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

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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)

Key words: Egypt, Emerging Economies, Accounting Standards, Egyptian Accounting

Standards (EASs), Capital Market Authority, Egyptian Accounting Standard

Board (EASB), compliance, enforcements, IASs, IFRSs, standards-setting,

Corporate Governance

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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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 Government‘s 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

Zimbabwe‘s 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 nation‘s 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 nation‘s

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 country‘s 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 country‘s

needs rather than imitating a developed country‘s 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 country‘s 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 country‘s

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 Egypt‘s 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 CPA‘s 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).

35

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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