The Value of High Quality Auditing in Enforcing and Implementing IFRS : The Case of Goodwill Impairment

We examine the value of higher audit quality in enforcing and implementing International Financial Reporting Standards (IFRS) using the recent changes in goodwill accounting regulation. IFRS requires management to test for goodwill impairment and write off impairment losses against income. Accounting regulators claim that the IFRS impairment regime better reflects the underlying economic attributes of goodwill. Our results indicate that this claim depends on the enforcement and implementation of IFRS standards by higher quality assurance providers. We develop arguments as to why choosing a Big 4 auditor gives greater assurance of IFRS enforcement and implementation. We find support for this proposition by showing that goodwill impairment charges under IFRS better reflect the underlying economic value of the goodwill only in the presence of high quality auditing and that this is most apparent in ensuring that no goodwill impairment charges are made against income where this supported by the firm's circumstances