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Publication: Academy of Accounting and Financial Studies Journal
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Language: English
PMID: 68049
ISSN: 10963685
Journal code: CSFJ

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The rise of the International Financial Reporting Standards (IFRS) as a global benchmark of accounting standards, marked by the use of the standards in 122 countries (IASPlus, 2010), suggests that the International Accounting Standards Board (IASB) has succeeded in achieving its objective of bringing "about convergence of national accounting standards and International Accounting Standards [or IFRS] to high-quality solutions" (IASB, 2007, p. 4).

This growing acceptance also indicates that IFRS constitutes "a single set of high-quality, understandable and enforceable accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions" (IASB, 2007, p. 4). As non-capital markets participants become secondary users (Salvary, 2006), the IASB has focused the development of IFRS in such a way that it satisfies the demand of more efficient financial reporting and global capital markets which plays a major role in the wealth distribution process in market economies (Jorissen, Lybaert, & van de Poel, 2006).

In order to get into this distribution of wealth, more and more countries are willing to exchange their national accounting standards for IFRS. In other words, more countries have started to acknowledge the importance of financial reporting for economic reasons where it is believed that countries adopting IFRS have higher reporting transparency and comparability, greater chances to attract more investment, increase financial surplus, and achieve higher economic growth rates. However, little supporting empirical evidence has been found for this belief. Botswana, Haiti, Nepal, Panama, Papua New Guinea, Tajikistan, and Venezuela are among countries that have substantially adopted IFRS yet have not been able to obtain desirable economic benefits from the adoption. The issue is then; if direct economic benefits from accommodating IFRS have never been certain, why do developing countries adopt IFRS?

Recent studies on adoption of IFRS focused on how it improves the competitiveness of countries or firms to compete for economic resources. For instance, it has been maintained by the European Union (EU) and other developed countries that adopting IFRS will help to produce high quality financial reporting. In results, the adoption would help governments and other regulators, such as stock exchange administrators, to reduce monitoring costs related to company financial reporting (Rodrigues & Craig, 2007). National governments could also benefit from adopting IFRS because it would encourage international flows of capital across national boundaries by providing significant positive signals to investors of the higher quality of the countries' financial reporting system (Roberts, Weetman, & Gordon, 2002).

A few studies revealed noneconomic factors such as literacy rate (Zeghal & Mhedhbi, 2006); culture (Zeghal & Mhedhbi, 2006), (Ding, Jeanjean, & Stolwy, 2005) and (Hope, 2003); and language (Doupnik & Taylor, 1985) among the antecedents of the decision to adopt IFRS. This suggests that justifying the adoption of IFRS by only using economic explanation is too simplistic because organizations [countries or firms] are not only the producers of goods or services, but are also symbolic social and cultural entities (Meyer & Rowan, 1977). Additionally, "organizations and organizational actors not only seek to compete for resources, but they ultimately seek legitimacy and social acceptance" (Judge, Li, & Pinsker, 2010, p. 162). The need to be socially accepted by the global community is sometime very paramount that the decision to adopt IFRS might not be triggered by the need to compete economically. For example it was found that Gross Domestic Product (GDP) growth and Foreign Direct Investment (FDI) are not significantly related to developing countries' decisions to adopt IFRS (Zeghal & Mhedhbi, 2006)

In the context of the diffusion of IFRS, most developing countries are pressured by international organizations to meet the necessity of having legitimate, modern, and high quality accounting standards. They have to accept IFRS partly because of their limited ability to produce a legitimate set of standards, and partly because of their dependence on these organizations. International organizations that promote globalization and multi-national cooperation are highly likely to influence the process of adoption of IFRS in developing countries. These organizations include the World Trade Organization (WTO), the Organization for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), the World Bank (WB) and virtually all multinational companies (Rodrigues & Craig, 2007), and "the IASB, the European Union, the International Organization of Securities Commissions (IOSCO), and the United Nations (UN)" (Wyatt, 1997, p. 10.15).

Given the fact that some countries adopting IFRS have not enjoyed the expected economic benefits of their decision, and based on the belief that organizations are social entities that seek legitimacy and for reasons that will be explained in the next section, there is a strong possibility that these countries have been influenced to accept IFRS for non-economic reasons by external forces such as other organizations, beliefs and processes perceived as legitimate. Therefore, it is necessary to assess the process using an institutional perspective which is able to explain how adoption of IFRS has been taken place where economic pressures are not the only drivers and how accounting standard-setting bodies and accounting practitioners have searched for legitimacy and have been influenced by external forces.


Accounting in Institutional Context

A set of accounting standards is the result of a complex system and no set is identical to another due to differing environments and history. The most notable factors include ecological or environmental, institutional, governmental or political, economic, legal, tax, educational and financial systems (Roberts, Weetman, & Gordon, 2002). Nobes & Parker, (2008) listed culture, legal systems, and providers of finance, taxation, external influences, and the accounting profession as the main reasons for accounting standards differences among countries. Another list of institutional influences on accounting standards diversity includes economic, political, legal, educational, and religious systems (Iqbal, Mel cher, & Elmallah, 1997). Traditionally, the impacts of these institutional factors were nationally limited. They affected accounting standards enacted within certain jurisdictions and did not go beyond that.

However, given the unstoppable rise of IFRS as the legitimate international standard, the influences of these factors far exceed national borders. The decision of countries like Kazakhstan, Malawi, or Peru to adopt IFRS might be triggered by the fact that the quality of their national accounting standards was seen as insufficient. They need to upgrade their local accounting standards to a certain level where it is perceived that their standards stand on the same ground with those that have already adopted IFRS. Even countries with strong accounting traditions like Australia, Canada, and the USA, have either adopted or converged to IFRS.

Accounting in an institutional context thus indicates that "institutionalization can be viewed as a social process through which individuals [or actors of organization] accept that national accounting standards are usurped in the interests of international accounting harmonization" (Rodrigues & Craig, 2007, p. 743). This acceptance explains why countries have a tendency to use the same accounting standards used by other countries. This tendency continues regardless it might not necessarily lead to economic benefits as promoted by the IASB and regardless it takes place in countries whose institutional environments are different because countries tend to ceremonially or actually conform to dominant norms and social influences for legitimacy (DiMaggio & Powell, 1983). In this perspective, institutional theory of isomorphism and legitimacy are appropriate to be used to study the adoption of IFRS.

Isomorphism and Legitimacy

DiMaggio & Powell's institutional isomorphism was derived from their observation that "despite the fact that organizations could develop new goals and practices, in the long run, organizational actors making rational decision construct around themselves an environment that constrains their ability to change further [improve performance]... [This is because] adoption provides legitimacy rather than improves performance (DiMaggio & Powell, 1983, p. 148). Legitimacy is best described as "a generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs, and definitions" (Suchman, 1995, p. 574)

Isomorphism and legitimacy have been used to "globally examining transfer pricing, international alliances, distributive justice norms, strategic renewal of incumbent firms, penetration of e-commerce, foreign entry mode..." [Eden, Dacin & Wan (2001), Giacobbemiller, Miller, Zhang & Victorov (2003), Flier, Van den Bosch & Volberda (2003), Gibbs & Kraemer (2004), Meyer & Nguyen (2001) in (Judge, Li, & Pinsker, 2010)].

Their works have focused on the "responds of organization to pressures from their institutional environments through adopting some practices..." (Hassan, 2010, p. 292), even if the benefits of these practices are uncertain (Meyer & Rowan, 1977). The frameworks used in the previous studies could be traced back to "Institutional Isomorphism" (DiMaggio & Powell, 1983). The same framework will be used in our study.

DiMaggio and Powell (1983) recognized that organizations look for legitimacy and social acceptance from other organizations because "organizations compete not just for resources and customers, but for political power and institutional legitimacy, for social as well as economic fitness" and "the major factors that organizations must take into account are other organizations" (DiMaggio & Powell, 1983, p. 150), and they therefore claimed that "the concept of institutional isomorphism is a useful tool for understanding the politics and ceremony that pervade much modern organizational life" (DiMaggio & Powell, 1983, p. 150).

The interaction among organizations that cause isomorphic changes is divided into three forms: "(1) coercive isomorphism that stems from political influence and the problem of legitimacy; (2) mimetic isomorphism resulting from standard responses to uncertainty; and (3) normative isomorphism, associated with professionalization" (DiMaggio & Powell, 1983, p. 150). Although these three forms are not always exclusively distinct in empirical setting, they "tend to derive from different conditions and may lead to different outcomes" (DiMaggio & Powell, 1983, p. 150).

There are two recent studies on accounting harmonization using DiMaggio & Powell· s institutional isomorphism framework. Rodrigues & Craig (2007) theoretically explored the processes, effects and likely future progress of the convergence of national accounting standards with IFRS and built a conversation of pros and cons of the convergence by mainly drawing on the ideas of institutional isomorphism (Rodrigues & Craig, 2007). In addition, Judge, Li, & Pinsker (2010) empirically predicted the determinants of national adoption of IFRS using variables that were derived from institutional isomorphism. They used foreign aid, import penetration, and level of education as representatives of coercive, mimetic, and normative isomorphism. They found that all independent variables are significantly related to the adoption of IFRS. This implies that the process of adoption is highly motivated by social pressures.


Institutional pressures can be divided into three isomorphic changes: coercive, mimetic, and normative isomorphism; each hatches its own hypothesis. Coercive isomorphism implies that there are external pressures that can induce a country to comply with IFRS. Mimetic isomorphism suggests that the more globalized the economy of a country, the more likely that that country becomes isomorphic to others that adopt IFRS. Normative isomorphism reveals that level of professionalization, education and training influence a country's decision to adopt IFRS. Thus, our hypotheses comprise:

H1. The bigger the external pressure, the more likely a country will adopt IFRS. (coercive isomorphism)

H2. The more globalized the economy, the more likely a country will adopt IFRS. (mimetic isomorphism)

H3. The more advanced the level of education, the more likely a country will adopt IFRS. (normative isomorphism)


Research Model

We apply an ordinary least square (OLS) model, which is defined as:

Y1=β^sub 0^+β^sub 1^AIDi+β^sub 2^MCAPl+β^sub 3^ ENROL1+ β^sub 4^ FDI1+ β^sub 5^GDP1+ ε1

Where: Y is the level of adoption of IFRS, β^sub 0^ is the intercept, β^sub 1^-β^sub 5^ are the slopes/regression weights that represent the relationships between dependent variable and independent variables, and AID is countries' foreign aid, MCAP is countries' stock market capitalization, ENROI is countries' level of education, FDI is countries' foreign direct investment inflows, and GDP is the countries' gross domestic product growth rate.

To anticipate the possibility of non-linear relationships between dependent and independent variables, a logistic regression is employed. This regression is used to increase the robustness of the model and to accommodate the binomial-discrete dependent variables. The logistic regression is defined as:


Where: Y is the level of adoption of IFRS, β^sub 0^ is the intercept, β^sub 1^-β^sub 5^ are the slopes/regression weighs that represent the relationships between dependent variable and independent variables, and AID is countries' foreign aid, MCAP is countries' stock market capitalization, ENROI is countries' level of education, FDI is countries' foreign direct investment inflows, and GDP is the countries' gross domestic product growth rate.


The dependent variable, which represents the level of adoption of IFRS, is derived from the Deloitte - IASPlus (2010) report surveying current status of the adoption in a wide variety of jurisdictions as of June 21, 2010. Consistent with Hope, Jin, & Kang (2006) and Judge, Li, & Pinsker (2010), a country is codified "1" if it fully adopts IFRS, where all listed domestic and international firms are required to use the standards; otherwise it is codified "0". Consequently, a country that partially adopts IFRS, either by not requiring all listed firms to use IFRS or by adopting a modified IFRS, is codified "0".

We select volume of aid received by countries from international organizations as a proxy for external pressure which represents coercive isomorphism. This pressure could significantly control the availability of important resources, such as financial resources and hence could significantly influence the decision of developing countries to adopt IFRS. Specifically we use the average of total foreign aid as a percentage of GDP from 2005 to 2009, calculated using data from the World Bank's World Development Indicators (World Bank, 2010).

For the openness of economy that represents mimetic isomorphism, we choose the average of market capitalization as a percentage of GDP from 2005 to 2009, calculated using data from the World Bank's World Development Indicators (World Bank, 2010). Theoretically, a significant proportion of stock financing in an economy signifies that a country is becoming more integrated and open, thus there are more chances for it to bring its accounting practices into line with those of countries adopting IFRS. The IASB itself maintains that IFRS is created to support the globalization of capital markets and thus the ultimate users of accounting information today are capital markets participants.

For the advancement of accounting professionalization, we select the level of education of a country. We use the average enrollment of secondary schools as a percentage of total population from 2005 to 2009, also calculated using data from the World Bank's World Development Indicators (World Bank, 2010).

We admit that besides previously mentioned independent variables, non-institutional aspects could significantly influence a country to exercise their conformance to IFRS. Two particular economic pressures, namely the desire to increase FDI inflows and to experience higher economic growth were found to be related to IFRS adoption (Zeghal & Mhedhbi, 2006). We select the average of FDI inflows as a percentage of GDP from 2005 to 2009 and the average growth of GDP from 2005 to 2009 as proxies for these economic pressures. Both are calculated using data from the World Bank' s World Development Indicators (World Bank, 2010).


Sample Description

To separate developing from developed countries, we use UNDP' s Classification of countries report (UNDP, 2010). Countries whose data are missing are excluded from the sample. We are able to retrieve complete data of 46 countries (see Table 1), in which we are confident that the sample gives us a fair representation of institutional settings in developing countries because it includes countries in all related continents.

Regression Results

We first examine the descriptive statistics of all variables. Table 2 shows the statistics of dependent, independent and control variables. We decided to transform the natural logarithm of all variables to reduce the skewness. To maintain the quality of our model, the White test, the Breusch-Pagan test, and the variable inflation test are used to assess the existence of heteroskedasticity and multicollinearity for OLS. In addition, the Ramsey reset test, using powers of the fitted values, is used to see whether the model has no omitted variables. For logistic regression, we perform the Hosmer-Lemeshow goodness of fit test, link test, and collinearity diagnostics. In general, the tests suggest that the models are able to generate reliable results.

Table 3 contains two statistical models for hypothesis testing. Model 1 is a linear regression using ordinary least squares estimation, in which we found that all hypotheses are strongly supported. Model 2 is a logistic regression model. Similar to model 1, this model strongly supports the hypotheses. In both models, foreign aid as a proxy for coercive isomorphism is the strongest pressure for developing countries to adopt IFRS, followed by level of education (normative isomorphism) and market capitalization (mimetic isomorphism). Conversely, none of the economic benefits associated with IFRS adoption is found to be significantly related to developing countries' decision to adopt IFRS. Both FDI inflows and GDP growth are not important predictive factors to adopt IFRS. Thus, the results show that institutional isomorphism can better predict the probability of developing countries to adopt IFRS.


It is a long-standing belief that higher accounting standards are substantially related to the chance of obtaining economic benefits such as a higher inflow of Foreign Direct Investment (FDI) and higher Gross Domestic Product (GDP) growth rate. This belief stands on one premise: that all countries share a common institutional context where the relation of the adoption and its associated economic benefits established in a country or a group of countries is also applicable in other regions. However, IFRS as crafted by developed countries, might not able to create the same relationship in developing countries because of different socio-economic and politicaleconomic environments.

Drawing upon DiMaggio and Powell (1983) s Institutional Isomorphism theory, we reveal that IFRS adoption by developing countries is significantly related to social pressures of isomorphic changes (i.e., coercive isomorphism, mimetic isomorphism, and normative isomorphism) which contradict traditional belief that the adoption is highly related to its corresponding economic benefits.

Specifically, we show that foreign aid (as a proxy for coercive isomorphism), capital markets (as a proxy of mimetic isomorphism), and level of education (as a proxy for normative isomorphism) are strong predictive factors for developing countries to adopt IFRS. More importantly, these institutional pressures are more influential than economic pressures such as FDI inflows and GDP growth on the decision to adopt IFRS. This finding touches on a new perspective on the adoption of IFRS by developing countries because not only research on the antecedent of the adoption is relatively rare, but also the finding hints that the decision of developing countries to adopt IFRS is motivated more by social pressures of legitimacy, than it is by economic reasoning.

We concede that the results of our study should be interpreted carefully due to several limitations. First, we heavily rely on archival data. Capturing countries' motives is certainly needed to reveal specific reasons to adopt or not to adopt IFRS. Second, considering that the decision to adopt or not to adopt IFRS are changing over time, investigating the diffusion of IFRS in a longer observation period and bringing more variables into the model would improve the quality of our study.


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Author affiliation:

Lasmin, Ritsumeikan Asia Pacific University

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