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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
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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
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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 Governments decision to nationalise the core industries till
1990 when the Government moved from socialist to market economy by
economic reforms, privatization and changes in the regulatory environment.
The two stock exchanges were very active till the 1940s. However, the central
planning and socialist policies, adopted since the 1950s, led to a drastic
reduction in activity on the Egyptian stock exchanges for four decades. The
Egyptian stock market till the late 1980s was not prepared to execute
privatisation transactions. In the 1990s, capital market reform became
mandatory with the move towards a free market economy and the privatisation
programme.

The Capital Market Law No. 95 of 1992 was promulgated in 1992 and
came into effect in 1993 through the issuance of its Executive Regulations.
According to Law No. 95 of 1992, the Capital Market Authority (CMA) was given
sole control over supervising the securities market, including Alexandria and
Cairo Stock Exchanges. The Capital Market Law introduced new roles and
functions for the CMA. These include monitoring the performance of exchanges
and enforcement of listing and trading regulations. The CMA also monitors
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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,
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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
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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
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ministerial decree. A new set of EASs were issued based on the Decree No.
243/2006 of the Minister of Investment where the old standards issued under
the two ministerial decrees Nos. 503/1997 and 345/2002 have been replaced,
and are mandatory for all listed joint stock companies in Egypt, and it is
expected that the new set of EASs will help to improve the application of
principles of good corporate governance by listed companies. Again, the latest
Income Tax Act No. 91/2005 requires that net profits for tax purposes be based
on the accounting profit in the audited financial statements which are prepared
under these EASs. Subsequent revisions were also made by Ministerial
Decrees, and currently, a total of 39 EASs have been prepared on the basis of
IFRS (Farag, 2009). Till 2009, the total number of such adopted accounting
standards (called EASs) is 39 and since 1998, all listed companies in Egypt are
required to comply with these EASs. In 2007, the new Egyptian Accounting
Standards were issued as per the decree of the Minister of Investment,
no.243/2006 to replace current ones issued under the two ministerial decrees
no. 503/1997 and 345/2002. If a careful comparison between the accounting
standards as adopted by the permanent committee for Accounting and
Auditing Standards and IASs is made, it will be found that there is no deviation
of the adopted accounting standards and the IASs (except some minor
difference). As a result it can be argued that the EASs are the outcomes of the
wholesale adoption of the IASs.

If a careful comparison between the accounting standards as adopted by
the CMA and IASs/ISRSs is made, it will be found that there is no significant
deviation of the adopted accounting standards and the IASs. Here the authors
like to urge upon the national government of Egypt for the creation of a
mechanism (separate standard-setting agency) which will be authorised to
develop and promulgate accounting standards. The standard-setting process
adopted by the CMA is eventually a closed-door process and interested users of
accounting information do not have any chance to participate in the standard
setting process.
19

It has already mentioned that the CMA has established a Permanent
Committee with the responsibility of making selection of IASs that are related
to the national regulations. The Permanent Committee of the CMA selects a
particular International Accounting Standard for issuance in order of priority.
The Committee reviews the IASs and where necessary adopts the IASs. The
Permanent Committee prepare a draft standard for the adopted accounting
standard subject to the consideration of the Ministry. The comments and
suggestions received on the draft are examined by the Permanent Committee
and the standards are reviewed and modified where necessary to conform to
local statutory regulations. Finally, the Ministry for approval forwards modified
draft standards and upon approval it becomes operational from a specified date
and the draft standard becomes national accounting standards in Egypt.

This section now outlines the proposed structure of institutional
arrangements for standard-setting in Egypt. Where the standard-setting
process is in the hand of the national accounting profession or CMA, the
accounting profession was accused of monopolising the standard-setting
process while not representing the majority of the users of financial
statements. It can be observed that the accounting profession in Egypt due to
absence of recognition of accounting services as instrumental to economic
development has to take the initiative for standardisation of the accounting and
auditing practices as a matter of self-regulation only. Experiences from other
countries have shown that this kind of arrangement (self-regulation) cannot be
appropriate for the development of sound accounting standard (e.g., UK, USA
and Australia). In order to avoid the seemingly undue influence of the ESAA on
the standard-setting process, a private sector organisation, the Egyptian
Accounting Standard Board (EASB) is proposed by the authors. This board
needs to be established in order to improve the enforceability of the accounting
standards in Egypt. The EASB should possess the authority to issue
accounting standards on its own authority with representation of accountancy
20
profession, the major interested groups, and the users including the
government. The Capital Market Authority (CMA) of Egypt is the supreme
corporate regulator in Egypt. The CMA will delegate the responsibility for
standard-setting to the proposed EASB. The proposed Egyptian Accounting
Standard Board (EASB) should be created under the statute by virtue of the
Capital Market Act.

The Proposed EASB should develop a conceptual framework which will
set out the concepts that underlie the preparation of the financial statements
for external users. At the same time the proposed EASB should constitute a
committee to review all IASs/IFRSs to be adopted or already adopted by the
CMA. After thorough review these IASs/IFRSs, these should be considered for
the issuance. Before the issuance, these IASs/IFRSs must be modified after
due consideration of the specific requirements of Egypt (e.g. in the light of
Indian experience). The members of the agency should work on a full time
basis and they should be selected from a wide variety of relevant backgrounds.
The accounting standards adopted by the CMA without involvement of the
interested groups, preparers and users in the standard setting process has
made their acceptance a difficult proposition. In India, the Constitution of the
standard-setting body Accounting Standards Board (ASB) gives adequate
representation to all interested parties and at present it consists of 15
members including representatives of Industry, Company Law Board, Central
Board of Direct Taxes and Controller and Auditor General of India. The
accounting profession in Egypt), the regulatory agencies (i.e., CMA), stock
exchanges, chamber of commerce and major users of corporate annual reports
of Egypt should participate in the reviewing the accounting standards and
modify these accounting standards under consideration according to the
requirements of Egypt. This will ensure a wider participation in the adoption
and issuance of accounting standards, which in turn reflect the views of
different user groups in Egypt.

21

6. Need for Separate Set of Accounting Standards in
Egypt

There are some studies in the context of developing countries which have
examined the relevance and importance of the IASs in those countries and
most of these studies have either observed or recommended for modified
adoption of IASs to meet local environmental factors (see for example, Hossain,
2002; Hassan, 1998; Al-Rai and Dahmash, 1998; Mirghani, 1998; Larson,
1993; Enthoven, 1969 and 1973). Wallace argued that there are some
developing countries that are using IASs as national standards without any
modifications (Wallace, 1993, p. 135). However, Egypt is one of those
developing countries where EASs are mandatory for the listed company that is
not wholesale adaptation of IASs/IFARs. However, there is a shortage of
existing literature which have investigated the roles and compliances of the
IASs in these developing countries with transitional economies. The notable
exception is Zimbabwe. Chamisa (2000) investigated the adoption and
compliance of IASs in Zimbabwe and found IASs to be largely relevant to
Zimbabwes accounting and financial environment. Juchan (1978) observed
that there was a tremendous influence of Australian and New Zealand
accounting and financial reporting practices in two developing countries (Fiji
and Papua New Guinea) which he studied.

However, Enthoven (1981) argued that where developing countries are in
need of assistance for accounting education from a developed country, the
donor country should be aware of the needs of the developing country before
such assistance is given. Again, the diversity of environment in both developing
countries and developed countries means that it is difficult to say which
developed countries accounting systems should be considered by which
developing countries. The respective levels of the influential factors that shape
a nations accounting systems need to be considered (e.g., the level of
22
government control, the extent and ability of the accounting profession, the
influence of the tax system on commercial accounting, the social objectives of
the country and any cultural trait that influence the acceptability of an
accounting system, etc.) (Lawrence, 1996; p. 206-207). In another study
Enthoven (1985) commented that the accounting principles should be carefully
evaluated within the whole economic structure.


Historically, the rate of growth and the development of a nations
economy in both the private and public sector are tied to a certain extent to the
adequacy of accounting systems and the accounting development process in a
country. It has been argued by the researchers that the financial reports must
be designed to meet local information needs. The economic conditions and the
needs of a particular developing countrys demand the improvement of all
components of the accounting establishment. Just as the needs of the
developing countries/emerging economies are different from developed
countries, so are the needs of different developing countries (Chandler and
Holzer, 1984). Although developing countries/emerging economies are by no
means homogeneous, they share a number of political and economic problems,
leading to many problems in accounting (Radebough and Gray, 1993).

The objectives of accounting in developing countries/ emerging
economies are not identical to those of developed countries (Briston, 1984).
Accounting in most developing countries/ emerging economies is still in an
embryonic stage (Jaggi, 1973), and each national accounting and business
environment is different and may require an accounting system with a different
approach from that used in other countries (Jagetia and Nwadike, 1983), and
accounting systems of a developing country should be relevant to the countrys
needs rather than imitating a developed countrys accounting system (Briston,
1978; and Samuels and Oliga, 1982). There are several studies where the
researchers cast serious doubts about the relevance of the Western accounting
23
principles and practices that developing countries/ emerging economies adopt
(e.g., Briston, 1978; Samuels Oliga, 1982; Perera, 1975) and argue for the
creation of a system for each developing country which is appropriate to its
own requirements (Briston, 1978).

As already noted accounting technology has not only been exported
through colonialism but also has imposed on developing countries/ emerging
economies without careful examination of local conditions and suitability. It is
essential for developing countries to consider the ever-changing needs of
society and (hence the accounting system) must reflect the social, political, and
economic conditions within which it operates (Hove, 1986). Jagetia and
Nwadike (1983) has advocated for the need for more relevant and useful
accounting systems which consider the environmental variables in operation
and the level of sophistication of users of financial information in developing
countries/emerging economies, and state that developing countries need
systematic and carefully planned accounting systems designed to meet the
unique requirements of the individual countrys accounting and business
environments. Again, Briston (1978; p.109) suggests that instead of blindly
embracing colonial systems, developing countries should concentrate upon an
assessment of their information needs in the enterprise, government, and
national accounting sectors and should seek to establish training programmes
to produce the staff for the provision and use of that information.

There is limited evidence that developing countries/ emerging economies
are attempting to utilise accounting in their development programmes as far as
is possible (Jaggi, 1975). There is also little evidence of proper adoption of
accounting practices in developed countries to suit local situations. So far, no
developing country has been able to construct a system of accounting designed
primarily to meet its own information needs (Briston, 1978; p.116). In
Zimbabwe, for example, the Companies Act is still based on the British Act of
1948 (like India, Pakistan and Bangladesh), and there is general application of
24
all international accounting standards with modification. In addition, the
developing countries/emerging economies must ensure that their accounting
practices mirror their social needs.

Belkaoui (1985) has noted the importance of economic, cultural, political,
and social conditions, and the arguments of several authors that each
developing country should create an appropriate accounting system to its own
needs. However, Perera (1989) argued that accounting practices based on a
uniform approach for developing countries might be appropriate and opined
that it may be the only practical alternative available to many developing
countries. The IASC (now the IASB since 2001), the United Nations, and the
OECD have undertaken attempts to standardise financial reporting practices
across the world, including developing countries. However, it may be argued
that there is greater difficulty in developing uniform accounting practices in
developing countries (than in developed countries. Despite this, there are
proponents who believe that an integrated macro-based accounting system
should be adopted by the developing countries (e.g., Enthoven, 1973, Mirgani,
1982, Shuaib, 1980; and Abdeen, 1980)1. The capital markets in most of the
developing countries are underdeveloped. In developed countries (e.g., UK and
USA) capital market and financial reporting are closely related. The
improvement of the quality of accounting in any developing country/ emerging
economies requires proper research to accurately determine a countrys
particular accounting needs, and the role of accounting in the countries
economic development process.

It is evident from the earlier section that the companies in Egypt are
expected to comply with the prescribed accounting standards adopted by the
EASB and those accounting standards are actually promulgated by the IASB.
The Egyptian Society of Accountants and Auditors is a member of the IASB,

1
See Wallace, 1993, p.21-22 for a detailed discussion.
25
and as such it has a responsibility to observe it that the standards
promulgated by the IASC/IASB are duly implemented in Egypt. The standards
promulgated by the IASC/IASB are dealing with issues, which are expected to
be of common concerns to all member countries. However, it is not possible for
any international organization to develop accounting standards appropriate to
the local needs of each and every country and an international body can
prescribe accounting standards covering only certain broad areas of financial
reporting (Basu, 1986). Local conditions of the developing countries like Egypt
may not be similar to those of developed countries. In that case Rashid (1990)
has argued that the national standard-setting bodies rather than international
body can formulate standards necessary to serve the local needs.

The Egyptian Society of Accountants and Auditors is not aware of the
very need for separate accounting standards and its requirements with special
reference to Egypt. Has been argued by researchers that before the
international standards are adopted or integrated into national standard it is
necessary for the accountancy institute to take inventory of different
accounting practices and treatment that are in practice in a country
(Azizuddin, 1991). The Egyptian Society of Accountants and Auditors always
claim and demand the credit for just wholesale adoption of International
Accounting Standards as the national accounting standards. This is the high
time for Egypt to analyse and study its requirements of accounting standards,
to meet its specific requirements to be determined by the financing
arrangements, the capital market and the socio-economic environments in
Egypt.

7 Enforcement Mechanisms for the Accounting
Standards in Egypt

The Egyptian Society of Accountants and Auditors (ESAA) do not have
any direct control over those responsible for preparation of annual financial
26
reports. The members of the ESAA are requested to follow all accounting
standards adopted by the institute irrespective of the type or size of the entity
they are auditing. The ESAA have been trying to exercise indirect control
through its members who are subject to its disciplinary jurisdiction by
requesting them to qualify annual reports for compliance with the accounting
standards adopted by the ICAP.

The practicising accountants are not likely to follow the voluntary
accounting standards in the preparation of Company Annual Reports (CARs) in
case the management has a reservation not to follow accounting standards.
Lastly, if the members of the ESAA do not comply with the adopted accounting
standards in the preparation and auditing of the financial statements, the
ESAA is not in a position to take any disciplinary action against such
members. The ESAA has not yet been able to adopt any disciplinary measure
under the code of professional ethics for non-compliance of the instruction. As
a result, it is very difficult for the ESAA to ensure the compliance of the
accounting standards on its own. In Egypt, the adopted accounting standards
have legal or statutory backing. Accounting standards are recommended to the
CMA for the Government of Egypt to issue necessary notification for mandatory
compliance by the listed companies under the Companies Act or Capital
Market Act.

In 2002, a Code of Corporate Governance was introduced in Egypt by the
CMA for the stated purpose of establishing a framework of good corporate
governance, whereby a listed company can be managed in compliance with
international best practices. This is important to mention here that this Code
has been introduced by amendments to the Companies Act, which have
provided the requirement for the listed companies as described Companies Act
or Capital Market Act include compliance with requirements of the adopted
EASs that have been officially notified by the CMA. In addition, the code has
been adopted by all stock exchanges in Egypt by way of its incorporation in
27
their listing in their respective listing requirements and regulations and as a
result, all listed companies in Egypt are now required to comply with the
provisions of the said Code.

It can be argued that some regulatory measures are necessary for
ensuring full compliance with the standards prescribed by the regulatory body.
In Egypt any non-compliance reported to the ESAA or CMA should be fully
investigated and actions are to be taken as per rules. In Egypt, mandatory
enforcement of the local accounting standards (EASs) has been ensured
through the company law (Companies Act and or Capital Market Act). The
Companies Act (law) and/or Capital Market Act of Egypt has made it obligatory
for companies to prepare financial statements in the line with the EASs
adopted by the ESAA. Although the Companies Act and/or Capital Market Act
of Egypt is quite specific that the companies are to prepare their financial
statements strictly in accordance with the EASs prescribed by the CMA, this
does not mean that compliance with the EASs has been ensured in Egypt. The
researchers have argued that some regulatory measures are necessary for
ensuring full compliance with the EASs and any non-compliance with the
standards prescribed must be reported to the regulatory body and proper
actions must be taken based on the existing laws that may need some sort or
modifications and amendments to accommodate that.

8. Compliance Mechanism of Accounting Standards in
Egypt

As Egypt belongs to emerging capital markets, it is particularly relevant
for them to comply with financial reporting requirements of the standards. It
has been argued by Ahmed and Nicholls (1994) that there are many incentives
for disclosure in emerging economies but there are also considerable reasons
for not complying with mandatory disclosure requirements. It has been argued
by Chowdhury (2000) that without proper compliance mechanism, accounting
28
standards become valueless and will loose their usefulness in market economy.
Egypt should consider like many developed and developing countries in the
world an arrangement for compliance with accounting standards for the
preparers and auditors while preparing and auditing financial statements of
the companies in Egypt. It is firmly believed by the researchers like Chowdhury
(2000) that compliance with accounting standards will be prudent for the
preparers and auditors in endeavouring to satisfy their professional and legal
responsibilities with respect to preparation and audit of financial statements. If
critically examine, it can be observed that weak enforcement mechanisms are
more critical to explaining the state of financial reporting in Egypt and can be
argued that Egypts adoption of EASs based on International Financial
Reporting Standards (IFRS) as national standards has not led to improvement
in the quality of financial reporting. It has been mentioned earlier that the
listed companies are required to comply with Capital Market Authority (CMA)
requirements with respect to corporate disclosure based on the mandatory
EASs. However, the strength of the Capital Market Authority (CMA) to monitor
and enforcement of the compliance of these IASs made by the listed companies
is very weak and inadequate.

There are several studies of accounting disclosures made by the
accounting policies, presentations and disclosures made by the listed
companies have failed to comply with the requirements of the adopted
mandatory IASs. Although Capital Market Authority has to identify the cases of
non-compliance and sanction punishment against a particular company, it has
become very difficult for Capital Market Authority (CMA) to conduct proper
monitoring activities due to a shortage of technically qualified human
resources. It can be argued that lack of adequate capabilities limits full
investigation by Capital Market Authority (CMA) in cases when material non
compliances might have taken place. There are only a few instances where the
CMA de-listed some companies because of the non-compliance of the Egyptian
Accounting Standards while preparing and auditing financial statements.
29
There are situations where the limited companies do not comply with the EASs.
There are provisions in the law (Capital Market Act) for the punishment and
penalty for such type of non-compliance. However, No significant punishment
has been made to the companies who do not comply with the EASs in the
preparation of their financial statements as well as CARs.

Sixth, the company decisions to implement (or not to implement) IAS are
strongly affected by the culture and socio-economic factors. All companies
comply with IAS when they do not conflict with local culture factors, but they
have deviated where conflict exists. For example, the disclosure level in the
company financial statements is considerably lower than the IAS requirements,
especially when the disclosure conflicts with the Egyptian tendency for secrecy
(Dahawy, Merino, & Conover, 2002).15 The level of compliance with familiar
aspects of IAS disclosure requirements in Egypt is significantly higher than for
relatively unfamiliar aspects of IAS disclosure, although both sets of
requirements are available in Arabic. Where aspects of IAS disclosure
requirements are relatively unfamiliar, the level of compliance is lower when
regulations are not available in official Arabic translations (Abd-Elsalam and
Weetman, 2003). The revisions by the Capital Market Authority disclose that
many listed companies do not comply with disclosure requirements. Moreover,
auditors reports frequently do not comply with required reporting design
(Rahman et al., 2002).

The researchers have proposed a model for such type of non-compliance
of accounting standards in Egypt. It has been argued by the researchers that
the accounting standards in Egypt have legal backing where the accounting
standards are to be compulsorily followed by the companies in the preparation
of their financial statements. The compliance can be ensured by following the
examples of the UK and USA. In the UK, the standards are set by the ASB
having power to issue accounting standards on its own authority.

30
In the UK, there is a legal sanction for companies that do not comply
with the Financial Reporting standards in that any departures from accounting
standards must be explained and the financial effects disclosed (Redebaugh
and Gray, 1993). If it is found that a company (other than small and medium
size companies as defined in the Companies Act 1989) does not comply with
the UK accounting standards, and fails to provide the particulars and reasons
for any departure, that company will be asked by the Financial Reporting
Review Panel of the Financial Reporting Council (FRC) to provide satisfactory
explanation for such deviation from statutory requirement or to revised the
financial statements appropriately. If not, the Review Panel and the
Department of Trade and Industry can apply to the court for an order requiring
financial statements to be compulsorily revised where they fail to comply with
the requirements of the law. Similarly in the USA, corporations are required to
follow FASB standards; otherwise the SEC will refuse registration and hence
trading in their securities (Redebaugh and Gray, 1993). In Egypt, the Capital
Market Authority (CMA) can play such role for the companies those fail to
comply with the local accounting standards and impose penalty against the
directors of concerned companies for such non-compliance. If a company fails
to comply with the accounting standards of the proposed EASB, the Capital
Market Authority should take punitive measures against the directors of the
respective companies in order to revise financial statements.

The researchers strongly believe that a Financial Statement Review
Committee (FARC) should be set up in the light of UK (for example)with the
task to review the financial statements of all listed companies in Egypt in order
to determine the non-compliance with the adopted international accounting
standards. This committee also measure and assess the compliance gap in
corporate financial reports prepared by the listed companies. Compliance gaps
mean the difference between actual accounting practice and the adopted IASs
requirements. The researchers also believe that the compliance of accounting
standards can be achieved in another way. The professional accountancy
31
bodies in Egypt (for example the Egyptian Society of Accountants and Auditors
should promulgate a professional accounting statement regarding conformity
with accounting standards requiring members to comply with accounting
standards compulsorily while preparing and auditing financial statements.
Disciplinary actions must be taken if any member fails to comply with
accounting standards (for example, fine or expulsion from the respective
institutes). In the USA, if the standards have not been compiled with, the CPAs
have to give an opinion of non-compliance in the audit reports. Failure to do so
may lead to cancellation of a CPAs license to practice under Rule 203 of the
code of Professional Ethics. However, in Egypt, there are many cases of non-
compliance reported to the Egyptian Society of Accountants and Auditors and
CMA, no serious actions are taken as per rule. It is worthwhile to mention that
the Egyptian Society of Accountants and Auditors will take necessary actions
to educate company accountants and auditors in relation to preparation and
auditing of financial reports under the EASs.

9. Summary and Conclusions

The main objective of this paper is to develop a mechanism wherein the
enforcement and compliance of the accounting standards can be ensured in an
emerging and transitional country, Egypt. The establishment and enforcement
of standards is an important issue for the accounting profession and its
interested users. It has been argued that by adopting International Accounting
Standards (IASs/IFRSs) the developing countries will be able to improve the
quality of their accounting systems so that their specific financial information
requirements will be better satisfied. .Since the liberization policy of the
Government of Egypt, the CMA so far has adopted thirty nine International
Accounting Standards (IASs). In Egypt, compliance with the accounting
standards is legally required by the CMA. The standard-setting process adopted
by the CMA through EFAA is eventually a closed-door process and interested
32
users of accounting information do not have any chance to participate in the
standard setting process.

This paper has proposed a structure of institutional arrangements for
standard-setting in Egypt and a separate Accounting Standard setting board
needs to be established in order to improve the enforceability of the accounting
standards in Egypt. The proposed Egyptian Accounting Standard Board (EASB)
should be created under the statute by virtue of the Capital Market Act. The
accounting profession in Egypt, the regulatory agencies (i.e., CMA), stock
exchanges, chamber of commerce and major users of corporate annual reports
of Egypt should participate in the reviewing the accounting standards and
modify these accounting standards under consideration according to the local
requirements of Egypt. This will ensure a wider participation in the adoption
and issuance of accounting standards, which in turn reflect the views of
different user groups in Egypt. Local conditions of the developing countries like
Egypt may not be similar to those of developed countries. In that case it has
been argued that the national standard-setting bodies rather than
international body can formulate standards necessary to serve the local needs.
This is the high time for Egypt to analyse and study its requirements of
accounting standards, to meet its specific requirements to be determined by
the financing arrangements, the capital market and the socio-economic
environments in Egypt.

It is well known that serious problems are sometimes encountered in
ensuring compliance with the standards formulated by the agencies with
statutory backing. In Egypt, the mandatory compliance of the local accounting
standards can be ensured through the company law. Under this mechanism,
the provisions of accounting standards should be included in the Companies
Act and/ Capital Market Act which will definitely make the companies to
prepare their financial statements as per the accounting standards. In order to
avoid non-compliance of the accounting standards In Egypt, the authors
33
proposed that the CMA will take the responsibility. If a company fails to comply
with the accounting standards of the proposed EASB, the CMA should take
punitive measures against the directors of the respective companies in order to
revise financial statements. Lastly, the professional accountancy bodies in
Egypt should promulgate a professional accounting statement regarding
conformity with EASs requiring members to comply with EASs compulsorily
while preparing and auditing financial statements. Disciplinary actions must
be taken if any member fails to comply with EASs (e.g., fine or expulsion from
the respective institutes). In this way, the authors considers that enforcement
and compliance of the accounting standards will be ensured as the standard-
setting will be broad-based, having legal backing and punitive measure for
those company directors and auditors in case of non-compliance.

This paper reviews practical implementation issues of EASs/IFRS in
Egypt, and describes the current accounting and auditing situation and the
legal framework of the profession in Egypt. In recent years, Egypt has made
significant efforts (1) to align corporate financial reporting requirements with
the IAS/IFRS and (2) to close the compliance gap in both accounting and
auditing practice. Consequently, important improvements have been made to
accounting and disclosure requirements for the publicly traded companies and
financial institutions and in EAS, as benchmarked against IFRS. Moreover, the
new Accounting Practice Act has been drafted and agreed upon by all
stakeholders, though not yet been issued. Further improvements could be
achieved by issuing a modern legislative framework that includes an
appropriate regulatory framework for practising auditors, addressing
weaknesses in professional education and training arrangements, introducing
qualification examinations for auditor licensing, and developing an enforcement
mechanism to ensure compliance with applicable accounting and auditing
standards. Notable steps have already been taken to build on the accounting
reform. Despite these steps, the financial reporting system in Egypt requires
further improvements, especially in expediting the process of issuing new EASs
34
after the release of any new IFRS, and reducing the gap between accounting
education and practices in relation to international requirements.

Egypt is a country where private sector bodies are not involved in
accounting standard setting; where accounting practices followed based on the
Continental model; and where the remuneration of the auditors for their audit
services is comparatively lower. Egypt had shortages of qualified accountants.
We suggest that there is a pressing need for further research to make
accountants more effective at improving the quality of accounting, to specify
accounting manpower needs; to develop proper training policies and to improve
management education and awareness for the quality accounting information
in developing countries and Egypt should be consider it for making their future
policy. In addition, because of the limitation of funds and other resources,
difficult questions of priorities cannot be tackled (e.g. proper training for the
accountants to prepare and audit of the financial statements).















35
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42

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