St
Content
ST.ROCKS COLLEGE OF COMMERCE & SCIENCE
PROJECT NAME ON INTERNATIONAL ACCOUNTING STANDARD
SUBJECT :- LOGISTIC MANAGEMENT SUBMITED TO :- PROF. JIGNESH MHETA SUBMITED BY :- ARPIT SONANI STD :- T.Y.BMS[V SEM] ROLL NO :- 1036 DATE :- 16/8/2010
Index
Introduction Elements of a high quality global financial reporting structure International Accounting Standards and Selected Middle East Stock Exchanges The Need for International Accounting Standards International Accounting Standards and Global Securities Exchange Markets International Accounting Standards and Middle East Countries
Introduction
Over the last two decades, the global financial landscape has undergone a significant transformation. These developments have been attributable, in part, to dramatic changes in the business and political climates, increasing global competition, the development of more market-based economies, and rapid technological improvements. At the same time, the world's financial centers have grown increasingly interconnected. Corporations and borrowers look beyond their home country's borders for capital. An increasing number of foreign companies routinely raise or borrow capital in U.S. financial markets, and U.S. investors have shown great interest in investing in foreign enterprises. This globalization of the securities markets has challenged securities regulators around the world to adapt to meet the needs of market participants while maintaining the current high levels of investor protection and market integrity. Our efforts to develop a global financial reporting framework have been guided by the cornerstone principle underlying our system of regulation -- pursuing our mandate of investor protection by promoting informed investment decisions through full and fair disclosure. Financial markets and investors, regardless of geographic location, depend on high quality information in order to function effectively. Markets allocate capital best and maintain the confidence of the providers of capital when the participants can make judgments about the merits of investments and comparable investments and have confidence in the reliability of the information provided. Because of increasing cross-border capital flows, we and other securities regulators around the world have an interest in ensuring that high quality, comprehensive information is available to investors in all markets. We stated this view in 1988, when we issued a policy statement that noted that "all securities regulators should work together diligently to create sound international regulatory frameworks that will enhance the vitality of capital markets." We have applied this approach in a number of instances, including our recent adoption of the International Disclosure Standards developed by the International Organization of Securities Commissions (IOSCO) for non-financial statement information. Our decision to adopt the International Disclosure Standards was based on our conclusion that the standards
were of high quality and that their adoption would provide information comparable to the amount and quality of information that U.S. investors receive today. Currently, issuers wishing to access capital markets in different jurisdictions must comply with the requirements of each jurisdiction, which differ in many respects. We recognize that different listing and reporting requirements may increase the costs of accessing multiple capital markets and create inefficiencies in cross-border capital flows. Therefore, we are working with other securities regulators around the world to reduce these differences. To encourage the development of accounting standards to be considered for use in cross-border filings, we have been working primarily through IOSCO, and focusing on the work of the International Accounting Standards Committee (IASC). Throughout this effort, we have been steadfast in advocating that capital markets operate most efficiently when investors have access to high quality financial information. However, ensuring that high quality financial information is provided to capital markets does not depend solely on the body of accounting standards used. An effective financial reporting structure begins with a reporting company's management, which is responsible for implementing and properly applying generally accepted accounting standards. Auditors then have the responsibility to test and opine on whether the financial statements are fairly presented in accordance with those accounting standards. If these responsibilities are not met, accounting standards, regardless of their quality, may not be properly applied, resulting in a lack of transparent, comparable, consistent financial information.
ELEMENTS OF A HIGH QUALITY GLOBAL FINANCIAL REPORTING STRUCTURE
High Quality Accounting Standards
High quality accounting standards are critical to the development of a high quality global financial reporting structure. Different accounting traditions have developed around the world in response to varying needs of users for whom the financial information is prepared. In some countries, for example, accounting standards have been shaped primarily by the needs of private creditors, while in other countries the needs of tax authorities or central planners have been the predominant influence. In the United States, accounting standards have been developed to meet the needs of participants in the capital markets. U.S. accounting standards provide a framework for reporting that seeks to deliver transparent, consistent, comparable, relevant and reliable financial information. Establishing and maintaining high quality accounting standards are critical to the U.S. approach to regulation of capital markets, which depends on providing high quality information to facilitate informed investment decisions. High quality accounting standards consist of a comprehensive set of neutral principles that require consistent, comparable, relevant and reliable information that is useful for investors, lenders and creditors, and others who make capital allocation decisions. High quality accounting standards are essential to the efficient functioning of a market economy because decisions about the allocation of capital rely heavily on credible and understandable financial information. When issuers prepare financial statements using more than one set of accounting standards, they may find it difficult to explain to investors the accuracy of both sets of financial statements if significantly different operating results, financial positions or cash flow classifications are reported under different standards for the
same period. Questions about the credibility of an entity's financial reporting are likely where the differences highlight how one approach masks poor financial performance, lack of profitability, or deteriorating asset quality. The efficiency of cross-border listings would be increased for issuers if preparation of multiple sets of financial information was not required. However, the efficiency of capital allocation by investors would be reduced without consistent, comparable, relevant and reliable information regarding the financial condition and operating performance of potential investments. Therefore, consistent with our investor protection mandate, we are trying to increase the efficiency of cross-border capital flows by seeking to have high quality, reliable information provided to capital market participants.
High Quality Auditing Standards
The audit is an important element of the financial reporting structure because it subjects information in the financial statements to independent and objective scrutiny, increasing the reliability of those financial statements. Trustworthy and effective audits are essential to the efficient allocation of resources in a capital market environment, where investors are dependent on reliable information. Quality audits begin with high quality auditing standards. Recent events in the United States have highlighted the importance of high quality auditing standards and, at the same time, have raised questions about the effectiveness of today's audits and the audit process. We are concerned about whether the training, expertise and resources employed in today's audits are adequate. Audit requirements may not be sufficiently developed in some countries to provide the level of enhanced reliability that investors in U.S. capital markets expect. Nonetheless, audit firms should have a responsibility to adhere to the highest quality auditing practices -- on a world-wide basis -- to ensure that they are performing effective audits of global companies participating in the international capital markets. To that end, we believe all member or affiliated firms performing audit work on a global audit client should follow the same body of high quality auditing practices even if adherence to these higher practices is not required by local laws. Others have expressed similar concerns.
Audit Firms with Effective Quality Controls
Accounting and auditing standards, while necessary, cannot by themselves ensure high quality financial reporting. Audit firms with effective quality controls are a critical piece of the financial reporting infrastructure. Independent auditors must earn and maintain the confidence of the investing public by strict adherence to high quality standards of professional conduct that assure the public that auditors are truly independent and perform their responsibilities with integrity and objectivity. As the U.S. Supreme Court has stated: "It is not enough that financial statements be accurate; the public must also perceive them as being accurate. Public faith in the reliability of a corporation's financial statements depends upon the public perception of the outside auditor as an independent professional...."6 In addition, audit firms must ensure that their personnel comply with all relevant professional standards. The quality control policies and procedures applicable to a firm's accounting and auditing practice should include elements such as:7
y y y y y
independence, integrity and objectivity; personnel management, including proper training and supervision; acceptance and continuance of clients and engagements; engagement performance; and monitoring.
A firm's system of quality control should provide the firm and investors with reasonable assurance that the firm's partners and staff are complying with the applicable professional standards and the firm's standards of quality. Historically, audit firms have developed internal quality control systems based on their domestic operations. However, as clients of audit firms have shifted their focus to global operations, audit firms have followed suit and now operate on a world-wide basis. Therefore, quality controls within audit firms that rely on separate national systems may not be effective in a global operating environment. We are concerned that audit firms may not have developed and maintained adequate internal quality control systems at a global level.
Profession-Wide Quality Assurance
The accounting profession should have a system to ensure quality in the performance of auditing engagements by its members. Necessary elements of the system include:
y y
y
providing continuing education and training on recent developments; providing an effective monitoring system to ensure that: o firms comply with applicable professional standards; o firms have reasonable systems of quality control; o there is an in-depth, substantive and timely study of firms' quality controls, including reviews of selected engagements; o deficiencies and/or opportunities for improvements in quality controls are identified; and o results of monitoring are communicated adequately to the appropriate parties. providing an effective and timely disciplinary process when individuals or firms have not complied with applicable firm or professional standards.
In some jurisdictions the local accounting profession may have a system of quality assurance. However, structures focused on national organizations and geographic borders do not seem to be effective in an environment where firms are using a number of affiliates to audit enterprises in an increasingly integrated global environment.
Active Regulatory Oversight
The U.S. financial reporting structure has a number of separate but interdependent elements, including active regulatory oversight of many of these elements, such as registrants' financial reporting, private sector standard-setting processes and selfregulatory activities undertaken by the accounting profession. Each of these elements is essential to the success of a high quality financial reporting framework. This oversight reinforces the development of high quality accounting and auditing standards and focuses them on the needs of investors. It provides unbiased third party scrutiny of self-regulatory activities. Regulatory oversight also reinforces the application of accounting standards by registrants and their auditors in a rigorous and consistent manner and assists in ensuring a high quality audit function.
International Accounting Standards and Selected Middle East Stock Exchanges
In an effort to generate comparable and reliable accounting information to help investors, creditors and others, each country has developed its own national financial accounting standards. These standards reflect the culture, history, and the characteristics of accounting problems facing that country. In some countries, the professional bodies formulate the financial accounting standards, while in many others governments and regulators establish these standards. As a result, much of the 20th century had witnessed a high degree of variation in the international accounting practices. International accounting diversity was one of the topics discussed in the tenth International Congress of Accountants in 1972. Accounting bodies of some countries attending the meeting were concerned in reducing the degree of variation in international accounting practices. As a result, in 1973, the International Accounting Standards Committee (IASC) was formed. The founders of this Committee included accounting bodies from Australia, Canada, France, Japan, Mexico, Netherlands, West Germany, the United States, United Kingdom and Ireland. Harmonization of accounting standards around the world was one of the main objectives of this Committee. Harmonization can be defined as the process of reducing the degree of variation in international accounting practices.
Once established, the IASC started the process of developing the International Accounting Standards (IASs). The first exposure draft and the first international accounting standard appeared in 1974. In its early years the IASC concentrated on the development of the international accounting standards. The Committee had issued 13 International Accounting Standards between 1974 and 1979. However there was little success, if any, with respect to the harmonization goal because of lack of enforcement. The IASC was a private organization and its members included accounting bodies from various countries. Adoption of International Accounting Standards by different countries was not enforceable by this Committee. Even though the member bodies pledged to cooperate with the IASC,
the accounting standard setting bodies of most countries did not adopt these standards during the early years. The two main reasons for this were:
(a) (b)
International Accounting Standards were not comprehensive enough, and International Accounting Standards were very flexible. They provided alternative options to accountants to deal with one accounting issue.
During later years the IASC addressed these issues. In 1987 the Comparability Project was undertaken to reduce the number of options allowed by the International Accounting Standards. In 1993, the project was completed and ten of the revised standards were approved. The International Organization of Securities Exchange Commissions (IOSCO) had been pressuring the IASC to develop a comprehensive set of Core Standards. In 1995, the IASC and the IOSCO¶s Technical Committee reached an agreement on a work plan for a set of forty Core Standards. Upon successful completion of these standards, IOSCO agreed to endorse IASs in all global markets. The IASC completed the development of these forty Core Standards by 1999. Recently IASC experienced a structural change similar to the structure of Financial Accounting Standards Board (FASB) of the United States. In March 2000, a new IASC constitution was approved and the name of the international standard setting body was changed to International Accounting Standards Board (IASB). The new board (IASB) reports to IASC Foundation and assumed its duties in April 2001.
This paper provides a brief history of international accounting standards and makes a modest attempt to evaluate the adoption of International Accounting Standards for listing purposes by the selected Middle East securities markets. The remainder of this paper is organized as follows: The first section discusses the need for establishing IASs. The second Section outlines the need for IASs in the global securities exchange markets, while the third section discusses this issue for some selected Middle East securities exchanges. The fourth section contains concluding remarks.
The Need for International Accounting Standards
As we start the new millennium, international economic activity along with other international activities has been increasing at a very rapid rate. International trade, capital movements between countries, international investment, number of multinational firms, and international bond and equity offerings exhibited a huge growth over the last decade. Table I shows International Equity Offerings made by companies from five geographic regions for years 1995 and 1999. As observed, the value of equity offerings for the total market increased from $57,725 million to $151,887 million. This represents an increase of almost three times. The volumes of activity for North America, Europe, and Asia-Pacific are more notable. The volumes of activity for Latin America and Africa-Middle East regions are low when compared to the other three regions. This is normal because most of the multinational companies which engage in equity offerings are headquartered in more developed countries. These companies are continuously seeking higher returns and growth and less costly financing. In their quest for higher returns and cheaper financing, they have to consider international alternatives. In order to evaluate these alternatives intelligently they need reliable and comparable information. Dealing with accounting diversity and the requirements of different national accounting standards was a major and costly problem for these companies. If all countries of the world employ the same accounting standards, such as international accounting standards, multinational companies stand to gain tremendously. Another interest group, who could benefit from the global harmonization of accounting principles, is the international investor. With the arrival of high-tech computers and information age massive amounts of international financial information is available on the Internet. More and more institutional and individual investors are interested in making international investments.
Other groups, which may be interested in universal harmonization of accounting principles, include international filer companies, international accounting firms, international intergovernmental organizations, governments and regulating bodies, and financial markets. A short discussion of these groups is as follows: A. Some companies listed in the large stock exchanges are not multinationals but they are interested in raising additional funds and trading securities with favorable terms. However, the regulating bodies of stock exchanges, such as the Securities Exchange Commission (SEC) in the USA, place restrictive filing requirements. Usually they require financial statements to be prepared according to the domestic financial reporting standards. Adoption of the IASs would remove such restrictions. B. International accounting firms constitute another group. They provide auditing and consulting services in many countries. In order to perform these services, they must possess expertise in the area of domestic financial accounting principles and the related laws. Development of this expertise is very costly to these firms and global harmonization of accounting principles would likely to reduce these costs substantially. C. International intergovernmental organizations, such as United Nations (UN), European Union (EU), and the Organization for Economic Cooperation and Development (OECD), are also interested in obtaining comparable financial information. These organizations need to evaluate projects, extend credits and make other decisions about the different nations of the world. Worldwide accounting principles would produce comparable financial information needed by these organizations. D. Many developing countries as well as the Eastern European countries did not experience the problems of developed countries and their domestic accounting standards are not very comprehensive. If the governments and/or accounting regulating bodies of these countries adopt international accounting standards as their national standards they can not only have a comprehensive set of standards but also may have easier access to international financing sources. E. International accounting standards can be very important for the development of global financial markets, especially for stock exchanges. This will be discussed in more detail in the next section.
International Accounting Standards and Global Securities Exchange Markets
The increase in international financing activity and the availability of massive amounts of global financial information through the Internet have caused some large stock exchanges to become internationalized. Table II shows the number of domestic and foreign listed companies in the Stock Exchanges of the countries where there are at least 100 foreign listed companies. United Kingdom, NYSE and Nasdaq of USA have more than 400 foreign listed companies. Stock Exchanges of Germany and Luxembourg include more than 200 foreign listed companies. The last column shows the number of foreign companies as a percentage of total listed companies. In the Luxembourg Stock Exchange 80% of total companies are foreign listed companies. These markets are on the way to becoming truly global markets. Internationalization of stock exchanges can receive a boost if all stock exchanges require financial statements prepared according to International Accounting Standards. This is why the International Organization of Securities Commissions (IOSCO) is so interested in the international accounting standards and has pressured the IASC to undertake the Core Standards Project. After the completion of Core Standards by the IASC, the IOSCO began the assessment of these standards. Eventually the IOSCO completed the evaluation and recommended that its members should permit the incoming multinational issuers to use 30 of these standards. This endorsement by IOSCO was a turning point in support of the IASC¶s activities. As a result, more and more stock exchanges are expected to accept the financial statements that are prepared according to IASs for filing purposes. In fact with the exception of United States all the countries listed in Table II have permitted the foreign companies to use IAS financial statements for listing purposes. In the United States the Securities and Exchange Commission (SEC) requires that the foreign companies must provide reconciliation to U.S.
financial accounting standards if they submit IAS financial statements for listing purposes. The countries listed in Table II are highly developed western countries. Obviously this is not a coincidence. The stock exchanges of less developed countries have a lower number of foreign listed companies. Most of these countries need to attract foreign capital in order to increase the rate of their development. The remaining parts of this paper will discuss the use of international accounting standards in the stock exchanges of the Middle Eastern countries. Most of these countries are developing nations and they are faced with many economic problems. Allowing IAS financial statements for filing purposes may provide a boost to the securities exchanges of these countries in attracting foreign companies.
International Accounting Standards and Middle East Countries
The Middle Eastern countries have many similarities as well as some important differences. Countries like Egypt and Turkey have developing economies and are in need of capital accumulation whereas oil rich countries such as Saudi Arabia and Kuwait have enough capital to invest in foreign markets. In either case these countries need to develop their stock markets and the use of the International Accounting Standards can help them in this regard.
To conduct this study we used the data compiled by International Accounting Standards Committee, currently called International Accounting Standards Board (IASB) [1]. We used the IASB data, which have some shortcomings. The data for some countries seemed to be quite up to date while other countries were not. We sought information on whether the accounting bodies of the countries are members of the International Federation of Accountants (IFAC), on how accounting principles (standards) are determined, and about the acceptability of international accounting standards for listing purposes in the stock markets. In addition we tried
to obtain data about the number of domestic as well as the number of foreign companies listed in these stock exchanges. For this purpose we also utilized the data collected by International Federation of Stock Exchanges (recently changed its name to World Federation of Stock Exchanges). For some countries we were able to obtain data on all of these items, while for some other countries information was available on certain items only. We were not able to obtain any information for few countries. That is why the title of this paper includes the term ³selected stock exchanges.´
Table III shows a summary of the information available for the Middle East countries. The first column indicates whether the country¶s accounting body is a member of the IFAC or not. The second column shows the acceptability of international accounting standards in the stock exchanges. The third column presents information about the accounting principles (standards) applicable within the country. The fourth and fifth columns indicate the number of listed domestic companies and foreign companies, respectively. The countries for which we were not able to obtain any information include Algeria, Oman, Qatar and United Arab Emirates. For Iraq, Libya and Sudan only IFAC membership information was available. For Egypt, Israel, Kuwait and Turkey we were able to find information on all five items we inquired. The remaining countries listed in Table III missed at least one item of information. On the critical item of acceptability of international accounting standards (column two) we were able to find data about Egypt, Iran, Israel, Jordan, Kuwait and Turkey. In addition, the information about accounting principles applicable in Syria and Tunisia indicates that they are similar to international accounting standards. The data on the number of listed domestic and foreign companies can be used as an indicator of the size and also the degree of internationalization of these stock exchanges.
Bibliography
www.wikipedia.com www.google.com www.infossek.com www.bmscampus.com
PROJECT NAME ON INTERNATIONAL ACCOUNTING STANDARD
SUBJECT :- LOGISTIC MANAGEMENT SUBMITED TO :- PROF. JIGNESH MHETA SUBMITED BY :- ARPIT SONANI STD :- T.Y.BMS[V SEM] ROLL NO :- 1036 DATE :- 16/8/2010
Index
Introduction Elements of a high quality global financial reporting structure International Accounting Standards and Selected Middle East Stock Exchanges The Need for International Accounting Standards International Accounting Standards and Global Securities Exchange Markets International Accounting Standards and Middle East Countries
Introduction
Over the last two decades, the global financial landscape has undergone a significant transformation. These developments have been attributable, in part, to dramatic changes in the business and political climates, increasing global competition, the development of more market-based economies, and rapid technological improvements. At the same time, the world's financial centers have grown increasingly interconnected. Corporations and borrowers look beyond their home country's borders for capital. An increasing number of foreign companies routinely raise or borrow capital in U.S. financial markets, and U.S. investors have shown great interest in investing in foreign enterprises. This globalization of the securities markets has challenged securities regulators around the world to adapt to meet the needs of market participants while maintaining the current high levels of investor protection and market integrity. Our efforts to develop a global financial reporting framework have been guided by the cornerstone principle underlying our system of regulation -- pursuing our mandate of investor protection by promoting informed investment decisions through full and fair disclosure. Financial markets and investors, regardless of geographic location, depend on high quality information in order to function effectively. Markets allocate capital best and maintain the confidence of the providers of capital when the participants can make judgments about the merits of investments and comparable investments and have confidence in the reliability of the information provided. Because of increasing cross-border capital flows, we and other securities regulators around the world have an interest in ensuring that high quality, comprehensive information is available to investors in all markets. We stated this view in 1988, when we issued a policy statement that noted that "all securities regulators should work together diligently to create sound international regulatory frameworks that will enhance the vitality of capital markets." We have applied this approach in a number of instances, including our recent adoption of the International Disclosure Standards developed by the International Organization of Securities Commissions (IOSCO) for non-financial statement information. Our decision to adopt the International Disclosure Standards was based on our conclusion that the standards
were of high quality and that their adoption would provide information comparable to the amount and quality of information that U.S. investors receive today. Currently, issuers wishing to access capital markets in different jurisdictions must comply with the requirements of each jurisdiction, which differ in many respects. We recognize that different listing and reporting requirements may increase the costs of accessing multiple capital markets and create inefficiencies in cross-border capital flows. Therefore, we are working with other securities regulators around the world to reduce these differences. To encourage the development of accounting standards to be considered for use in cross-border filings, we have been working primarily through IOSCO, and focusing on the work of the International Accounting Standards Committee (IASC). Throughout this effort, we have been steadfast in advocating that capital markets operate most efficiently when investors have access to high quality financial information. However, ensuring that high quality financial information is provided to capital markets does not depend solely on the body of accounting standards used. An effective financial reporting structure begins with a reporting company's management, which is responsible for implementing and properly applying generally accepted accounting standards. Auditors then have the responsibility to test and opine on whether the financial statements are fairly presented in accordance with those accounting standards. If these responsibilities are not met, accounting standards, regardless of their quality, may not be properly applied, resulting in a lack of transparent, comparable, consistent financial information.
ELEMENTS OF A HIGH QUALITY GLOBAL FINANCIAL REPORTING STRUCTURE
High Quality Accounting Standards
High quality accounting standards are critical to the development of a high quality global financial reporting structure. Different accounting traditions have developed around the world in response to varying needs of users for whom the financial information is prepared. In some countries, for example, accounting standards have been shaped primarily by the needs of private creditors, while in other countries the needs of tax authorities or central planners have been the predominant influence. In the United States, accounting standards have been developed to meet the needs of participants in the capital markets. U.S. accounting standards provide a framework for reporting that seeks to deliver transparent, consistent, comparable, relevant and reliable financial information. Establishing and maintaining high quality accounting standards are critical to the U.S. approach to regulation of capital markets, which depends on providing high quality information to facilitate informed investment decisions. High quality accounting standards consist of a comprehensive set of neutral principles that require consistent, comparable, relevant and reliable information that is useful for investors, lenders and creditors, and others who make capital allocation decisions. High quality accounting standards are essential to the efficient functioning of a market economy because decisions about the allocation of capital rely heavily on credible and understandable financial information. When issuers prepare financial statements using more than one set of accounting standards, they may find it difficult to explain to investors the accuracy of both sets of financial statements if significantly different operating results, financial positions or cash flow classifications are reported under different standards for the
same period. Questions about the credibility of an entity's financial reporting are likely where the differences highlight how one approach masks poor financial performance, lack of profitability, or deteriorating asset quality. The efficiency of cross-border listings would be increased for issuers if preparation of multiple sets of financial information was not required. However, the efficiency of capital allocation by investors would be reduced without consistent, comparable, relevant and reliable information regarding the financial condition and operating performance of potential investments. Therefore, consistent with our investor protection mandate, we are trying to increase the efficiency of cross-border capital flows by seeking to have high quality, reliable information provided to capital market participants.
High Quality Auditing Standards
The audit is an important element of the financial reporting structure because it subjects information in the financial statements to independent and objective scrutiny, increasing the reliability of those financial statements. Trustworthy and effective audits are essential to the efficient allocation of resources in a capital market environment, where investors are dependent on reliable information. Quality audits begin with high quality auditing standards. Recent events in the United States have highlighted the importance of high quality auditing standards and, at the same time, have raised questions about the effectiveness of today's audits and the audit process. We are concerned about whether the training, expertise and resources employed in today's audits are adequate. Audit requirements may not be sufficiently developed in some countries to provide the level of enhanced reliability that investors in U.S. capital markets expect. Nonetheless, audit firms should have a responsibility to adhere to the highest quality auditing practices -- on a world-wide basis -- to ensure that they are performing effective audits of global companies participating in the international capital markets. To that end, we believe all member or affiliated firms performing audit work on a global audit client should follow the same body of high quality auditing practices even if adherence to these higher practices is not required by local laws. Others have expressed similar concerns.
Audit Firms with Effective Quality Controls
Accounting and auditing standards, while necessary, cannot by themselves ensure high quality financial reporting. Audit firms with effective quality controls are a critical piece of the financial reporting infrastructure. Independent auditors must earn and maintain the confidence of the investing public by strict adherence to high quality standards of professional conduct that assure the public that auditors are truly independent and perform their responsibilities with integrity and objectivity. As the U.S. Supreme Court has stated: "It is not enough that financial statements be accurate; the public must also perceive them as being accurate. Public faith in the reliability of a corporation's financial statements depends upon the public perception of the outside auditor as an independent professional...."6 In addition, audit firms must ensure that their personnel comply with all relevant professional standards. The quality control policies and procedures applicable to a firm's accounting and auditing practice should include elements such as:7
y y y y y
independence, integrity and objectivity; personnel management, including proper training and supervision; acceptance and continuance of clients and engagements; engagement performance; and monitoring.
A firm's system of quality control should provide the firm and investors with reasonable assurance that the firm's partners and staff are complying with the applicable professional standards and the firm's standards of quality. Historically, audit firms have developed internal quality control systems based on their domestic operations. However, as clients of audit firms have shifted their focus to global operations, audit firms have followed suit and now operate on a world-wide basis. Therefore, quality controls within audit firms that rely on separate national systems may not be effective in a global operating environment. We are concerned that audit firms may not have developed and maintained adequate internal quality control systems at a global level.
Profession-Wide Quality Assurance
The accounting profession should have a system to ensure quality in the performance of auditing engagements by its members. Necessary elements of the system include:
y y
y
providing continuing education and training on recent developments; providing an effective monitoring system to ensure that: o firms comply with applicable professional standards; o firms have reasonable systems of quality control; o there is an in-depth, substantive and timely study of firms' quality controls, including reviews of selected engagements; o deficiencies and/or opportunities for improvements in quality controls are identified; and o results of monitoring are communicated adequately to the appropriate parties. providing an effective and timely disciplinary process when individuals or firms have not complied with applicable firm or professional standards.
In some jurisdictions the local accounting profession may have a system of quality assurance. However, structures focused on national organizations and geographic borders do not seem to be effective in an environment where firms are using a number of affiliates to audit enterprises in an increasingly integrated global environment.
Active Regulatory Oversight
The U.S. financial reporting structure has a number of separate but interdependent elements, including active regulatory oversight of many of these elements, such as registrants' financial reporting, private sector standard-setting processes and selfregulatory activities undertaken by the accounting profession. Each of these elements is essential to the success of a high quality financial reporting framework. This oversight reinforces the development of high quality accounting and auditing standards and focuses them on the needs of investors. It provides unbiased third party scrutiny of self-regulatory activities. Regulatory oversight also reinforces the application of accounting standards by registrants and their auditors in a rigorous and consistent manner and assists in ensuring a high quality audit function.
International Accounting Standards and Selected Middle East Stock Exchanges
In an effort to generate comparable and reliable accounting information to help investors, creditors and others, each country has developed its own national financial accounting standards. These standards reflect the culture, history, and the characteristics of accounting problems facing that country. In some countries, the professional bodies formulate the financial accounting standards, while in many others governments and regulators establish these standards. As a result, much of the 20th century had witnessed a high degree of variation in the international accounting practices. International accounting diversity was one of the topics discussed in the tenth International Congress of Accountants in 1972. Accounting bodies of some countries attending the meeting were concerned in reducing the degree of variation in international accounting practices. As a result, in 1973, the International Accounting Standards Committee (IASC) was formed. The founders of this Committee included accounting bodies from Australia, Canada, France, Japan, Mexico, Netherlands, West Germany, the United States, United Kingdom and Ireland. Harmonization of accounting standards around the world was one of the main objectives of this Committee. Harmonization can be defined as the process of reducing the degree of variation in international accounting practices.
Once established, the IASC started the process of developing the International Accounting Standards (IASs). The first exposure draft and the first international accounting standard appeared in 1974. In its early years the IASC concentrated on the development of the international accounting standards. The Committee had issued 13 International Accounting Standards between 1974 and 1979. However there was little success, if any, with respect to the harmonization goal because of lack of enforcement. The IASC was a private organization and its members included accounting bodies from various countries. Adoption of International Accounting Standards by different countries was not enforceable by this Committee. Even though the member bodies pledged to cooperate with the IASC,
the accounting standard setting bodies of most countries did not adopt these standards during the early years. The two main reasons for this were:
(a) (b)
International Accounting Standards were not comprehensive enough, and International Accounting Standards were very flexible. They provided alternative options to accountants to deal with one accounting issue.
During later years the IASC addressed these issues. In 1987 the Comparability Project was undertaken to reduce the number of options allowed by the International Accounting Standards. In 1993, the project was completed and ten of the revised standards were approved. The International Organization of Securities Exchange Commissions (IOSCO) had been pressuring the IASC to develop a comprehensive set of Core Standards. In 1995, the IASC and the IOSCO¶s Technical Committee reached an agreement on a work plan for a set of forty Core Standards. Upon successful completion of these standards, IOSCO agreed to endorse IASs in all global markets. The IASC completed the development of these forty Core Standards by 1999. Recently IASC experienced a structural change similar to the structure of Financial Accounting Standards Board (FASB) of the United States. In March 2000, a new IASC constitution was approved and the name of the international standard setting body was changed to International Accounting Standards Board (IASB). The new board (IASB) reports to IASC Foundation and assumed its duties in April 2001.
This paper provides a brief history of international accounting standards and makes a modest attempt to evaluate the adoption of International Accounting Standards for listing purposes by the selected Middle East securities markets. The remainder of this paper is organized as follows: The first section discusses the need for establishing IASs. The second Section outlines the need for IASs in the global securities exchange markets, while the third section discusses this issue for some selected Middle East securities exchanges. The fourth section contains concluding remarks.
The Need for International Accounting Standards
As we start the new millennium, international economic activity along with other international activities has been increasing at a very rapid rate. International trade, capital movements between countries, international investment, number of multinational firms, and international bond and equity offerings exhibited a huge growth over the last decade. Table I shows International Equity Offerings made by companies from five geographic regions for years 1995 and 1999. As observed, the value of equity offerings for the total market increased from $57,725 million to $151,887 million. This represents an increase of almost three times. The volumes of activity for North America, Europe, and Asia-Pacific are more notable. The volumes of activity for Latin America and Africa-Middle East regions are low when compared to the other three regions. This is normal because most of the multinational companies which engage in equity offerings are headquartered in more developed countries. These companies are continuously seeking higher returns and growth and less costly financing. In their quest for higher returns and cheaper financing, they have to consider international alternatives. In order to evaluate these alternatives intelligently they need reliable and comparable information. Dealing with accounting diversity and the requirements of different national accounting standards was a major and costly problem for these companies. If all countries of the world employ the same accounting standards, such as international accounting standards, multinational companies stand to gain tremendously. Another interest group, who could benefit from the global harmonization of accounting principles, is the international investor. With the arrival of high-tech computers and information age massive amounts of international financial information is available on the Internet. More and more institutional and individual investors are interested in making international investments.
Other groups, which may be interested in universal harmonization of accounting principles, include international filer companies, international accounting firms, international intergovernmental organizations, governments and regulating bodies, and financial markets. A short discussion of these groups is as follows: A. Some companies listed in the large stock exchanges are not multinationals but they are interested in raising additional funds and trading securities with favorable terms. However, the regulating bodies of stock exchanges, such as the Securities Exchange Commission (SEC) in the USA, place restrictive filing requirements. Usually they require financial statements to be prepared according to the domestic financial reporting standards. Adoption of the IASs would remove such restrictions. B. International accounting firms constitute another group. They provide auditing and consulting services in many countries. In order to perform these services, they must possess expertise in the area of domestic financial accounting principles and the related laws. Development of this expertise is very costly to these firms and global harmonization of accounting principles would likely to reduce these costs substantially. C. International intergovernmental organizations, such as United Nations (UN), European Union (EU), and the Organization for Economic Cooperation and Development (OECD), are also interested in obtaining comparable financial information. These organizations need to evaluate projects, extend credits and make other decisions about the different nations of the world. Worldwide accounting principles would produce comparable financial information needed by these organizations. D. Many developing countries as well as the Eastern European countries did not experience the problems of developed countries and their domestic accounting standards are not very comprehensive. If the governments and/or accounting regulating bodies of these countries adopt international accounting standards as their national standards they can not only have a comprehensive set of standards but also may have easier access to international financing sources. E. International accounting standards can be very important for the development of global financial markets, especially for stock exchanges. This will be discussed in more detail in the next section.
International Accounting Standards and Global Securities Exchange Markets
The increase in international financing activity and the availability of massive amounts of global financial information through the Internet have caused some large stock exchanges to become internationalized. Table II shows the number of domestic and foreign listed companies in the Stock Exchanges of the countries where there are at least 100 foreign listed companies. United Kingdom, NYSE and Nasdaq of USA have more than 400 foreign listed companies. Stock Exchanges of Germany and Luxembourg include more than 200 foreign listed companies. The last column shows the number of foreign companies as a percentage of total listed companies. In the Luxembourg Stock Exchange 80% of total companies are foreign listed companies. These markets are on the way to becoming truly global markets. Internationalization of stock exchanges can receive a boost if all stock exchanges require financial statements prepared according to International Accounting Standards. This is why the International Organization of Securities Commissions (IOSCO) is so interested in the international accounting standards and has pressured the IASC to undertake the Core Standards Project. After the completion of Core Standards by the IASC, the IOSCO began the assessment of these standards. Eventually the IOSCO completed the evaluation and recommended that its members should permit the incoming multinational issuers to use 30 of these standards. This endorsement by IOSCO was a turning point in support of the IASC¶s activities. As a result, more and more stock exchanges are expected to accept the financial statements that are prepared according to IASs for filing purposes. In fact with the exception of United States all the countries listed in Table II have permitted the foreign companies to use IAS financial statements for listing purposes. In the United States the Securities and Exchange Commission (SEC) requires that the foreign companies must provide reconciliation to U.S.
financial accounting standards if they submit IAS financial statements for listing purposes. The countries listed in Table II are highly developed western countries. Obviously this is not a coincidence. The stock exchanges of less developed countries have a lower number of foreign listed companies. Most of these countries need to attract foreign capital in order to increase the rate of their development. The remaining parts of this paper will discuss the use of international accounting standards in the stock exchanges of the Middle Eastern countries. Most of these countries are developing nations and they are faced with many economic problems. Allowing IAS financial statements for filing purposes may provide a boost to the securities exchanges of these countries in attracting foreign companies.
International Accounting Standards and Middle East Countries
The Middle Eastern countries have many similarities as well as some important differences. Countries like Egypt and Turkey have developing economies and are in need of capital accumulation whereas oil rich countries such as Saudi Arabia and Kuwait have enough capital to invest in foreign markets. In either case these countries need to develop their stock markets and the use of the International Accounting Standards can help them in this regard.
To conduct this study we used the data compiled by International Accounting Standards Committee, currently called International Accounting Standards Board (IASB) [1]. We used the IASB data, which have some shortcomings. The data for some countries seemed to be quite up to date while other countries were not. We sought information on whether the accounting bodies of the countries are members of the International Federation of Accountants (IFAC), on how accounting principles (standards) are determined, and about the acceptability of international accounting standards for listing purposes in the stock markets. In addition we tried
to obtain data about the number of domestic as well as the number of foreign companies listed in these stock exchanges. For this purpose we also utilized the data collected by International Federation of Stock Exchanges (recently changed its name to World Federation of Stock Exchanges). For some countries we were able to obtain data on all of these items, while for some other countries information was available on certain items only. We were not able to obtain any information for few countries. That is why the title of this paper includes the term ³selected stock exchanges.´
Table III shows a summary of the information available for the Middle East countries. The first column indicates whether the country¶s accounting body is a member of the IFAC or not. The second column shows the acceptability of international accounting standards in the stock exchanges. The third column presents information about the accounting principles (standards) applicable within the country. The fourth and fifth columns indicate the number of listed domestic companies and foreign companies, respectively. The countries for which we were not able to obtain any information include Algeria, Oman, Qatar and United Arab Emirates. For Iraq, Libya and Sudan only IFAC membership information was available. For Egypt, Israel, Kuwait and Turkey we were able to find information on all five items we inquired. The remaining countries listed in Table III missed at least one item of information. On the critical item of acceptability of international accounting standards (column two) we were able to find data about Egypt, Iran, Israel, Jordan, Kuwait and Turkey. In addition, the information about accounting principles applicable in Syria and Tunisia indicates that they are similar to international accounting standards. The data on the number of listed domestic and foreign companies can be used as an indicator of the size and also the degree of internationalization of these stock exchanges.
Bibliography
www.wikipedia.com www.google.com www.infossek.com www.bmscampus.com
