani et al., 2009), the aim of auditing is to independently verify the financial
statements provided by management (O’Sullivan, 2000). It constitutes a “policing”
function which is part of the regulatory processes in financial reporting (Alleyne et al., XBRL and
2013). The value of auditing results from the expectation or probability that an auditor IFRS adoption
will detect and report breaches (or risks thereof) in the client’s accounting systems (e.g.
inadequate internal controls) and in financial statements (e.g. material omissions or
and audit fees
misstatements) (DeAngelo, 1981; Dopuch and Simunic, 1982). Audit failure is deemed to
have occurred when GAAPs are not enforced and when auditors fail to qualify audit
reports when material misstatements are detected which can mislead users of financial 115
statements (Francis, 2004). Our principal motivation is to determine whether XBRL can
assist auditors in carrying out their duties as a result of the increased transparency it
offers thereby reducing the information asymmetry that exists between the principal
(e.g. firm owners) and the agent (e.g. management), hence reducing agency costs.
XBRL proponents argue that XBRL can positively impact on auditing by reducing
its costs and enhancing the efficiency of auditing processes (Pinsker and Li, 2008;
Troshani and Lymer, 2010; KPMG, 2012). It can effect greater corporate transparency
(Scannell, 2006) whilst reducing the cost of compiling financial information and
streamlining internal and external financial reporting for companies. In turn, this
reporting process can facilitate both internal and external auditing processes
(Premuroso and Bhattacharya, 2008) in relation to the identification and correction of
material omissions and misstatements (Khurana and Raman, 2004) resulting in savings
in audit fees (Leventis et al., 2011).
Specifically, from the auditor’s viewpoint XBRL can reduce audit fees in at least two
ways. First, XBRL improves access to and analysis of financial information in financial
statements by auditors by facilitating data gathering, integration, and sharing between
audit clients (i.e. auditees) and auditors (Xiao et al., 2004; Chen and Liu, 2008; Ye and He,
2008; Gao, 2011; Han and Liu, 2011; Ragothaman, 2012; Jimei et al., 2013; Boyle et al.,
2014; Shan, 2014). For example, audit data can be offered as a whole electronically to
auditors at the beginning of the audit process which addresses piece-meal data access
inefficiencies that characterise traditional audit processes (Brands, 2013; Jimei et al.,
2013). By standardising the data format, XBRL creates data access efficiencies that
were not previously available to auditors who, although may have had access to
financial data electronically, had to undertake manual retrieval of data and analysis to
overcome lack of interchangeability and interoperability issues affecting auditee data
typically available in different formats (e.g. MS Excel spreadsheets, MS Word
documents, PDF and HTML) or platforms and software applications (Peng et al., 2011;
Jimei et al., 2013; Liu et al., 2014). Thus, whilst XBRL formatted financial statements are
not intended to offer new information beyond what is reported in traditional formats,
XBRL facilitates accessibility by facilitating extraction and integration of financial
information from financial statements, thereby improving transparency and potentially
reducing auditing costs (Peng et al., 2011).
Second, XBRL facilitates analytical reviews carried out by auditors on financial
statements that are in XBRL format resulting in reduced labour, time and costs
(Xiao et al., 2004; Chen and Liu, 2008; Ye and He, 2008; Gao, 2011; Han and Liu, 2011;
Peng et al., 2011; La Rosa and Caserio, 2013; Shan, 2014). That is, as XBRL enables
financial data to be captured at a much more granular level (PWC, 2011) for each
disclosed item, it facilitates the work of auditors by supporting auditing processes with
computers (Bizarro and Garcia, 2010; Eccles and Krzus, 2010). This enables the automatic
validation of calculated numbers or compliance with disclosure checklists, improves
analysis, enhances audit trails whilst also reducing spreadsheet proliferation ( Jimei et al.,
2013). To illustrate, when financial data is captured in XBRL format, suitable
IJMF XBRL-enabled applications or even publicly available tools (e.g. available at the
12,2 Shanghai Stock Exchange (SHSE) website) can be used to facilitate auditing by quickly
identifying anomalies that might be indicative of financial reporting fraud. For example,
financial statement data in XBRL format can be quickly analysed to identify patterns of
risk indicators or potentially faulty internal controls over financial reporting that might
suggest firms may be engaging in earnings management (Peng et al., 2011). Specific
116 examples include high proportions of off-balance-sheet transactions, understatement and
overstatement of earnings based on the level of discretionary (abnormal) accruals (e.g.
accounting policies that increase reported book earnings and attempts to minimise
taxable income), compensation incentives that do not meet analysts’ earnings targets
(Xiao et al., 2004; Chen and Liu, 2008; Ye and He, 2008; Gao, 2011; Han and Liu, 2011;
Holzinger, 2013; Roselli, 2013; Tysiac, 2013; Boyle et al., 2014; Shan, 2014). Whilst these
auditing analyses can be carried out with traditional financial statements, they are likely
to be time-consuming, error-prone and costly (Peng et al., 2011).
There is evidence to suggest that filing in XBRL format is improving the quality of
financial information in China (Kernan, 2008; Zion et al., 2008; Li et al., 2013; Rao et al.,
2013; Wang et al., 2014). For example drawing on evidence from listed companies in
China, Peng et al. (2011) show that total accruals in the post-XBRL implementation
period is lower relative to that of the pre-XBRL implementation period. Thus, XBRL
can facilitate auditing and potentially reduce audit-related costs, resulting in lower
audit fees (Leventis et al., 2011). In this study, we deliberately focus our attention on
publicly listed firms and auditing fees paid to external auditors, which is particularly
important given the potential agency costs that may arise as a direct result of the
separation of firm ownership and management (Francis, 2004).
Current research has found that a significant correlation exists between audit fees
and firm size, though results are mixed (Simunic, 1980; Wallace, 1984; Firth, 1985;
Casterella et al., 2004; Fleischer and Goettsche, 2012; Fung et al., 2012). For instance,
some studies have found that audit fees are inversely related to firm size (e.g. Simunic,
1980; Wallace, 1984) which is attributed to a firm’s accounting information systems and
internal audit functions. For example, larger clients usually benefit from more
sophisticated accounting information systems and more efficient internal audit
functions than their smaller counterparts, which can facilitate external auditing whilst
also enabling external auditors to taking advantage of the work carried out by internal
auditors thereby reducing audit fees. Also, larger firms are likely to have more human
and financial resources to support XBRL implementations relative to smaller firms.
It follows that larger firms are more likely to incorporate XBRL into their business
reporting processes (than their smaller counter parts), which in turn can make their
auditors more likely to benefit from XBRL use resulting in reduced audit costs.
Furthermore, larger firms have stronger bargaining power than smaller firms which
enables the former to increase the scale of audit fee discounts (Casterella et al., 2004;
Fung et al., 2012).
Conversely, other studies have found that a positive relationship exists between
audit fees and firm size (e.g. Firth, 1985; Fleischer and Goettsche, 2012) which is
attributed to the inherent complexity (Firth, 1985), risk (Firth, 1985) and the political
visibility of larger firms relative to smaller firms (Premuroso and Bhattacharya, 2008).
Increasing complexity can make it harder for external auditors to audit the accounts of
larger firms and detect fraud (Firth, 1985). Furthermore, external auditors may charge
large firms a premium when they perceive the audit to be risky (Reynolds and Francis,
2001; Khadaroo, 2005). Risk may be driven by potential litigation costs and loss of
goodwill (Firth, 1985). Also, larger firms are more likely to receive more public attention XBRL and
since they are more politically prominent than smaller firms (Meek et al., 1995; Marston IFRS adoption
and Polei, 2005; Premuroso and Bhattacharya, 2008). Consequently, larger firms often
respond to public scrutiny pressures by disclosing additional information beyond what
and audit fees
is legally required which, in turn, can increase the external auditors’ work, also leading
to higher audit fees. Based on these arguments, we, thus, hypothesise that:
H2. Ceteris paribus, audit fees are affected by the interactive effects of XBRL and 117
firm size.
4. Research design
Data
This study investigates the impact of XBRL and IFRS on audit fees with data sourced
from listed companies in the SHSE. The SHSE became the world’s sixth largest stock
market with a market capitalisation of US$2.3 trillion as of the end of 2011 and is
treated as the vane of economic reform and capital market in China.
The data for this study were sourced from the Thomson Reuters database. As
shown in Figure 1, the duration of 12 years commencing in 2000 until 2011 was selected
which includes the time spans of 2000-2003 and 2004-2011, denoted as pre-XBRL and
post-XBRL mandate, respectively (XBRLChina, 2004), and the time spans of 2000-2006
and 2007-2011 which are denoted as pre-IFRS and post-IFRS convergence, respectively.
As shown in Table I, a total of 9,645 listed companies on SHSE issued A-Shares
between 2000 and 2011. However, since reporting audit fees is voluntary, many Chinese
companies do not disclose audit fees (Lin and Liu, 2009) which results in a significant
reduction in observations. After removing missing data, financial institutions and
insurance companies, the final data set consists of 1,798 firm-year observations.
Dependent variable
Prior studies have commonly used audit fees as a proxy of audit cost in firms (e.g.
O’Sullivan, 2000; Boo and Sharma, 2008; Elder et al., 2009; Leventis et al., 2011; Zaman
et al., 2011; Fleischer and Goettsche, 2012). Following these studies, we use the natural
logarithm of total audit fees (AUDITFEES) paid by company i in fiscal year t as the
dependent variable.
Independent variables
Independent variables in this study consist of XBRL, IFRS and FIRMSIZE. Following
Premuroso and Bhattacharya (2008), XBRL is a dichotomous variable to measure
whether the company files its financial statements in XBRL format, coded as 1 if
the company is an XBRL filer for the years after the XBRL mandate came into effect,
i.e., 2004 onwards, 0 otherwise for the years prior to the XBRL mandate. According to
Pre-XBRL mandate Post-XBRL mandate
2000 2002 2004 2006 2008 2010

Figure 1.
2001 2003 2005 2007 2009 2011
XBRL mandate and
IFRS convergence
timelines in China
Pre-IFRS convergence Post-IFRS convergence
IJMF No. of observations
12,2
Data
No. of A-shares on SHSE at the end of 2000 572
118 No. of A-shares on SHSE at the end of 2004 837
Less: missing, financial institutions and insurance companies (7,847)
Total firm-year observations 1,798
Distribution of observation by year
Year 2000 22
Year 2001 29
Year 2002 89
Year 2003 153
Year 2004 158
Year 2005 163
Year 2006 173
Year 2007 174
Year 2008 193
Year 2009 204
Table I. Year 2010 215
Distribution of Year 2011 225
observations Total firm-year observations 1,798
Liu et al. (2011), IFRS is a dichotomous variable that measures whether financial
statements are prepared in accordance with IFRS, i.e., coded as 1 when companies
lodge their financial statements for the years post-IFRS convergence, i.e., 2007
onwards, 0 otherwise for the years prior to IFRS convergence. The relationship
between firm size and audit quality has been widely examined in previous research
(Abbott et al., 2007; Gul et al., 2007; Premuroso and Bhattacharya, 2008). Consistent
with prior research, in this study, we measure firm size (FIRMSIZE) as the natural
logarithm of total assets of company i at the end of fiscal year t.
Control variables
Consistent with prior related research, we define the control variables as follows. Change
of earnings per share (ΔEPS) is computed as the difference between EPS for company i at
the end of fiscal year t and EPS for company i at the end of fiscal year t−1 (Chen and
Zhang, 2010); change of sales ratio (ΔSALES) is calculated as the difference between
sales for company i at the end of fiscal year t and sales for company i at the end of fiscal
year t−1, divided by sales for company i at the end of fiscal year t−1 (Houqe et al., 2012);
debt-to-equity ratio (DERATIO) is measured as the ratio of long-term debt to total equity
for company i at the end of fiscal year t (Seetharaman et al., 2002); Tobin’s Q (TOBINSQ)
represents a market performance indicator and is computed as the ratio of market value XBRL and
of stock and book value of debt, divided by book value of total assets, for company i at IFRS adoption
the end of fiscal year t (Shan, 2014); Big 4 auditor (BIG4) is coded as 1 if the company is
audited by a Big 4 auditor, 0 otherwise (Premuroso and Bhattacharya, 2008); year
and audit fees
dummy (YEAR) represents the year effect reflecting the years between 2000 and 2011;
industry dummy (INDUSTRY) reflects the company’s industry in accordance with the
industry classification of the China Securities Regulatory Commission. 119
Model development and diagnostics
This study builds on the model of Shan and Troshani (2014) as the basic model to
examine the hypotheses and investigate whether there is an interaction between IFRS
and XBRL use and firm size on firm audit fees in the selected SHSE firms (see Table I):
AUDITFEESi ¼ a þ b1 IFRSi þ b2 XBRLi þ b3 FIRMSIZEi þ b4 IFRSi FIRMSIZEi
þ b5 XBRLi FIRMSIZEi þ b6 DEPSi þ b7 DSALESi þ b8 DERATIOi
X
8 X
11
þ b9 TOBINSQi þ b10 BIG4i þ gj YEARi þ Zk INDUSTRYi þ ei
j¼1 k¼1
(1)
We extend the work of Shan and Troshani (2014) by investigating the interaction of
IFRS and firms size, in addition to the interaction of XBRL and firm size in an emerging
economy, namely, China.
5. Results
Descriptive statistics
The descriptive statistics of key variables in our model are provided in Table II.
Accordingly, the mean (median) for audit fees is RMB172,819 (129,314) for all
years, with a mean (median) of RMB125,492 (102,744) and RMB185,350 (137,310) for the
pre- and post-XBRL mandate periods, respectively, and a mean (median) of RMB131,926
(101,722) and RMB215,346 (151,752) for the pre- and post-IFRS convergence periods,
respectively. The mean (median) for firm size is RMB321,980,003 (288,440,678) for all
years, with a mean (median) of RMB183,917,896 (205,303,514) and RMB366,679,967
(338,488,271) for the pre- and post-XBRL mandate years, respectively; and a mean
(median) of RMB217,998,775 (222,402,642) and RMB447,863,923 (421,782,358) for the pre-
and post-IFRS convergence periods, respectively (see Figure 1)[2].
The descriptive statistics of the control variables are shown in Panel A of Table II.
The mean (median) for the change of EPS is 0.01 (0.003) for all years with a range of
−0.18 to 0.19, and the mean (median) for the change of sales ratio is 0.27 (0.2) for all
years with a range of −0.74 to 3.74. The mean (median) for the long-term debt-to-equity
ratio is 0.35 (0.11) for all years with a range of 0.00 to 3.91. The mean (median) for
Tobin’s Q, the market performance indicator, is 1.28 (1.04).
Model diagnostics and multivariate analyses

Model diagnostics consist of the Pearson correlation diagnostic (PCD) and the variance
inflation factor (VIF) test. First, the PCD coefficients presented in Panel A of Table III
indicate that the values of any pairs of independent variables are well below the critical
value of 0.8. Second, the VIF test is also conducted, as multicollinearity may still exist
12,2
120
IJMF
Table II.
for key variablesa

Descriptive statistics
Panel A: All years 2000-2011
Key variable Mean Med Min Max SD
AUDITFEES 12.06 11.77 10.15 16.22 1.2
AUDITFEES (RMB) 172,819 129,314 25,591 11,072,776
FIRMSIZE 19.59 19.48 15.2 24.01 1.56
FIRMSIZE (RMB) 321,980,003 288,440,678 3,992,787 26,755,342,233
ΔEPS 0.01 0.003 −0.18 0.19 0.04
ΔSALES 0.27 0.2 −0.74 3.74 0.53
DERATIO 0.35 0.11 0.00 3.91 0.63
TOBINSQ 1.28 1.04 0.41 2.78 0.77
Panel B: XBRL timespan

Pre-XBRL mandate Post-XBRL mandate
Key variable Mean Med Min Max SD Mean Med Min Max SD
AUDITFEES 11.74 11.54 10.15 16.22 1.09 12.13 11.83 10.15 16.22 1.22
AUDITFEES (RMB) 125,492 102,744 25,591 11,072,756 185,350 137,310 25,591 11,072,776
FIRMSIZE 19.03 19.14 15.2 23.2 1.18 19.72 19.64 15.2 24.01 1.6
FIRMSIZE (RMB) 183,917,896 205,303,514 3,992,787 11,902,329,807 366,679,967 338,488,271 3,992,787 26,755,342,233
ΔEPS 0.0001 0.001 −0.18 0.19 0.03 0.007 0.005 −0.18 0.19 0.05
ΔSALES 0.28 0.18 −0.74 3.74 0.53 0.27 0.21 −0.74 3.74 0.54
DERATIO 0.26 0.07 0.00 3.91 0.59 0.37 0.13 0.00 3.91 0.64
TOBINSQ 1.29 1.1 0.41 2.78 0.73 1.27 1.02 0.41 2.78 0.78
Panel C: IFRS timespan

Pre-IFRS convergence Post-IFRS convergence
Key variable Mean Med Min Max SD Mean Med Min Max SD
AUDITFEES 11.79 11.53 10.15 16.22 1.13 12.28 11.93 10.15 16.22 1.22
AUDITFEES (RMB) 131,926 101,722 25,591 11,072,776 215,346 151,752 25,591 11,072,776
FIRMSIZE 19.2 19.22 15.2 23.8 1.27 19.92 19.86 15.2 24.01 1.69
FIRMSIZE (RMB) 217,998,775 222,402,642 3,992,787 21,687,458,910 447,863,923 421,782,358 3,992,787 26,755,342,233
ΔEPS 0.001 0.002 −0.18 0.19 0.03 0.01 0.007 −0.18 0.19 0.05
ΔSALES 0.28 0.2 −0.74 3.74 0.54 0.27 0.2 −0.74 3.73 0.53
DERATIO 0.28 0.08 0.00 3.91 0.55 0.41 0.15 0.00 3.91 0.69
TOBINSQ 1.15 0.93 0.41 2.78 0.7 1.37 1.12 0.41 2.78 0.81
Notes: aAUDITFEES ¼ natural logarithm of audit fees; FIRMSIZE ¼ natural logarithm of value of total assets at the end of fiscal year; ΔEPS ¼ change of EPS, EPSt − EPSt − 1;
ΔSALES ¼ change of sales ratio, (SALESt − SALESt−1)/SALESt–1; DERATIO ¼ long-term debt to total equity; TOBINSQ ¼ Tobin’s Q, market value of stock and book value of debt divided by
book value of total assets
Panel A: Pearson correlation matrix
XBRL and
Variables (1) (2) (3) (4) (5) (6) (7) (8) IFRS adoption
(1) XBRL 1.000 and audit fees
(2) IFRS 0.495*** 1.000
(3) FIRMSIZE 0.164*** 0.258*** 1.000
(4) ΔEPS 0.087*** 0.136*** 0.168*** 1.000
(5) ΔSALES 0.002 −0.004 0.237*** 0.349*** 1.000
(6) DERATIO 0.065** 0.08** 0.352*** −0.003 0.153*** 1.000
121
(7) TOBINSQ −0.004 0.144*** –0.281*** 0.2*** 0.045**** −0.214*** 1.000
(8) BIG4 −0.046**** −0.006 0.297*** 0.094*** 0.113*** 0.182*** −0.088*** 1.000
Panel B: VIF diagnostic

XBRL IFRS FIRMSIZE ΔEPS ΔSALES DERATIO TOBINSQ BIG4
VIF 1.34 1.49 1.43 1.09 1.06 1.08 1.27 1.16
Notes: aXBRL ¼ filing financial statements in XBRL format, coded as 1 if company is an XBRL filer, 0 otherwise;
IFRS ¼ preparing financial statements in accordance with IFRS, coded as 1 if IFRS is applied, 0 otherwise;
FIRMSIZE ¼ natural logarithm of value of total assets at the end of fiscal year; ΔEPS ¼ change of EPS, EPSt−EPSt−1;
ΔSALES ¼ change of sales ratio, (SALESt−SALESt−1)/SALESt−1; DERATIO ¼ long-term debt to total equity;
TOBINSQ ¼ Tobin’s Q, market value of stock and book value of debt divided by book value of total assets; BIG4 ¼ Big
4 auditor, coded 1 if the firm is audited by a Big4 auditor, 0 otherwise; bThe critical value of the VIF to test for
multicollinearity is 10. Gujarati (2003) suggests that there is no evidence of multicollinearity unless the VIF of a variable Table III.
exceeds 10. All values used in this study were well below this critical level; *po0.05; **po0.01; ***po0.001; Collinearity
****po0.10 (two-tailed p-values are used in determining significance) diagnosticsa,b
even if the correlation value is small (Gujarati, 2003). The results, reported in Panel B of
Table III, show that the largest VIF is 1.49 and that the VIFs of all other independent
variables are well below the critical value of 10. Thus, the regression model has no
evidence of multicollinearity.
Table IV provides the regression results of the multivariate model to examine the
impact of independent variables (Column (1)) and the interactive effects of XBRL and
IFRS with firm size (Column (2)) on audit fees. The regression results are characterised
by an adjusted R2 of 0.5582 with an F-statistic of 284.8 and an adjusted R2 of 0.5621
with an F-statistic of 231.64, respectively[3]. The high adjusted R2s and F-statistics
suggest that the dependent variable – AUDITFEES is well explained by the
independent variables and the interactive effects of XBRL and IFRS with firm size.
The results, shown in Column (1) of Table IV, reveal a positive coefficient for IFRS
with a statistical significance ( β ¼ 0.195, t ¼ 4.29, p o 0.001). We infer that the
significantly positive relationship between IFRS convergence and audit fees is caused
by the complexity of audit tasks, the quality of financial statements and legal regime in
China (Kim et al., 2012). These complex tasks can increase the number of hours worked
by external auditors and additional information disclosure that IFRS compliance
entails (Choi and Mueller, 1984; De George et al., 2013).
The results indicate a weakly negative coefficient for XBRL ( β ¼ −0.114, t ¼ −1.88,
p o 0.1). This suggests that the auditing of financial statements of listed companies in
XBRL format was facilitated. Consequently, XBRL has contributed by reducing
auditing costs by improving accessibility and disclosure and facilitating analytical
reviews carried out by auditors on financial statements that are in XBRL format
resulting in reduced costs of financial statement auditing as also evidenced across a
number of studies focusing on XBRL adoption in China and indicative XBRL benefits
on financial statement auditing (Xiao et al., 2004; Chen and Liu, 2008; Kernan, 2008;
IJMF Model without interactive effect Model with interactive effect
12,2 Column (1) Column (2)
Independent variable Expected sign β t β t
Intercept n/a 3.744 14.26*** 3.381 4.26***

IFRS − 0.195 4.29*** 2.822 4.5***
XBRL − −0.114 −1.88**** −1.759 −1.83****
122 FIRMSIZE + 0.407 29.61*** 0.426 10.25***
IFRS × FIRMSIZE ? –0.135 −4.2***
XBRL × FIRMSIZE ? 0.085 1.7****
ΔEPS ? −0.865 −2.42* −0.85 −2.38*
ΔSALES ? −0.0003 −0.28 −0.0003 −0.28
DERATIO ? 0.078 3.99*** 0.077 3.96***
TOBINSQ ? 0.006 2.5* 0.005 2.11*
BIG4 ? 1.018 21.26*** 1.013 21.25***
Year effect Included Included
Industry effect Included Included
Adjusted R2 0.5582 0.5621
F-statistic 284.8*** 231.64***
Observation 1,798 1,798
This table reports the results of the pooled OLS regression models:
AUDITFEESi ¼ a þ b1 IFRSi þ b2 XBRLi þb3 FIRMSIZEi þb4 IFRSi FIRMSIZEi
þ b5 XBRLi FIRMSIZEi þ b6 DEPSi þb7 DSALESi þ b8 DERATIOi
X
8 X
11
þ b9 TOBINSQi þb10 BIG4i i þ gj YEARi þ Zk INDUSTRYi þ ei (1)
j¼1 k¼1
where AUDITFEES ¼ natural logarithm of audit fees; IFRS ¼ preparing financial statements in
accordance with IFRS, coded as 1 if IFRS is applied, 0 otherwise; XBRL ¼ filing financial statement in
XBRL format, coded as 1 if company is an XBRL filer, 0 otherwise; FIRMSIZE ¼ natural logarithm of
value of total assets at the end of fiscal year; ΔEPS ¼ change of EPS, EPSt−EPSt−1; ΔSALES ¼ change
of sales ratio, (SALESt−SALESt−1)/SALESt−1; DERATIO ¼ long-term debt to total equity;
TOBINSQ ¼ Tobin’s Q, market value of stock and book value of debt divided by book value of total
assets; BIG4 ¼ BIG4 ¼ Big 4 auditor, coded 1 if the firm is audited by a Big4 auditor, 0 otherwise; Year
dummy (YEAR) represents dummy variables that reflect the years between 2000 and 2011; Industry
dummy (INDUSTRY) reflects the company’s industry in accordance with the industry classification of
Table IV. the CSRC.
Regression results Notes: *p o0.05; **p o0.01; ***p o 0.001; ****p o0.10. All tests are two-tailed
Ye and He, 2008; Zion et al., 2008; Gao, 2011; Han and Liu, 2011; Peng et al., 2011; Jimei
et al., 2013; Li et al., 2013; Rao et al., 2013; Liu et al., 2014; Wang et al., 2014).
Additionally, the internal controls of filers were enhanced, which may suggest that
other relevant costs in relation to auditing, such as verification costs and substantive
tests were reduced (Chen and Liu, 2008; Rezaee, 2009; Gao, 2011; Han and Liu, 2011;
Chen and Rezaee, 2012). The positive association between firm size and XBRL on audit
fees may be indicative of firm size effects, that is, large companies are more likely to
have more complex accounts, transactions, as well as a higher risk in potential
litigation and goodwill loss (Firth, 1985) and higher political costs due to public
visibility (Premuroso and Bhattacharya, 2008) than smaller companies.
As far as H1 is concerned, the results, shown in Column (2) of Table IV, reveal that
IFRS increases audit fees for all firms, with the negative coefficient for
IFRS×FIRMSIZE ( β ¼ −0.135, t ¼ −4.2, p o 0.001) indicating that this effect is weaker XBRL and
for larger firms. Thus, H1 is supported. One possible way to explain this could be that IFRS adoption
whilst IFRS might increase firms’ audit fees, larger firms have a stronger bargaining
power and thus could be in a better position to negotiate better terms with audit firms.
and audit fees
This may explain why the positive association between IFRS and audit fees is weaker
amongst large firms. Yet another way to explain this finding could be that large firms
are more likely to have more effective corporate governance mechanisms in place 123
which can reduce the positive association between IFRS and their audit fees.
With the H2 concerning the interactive impact of XBRL and firm size on audit fees, we
find a weak correlation between the XBRL × FIRMSIZE and AUDITFEES (β ¼ 0.085,
t ¼ 1.7, po0.1). Although the coefficient is incremental, the combined values of the
coefficients (−1.248) for XBRL, FIRMSIZE and XBRL × FIRMSIZE were clearly reduced
since XBRL filing was mandated in China. This conclusion is evident by the coefficient
of FIRMSIZE and the coefficient of XBRL × FIRMSIZE resulting in a decrease of
293 per cent. Thus, our results indicate that XBRL has a main negative effect on audit
fees which is weaker for larger firms. Thus, H2 is supported. Possible explanations of the
positive coefficient might be related to the set-up and training costs and time required in
the short-term which might be more substantial for larger firms; the coefficient is likely to
become negative in the longer term (Shan et al., 2015).
With the control variables, we find that the DERATIO, TOBINSQ and BIG4 are
positively correlated with audit fees, whereas ΔEPS reveals negative associations.
The other control variable, ΔSALES, is found to have no impact. Year dummies are
significant for all years except 2006, 2008 and 2009.
Robustness checks
The robustness of our primary results was evaluated in five ways. First, Ramsey’s
Regression Specification Error Test (RESET) was conducted to determine the potential
of nonlinear partial effects of omitted variables in the regression model. The RESET
complete the second, third and fourth powers of fitted variables. The results (not
reported in this paper) show that individual t-statistics are insignificant, which indicate
that there is no nonlinear effect. This confirms that the linear regression model is a
statistically appropriate model specification.
Second, we winsorized all continuous variables at the 1st and 99th percentile to
assess the potential impact of outliers. The results (not reported in this paper) indicate
that there are no differences with the primary findings.
Third, we regrouped our data set by firm size (FIRMSIZE), i.e., a data set comprising
899 observations that FIRMSIZE is greater than the median and another data set
comprising 899 observations that FIRMSIZE is smaller than the median. The results
(not reported in this paper) indicate that there are no differences with the primary
findings, except the insignificant coefficient of IFRS×FIRMSIZE for smaller companies.
This finding confirms our primary finding for H1, i.e., IFRS reporting costs become a
burden for smaller companies (Hail et al., 2010).
Fourth, prior studies conduct change analyses (Kim et al., 2012; Holm and
Thinggaard, 2014). For example, Kim et al. (2012) examine whether the change of audit
fees is associated with changes of the independent variables with the intention of
mitigating concerns about potential problems of correlated omitted variables. Similarly,
Holm and Thinggaard (2014) modified a change model of audit fees using first-
differences over time of the variables. Accordingly, we develop a change model to test
both H1 and H2 and investigate whether and how change variables are different from
IJMF our primary results. The change model (Model (2)) is specified by computing change in
12,2 the variables that appear in Model (1):
DAUDITFEESi ¼ a þ b1 IFRSi þ b2 XBRLi þ b3 DFIRMSIZEi
þ b4 IFRSi DFIRMSIZEi þ b5 XBRLi DFIRMSIZEi
124 þ b6 DEPSi þ b7 DSALESi þ b8 DDERATIOi þ b9 DTOBINSQi
X
8 X
11
þ b10 BIG4i þ gj YEARi þ Zk INDUSTRYi þ ei (2)
j¼1 k¼1
Table V reports the results of the change model (Model (2)), focusing on the testing of
H1 and H2.
Change model with interactive effect

Independent variable Expected sign β t
Intercept n/a 11.285 7.1***

IFRS − 0.421 7.31***
XBRL − −0.123 –1.83****
ΔFIRMSIZE + 0.011 5.22***
IFRS × ΔFIRMSIZE ? −0.236 −2.04*
XBRL × ΔFIRMSIZE ? 0.127 1.71****
ΔEPS ? 0.649 1.17
ΔSALES ? −0.01 −0.21
ΔDERATIO ? 0.011 0.18
ΔTOBINSQ ? −0.016 −0.49
BIG4 ? 1.584 30.37***
Year effect Included
Industry effect Included
Adjusted R2 0.3755
F-statistic 104.59***
Observation 1,724
DAUDITFEESi ¼ a þb1 IFRSi þb2 XBRLi þ b3 DFIRMSIZEi þ b4 IFRSi DFIRMSIZEi
þ b5 XBRLi DFIRMSIZEi þb6 DEPSi þ b7 DSALESi þb8 DDERATIOi
X
8 X
11
þb9 DTOBINSQi þ b10 BIG4i i þ gj YEARi þ Zk INDUSTRYi þ ei (2)
j¼1 k¼1
where ΔAUDITFEES ¼ change of the natural logarithm of audit fees, ΔAUDITFEESt−

ΔAUDITFEESt−1; IFRS ¼ preparing financial statements in accordance with IFRS, coded as 1 if IFRS is
applied, 0 otherwise; XBRL ¼ filing financial statement in XBRL format, coded as 1 if company is an
XBRL filer, 0 otherwise; ΔFIRMSIZE ¼ change of the natural logarithm of value of total assets at the end
of fiscal year, ΔFIRMSIZEt−ΔFIRMSIZEt−1; ΔEPS ¼ change of EPS, EPSt−EPSt−1; ΔSALES ¼ change
of sales ratio, SALESt−SALESt−1; ΔDERATIO ¼ change of the ratio of long-term debt to total equity,
ΔDERATIOt−ΔDERATIOt−1; ΔTOBINSQ ¼ change of Tobin’s Q, market value of stock and book value
of debt divided by book value of total assets, ΔTOBINSQt−ΔTOBINSQt−1; BIG4 ¼ BIG4 ¼ Big 4 auditor,
coded 1 if the firm is audited by a Big4 auditor, 0 otherwise; Year dummy (YEAR) represents dummy
Table V. variables that reflect the years between 2000 and 2011; Industry dummy (INDUSTRY) reflects the
Robustness check: company’s industry in accordance with the industry classification of the CSRC.
change analysis Notes: *po0.05; **po0.01; ***po0.001; ****po0.10. All tests are two-tailed
We find that the change model results are consistent with the primary results XBRL and
(Table IV). That is, we find a negative coefficient for IFRS×FIRMSIZE ( β ¼ −0.236, IFRS adoption
t ¼ −2.04, p o 0.05) and a weak correlation between the XBRL×FIRMSIZE and
AUDITFEES ( β ¼ 0.127, t ¼ 1.71, p o 0.1). These results indicate that our previous
and audit fees
interpretation of the interactive effects in Table IV is accurate.
Fifth, prior studies indicate that corporate governance factors influence firms’
financial reporting quality and audit fees (Cohen et al., 2004; Larcker and Richardson, 125
2004). For example, Cohen et al. (2004) argue that corporate governance plays an
important role in ensuring the quality of the financial reporting process. Larcker and
Richardson (2004) include corporate governance variables to examine their effects of
audit fees. Similarly, Shan (2014) investigates whether audit quality is affected by
internal governance mechanisms. Accordingly, we extend our model (i.e. Model (1))
with two corporate governance factors of board characteristics as control variables.
Consistent with prior literature these factors are board independence (BDINDP); and
supervisory board size (SBSIZE). These variables represent the typical characteristics
of the two-tier board system in China (Shan and Round, 2012; Shan, 2013). BDINDP is
measured as the proportion of the number of independent directors to the total number
of directors on the board (Larcker and Richardson, 2004), whereas SBSIZE represents
the total number of supervisors serving on the supervisory board (Shan, 2013; Shan,
2014). Our empirical model is modified as follows:
AUDITFEESi ¼ aþ b1 IFRSi þ b2 XBRLi þ b3 FIRMSIZEi þ b4 IFRSi FIRMSIZEi
þ b5 XBRLi FIRMSIZEi þ b6 DEPSi þ b7 DSALESi
þ b8 DERATIOi þ b9 TOBINSQi þ b10 BIG4i þ b11 BDINDPi
X
8 X
11
þ b12 SBSIZEi þ gj YEARi þ Zk INDUSTRYi þ ei (3)
j¼1 k¼1
The results of Column (1) of Table VI indicate a positive coefficient for IFRS ( β ¼ 0.269,
t ¼ 5.43, po0.001) and a weakly negative coefficient for XBRL ( β ¼ −0.112, t ¼ −1.69,
po0.1), and the results of Column (2) report a weakly negative coefficient for
IFRS×FIRMSIZE ( β ¼ −0.065, t ¼ −1.73, po0.1) and a weakly positive coefficient for
XBRL×FIRMSIZE ( β ¼ 0.104, t ¼ 1.7, po0.1). These findings are consistent with our
primary results. We also note that both corporate governance variables, i.e. BDINDP and
SBSIZE, are not significant in either model (see Columns (1) and (2) of Table VI). Therefore,
we conclude that the primary results are not influenced by corporate governance variables.
6. Conclusion
We set out to investigate the following research question:
RQ1. What is the effect of IFRS and XBRL on audit fees? Is such effect moderated
by firm size?
Whilst IFRS constitute high quality accounting standards, XBRL represents a
technology standard that can enhance IFRS usability. With the increasing importance of
auditing, we argue that IFRS and XBRL can affect auditing functions amongst
companies that have adopted them and have offsetting impacts. Specifically, in this
paper we have assessed the impact of IFRS and XBRL on audit fees by using evidence
from companies listed in the SHSE in China. There is paucity of research concerning the
IJMF Model without interactive effect Model with interactive effect
12,2 Column (1) Column (2)
Independent variable Expected sign β t β t
Intercept n/a 4.029 13.22*** 4.934 4.98***

IFRS − 0.269 5.43*** 1.524 2.1*
XBRL − −0.112 −1.69**** –2.112 −1.8****
126 FIRMSIZE + 0.382 24.9*** 0.335 6.48***
IFRS×FIRMSIZE ? –0.065 –1.73****
XBRL×FIRMSIZE ? 0.104 1.7****
ΔEPS ? −0.734 −1.99* −0.72 −1.96*
ΔSALES ? −0.0003 −0.28 −0.0003 −0.28
DERATIO ? 0.099 4.71*** 0.097 4.67***
TOBINSQ ? −0.011 −0.85 −0.013 −0.96
BIG4 ? 1.006 19.83*** 1.005 19.82***
BDINDP ? 0.188 0.6 0.207 0.66
SBSIZE ? 0.022 1.55 0.021 1.59
Year effect Included Included
Industry effect Included Included
Adjusted R2 0.554 0.5545
F-statistic 200.86*** 167.91***
Observation 1,610 1,610
AUDITFEESi ¼ a þb1 IFRSi þ b2 XBRLi þ b3 FIRMSIZEi
þ b4 IFRSi FIRMSIZEi þ b5 XBRLi FIRMSIZEi
þ b6 DEPSi þ b7 DSALESi þb8 DERATIOi þb9 TOBINSQi þ b10 BIG4i
X
8 X
11
þb11 BDINDPi þ b12 SBSIZEi þ gj YEARi þZk INDUSTRYi þ ei (3)
j¼1 k¼1
where AUDITFEES ¼ natural logarithm of audit fees; IFRS ¼ preparing financial statements in
accordance with IFRS, coded as 1 if IFRS is applied, 0 otherwise; XBRL ¼ filing financial statement in
XBRL format, coded as 1 if company is an XBRL filer, 0 otherwise; FIRMSIZE ¼ natural logarithm of
value of total assets at the end of fiscal year; ΔEPS ¼ change of EPS, EPSt−EPSt−1; ΔSALES ¼ change
of sales ratio, (SALESt−SALESt−1)/SALESt−1; DERATIO ¼ long-term debt to total equity;
TOBINSQ ¼ Tobin’s Q, market value of stock and book value of debt divided by book value of total
assets; BIG4 ¼ BIG4 ¼ Big 4 auditor, coded 1 if the firm is audited by a Big4 auditor, 0 otherwise;
BDINDEP ¼ board independence, the proportion of independent directors to all directors on the board;
Table VI. SBSIZE ¼ the number of members on the supervisory board; Year dummy (YEAR) represents dummy
Robustness check: variables that reflect the years between 2000 and 2011; Industry dummy (INDUSTRY) reflects the
corporate company’s industry in accordance with the industry classification of the CSRC.
governance factors Notes: *p o0.05; **p o0.01; ***p o 0.001; ****p o0.10. All tests are two-tailed
effect of XBRL and IFRS on audit fees, and investigating their joint use in firms is
important as they can have offsetting impacts on audit fees (Kim et al., 2012).
Additionally, as IFRS critics argue that single standards may not be suitable for all
jurisdictions, IFRS may not equally enhance financial reporting quality and transparency
due to specific country differences (Soderstrom and Sun, 2007) suggesting that IFRS/
XBRL practices need be assessed on a country-by-country basis (Nobes, 2006).
We find that XBRL has a main negative effect on audit fees which is weaker for larger
firms. Our findings also indicate that IFRS increases audit fees for all companies, and that
this effect is positive for firms of different sizes though weaker for larger companies. We XBRL and
argue that our findings contribute to the existing body of knowledge by providing IFRS adoption
empirical evidence from listed companies in one of the largest economies in the world,
China, indicating that IFRS and XBRL do impact on auditing costs of companies that
and audit fees
have adopted them. Thus, this study contributes to the ongoing debate concerning
whether the economic benefits of IFRS and XBRL are materialising in practice.
As others, this study also suffers from several limitations. This study provides a 127
focused assessment of the impact of IFRS and XBRL on audit fees of companies listed
in the SHSE in China which may or may not be generaliseable to other economies. For
example, we have focused on listed companies in the SHSE due to data availability
considerations (e.g. audit fees data). Nevertheless, we argue that our findings and
conclusions provide an important basis upon which further research can be designed in
order to extend this analysis. For example, further research can be conducted to
confirm (or refute) whether our findings apply in other economies such as the UK, the
Netherlands, Singapore and South Korea, where both IFRS and XBRL have been
adopted in order to enhance the generaliseability of our findings.
Furthermore, this study has also ignored how auditing processes are influenced as a
result of using IFRS and XBRL. Whilst IFRS convergence in an emerging economy
such as China is necessary it is not by itself sufficient to achieve high accounting
standards. Infrastructure support for enhancing widespread understanding amongst
Chinese accountants, oversight and enforcement of the proper application of IFRS
principles is also essential for the successful implementation of IFRS and need to be
considered in relation to the manner in which they impact on auditing fees.
Additionally, whilst current auditing practices are generally effective in providing
some assurance of financial statements, they typically discover materials
misstatements and fraud after these have adversely affected companies (Rezaee,
2009). Whilst IFRS offers high quality accounting standards, XBRL can enable
continuous auditing cost-effectively, and in doing so, it can reduce or potentially
eliminate the time lag between the occurrence of accounting events and assurance
services carried out by auditors (Rezaee, 2009). That is, together IFRS and XBRL can
reduce the risk of fraud or material misstatements by potentially identifying these
sooner by enhancing the monitoring roles of auditors and regulators in relation
financial statements for both individual companies and capital markets (Roohani et al.,
2009; Srivastava and Kogan, 2010). Further research could, therefore, also explore
qualitatively how IFRS and XBRL are affecting the scope of the traditional audit
function and the manner in which internal control activities are being carried out
(Srivastava and Kogan, 2010).
Nevertheless, our findings have important implications for regulators, auditors and
companies that are undertaking IFRS convergence and XBRL implementation projects in
developing economies around the world. Based on our findings, regulators may need to
consider how IFRS and XBRL compliance requirements and transition programmes may
be better tailored for companies in order to reduce possible compliance stress in order to
enhance transition and minimise disruption in business operations (De George et al., 2013).
Additionally, our findings offer evidence supporting the business case of XBRL
adoption in jurisdictions where XBRL use has been mandated (e.g. the USA, UK, South
Korea, Japan, the Netherlands) whilst also informing the development of XBRL
diffusion strategies in jurisdictions where XBRL use is voluntary (e.g. Australia) or
currently still being considered. Whilst to the best of our knowledge there is little
evidence to suggest whether or how XBRL filings are being audited in all jurisdictions
IJMF where XBRL use has been mandated (notable exceptions focusing on the US include
12,2 Janvrin et al., 2010; Brands, 2013; Holzinger, 2013; La Rosa and Caserio, 2013; Roselli,
2013; Tysiac, 2013; Boyle et al., 2014; Shan and Troshani, 2014), being the first to
address the impact of IFRS and XBRL, our study also can offer evidence to auditing
practitioners that XBRL can reduce auditing costs and therefore encourage auditing of
XBRL filings. Additionally, with auditing costs being reduced as a result of XBRL,
128 auditors can reconsider the allocation of scarce internal auditing resources to other
financial reporting activities after XBRL is introduced (Helliar et al., 1996).
Furthermore, our findings have wider implications as increased financial reporting
transparency through XBRL use can reduce information asymmetry between
management and shareholders and enhance the credibility of firms resulting in an
overall improvement of investor confidence in today’s capital markets.
Notes
1. Convergence of accounting standards is a process that denotes the “development of a single
set of high quality, understandable and enforceable global accounting standards” (Pacter,
2001, p. 67).
2. The corresponding natural logarithm values used in the analysis can be found in Table II.
3. In the study of Shan and Troshani (2014) the value of the adjusted R2 is 0.7405 which is
relatively higher than the corresponding R2 in this study.
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Corresponding author
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The effect of mandatory XBRL XBRL and

Evidence from the Shanghai Stock Exchange

2. IFRS convergence in China

3. Literature and hypotheses development

IFRS impact on audit fees

Pre-XBRL mandate Post-XBRL mandate

2000 2002 2004 2006 2008 2010

Model diagnostics and multivariate analyses

for key variablesa

Panel B: XBRL timespan

Panel C: IFRS timespan

Panel B: VIF diagnostic

Intercept n/a 3.744 14.26* 3.381 4.26*

Change model with interactive effect

Intercept n/a 11.285 7.1***

where ΔAUDITFEES ¼ change of the natural logarithm of audit fees, ΔAUDITFEESt−

Intercept n/a 4.029 13.22* 4.934 4.98*

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