Drivers of institutional change around the world: The case of IFRS

Abstract

Today more than ever it is crucial to understand the dynamic and intricate institutional landscape that MNEs operate in. However, the drivers of institutional change are still little understood. We focus on a recent fundamental institutional change: the worldwide switch to International Financial Reporting Standards (IFRS). The switch to IFRS was unexpected and not particularly welcomed by MNEs given that most national accounting systems in the pre-IFRS period were considered to be well aligned to the local cultural and environmental characteristics of each country. We test the drivers of this institutional change in a sample of 168 countries between 2002 and 2012 using empirical constructs from policy diffusion theory. Our findings show that the country-level decisions to adopt IFRS are not driven by local determinants but instead by adoption decisions by other, neighbouring countries and influential organizations. We find evidence for competition, learning and emulation as driving forces for the international spread of IFRS. We conclude that the switch to IFRS was not driven by an economic rationale only and diffused beyond the influence and interest of MNEs. Understanding these drivers is essential, because it enables management to anticipate and respond to institutional changes and consequently enhance performance and create competitive advantage.

Résumé

Aujourd’hui, plus que jamais, il est crucial de comprendre le paysage institutionnel dynamique et complexe dans lequel les entreprises multinationales (EMN) opèrent. Toutefois, les facteurs du changement institutionnel sont toujours peu compris. Nous nous concentrons sur un changement institutionnel fondamental récent : l’adoption mondiale des standards internationaux de reporting financier (International Financial Reporting Standards - IFRS). L’évolution vers les IFRS était inattendue et pas particulièrement bien accueillie par les EMN car la plupart des systèmes comptables nationaux de la période pré-IFRS étaient considérés comme bien alignés avec les caractéristiques culturelles et environnementales locales de chaque pays. Nous testons les facteurs du changement institutionnel sur un échantillon de 168 pays entre 2002 et 2012 en utilisant les construits empiriques de la théorie de diffusion politique. Nos résultats montrent que les décisions d’adopter les IFRS au niveau d’un pays ne sont pas motivées par des déterminants locaux, mais par des décisions d’adoption par d’autres pays limitrophes et des organisations d’influence. Nous trouvons des preuves que la concurrence, l’apprentissage et l’émulation constituent des facteurs essentiels pour la diffusion globale des IFRS. Nous concluons que l’adoption des IFRS n’était pas uniquement déterminée par un motif économique et qu’elle a été diffusée au-delà de l’influence et de l’intérêt des EMN. Comprendre ces facteurs est essentiel, parce que cela permet aux dirigeants d’anticiper et de répondre aux changements institutionnels et, par conséquent, d’améliorer la performance et de créer un avantage concurrentiel.

Resumen

Hoy más que nunca es decisivo entender las dinámicas y el intricado del panorama institucional en el que las EMN operan. Sin embargo, los impulsores del cambio institucional son aún poco entendidos. Nos enfocamos en un cambio institucional fundamental reciente: el cambio mundial hacia las normas internacionales de información financiera (NIIF). El cambio a las NIIF fue inesperado y fue particularmente bienvenido por las EMN debido a que la mayoría de los sistemas de contabilidad nacional en el periodo pre-NIIF eran consideradas bien alineadas a las características culturales y ambientales locales de cada país. Pusimos a prueba los impulsores de este cambio institucional en una muestra de 168 países entre el 2002 y el 2012 usando constructores empíricos de la teoría de la difusión de las políticas. Nuestros hallazgos muestran que las decisiones a nivel país de adoptar NIIF no son impulsadas por determinantes locales sino por el contrario por decisiones de adopción de otros, países vecinos y organizaciones influyentes. Encontramos evidencia por competencia, aprendizaje y emulación como fuerzas impulsadoras para la divulgación internacional de las NIIF. Concluimos que el cambio a NIIF no es motivado por un racional económico solamente y difundido más allá de la influencia e interés de las EMN. Entender estos impulsadores es esencial, puesto que esto permite a la gerencia anticiparse y responder a cambios institucionales y consecuentemente aumentar el desempeño y crear ventaja competitiva.

Resumo

Hoje, mais do que nunca, é crucial entender o dinâmico e intrincado cenário institucional em que operam as multinacionais (MNEs). No entanto, os fatores de mudança institucional ainda são pouco compreendidos. Nós nos concentramos em uma recente mudança institucional fundamental: a mudança mundial para as Normas Internacionais de Relato Financeiro (IFRS). A mudança para as IFRS foi inesperada e não particularmente bem-vinda pelas MNEs, uma vez que a maioria dos sistemas contábeis nacionais no período pré-IFRS foi considerado como bem alinhado com as características culturais e ambientais locais de cada país. Testamos os fatores dessa mudança institucional em uma amostra de 168 países entre 2002 e 2012, usando construtos empíricos da teoria da difusão de políticas. Nossas descobertas mostram que as decisões a nível de país para adotar as IFRS não são conduzidas por determinantes locais, mas sim por decisões de adoção de outros países vizinhos e organizações influentes. Encontramos evidências de competição, aprendizado e emulação como forças motrizes para a disseminação internacional das IFRS. Concluímos que a mudança para IFRS não foi conduzida apenas por uma lógica econômica e difundida além da influência e interesse das MNEs. Compreender esses fatores é fundamental, porque permite que a gerência se antecipe e responda a mudanças institucionais e, consequentemente, melhore o desempenho e crie vantagem competitiva.

概要

今天比以往任何时候都更至关重要去了解跨国公司运营的动态和复杂的制度环境。然而,制度变化的驱动力仍知之甚少。我们关注近来的根本的制度变化:全球转向国际财务报告准则(IFRS)。由于在IFRS出台之前大多数国家的会计制度被认为与每个国家的当地文化和环境特征保持一致,所以转向IFRS是出乎意料的,且不受跨国企业的特别欢迎。我们使用政策扩散理论的实证结构在2002年至2012年间的168个国家的样本中测试这一制度变化的驱动力。我们的研究结果表明,采用IFRS的国家层面的决策不是由当地的决定因素驱动,而是由其它邻国和有影响力的组织的采纳决定驱动。我们发现竞争、学习和模仿是IFRS国际传播驱动力的证据。我们得出结论,转向IFRS不仅仅由经济原理驱动,而是扩散到了跨国企业的影响和利益之外。理解这些驱动力是必需的,因为它可以使管理层对制度变化进行预测和响应,并因此提高绩效和创造竞争优势。

APPENDIX: COLLECTION AND CONSTRUCTION OF THE DEPENDENT VARIABLE ‘IFRS STATUS’

To construct the IFRS variable, we code the information about the IFRS adoption per jurisdiction per year, for domestic companies (listed and unlisted; excluding financial institutions). We distinguish five categories of IFRS (non-)adoption, similar to classifications used in IFRS adoption surveys (such as IAS Plus by Deloitte), as follows:

Code	IFRS adoption status
0	No policy with respect to IFRS
1	IFRS not permitted
2	IFRS permitted
3	IFRS required for some firms
4	IFRS required for all firms

We apply this classification scheme as straightforward as possible, using a broad understanding of IFRS adoption. Since our research question focuses on the adoption decision by jurisdictions, we base our classification on the explicit reference of regulators to IFRS. We do not take into account the quality of the adoption as reflected in the compliance level of annual reports of domestic firms. When a country explicitly refers to its accounting standards as IFRS and has an adoption policy in place for the adoption of updates of the standards, it is classified as IFRS adoption. For example, some countries have adopted an old version of IFRS or IAS in the past without any updates. This is not an IFRS adoption according to our criteria. Moreover, when countries model their standards on IFRS, but modify the standards to some extent, it is not considered to be an adoption of IFRS.

Data are collected on the adoption per jurisdiction over the period 2002 till 2012. This period is chosen for two reasons. First, before 2002, only few IFRS (or IAS as they were named at that time) adoptions took place. The International Accounting Standards board (IASB) is responsible for developing IFRS and promoting the use and application of these standards. The IASB was founded in 2001 as the successor to the International Accounting Standards Committee (IASC). The new organizational structure was changed in order to increase its independence and hence it legitimacy as an international standard setter. In the same period, the IASB increased the intensity with which it was working to improve its accounting standards. Moreover, in 2002 the European Union announced its intention to adopt IFRS in 2005, augmenting the legitimacy of IFRS considerably. Second, most of the data with respect to IFRS/IAS adoptions start in 2002.

We collect and interpret information from several sources to construct the IFRS adoption variable. Using more than one source allows us find information on as many jurisdictions as possible. Moreover, using multiple data sources supports validation of the data through cross verification, which increases the reliability of the data. We collect and interpret information from multiple sources. The qualitative process of converging the data from multiple sources in order to corroborate the data is known as triangulation. Our initial classification is based on four primary sources:

• 1. IAS Plus (Deloitte) history from 2002 to 2012: http://www.iasplus.com/country/useias.htm.

• 2. EY IFRS implementation (based on a 2010 survey): http://www.ey.com/GL/en/Issues/IFRS/IFRS-Status-of-implementation-by-country.

• 3. PWC IFRS per country (based on a 2011 survey) http://www.pwc.com/us/en/issues/ifrs-reporting/country-adoption.

• 4. Reconstruction of IFRS adoption per country, produced by the IFRS Adoption Research Group at Simon Fraser University, Canada: http://www.adoptifrs.org/.

IAS Plus (source 1) is the starting point of the data collection, because of its coverage of a large set of countries over several years. Using older versions of the IAS Plus website (source 1) or yearly editions of the “IFRS in your pocket” publications by Deloitte (that contain the same data as the IAS Plus website), we retrieve the historical adoption status per country year. The descriptions of the adoption process per country offered by source four serve to corroborate historical information from source one. We code the data per jurisdiction year and cross check the classification across the four sources. As an additional validation, we compare the initial classifications with the IAS Plus jurisdiction updates, that contain more detailed information on the adoption process per country. If the IFRS adoption status over the period is unclear based on these sources for a certain country (e.g. because the sources are contradictory to some extent), we conduct an additional search. Primarily, we search for IMF/World Bank Reports on the Observance of Standards and Codes (ROSCs) and regulatory publications (such as amendments to the company law). These additional sources are used to complement and clarify the main sources and to reach a final classification.