ACCOUNTING STANDARDS AND THE ARAB WORLD COUNTRIES
A PRESENTATION AT THE ANNUAL BANQUETS CANISIUS COLLEGE, BUFFALO, NEW YORK April 29,1987.
1. Introduction Mr. Chairman, Ladies and Gentlemen, It is a great pleasure for me to be here with you this evening and to be the guest speaker at your dinner. This evening I am going to consider some of the issues which have arisen as we attempt to introduce accounting standards into the Arab world. I am sure you are all aware of the economic significance of this region and its importance in the world economy. It occupies a total land area of about 8 million square miles, which by comparison is about 1 .5 times the landmass of the United States of America. It has a current population of about 180 million which is expected to grow to 300 million by the turn of the century and unlike many other parts of the developed word it will be primarily a young population. The most significant natural resource is oil where it is the biggest repository in the world, accounting for about 54% of total reserves. These proven reserves of almost 400 billion barrels mean that in terms of present consumption they will last well into the next century. In addition, of course, there are significant reserves of gases and other natural resources, for example, more than 50% of the world’s phosphate reserves are currently located there. More important for this evening’s discussion it consists of 22 independent countries each fiercely proud of its own independence and its right to manage its own affairs and to forge its own destiny. Within and between each individual country different cultures have emerged. Developments in business and commercial law have been largely influenced by political and historical events. With accounting, for example, in those countries where there has been a significant French influence, the codification approach has developed where all that has to be disclosed and in what fashion is embodied in a code of accounts. On the other hand in those countries where there has been an Anglo-Saxon influence, rather than incorporate specific rules into statutory regulation, general guides such as “true and fair” or “rarely represent” are relied upon, leaving it to the accountancy profession to develop accounting practices which properly reflect these general concepts. You will appreciate, therefore, the magnitude of the problem with which we are faced when dealing with such diverse countries. Despite their apparent differences, however, all of the Arab nations are conscious of their common heritage and are committed to economic and social cooperation e.g. one of the prime objectives of the Arab League is to “encourage economic and cultural cooperation”.
Within the Arab world itself there are beginning to develop larger economic trading units such as the Gulf Cooperation Council. If individual countries and these economic trading units are to develop to their full potential then it is absolutely essential that financial statements are prepared within a common framework which has at its base generally accepted accounting standards. 2. Need for accounting standards I think we are all aware that in order to achieve consistency, comparability and user confidence in financial statements, some boundaries have to be established which set the constraints and parameters within which the freedom to exercise judgment on accounting principles is operated. I would emphasize here that we are not seeking a single set of rigid rules, which have to be applied irrespective of the circumstances. It is impossible to do this and there will still be an overriding requirement to judge the application of such rules against the background of a broader concept such as “true and fair” or “fairly represents”. The need for accounting standards is one, which we all accept nationally. With the growth in international trade and the development of international capital markets there is also a need internationally to raise the level of the accounting practice and at the same time to obtain greater harmonization in the preparation of financial statements. In the Arab world we see this as an immediate priority, which is why we attach particular importance to developing relationships with such bodies as WAC and IASC. 3. Conditions necessary for the introduction of accounting standards Our experience to date has taught us that in the Arab world -and I suspect this is true all over- certain conditions have to be present for the effective introduction of accounting standards. 4. Responsive government The first and perhaps the most important is that government is responsive to the need for such standards. It is governments, which lay down the rules for the preparation and presentation of financial statements, and it is also governments that license auditors to verify that such rules and regulations have been adhered to. Until recently our governments did not often give a high priority to accounting nor fully appreciate its role in economic development. These could be seen by the little attention which was given to accounting matters and in the often loose away in which governments for example regulated the appointment of, or changes in, auditors. Requirements for the filing of financial statements were often not rigorously enforced and the absence of tax legislation did not help. There is little doubt that in those countries with a varied and complex fiscal system the services of the accountant both within and outside government is more easily understood and apprecaited, as the accountant has not been confined to government but his/her work also extends to a considerable part of the general public. The negative attitude towards the role of the accountant has not been confined to government but also extends to a considerable part of the general public . The reasons for this are many but essentially it has been a problem of communication. Accounting information is technical and often only understandable to specialists, even when presented to the sophisticated user-and these are relatively few. Accounting information
has often been incomplete so even the accountant has found it misleading and difficult to interpret. In the Arab world there has been the added problem that the terminology used has been neither consistent nor comprehensive. It was this which led me to publish my Arab/English Dictionary of Accounting as a necessary first step towards overcoming this problem. However, governments are now more responsive. The onset of recession and widespread bankruptcies has led to increasing government concern about the role of the profession and drawn it to the forefront of attention and also subjected it to widespread criticism. Many have been asking the same questions; where were the auditors, why is the accounting profession lacking in accountability, and why is there such a wide disparity in the quality and standard of services which accountants offer? I would have preferred this increased awareness and responsiveness to have been occasioned by more positive factors. Nevertheless it has presented an opportunity for us to convince our governments of the need for accounting standards. 5. Public support The second necessary condition which is closely linked with the first is public support. Government is only one — albeit an important one — of the users of financial statements and the negative attitude which I have referred to earlier has also extended to a considerable part to the public in general and business in particular. It is not really surprising that users do not place too high a value on what they perceive to be unreliable information, especially where the lack of adequate accounting standards means that in many cases management has too great an influence on the form and content of financial statements which are often regarded as reports by management rather than reports on management. It is considerably easier to obtain the adoption of accounting standards when there is support from the public at large. This is not unique to the Arab world. Note how in the United Kingdom and here in the USA the support for an accounting standard which would better reflect changing money values in financial statements has steadily declined as inflation itself has declined and with it public interest in the matter. 6. Recognized Professional Society A third condition for the introduction of accounting standards is an active recognized professional accounting society which will promote their adoption. It is essential that there exists an established professional society that can develop and promulgate standards and establish an ethical code which has strong persuasive authority. It must be a society that can hold out to the public at large that its members are truly professionals and which can speak on the profession’s behalf and represent it in dealings with government and other interested parties. Although in some Arab countries professional organizations had been in existence for some time, none had emerged with a pan-Arab nature of a sufficient stature. The Arab Society of Certified Accountants was established to fill this vacuum. Its pan-Arab education and training and ethical requirements will stand comparison with the rest of the world. Its council consists of leading accountants from all of the Arab countries and it is a full member of IFAC.
It is not the intention of the Arab Society to re-invent the wheel and it will start with these standards which have been developed elsewhere and which it feels are particularly appropriate for its needs. Indeed, its commitment to IASC means that it will be promoting the adoption of all international accounting standards — again provided they are apposite to its needs. I have spent a great deal of my time speaking at conferences and talking to governments on the advantages of the adaptation and adoption of the pronouncements of IFAC and IASC and although it has been a difficult task, I believe we are beginning to get somewhere. 7. Implementation of accounting standards Of course constructing accounting standards for the Arab world whether they are new or suitably amended IASC standards is only the first step. The next is to get their implementation and we are tackling this problem on both voluntary and mandatory fronts, both of which we see as complementary to each other rather than mutually exclusive. 8. Voluntary approach Through the Arab Society and the many sister national societies with which it has a special relationship, we are seeking to persuade all members to adopt standards — once they have been approved — and to apply them in the preparation of financial statements. In essence we are hoping to achieve compliance which is about the minimum level demanded by the law. We do not underestimate the difficulties in trying to do this but we believe it to be very much worthwhile. Often for sound political reasons, and also to give time for the necessary adjustments to take place, the law is set initially at the level of the lowest common denominator. There is, therefore, a need to continually try to improve upon this. I believe that one of the hallmarks of a professional society is that its members accept standards of behavior and performance above the law. It is in this way that they demonstrate the right to continue to hold public trust and confidence, which is necessary for any self-regulated body. We are aware also of the problems which this will create for our clients and the need to adopt an evolutionary rather than a revolutionary approach. A considerable effort is needed to explain to the public in general and the business community in particular the need for and the purpose of such standards. Social attitudes and norms in the Arab world regard business affairs as being very personal and private to the individual and the family. Many public companies have grown out of family businesses and this concept of privacy still remains. Understandably then, suggestions of greater disclosure in the interests of public accountability are viewed with suspicion. You can imagine the delicate situation in terms of client relationship faced when recommending the adoption of a particular approach, when the client can point to a competitor firm which is prepared to agree to something different. I spend a great deal of my time talking to chambers of commerce and businessmen’s clubs on this and related matters and the barriers are slowly breaking down and will continue to do so particularly as Arab companies begin to take a more and more active role in the international capital markets. It is not only, of course, preparers and users that have to be convinced because I regret to say there are many accountants and auditors who are not willing or able to conform to the
discipline imposed by accounting standards and are content to apply their own interpretation and not necessarily a consistent one, of what constitutes minimum compliance with the law — where such law exists. 9. Mandatory Approach The mandatory approach requires governments to incorporate into their legislation or other rules the requirements to comply with certain specified standards. In the past some governments have been slow to act and therefore, the situation is not helped by the weak and often loose statutory reporting disclosure requirements which exist in many countries and the role of the auditor in relation to these. There is nevertheless, as I have already indicated, an increasing awareness by governments of their responsibility in this respect because of the financial problems and crises which have affected many companies and financial markets and because of the necessity to make better use of resources if plans for the development and growth of the economies are to be sustained. We are building upon this and using it to promote the official adoption of appropriate standards. We are not so naïve as to believe that the majority of contentious issues will be resolved because accounting standards are in existence — the gray area may be narrowed but it certainly will not be eliminated. There will still be many circumstances where different interpretations will be placed on the application of standards and further guidance will be required. You will be aware, I am sure, of the various interpretation problems which the application of FASB standards in your own country and IASC standards in the United Kingdom have given rise to. Should we introduce accounting standards for specific industries in addition to standards in general? Should we introduce statements of recommended accounting practice as guides rather than standards for areas where there is not sufficient consensus amongst the profession as to exactly what the correct standard should be? These are all matters which are still being discussed and have yet to be resolved. 10. Auditing implications We are also aware that a necessary concomitant of accounting standards is auditing guidelines. Here again we look to IFAC to help us to accelerate progress in this respect. We are all aware of the excellent work which IFAC is doing in the field of auditing and how much progress its auditing practices committee has made issuing guidelines on generally accepted auditing practices and on the form and content of audit reports so that the quality and uniformity of auditing practices throughout the world can be improved. This is an essential task particularly in the Arab world where the accounting profession lacks homogeneity and contains a wide range of qualities. At one end of the spectrum we have those Arab firms which can provide a quality of service to stand comparison against the best which is offered elsewhere. At the other end however are those which lack the quality and standards of professional competence which the public is entitled to expect from a profession. Attempts to introduce and enforce the application of accounting standards can only have very limited success if indeed any at all without a high quality independent auditing
profession with its own ethical and professional standards. I believe that a well-organized auditing profession is a virtual precondition for the successful introduction of accounting standards and the presentation of informative and useful financial statements. Auditing is the foundation upon which accounting standards are based and the building of such a foundation needs the support of public, government and users. Here again progress is being made. II. Conclusion Let me conclude by once again thanking you for giving me the opportunity to share my view with you this evening. The Arab world provides a challenging and exciting environment in which there is great opportunity to initiate change. You will have gathered that I am convinced that the most important contribution which can be made to assist the introduction of accounting standards, and also for many other matters is the creation for a professional accounting society of the highest quality. A professional society that is truly pan-Arab in nature and which commands authority and respect both within and outside the Arab worlds. This is what we intend the Arab Society of Certified Accountants will be. Such a task requires considerable commitment but it is well worth the benefits which will accrue both to the Arab people and also the world accounting profession.