Audit Integrity has announced the results of a study of western European corporations that have converted to International Financial Reporting Standards (IFRS) and identified the countries, corporations, and industry sectors with the highest accounting-related fraud risk.
The study coincides with the launch of Audit Integrity’s flagship accounting and governance risk (AGR) rating and analysis for over 4,000 publicly traded companies in 17 European countries, representing over 80% of the total European market capitalisation. AGR ratings are a risk management tool for institutions, such as investment firms, auditors and insurance companies, that identifies accounting and governance metrics that are predictive of earnings restatements, shareholder lawsuits, regulatory enforcement, and bankruptcy.
The examination of European accounting and governance risk by Audit Integrity revealed that the riskiest countries from an accounting and governance standpoint are Greece and the Netherlands, while corporations based in Luxembourg, Austria, and Switzerland demonstrate the most transparent accounting practices and best corporate governance.
The study also showed that overall the riskiest industry sectors in Europe are transportation and conglomerates, while the least risky include consumer/non-cyclical, and energy. European banks with large capitalisation were found to be practicing very aggressive accounting and poor governance standards.
Audit Integrity’s study found that European equity returns increased by 7.6% when companies with the most transparency (those which fell into the top 10%) were compared to the worst companies (the bottom 10%). The research also found that over 60% of class action lawsuits were filed against the companies rated in the bottom 10%.
Audit Integrity also examined and compared IFRS to US Generally Accepted Accounting Principles (GAAP). While the research found discrepancies in the depth of reporting, frequency of filings, and required governance disclosures between the IFRS standard and the GAAP standard, the analysis shows IFRS has greatly improved the consistency of financial reporting in Europe and is comparable for the purpose of calculating AGR ratings.
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