1
Enforcement and Compliance of Accounting Standards
in Emerging Economies: A Case of Egypt
Abstract
The main objective of this paper is to develop a mechanism wherein the
enforcement and compliance of the accounting standards can be established in
Egypt. Since 2006 Egypt has taken steps to implement
a total of 39
Egyptian
Accounting Standards (EASs)
.
T
he
process of issuing Egyptian Accounting
Standards, including translation into Arabic, is lengthy
seems to be a lengthy
process
.
T
here
are some minor adjustments or
difference
s
between the set of
Egyptian Accounting Standards (EASs) that are currently in ef
fect and
IAS/
IFRS
issued by IASB
.
In Egypt, f
or the compliance of these standards some
regulatory measures necessary for ensuring full compliance with the standards
prescribed by the regulatory body
Capital Market Authority (CMA
)
. There are
many
situations
where the limited companies do not comply with the EASs and
there is no
effective
punishment
or penalty
for companies who do not comply
with the EASs in the preparation of their financial statements.
The author
s
proposed that the mandatory compliance of EASs can be ensured
through the company law
and capital market authority (CMA)
that the
companies are to prepare their financial statements strictly in accordance with
the accounting standards prescribed by the Eg
yptian Accounting Standards
Board. The compliance of the EASs can
only be
ensured by following the
examples of the Australian, British and American pathways.
In this paper the
researchers have argued that in case
a company fails to comply with the EASs,
th
e Capital Market Authority in Egypt should take punitive measures against
the directors of the respective companies in order to revise their financial
statements.
Further, necessary d
isciplinary actions must be taken if any
member fails to comply with acco
unting standards (for example, fine or
expulsion from the respective
professional Accountancy body
the Egyptian
Society of Accountants and Auditors (ESAA
Original Title
6. Enforcement and Compliance of Accounting Standards
1
Enforcement and Compliance of Accounting Standards
in Emerging Economies: A Case of Egypt
Abstract
The main objective of this paper is to develop a mechanism wherein the
enforcement and compliance of the accounting standards can be established in
Egypt. Since 2006 Egypt has taken steps to implement
a total of 39
Egyptian
Accounting Standards (EASs)
.
T
he
process of issuing Egyptian Accounting
Standards, including translation into Arabic, is lengthy
seems to be a lengthy
process
.
T
here
are some minor adjustments or
difference
s
between the set of
Egyptian Accounting Standards (EASs) that are currently in ef
fect and
IAS/
IFRS
issued by IASB
.
In Egypt, f
or the compliance of these standards some
regulatory measures necessary for ensuring full compliance with the standards
prescribed by the regulatory body
Capital Market Authority (CMA
)
. There are
many
situations
where the limited companies do not comply with the EASs and
there is no
effective
punishment
or penalty
for companies who do not comply
with the EASs in the preparation of their financial statements.
The author
s
proposed that the mandatory compliance of EASs can be ensured
through the company law
and capital market authority (CMA)
that the
companies are to prepare their financial statements strictly in accordance with
the accounting standards prescribed by the Eg
yptian Accounting Standards
Board. The compliance of the EASs can
only be
ensured by following the
examples of the Australian, British and American pathways.
In this paper the
researchers have argued that in case
a company fails to comply with the EASs,
th
e Capital Market Authority in Egypt should take punitive measures against
the directors of the respective companies in order to revise their financial
statements.
Further, necessary d
isciplinary actions must be taken if any
member fails to comply with acco
unting standards (for example, fine or
expulsion from the respective
professional Accountancy body
the Egyptian
Society of Accountants and Auditors (ESAA
1
Enforcement and Compliance of Accounting Standards
in Emerging Economies: A Case of Egypt
Abstract
The main objective of this paper is to develop a mechanism wherein the
enforcement and compliance of the accounting standards can be established in
Egypt. Since 2006 Egypt has taken steps to implement
a total of 39
Egyptian
Accounting Standards (EASs)
.
T
he
process of issuing Egyptian Accounting
Standards, including translation into Arabic, is lengthy
seems to be a lengthy
process
.
T
here
are some minor adjustments or
difference
s
between the set of
Egyptian Accounting Standards (EASs) that are currently in ef
fect and
IAS/
IFRS
issued by IASB
.
In Egypt, f
or the compliance of these standards some
regulatory measures necessary for ensuring full compliance with the standards
prescribed by the regulatory body
Capital Market Authority (CMA
)
. There are
many
situations
where the limited companies do not comply with the EASs and
there is no
effective
punishment
or penalty
for companies who do not comply
with the EASs in the preparation of their financial statements.
The author
s
proposed that the mandatory compliance of EASs can be ensured
through the company law
and capital market authority (CMA)
that the
companies are to prepare their financial statements strictly in accordance with
the accounting standards prescribed by the Eg
yptian Accounting Standards
Board. The compliance of the EASs can
only be
ensured by following the
examples of the Australian, British and American pathways.
In this paper the
researchers have argued that in case
a company fails to comply with the EASs,
th
e Capital Market Authority in Egypt should take punitive measures against
the directors of the respective companies in order to revise their financial
statements.
Further, necessary d
isciplinary actions must be taken if any
member fails to comply with acco
unting standards (for example, fine or
expulsion from the respective
professional Accountancy body
the Egyptian
Society of Accountants and Auditors (ESAA
Enforcement and Compliance of Accounting Standards
in Emerging Economies: A Case of Egypt
Dr. Monirul Alam Hossain Professor in Accounting
E-mail: monirulhossain@yahoo.com
First Draft: January, 2013
1 Enforcement and Compliance of Accounting Standards in Emerging Economies: A Case of Egypt
Abstract The main objective of this paper is to develop a mechanism wherein the enforcement and compliance of the accounting standards can be established in Egypt. Since 2006 Egypt has taken steps to implement a total of 39 Egyptian Accounting Standards (EASs). The process of issuing Egyptian Accounting Standards, including translation into Arabic, is lengthy seems to be a lengthy process. There are some minor adjustments or differences between the set of Egyptian Accounting Standards (EASs) that are currently in effect and IAS/IFRS issued by IASB. In Egypt, for the compliance of these standards some regulatory measures necessary for ensuring full compliance with the standards prescribed by the regulatory body Capital Market Authority (CMA). There are many situations where the limited companies do not comply with the EASs and there is no effective punishment or penalty for companies who do not comply with the EASs in the preparation of their financial statements.
The authors proposed that the mandatory compliance of EASs can be ensured through the company law and capital market authority (CMA) that the companies are to prepare their financial statements strictly in accordance with the accounting standards prescribed by the Egyptian Accounting Standards Board. The compliance of the EASs can only be ensured by following the examples of the Australian, British and American pathways. In this paper the researchers have argued that in case a company fails to comply with the EASs, the Capital Market Authority in Egypt should take punitive measures against the directors of the respective companies in order to revise their financial statements. Further, necessary disciplinary actions must be taken if any member fails to comply with accounting standards (for example, fine or expulsion from the respective professional Accountancy body the Egyptian Society of Accountants and Auditors (ESAA)
Correspondence Address: Dr. Monirul Alam Hossain, Professor in Accounting, Department of Accounting and MIS, University of Hail, P.O. Box 2440, Hail, Kingdom of Saudi Arabia. FAX: +966-6-531-0500 E-mail:monirulhossain@yahoo.com 2 Enforcement and Compliance of Accounting Standards in Emerging Economies: A Case of Egypt
1. Introduction
The accounting standards are intended to describe methods of accounting or disclosure for the application to all adopted accounting statements expected to give a true and fair view of financial position and results. The establishment and enforcement of standards is an important issue for the accounting profession and its interested users. Determining the best mechanism to employ in establishment uniform accounting standards may be essential to the acceptability and usefulness of accounting standards (Belkaoui and Jones, 1996). The International Accounting Standard Committee (IASC) (now, The International Accounting Standard Board or IASB) the was established in 1973 as a standard setting body in the private sector to reduce the differences in accounting practices among countries whose objectives are (a) to formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their world-wide acceptance and observance; and (b) work generally for the improvement and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements. According to IASC/IASB, the members are required to support the work of the IASC/IASB by publishing in their respective countries every IAS/IFRS, approved for the issue by IASC/IASB. It has been argued that by adopting International Accounting Standards (IASs) or IFRS, the developing countries will be able to improve the quality of their accounting systems so that their specific financial information requirements will be better satisfied.
International Financial Reporting Standards (IFRS) were developed in advanced economies, but are increasingly being applied in emergent economies, potentially ignoring considerations of whether IFRS are appropriate or relevant 3 to such economies (Tyrrall, Woodward, and Rakhimbekova, 2007). The IASs/IFRSs are very important for emerging economies. It has been argued that IASs may be unsuitable or even detrimental to the needs of emerging economies (Briston and El-Ashker, 1984; Hove, 1989; Samuels and Oliga, 1982 and Elsalam and Weetman, 2003). The growing acceptance of the International Accounting Standards (IASs) by emerging capital markets has encouraged empirical investigation of compliance with the requirements of IASs (Abd- Elsalam and Weetman, 2003). There are a growing number of studies in the area of International Accounting Standards (IASs) to developing and emerging economies (Hossain et al, 2006; Susela, 1999; Banerjee et al.; 1998, Larson and Kenny 1998, 1996; Watty and Carlson, 1998; Hassan, 1998; Al-Rai and Dahmash, 1998; Mirghani, 1998; Carlson, 1997; Wallace and Briston, 1993; Larson, 1993; Wallace, 1993; Hove, 1990 and Perera, 1989). However, there is a shortage of existing literature which has investigated the roles of the IASs/IFRSs in the context of emerging and transitional economies like Egypt.
As a developing country with an emerging capital market, Egypt closely follows developments in international financial reporting and auditing. The Capital Market Authority (CMA) is fully committed to bring the Egyptian capital market in line with international standards, and promotes adherence to securities regulation rules established by the International Organization of Securities Commissions, the corporate governance principles of the Organisation for Economic Co-operation and Development, securities numbering schemes set forth by the Association of National Numbering Agencies, as well as clearing and settlement best practices, Egyptian and international accounting standards. There is only one accountancy body in Egypt- the Egyptian Society of Accountants and Auditors (ESAA). In 1977, the ESAA became the member of the International Accounting Standard Committee (IASC). The Egyptian Society of Accountants and Auditors (ESAA) are solely responsible for the accounting standards adhered to in Egypt. Since 1997, the Capital Market Authority (CMA started working on the adoption of the 4 International Accounting Standards and so far have adopted 39 Egyptian Accounting Standards (EASs) based on International Accounting Standards (IASs) or IFRSs with minor adjustments.
Farag (2009) while presenting a historical review of the evolution of accounting and the accounting profession in Egypt, discuss that the Egyptian accounting practice moved to adopt international accounting standards in an attempt to liberalize and integrate the Egyptian economy into the global economy since1975. In most of the developing countries (e.g. Egypt), compliance with the accounting standards is legally required. The laws of Egypt (Companies Law of 1951 and Capital Market Authority Rules 1992 for the listed companies) set the all the requirements as to the disclosure of accounting information in corporate annual reports. In Egypt, despite the fact that the Egyptian Accounting Standards (EASs) are mandatory, it could be seen that different companies are using different accounting policies and procedures in the preparation and presentation of their financial statements in their company annual reports. For example, the study of Elsalam and Weetman, 2003 shows that the level of compliance with familiar aspects of IASs disclosure requirements was significantly higher than the level of compliance with relatively unfamiliar aspects of IASs disclosure, where both sets of requirements were available in Arabic (Elsalam and Weetman, 2003). As a result of diversified use of accounting practices, a meaningful comparison of financial position as well as performance among the companies became difficult on the part of the users of accounting information for their decision- making purposes. Unless the full compliance is made at the national level, there is little scope of global harmonisation of accounting standards.
The main objective of this paper is to develop a mechanism wherein the enforcement and compliance of the accounting standards can be ensured. Next section reviews the existing framework of accounting standard in Egypt and proposed what should be the nature of the mechanism for the standard setting 5 process so that a wider acceptance can be achieved. Section three evaluates whether or not Egypt need a separate set accounting standards. Section four outlines an appropriate mechanism for the enforcement of accounting standards in Egypt. Section five prescribes how to ensure the compliance of such accounting standards followed by conclusion of the paper in section six.
3. Relevance and Impact of (IFRSs) on Emerging economies Financial Reporting practices
The adoption of International Financial Reporting Standards (IFRS) is supported in many countries because it may improve the quality and international comparability of financial reporting however, these goals are less likely to be achieved without regulatory oversight that promotes rigorous and consistent use of IFRS (Brown and Tarca, 2005);. The IASC/IASB formulates and publishes IASs/IFRSs to be complied in the presentation of financial statements and to promote their worldwide acceptance and observance (El-Gazzar et al. 1999). The IASB has issued a single set of core standards which may provide relevant and reliable information to the users. Consistent with the efforts provided by the IASB and other international agencies, a large number of developing/emerging (and developed) economies have adopted IFRSs as their national accounting standards (Ali, 2005). Hossain, Cooper, and Islam (2006) that have found that the companies of some developing countries like Bangladesh are reluctant to disclose information and they are only concerned about the minimum disclosure. Also, some empirical studies show that the developing countries have not adopted the IASs/IFRSs with enthusiasm (Christopher and Islam, 1999). Compliance appears to be gradually increasing both in developing and developed countries. One reason for the existing lower level of compliance with IFRSs may be that the mechanisms for monitoring and enforcing disclosure requirements in some 6 countries were not stringent (Ali, 2005). The researchers of this paper personally believe that the adoption of IFRSs by the emerging economies will produce many remarkable results. It can be argued here that International adaptation and application of International Financial Reporting standards (IFRSs) will greatly improve corporate reporting in many developing and /or emerging economies. The development of national accounting standards in the light of the IASs/IFRSs is encouraging and may be referred to as revolution for the development of corporate financial reporting practice emerging economies.
In many developing countries like Egypt, compliance with accounting standards is now legally required. However, such practices of mandatory compliance have not always worked well even in developed countries. In most developed countries, compliance with accounting standards now has a legal basis for at least some categories of companies. Developing countries should see that at least the large companies and multinationals are legally required to prepare their financial statements in accordance with national accounting standards. This can be done through amendments to companies acts of individual developing countries. Unless the compliance is made at the national level, there is little scope for effective global harmonisation of accounting standards.
While the IASC/IASB has no power to enforce IASs/IFRSs in its member countries, the International Organization of Securities Commissions (IOSCO) has provided significant support for the compliance with IASs/IFRSs. A large number of developing and developed countries around the world have accepted the IASs/IFRSs due to the efforts of IASB and several international organizations (Ali, 2005). The growing acceptance of the IASs/IFRSs by the emerging economies has already encouraged many researchers who are willing to investigate empirically the level of compliance with the requirements of IASB IFRSs after 2005. As globalization of trade and capital flows has grown at an 7 unprecedented pace, companies and investors are increasingly confronted with unfamiliar and non-comparable accounting standards. A common set of financial reporting standards worldwide, currently being pursued by the International Accounting Standards Board (LASB), is advertised to ensure comparability between financial statements of different countries. Accounting standards formulated by the IASB, however, will meet with significant challenges because of the differences in institutional environment shaping accounting information quality. Despite differences in quality of accounting information, there is a strong international trend towards the adoption of a single set of financial reporting model and a single set of global auditing standards. For example, the European Union (EU) has required companies listed on its national exchanges to use International Financial Reporting Standards (IFRSs) since 2005, and foreign issuers of securities in the U.S. following IFRSs will not need to reconcile to U.S. Generally Accepted Accounting Principles (GAAP) (from 2009).
3. Socio-Economic and Cultural Settings and Development of Accounting Standards in Egypt
Egypt has experienced from time to time as having different political and economic aims. The classification based on history and culture factor have placed Egypt in the Continental or code group. It is worthwhile to mention that since 1990 the relative wealth of the oil-based economies with a close association with the United States have already driven for a shift from Uniform Accounting System to the Anglo-American Accounting System through the pressure of the donor agencies (Kantor, Roberts and Salter, 1995). It can be argued that since accountancy operates in a socio-economic framework as a "service" function, the socio-economic activities and policies have a major bearing on accountancy in Egypt. Culture has been shown to be a major factor affecting the structure of accounting system of a country (Bloom and Naciri, 1989; Gray, 1988; Perera, 1989). This is very true for Egypt. Further, there are 8 researchers who opined that the legal structure and the development of stock markets in a society affect its accounting structure (Doupnik and Salter, 1994).
.Dahawy and Conover (2007) argue that the imposition of IFRS in Egypt creates resistance that is reflected in the selective compliance with the requirements of these standards. Scott and Troberg (1976) listed a list of the practice and educational problems of accounting in developing countries, and based on the list the following are worthwhile to mention:
1. The present Government have played a very important role for the mandatory EASs. The professional accountancy body is weak.
2. Locally authored accounting textbooks are inadequate based on the mandatory EASs . 3. Teaching of accounting subjects at the college level is inadequate to accommodate to prepare financial statements based on the EASs. In addition, inadequate number of qualified accounting faculty members can be observed.
4. Professional development through continuing education programme to provide the opportunities for accounting educators and practitioners to upgrade their knowledge based on the new EASs
4. Factors Influencing the Financial Reporting Practices in Egypt
4.1 Role of Capital Market Authority (CMA)
Capital Market Authority (CMA) is the market regulatory agency responsible for ensuring the development of a transparent and a secure market for investors in Egypt and it promotes market transparency by monitoring compliance with disclosure rules of all listed companies on the stock exchanges 9 in Egypt. The Egyptian Capital Market Act No. 95 was issued by CMA in 1992. According to this notification, all the corporations have to prepare their financial statements by following Egyptian Accounting Standards (EAS). It is the responsibility of CMA to review and analyse accounting, auditing and disclosure malpractice. CMA has enforced the Capital Market Act that ensures disclosure by market participants and adheres to EASs.
All companies registered under the Company Act should maintain sound accounting records and present annual audited financial statements. The Company Act in Egypt does not cover accounting and auditing standards, but requires that external audits should be conducted in compliance with the Accounting Practice Act No. 133/1951. It has already mentioned earlier that according to the Capital Market Act No. 95/1992, all listed companies are required to follow EASs and the Capital Market Act requires all listed companies to prepare financial statements in compliance with IASs.
As we have mentioned that the Capital Market Authority became effective since August 2002. The rules aim at ensuring that the preparation and presentation of financial statements comply with accounting, auditing, and legal requirements (Berg and Capaul, 2004). In 2002, to ensure timely preparation and presentation of financial statements and full compliance by issuers with accounting, auditing and other legal requirements, CMA approved new listing rules where CMA can impose an administrative penalty if the issuer failed to disclose information as per the EASs. In case of non-compliance of EASs made by the listed companies, CMA has the power to issue warning, de- list, suspend and revoke licences, impose monetary penalties, cancel transactions, inspect and suspend shareholder decisions. In addition, CMA can refer cases to the Prosecutor General to initiate proceedings. The new rules advocated by CMA aim to ensure timely preparation and presentation of financial statements and full compliance by issuers with accounting, auditing and other legal requirements. It can be noted here that hundreds of companies 10 were de-listed for failing to comply with the new listing rules. Further, the new rules have forced all listed companies to establish an audit committee. The objective behind setting up the audit committee is to strengthen corporate governance and to improve financial reporting. CMA reviews annual financial statements presented by listed companies to ensure timely filing of financial statements based on a checklist. This check list also helps to monitor whether or not the listed companies comply with the existing Egyptian Accounting Standards (EASs) in the preparation of their financial statements.
It is worth mentioning that CMA recently issued Decree No. 96/2006 that clarifies the role of CMA in monitoring corporate financial reporting, including assessing the quality of auditors. Act No. 123/2008 which contains some amendments to Capital Market Act No. 95/92 states that CMA is responsible for establishing a register for public companies accountants and that CMA will set the requirement for listing and delisting auditors in that register. Ministerial Decree No. 503/1997 was issued by the Ministry of Economy and Foreign Trade, which was the supervising ministry of CMA. The name of the ministry has been changed to the Ministry of Foreign Trade, which continues to issue accounting and auditing requirements for all enterprises falling under the CMA regulatory framework. Currently, the Ministry of Investment is responsible for issuing these standards.
The Central Agency for Accountancy required the company to use the Uniform Accounting System (as a state-owned enterprise) and the Egyptian Capital Market Authority required the company to use IFRS (as a partially private sector company registered in the stock exchange). To meet these conflicting institutional demands, the company adopted loosely coupled accounting rules and routines and IT was used to institutionalizing existing Uniform Accounting System and preserving the status quo (Berg and Capaul, 2004). As a result, the company ceremonially used IFRS but it actually used the Uniform Accounting System to manage business transactions. It resisted 11 the requirements of the Egyptian Capital Market Authority by disguising its compliance with IFRS. Berg and Capaul (2004) opted that the Uniform Accounting System as institutionalized accounting routines acted as a barrier against change towards IFRS implementation and internalization.
4.2 Role of the Accounting Profession in Egypt
The Egyptian Society of Accountants and Auditors is the only professional accountancy body in Egypt. The ESAA was established in 1946 which is a member of the International Federation of Accountants (IFAC) but it does not test whether its members comply with IFAC standards (IFAC, 2004). Now the total number of registered accountants is more than 30,000 accountants. At the end of 2007, the total membership of ESAA reached 1372 of which 482 are non-practicing (Farg, 2009).
In Egypt, all the major international auditing firms have a presence KPMG, Ernst and Young, Deloitte Touche Tohmatsu, and Price Waterhouse Coopers are the major international accountancy and legal firms with local partnership. As a result, it can be argued that international auditing firms working in Egypt would be more familiar with IAS including parts of the IAS which are not publicly available in Arabic (?????). As a result, it is expected that Egyptian companies audited by one of the international auditing firms will comply more closely with the IAS.
The quality of the auditing process is influenced by assigning, or changing, auditors. Shareholders have the power to assign, or change, auditors, and to determine levels of auditors compensation, but in practice, management makes these decisions. This practice forces auditors to comply with the wishes of top management, which affects the level of compliance with accounting and auditing standards. For example, an auditor may be forced to change an opinion to retain the auditee, although this behaviour is against 12 professional ethics and due care (Louwers, 1998). In addition, there is a lack of knowledge and proper guidelines regarding the application of Egyptian and international standards restricts the preparation of financial statements in compliance with these standards. Some auditing firms have competent auditors, who serve more clients than their capacity. This overstretching can negatively affect the audit quality, which, in turn, can result in non-compliance with accounting and auditing standards (Aly, 2001).
It is very interesting to know that in Egypt, under current law, individuals joining the public practice of accounting and auditing must register on the General Register for Accountants and Auditors does not require a qualifying examination for entry. At present, audit firms cannot be appointed as statutory auditors of companies companies appoint individual partners of audit firms. Under the current legislative framework in Egypt, only licensed individuals can act as auditors. The legal framework surrounding the accounting and auditing profession in Egypt includes the basic Company Act, the Accounting Practice Act (1951) and the Banking Act (1957). A revision of the Company Act was proposed in 1997 but is yet to be finalized and implemented. The Central Accounting Organization Act (1988) and Capital Market Act (1992) have had considerable impact and influence on the practice of accounting auditing in Egypt. The combined set of laws represents the legal framework for the accounting and auditing profession in Egypt.
The law requires that annual audit reports and periodic review reports should be conducted by independent, competent and qualified auditor in accordance with ISAs. The main components of the Egyptian disclosure and transparency framework are: (1) a legal framework to issue rules and regulations in accordance with international standards; (2) a regulatory agency enforcing the implementation of these standards; (3) an independent, competent and qualified auditor; and (4) a disciplined self-regulatory professional accounting association setting standards and monitoring 13 implementation. Standards alone do not guarantee the quality of financial information disclosed, rather institutional factors such as the incentives of preparers should also be considered, as well as building the capacities of the practitioners and developing independent, competent and qualified auditors.
The Egyptian Society of Accountants and Auditors has to revise its Code of Ethics for its members in the line with the IFAC Code of Ethics for professional Accountants in 2003, as well as to set up proper mechanism to enforce this code properly. It can be argued here that more stringent disciplinary actions and effective periodical audit for members are necessary to monitor for detecting ethical misconduct and violation. This proposed committee must be vested with more power for taking disciplinary actions against its members of the practicising professional accountants for violating code of ethics and professional norms. It can be argued that an independent review mechanism only can ensure the audit firms have adequate quality control arrangements in place for compliance with the adopted IASs requirements of quality assurance of audit firms. But the existing mechanism can be referred to as inadequate, insufficient, and ineffective in many situations.
4.3 Role of the Government of Egypt
The Government of Egypt has made efforts to modify the law to achieve compliance with internationally accepted accounting and auditing standards. These modifications include drafting a new accounting practice law and modifying the Company Act, the Capital Market Act and the Banking Act. Consequently, important improvements have been made to accounting and disclosure requirements the publicly traded companies and financial institutions, as well as to the Egyptian Accounting Standards (EAS), as benchmarked against the International Accounting Standards (IAS). Moreover, a new accounting practice bill has been drafted. As a result of various reforms 14 and in order to improve the quality of financial reporting and disclosure, a new set of EAS based on IFRS were issued in 2006. Furthermore, a new set of Egyptian Standards on Auditing (ESA) based on ISAs was prepared and issued pursuant to the Decree No. 166/2008 of the Minister of Investment.
4.4 Role of Stock Exchange
The Egyptian Capital Market has two locations: Alexandria and Cairo. The Cairo and Alexandria Stock Exchanges have set a number of listing requirements for listed companies. The Cairo Stock Exchange was established in 1883 while the Alexandria Stock Exchange was set up in 1903. The Cairo Stock Exchange and Alexandria Stock Exchange are now known as the Egyptian Exchange. The activities of these stock exchanges was compromised because of the Governments decision to nationalise the core industries till 1990 when the Government moved from socialist to market economy by economic reforms, privatization and changes in the regulatory environment. The two stock exchanges were very active till the 1940s. However, the central planning and socialist policies, adopted since the 1950s, led to a drastic reduction in activity on the Egyptian stock exchanges for four decades. The Egyptian stock market till the late 1980s was not prepared to execute privatisation transactions. In the 1990s, capital market reform became mandatory with the move towards a free market economy and the privatisation programme.
The Capital Market Law No. 95 of 1992 was promulgated in 1992 and came into effect in 1993 through the issuance of its Executive Regulations. According to Law No. 95 of 1992, the Capital Market Authority (CMA) was given sole control over supervising the securities market, including Alexandria and Cairo Stock Exchanges. The Capital Market Law introduced new roles and functions for the CMA. These include monitoring the performance of exchanges and enforcement of listing and trading regulations. The CMA also monitors 15 compliance by listed companies, and directs exchanges to de-list securities and to suspend listing or trading for non-compliance if the exchange fails to act promptly. The Capital Market Law stipulates that listed companies comply with full disclosure of financial statements and all other relevant information requirements according to IFRS, which were issued in September 1997. Early 1996, a list of 120 companies ripe for privatisation was published and two of 120 others were released in 1997 (Khattab, 2002). They covered a wide range of activities cement, metallurgy, textiles, pharmaceuticals, food processing, maritime transport and tourism.
The capitalization of Egyptian Stock Exchange was 602 billion as of 30 June 2007 as compared to its market capitalization 5 billion Egyptian pounds in 1990. At present 1075 domestic companies listed on the Cairo Stock Exchange. The exchanges are responsible for supervising commitment to registration rules, but without authority for investigation and inquiries. However, the exchanges may impose sanctions that include downgrading listing status, trade suspensions, delisting, and (since the recent changes to the listing rules) monetary penalties in case of non-compliance of disclosure based on the EASs. However the stock exchange had only one listed foreign company. An ineffective control mechanisms exist for imposing sanctions on public accountants and auditors who fail to comply with accounting and auditing standards.12 For example, the Cairo and Alexandria Stock Exchange does not have the necessary authority to ensure listed companies to comply with financial reporting requirements, and is incapable of applying sanctions for noncompliance with accounting standards requirements.13 Egyptian Stock Exchange (ESE) is developed as compared with the stock exchanges of the other Gulf countries. However, ESE have significant influence on accounting standards in that it requires providing financial information in accordance with the adopted accounting standards in Egypt. As the requirements of the listing rules, ESE supports the use of internationally acceptable standards. According to the listing requirements of the ESE, 16 securities are considered to conform to the listing requirements with regard to their issuer adhering to Egyptian Accounting Standards if the issuers present the Stock exchange with a financial statement that has been prepared in compliance with international accounting standards (IAS) with minor adjustments. The requirements to publish financial statements for listed companies are contained in the listing rules of the Egyptian Stock Exchange (ESE). Issuers are required to submit quarterly and annual reports to the stock exchange. However, the ESE conducted very little monitoring of reporting requirements. The World Bank (2007) suggested that disclosure of information by listed companies on the stock exchange website be timely and accurate, and that the ESE strengthen its oversight in this regard. Fifth, the Cairo and Alexandria Stock Exchange does not have the necessary authority to guarantee or enforce the listed companies to comply with financial reporting requirements. Thus, the Stock Exchange is incapable of applying sanctions for non-compliance with financial reporting requirements.
5. Framework for Accounting Standard-setting Process and Enforcement of EASs in Egypt
In October, 1997, the Permanent Committee for Accounting and Auditing Standards was established to issue Egyptian Accounting Standards (EASs) that were to be based on IASs issued by IASC (now IASB) in order to harmonize its national accounting standards with IAS taking into consideration the local needs and accounting environment in Egypt. According to the Ministerial Decision No. 503, the permanent committee for Accounting and Auditing Standards has the sole authority to prepare accounting standards for enforcement. In Egypt, the Permanent Committee for Accounting and Auditing Standards possess the authority to develop and promulgate accounting standards on its own authority. However, it is interesting to notice 17 that the Egyptian Society of Accountants and Auditors is the body responsible for drafting accounting and auditing standards.
It has already mentioned that the CMA started working on the adoption of IASs since 1997. The Egyptian Society of Accountants and Auditors has established a standard-setting committee with the responsibility of making selection of IASs that are related to the national regulations and environment in Egypt and selects a particular International Accounting Standard for issuance in order of priority. The Committee reviews the IASs and where necessary adopts the IASs. Once the committee selects an international standard, it is translated into Arabic. The Committee prepare a draft standard for the adopted accounting standard subject to the consideration of the permanent committee for Accounting and Auditing Standards. The draft standard is submitted to the permanent committee for discussion, finalization and adoption. The permanent Committee for Accounting and Auditing Standards forwards modified draft standards for approval and upon approval the final version of the standard is submitted to the Ministry of Foreign Trade of Egypt for issuance by a ministerial decree. In this way, an accounting standard becomes operational from a specified date and the draft standard becomes national accounting standards in Egypt once it gets approval by the Ministry.
In 1997, the Ministry of Foreign Trade had issued Ministerial Decree 478/1997, establishing the Permanent Committee for Accounting and Auditing Standards.11 This Committee has the official responsibility for setting the standards. Once the Egyptian Society of Accountants and Auditors has selected the international accounting and auditing standards applicable to the Egyptian situation, it translated them into Arabic language. These standards have become the basis for drafting an Egyptian standard. The first version of such standards is introduced to the Permanent Committee for discussion and adoption, and then sent to the Ministry of Foreign Trade for issuance by a 18 ministerial decree. A new set of EASs were issued based on the Decree No. 243/2006 of the Minister of Investment where the old standards issued under the two ministerial decrees Nos. 503/1997 and 345/2002 have been replaced, and are mandatory for all listed joint stock companies in Egypt, and it is expected that the new set of EASs will help to improve the application of principles of good corporate governance by listed companies. Again, the latest Income Tax Act No. 91/2005 requires that net profits for tax purposes be based on the accounting profit in the audited financial statements which are prepared under these EASs. Subsequent revisions were also made by Ministerial Decrees, and currently, a total of 39 EASs have been prepared on the basis of IFRS (Farag, 2009). Till 2009, the total number of such adopted accounting standards (called EASs) is 39 and since 1998, all listed companies in Egypt are required to comply with these EASs. In 2007, the new Egyptian Accounting Standards were issued as per the decree of the Minister of Investment, no.243/2006 to replace current ones issued under the two ministerial decrees no. 503/1997 and 345/2002. If a careful comparison between the accounting standards as adopted by the permanent committee for Accounting and Auditing Standards and IASs is made, it will be found that there is no deviation of the adopted accounting standards and the IASs (except some minor difference). As a result it can be argued that the EASs are the outcomes of the wholesale adoption of the IASs.
If a careful comparison between the accounting standards as adopted by the CMA and IASs/ISRSs is made, it will be found that there is no significant deviation of the adopted accounting standards and the IASs. Here the authors like to urge upon the national government of Egypt for the creation of a mechanism (separate standard-setting agency) which will be authorised to develop and promulgate accounting standards. The standard-setting process adopted by the CMA is eventually a closed-door process and interested users of accounting information do not have any chance to participate in the standard setting process. 19
It has already mentioned that the CMA has established a Permanent Committee with the responsibility of making selection of IASs that are related to the national regulations. The Permanent Committee of the CMA selects a particular International Accounting Standard for issuance in order of priority. The Committee reviews the IASs and where necessary adopts the IASs. The Permanent Committee prepare a draft standard for the adopted accounting standard subject to the consideration of the Ministry. The comments and suggestions received on the draft are examined by the Permanent Committee and the standards are reviewed and modified where necessary to conform to local statutory regulations. Finally, the Ministry for approval forwards modified draft standards and upon approval it becomes operational from a specified date and the draft standard becomes national accounting standards in Egypt.
This section now outlines the proposed structure of institutional arrangements for standard-setting in Egypt. Where the standard-setting process is in the hand of the national accounting profession or CMA, the accounting profession was accused of monopolising the standard-setting process while not representing the majority of the users of financial statements. It can be observed that the accounting profession in Egypt due to absence of recognition of accounting services as instrumental to economic development has to take the initiative for standardisation of the accounting and auditing practices as a matter of self-regulation only. Experiences from other countries have shown that this kind of arrangement (self-regulation) cannot be appropriate for the development of sound accounting standard (e.g., UK, USA and Australia). In order to avoid the seemingly undue influence of the ESAA on the standard-setting process, a private sector organisation, the Egyptian Accounting Standard Board (EASB) is proposed by the authors. This board needs to be established in order to improve the enforceability of the accounting standards in Egypt. The EASB should possess the authority to issue accounting standards on its own authority with representation of accountancy 20 profession, the major interested groups, and the users including the government. The Capital Market Authority (CMA) of Egypt is the supreme corporate regulator in Egypt. The CMA will delegate the responsibility for standard-setting to the proposed EASB. The proposed Egyptian Accounting Standard Board (EASB) should be created under the statute by virtue of the Capital Market Act.
The Proposed EASB should develop a conceptual framework which will set out the concepts that underlie the preparation of the financial statements for external users. At the same time the proposed EASB should constitute a committee to review all IASs/IFRSs to be adopted or already adopted by the CMA. After thorough review these IASs/IFRSs, these should be considered for the issuance. Before the issuance, these IASs/IFRSs must be modified after due consideration of the specific requirements of Egypt (e.g. in the light of Indian experience). The members of the agency should work on a full time basis and they should be selected from a wide variety of relevant backgrounds. The accounting standards adopted by the CMA without involvement of the interested groups, preparers and users in the standard setting process has made their acceptance a difficult proposition. In India, the Constitution of the standard-setting body Accounting Standards Board (ASB) gives adequate representation to all interested parties and at present it consists of 15 members including representatives of Industry, Company Law Board, Central Board of Direct Taxes and Controller and Auditor General of India. The accounting profession in Egypt), the regulatory agencies (i.e., CMA), stock exchanges, chamber of commerce and major users of corporate annual reports of Egypt should participate in the reviewing the accounting standards and modify these accounting standards under consideration according to the requirements of Egypt. This will ensure a wider participation in the adoption and issuance of accounting standards, which in turn reflect the views of different user groups in Egypt.
21
6. Need for Separate Set of Accounting Standards in Egypt
There are some studies in the context of developing countries which have examined the relevance and importance of the IASs in those countries and most of these studies have either observed or recommended for modified adoption of IASs to meet local environmental factors (see for example, Hossain, 2002; Hassan, 1998; Al-Rai and Dahmash, 1998; Mirghani, 1998; Larson, 1993; Enthoven, 1969 and 1973). Wallace argued that there are some developing countries that are using IASs as national standards without any modifications (Wallace, 1993, p. 135). However, Egypt is one of those developing countries where EASs are mandatory for the listed company that is not wholesale adaptation of IASs/IFARs. However, there is a shortage of existing literature which have investigated the roles and compliances of the IASs in these developing countries with transitional economies. The notable exception is Zimbabwe. Chamisa (2000) investigated the adoption and compliance of IASs in Zimbabwe and found IASs to be largely relevant to Zimbabwes accounting and financial environment. Juchan (1978) observed that there was a tremendous influence of Australian and New Zealand accounting and financial reporting practices in two developing countries (Fiji and Papua New Guinea) which he studied.
However, Enthoven (1981) argued that where developing countries are in need of assistance for accounting education from a developed country, the donor country should be aware of the needs of the developing country before such assistance is given. Again, the diversity of environment in both developing countries and developed countries means that it is difficult to say which developed countries accounting systems should be considered by which developing countries. The respective levels of the influential factors that shape a nations accounting systems need to be considered (e.g., the level of 22 government control, the extent and ability of the accounting profession, the influence of the tax system on commercial accounting, the social objectives of the country and any cultural trait that influence the acceptability of an accounting system, etc.) (Lawrence, 1996; p. 206-207). In another study Enthoven (1985) commented that the accounting principles should be carefully evaluated within the whole economic structure.
Historically, the rate of growth and the development of a nations economy in both the private and public sector are tied to a certain extent to the adequacy of accounting systems and the accounting development process in a country. It has been argued by the researchers that the financial reports must be designed to meet local information needs. The economic conditions and the needs of a particular developing countrys demand the improvement of all components of the accounting establishment. Just as the needs of the developing countries/emerging economies are different from developed countries, so are the needs of different developing countries (Chandler and Holzer, 1984). Although developing countries/emerging economies are by no means homogeneous, they share a number of political and economic problems, leading to many problems in accounting (Radebough and Gray, 1993).
The objectives of accounting in developing countries/ emerging economies are not identical to those of developed countries (Briston, 1984). Accounting in most developing countries/ emerging economies is still in an embryonic stage (Jaggi, 1973), and each national accounting and business environment is different and may require an accounting system with a different approach from that used in other countries (Jagetia and Nwadike, 1983), and accounting systems of a developing country should be relevant to the countrys needs rather than imitating a developed countrys accounting system (Briston, 1978; and Samuels and Oliga, 1982). There are several studies where the researchers cast serious doubts about the relevance of the Western accounting 23 principles and practices that developing countries/ emerging economies adopt (e.g., Briston, 1978; Samuels Oliga, 1982; Perera, 1975) and argue for the creation of a system for each developing country which is appropriate to its own requirements (Briston, 1978).
As already noted accounting technology has not only been exported through colonialism but also has imposed on developing countries/ emerging economies without careful examination of local conditions and suitability. It is essential for developing countries to consider the ever-changing needs of society and (hence the accounting system) must reflect the social, political, and economic conditions within which it operates (Hove, 1986). Jagetia and Nwadike (1983) has advocated for the need for more relevant and useful accounting systems which consider the environmental variables in operation and the level of sophistication of users of financial information in developing countries/emerging economies, and state that developing countries need systematic and carefully planned accounting systems designed to meet the unique requirements of the individual countrys accounting and business environments. Again, Briston (1978; p.109) suggests that instead of blindly embracing colonial systems, developing countries should concentrate upon an assessment of their information needs in the enterprise, government, and national accounting sectors and should seek to establish training programmes to produce the staff for the provision and use of that information.
There is limited evidence that developing countries/ emerging economies are attempting to utilise accounting in their development programmes as far as is possible (Jaggi, 1975). There is also little evidence of proper adoption of accounting practices in developed countries to suit local situations. So far, no developing country has been able to construct a system of accounting designed primarily to meet its own information needs (Briston, 1978; p.116). In Zimbabwe, for example, the Companies Act is still based on the British Act of 1948 (like India, Pakistan and Bangladesh), and there is general application of 24 all international accounting standards with modification. In addition, the developing countries/emerging economies must ensure that their accounting practices mirror their social needs.
Belkaoui (1985) has noted the importance of economic, cultural, political, and social conditions, and the arguments of several authors that each developing country should create an appropriate accounting system to its own needs. However, Perera (1989) argued that accounting practices based on a uniform approach for developing countries might be appropriate and opined that it may be the only practical alternative available to many developing countries. The IASC (now the IASB since 2001), the United Nations, and the OECD have undertaken attempts to standardise financial reporting practices across the world, including developing countries. However, it may be argued that there is greater difficulty in developing uniform accounting practices in developing countries (than in developed countries. Despite this, there are proponents who believe that an integrated macro-based accounting system should be adopted by the developing countries (e.g., Enthoven, 1973, Mirgani, 1982, Shuaib, 1980; and Abdeen, 1980)1. The capital markets in most of the developing countries are underdeveloped. In developed countries (e.g., UK and USA) capital market and financial reporting are closely related. The improvement of the quality of accounting in any developing country/ emerging economies requires proper research to accurately determine a countrys particular accounting needs, and the role of accounting in the countries economic development process.
It is evident from the earlier section that the companies in Egypt are expected to comply with the prescribed accounting standards adopted by the EASB and those accounting standards are actually promulgated by the IASB. The Egyptian Society of Accountants and Auditors is a member of the IASB,
1 See Wallace, 1993, p.21-22 for a detailed discussion. 25 and as such it has a responsibility to observe it that the standards promulgated by the IASC/IASB are duly implemented in Egypt. The standards promulgated by the IASC/IASB are dealing with issues, which are expected to be of common concerns to all member countries. However, it is not possible for any international organization to develop accounting standards appropriate to the local needs of each and every country and an international body can prescribe accounting standards covering only certain broad areas of financial reporting (Basu, 1986). Local conditions of the developing countries like Egypt may not be similar to those of developed countries. In that case Rashid (1990) has argued that the national standard-setting bodies rather than international body can formulate standards necessary to serve the local needs.
The Egyptian Society of Accountants and Auditors is not aware of the very need for separate accounting standards and its requirements with special reference to Egypt. Has been argued by researchers that before the international standards are adopted or integrated into national standard it is necessary for the accountancy institute to take inventory of different accounting practices and treatment that are in practice in a country (Azizuddin, 1991). The Egyptian Society of Accountants and Auditors always claim and demand the credit for just wholesale adoption of International Accounting Standards as the national accounting standards. This is the high time for Egypt to analyse and study its requirements of accounting standards, to meet its specific requirements to be determined by the financing arrangements, the capital market and the socio-economic environments in Egypt.
7 Enforcement Mechanisms for the Accounting Standards in Egypt
The Egyptian Society of Accountants and Auditors (ESAA) do not have any direct control over those responsible for preparation of annual financial 26 reports. The members of the ESAA are requested to follow all accounting standards adopted by the institute irrespective of the type or size of the entity they are auditing. The ESAA have been trying to exercise indirect control through its members who are subject to its disciplinary jurisdiction by requesting them to qualify annual reports for compliance with the accounting standards adopted by the ICAP.
The practicising accountants are not likely to follow the voluntary accounting standards in the preparation of Company Annual Reports (CARs) in case the management has a reservation not to follow accounting standards. Lastly, if the members of the ESAA do not comply with the adopted accounting standards in the preparation and auditing of the financial statements, the ESAA is not in a position to take any disciplinary action against such members. The ESAA has not yet been able to adopt any disciplinary measure under the code of professional ethics for non-compliance of the instruction. As a result, it is very difficult for the ESAA to ensure the compliance of the accounting standards on its own. In Egypt, the adopted accounting standards have legal or statutory backing. Accounting standards are recommended to the CMA for the Government of Egypt to issue necessary notification for mandatory compliance by the listed companies under the Companies Act or Capital Market Act.
In 2002, a Code of Corporate Governance was introduced in Egypt by the CMA for the stated purpose of establishing a framework of good corporate governance, whereby a listed company can be managed in compliance with international best practices. This is important to mention here that this Code has been introduced by amendments to the Companies Act, which have provided the requirement for the listed companies as described Companies Act or Capital Market Act include compliance with requirements of the adopted EASs that have been officially notified by the CMA. In addition, the code has been adopted by all stock exchanges in Egypt by way of its incorporation in 27 their listing in their respective listing requirements and regulations and as a result, all listed companies in Egypt are now required to comply with the provisions of the said Code.
It can be argued that some regulatory measures are necessary for ensuring full compliance with the standards prescribed by the regulatory body. In Egypt any non-compliance reported to the ESAA or CMA should be fully investigated and actions are to be taken as per rules. In Egypt, mandatory enforcement of the local accounting standards (EASs) has been ensured through the company law (Companies Act and or Capital Market Act). The Companies Act (law) and/or Capital Market Act of Egypt has made it obligatory for companies to prepare financial statements in the line with the EASs adopted by the ESAA. Although the Companies Act and/or Capital Market Act of Egypt is quite specific that the companies are to prepare their financial statements strictly in accordance with the EASs prescribed by the CMA, this does not mean that compliance with the EASs has been ensured in Egypt. The researchers have argued that some regulatory measures are necessary for ensuring full compliance with the EASs and any non-compliance with the standards prescribed must be reported to the regulatory body and proper actions must be taken based on the existing laws that may need some sort or modifications and amendments to accommodate that.
8. Compliance Mechanism of Accounting Standards in Egypt
As Egypt belongs to emerging capital markets, it is particularly relevant for them to comply with financial reporting requirements of the standards. It has been argued by Ahmed and Nicholls (1994) that there are many incentives for disclosure in emerging economies but there are also considerable reasons for not complying with mandatory disclosure requirements. It has been argued by Chowdhury (2000) that without proper compliance mechanism, accounting 28 standards become valueless and will loose their usefulness in market economy. Egypt should consider like many developed and developing countries in the world an arrangement for compliance with accounting standards for the preparers and auditors while preparing and auditing financial statements of the companies in Egypt. It is firmly believed by the researchers like Chowdhury (2000) that compliance with accounting standards will be prudent for the preparers and auditors in endeavouring to satisfy their professional and legal responsibilities with respect to preparation and audit of financial statements. If critically examine, it can be observed that weak enforcement mechanisms are more critical to explaining the state of financial reporting in Egypt and can be argued that Egypts adoption of EASs based on International Financial Reporting Standards (IFRS) as national standards has not led to improvement in the quality of financial reporting. It has been mentioned earlier that the listed companies are required to comply with Capital Market Authority (CMA) requirements with respect to corporate disclosure based on the mandatory EASs. However, the strength of the Capital Market Authority (CMA) to monitor and enforcement of the compliance of these IASs made by the listed companies is very weak and inadequate.
There are several studies of accounting disclosures made by the accounting policies, presentations and disclosures made by the listed companies have failed to comply with the requirements of the adopted mandatory IASs. Although Capital Market Authority has to identify the cases of non-compliance and sanction punishment against a particular company, it has become very difficult for Capital Market Authority (CMA) to conduct proper monitoring activities due to a shortage of technically qualified human resources. It can be argued that lack of adequate capabilities limits full investigation by Capital Market Authority (CMA) in cases when material non compliances might have taken place. There are only a few instances where the CMA de-listed some companies because of the non-compliance of the Egyptian Accounting Standards while preparing and auditing financial statements. 29 There are situations where the limited companies do not comply with the EASs. There are provisions in the law (Capital Market Act) for the punishment and penalty for such type of non-compliance. However, No significant punishment has been made to the companies who do not comply with the EASs in the preparation of their financial statements as well as CARs.
Sixth, the company decisions to implement (or not to implement) IAS are strongly affected by the culture and socio-economic factors. All companies comply with IAS when they do not conflict with local culture factors, but they have deviated where conflict exists. For example, the disclosure level in the company financial statements is considerably lower than the IAS requirements, especially when the disclosure conflicts with the Egyptian tendency for secrecy (Dahawy, Merino, & Conover, 2002).15 The level of compliance with familiar aspects of IAS disclosure requirements in Egypt is significantly higher than for relatively unfamiliar aspects of IAS disclosure, although both sets of requirements are available in Arabic. Where aspects of IAS disclosure requirements are relatively unfamiliar, the level of compliance is lower when regulations are not available in official Arabic translations (Abd-Elsalam and Weetman, 2003). The revisions by the Capital Market Authority disclose that many listed companies do not comply with disclosure requirements. Moreover, auditors reports frequently do not comply with required reporting design (Rahman et al., 2002).
The researchers have proposed a model for such type of non-compliance of accounting standards in Egypt. It has been argued by the researchers that the accounting standards in Egypt have legal backing where the accounting standards are to be compulsorily followed by the companies in the preparation of their financial statements. The compliance can be ensured by following the examples of the UK and USA. In the UK, the standards are set by the ASB having power to issue accounting standards on its own authority.
30 In the UK, there is a legal sanction for companies that do not comply with the Financial Reporting standards in that any departures from accounting standards must be explained and the financial effects disclosed (Redebaugh and Gray, 1993). If it is found that a company (other than small and medium size companies as defined in the Companies Act 1989) does not comply with the UK accounting standards, and fails to provide the particulars and reasons for any departure, that company will be asked by the Financial Reporting Review Panel of the Financial Reporting Council (FRC) to provide satisfactory explanation for such deviation from statutory requirement or to revised the financial statements appropriately. If not, the Review Panel and the Department of Trade and Industry can apply to the court for an order requiring financial statements to be compulsorily revised where they fail to comply with the requirements of the law. Similarly in the USA, corporations are required to follow FASB standards; otherwise the SEC will refuse registration and hence trading in their securities (Redebaugh and Gray, 1993). In Egypt, the Capital Market Authority (CMA) can play such role for the companies those fail to comply with the local accounting standards and impose penalty against the directors of concerned companies for such non-compliance. If a company fails to comply with the accounting standards of the proposed EASB, the Capital Market Authority should take punitive measures against the directors of the respective companies in order to revise financial statements.
The researchers strongly believe that a Financial Statement Review Committee (FARC) should be set up in the light of UK (for example)with the task to review the financial statements of all listed companies in Egypt in order to determine the non-compliance with the adopted international accounting standards. This committee also measure and assess the compliance gap in corporate financial reports prepared by the listed companies. Compliance gaps mean the difference between actual accounting practice and the adopted IASs requirements. The researchers also believe that the compliance of accounting standards can be achieved in another way. The professional accountancy 31 bodies in Egypt (for example the Egyptian Society of Accountants and Auditors should promulgate a professional accounting statement regarding conformity with accounting standards requiring members to comply with accounting standards compulsorily while preparing and auditing financial statements. Disciplinary actions must be taken if any member fails to comply with accounting standards (for example, fine or expulsion from the respective institutes). In the USA, if the standards have not been compiled with, the CPAs have to give an opinion of non-compliance in the audit reports. Failure to do so may lead to cancellation of a CPAs license to practice under Rule 203 of the code of Professional Ethics. However, in Egypt, there are many cases of non- compliance reported to the Egyptian Society of Accountants and Auditors and CMA, no serious actions are taken as per rule. It is worthwhile to mention that the Egyptian Society of Accountants and Auditors will take necessary actions to educate company accountants and auditors in relation to preparation and auditing of financial reports under the EASs.
9. Summary and Conclusions
The main objective of this paper is to develop a mechanism wherein the enforcement and compliance of the accounting standards can be ensured in an emerging and transitional country, Egypt. The establishment and enforcement of standards is an important issue for the accounting profession and its interested users. It has been argued that by adopting International Accounting Standards (IASs/IFRSs) the developing countries will be able to improve the quality of their accounting systems so that their specific financial information requirements will be better satisfied. .Since the liberization policy of the Government of Egypt, the CMA so far has adopted thirty nine International Accounting Standards (IASs). In Egypt, compliance with the accounting standards is legally required by the CMA. The standard-setting process adopted by the CMA through EFAA is eventually a closed-door process and interested 32 users of accounting information do not have any chance to participate in the standard setting process.
This paper has proposed a structure of institutional arrangements for standard-setting in Egypt and a separate Accounting Standard setting board needs to be established in order to improve the enforceability of the accounting standards in Egypt. The proposed Egyptian Accounting Standard Board (EASB) should be created under the statute by virtue of the Capital Market Act. The accounting profession in Egypt, the regulatory agencies (i.e., CMA), stock exchanges, chamber of commerce and major users of corporate annual reports of Egypt should participate in the reviewing the accounting standards and modify these accounting standards under consideration according to the local requirements of Egypt. This will ensure a wider participation in the adoption and issuance of accounting standards, which in turn reflect the views of different user groups in Egypt. Local conditions of the developing countries like Egypt may not be similar to those of developed countries. In that case it has been argued that the national standard-setting bodies rather than international body can formulate standards necessary to serve the local needs. This is the high time for Egypt to analyse and study its requirements of accounting standards, to meet its specific requirements to be determined by the financing arrangements, the capital market and the socio-economic environments in Egypt.
It is well known that serious problems are sometimes encountered in ensuring compliance with the standards formulated by the agencies with statutory backing. In Egypt, the mandatory compliance of the local accounting standards can be ensured through the company law. Under this mechanism, the provisions of accounting standards should be included in the Companies Act and/ Capital Market Act which will definitely make the companies to prepare their financial statements as per the accounting standards. In order to avoid non-compliance of the accounting standards In Egypt, the authors 33 proposed that the CMA will take the responsibility. If a company fails to comply with the accounting standards of the proposed EASB, the CMA should take punitive measures against the directors of the respective companies in order to revise financial statements. Lastly, the professional accountancy bodies in Egypt should promulgate a professional accounting statement regarding conformity with EASs requiring members to comply with EASs compulsorily while preparing and auditing financial statements. Disciplinary actions must be taken if any member fails to comply with EASs (e.g., fine or expulsion from the respective institutes). In this way, the authors considers that enforcement and compliance of the accounting standards will be ensured as the standard- setting will be broad-based, having legal backing and punitive measure for those company directors and auditors in case of non-compliance.
This paper reviews practical implementation issues of EASs/IFRS in Egypt, and describes the current accounting and auditing situation and the legal framework of the profession in Egypt. In recent years, Egypt has made significant efforts (1) to align corporate financial reporting requirements with the IAS/IFRS and (2) to close the compliance gap in both accounting and auditing practice. Consequently, important improvements have been made to accounting and disclosure requirements for the publicly traded companies and financial institutions and in EAS, as benchmarked against IFRS. Moreover, the new Accounting Practice Act has been drafted and agreed upon by all stakeholders, though not yet been issued. Further improvements could be achieved by issuing a modern legislative framework that includes an appropriate regulatory framework for practising auditors, addressing weaknesses in professional education and training arrangements, introducing qualification examinations for auditor licensing, and developing an enforcement mechanism to ensure compliance with applicable accounting and auditing standards. Notable steps have already been taken to build on the accounting reform. Despite these steps, the financial reporting system in Egypt requires further improvements, especially in expediting the process of issuing new EASs 34 after the release of any new IFRS, and reducing the gap between accounting education and practices in relation to international requirements.
Egypt is a country where private sector bodies are not involved in accounting standard setting; where accounting practices followed based on the Continental model; and where the remuneration of the auditors for their audit services is comparatively lower. Egypt had shortages of qualified accountants. We suggest that there is a pressing need for further research to make accountants more effective at improving the quality of accounting, to specify accounting manpower needs; to develop proper training policies and to improve management education and awareness for the quality accounting information in developing countries and Egypt should be consider it for making their future policy. In addition, because of the limitation of funds and other resources, difficult questions of priorities cannot be tackled (e.g. proper training for the accountants to prepare and audit of the financial statements).
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Appendix A
Egyptian Accounting Standards and Corresponding IAS Egyptian Accounting Standards Corresponding IAS (IFRS) EAS 1 Presentation of financial statements (IAS 1 ) EAS 2 Inventories IAS 2 EAS 4 Statement of cash flow IAS 7 EAS 5 Accounting policies, changes in accounting estimates and errors IAS 8 EAS 7 Events after the reporting period IAS 10 EAS 8 Construction contracts IAS 11 EAS 10 Fixed assets and their depreciation IAS 16 EAS 11 Revenue IAS 18 EAS 12 Accounting for Government grants and disclosure of Government assistance IAS 20 EAS 13 The effects of changes in foreign exchange rates IAS 21 EAS 14 Borrowing costs IAS 23 EAS 15 Related party disclosures IAS 24 EAS 17 Consolidated and separate financial statements IAS 27 EAS 18 Investments in associates IAS 28 EAS 19 Disclosures in financial statements of banks and similar financial institutions IAS 30 superseded by IFRS 7 EAS 20 Accounting rules and standards for financial leasing operations IAS 17 EAS 21 Accounting and reporting by retirement benefit plans IAS 26
Egyptian Accounting Standards Corresponding IAS (IFRS) EAS 22 Earnings per share IAS 33 EAS 23 Intangible assets IAS 38 EAS 24 Income taxes IAS 12 EAS 25 Financial instruments: disclosure and presentation IAS 32 superseded by IFRS 7 EAS 26 Financial instruments: recognition and measurement IAS 39 EAS 27 Interests in joint ventures IAS 31 EAS 28 Provisions, contingent assets and liabilities IAS 37 EAS 29 Business combinations IFRS 3 EAS 30 Interim financial reporting IAS 34 EAS 31 Impairment of assets IAS 36 EAS 32 Non-current assets held for sale and discontinued operations IFRS 5 EAS 33 Segment reporting IAS 14 EAS 34 Investment property IAS 40 EAS 35 Agriculture IAS 41 EAS 36 Exploration for and evaluation of mineral assets IFRS 6 EAS 37 Insurance contracts IFRS 4 EAS 38 Employee benefits IAS 19 EAS 39 Share-based payment IFRS 2