An investigation of compliance with international accounting standards by listed companies in the Gulf Co-Operation Council member states

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Abstract

This study investigates the extent of compliance with international accounting standards (IASs) by companies in the Gulf Co-Operation Council (GCC) member states (Bahrain, Oman, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates). Based on a sample of 137 companies (436 company-years) we find that compliance increased over time, from 68% in 1996 to 82% in 2002. Despite strong economic and cultural ties between the GCC states, there was significant between-country variation in compliance and among companies based on size, leverage, internationality, and industry. The study provides evidence of de jure but not de facto harmonization in the region. Noncompliance reflected some ineffectiveness in the functions of external auditors and enforcement bodies, which may be of interest to countries that have adopted IASs recently.

Introduction

Rapid globalization of financial markets has given rise to demands for more internationally comparable financial reporting. Harmonization of accounting is one way to promote more transparent and consistent reporting and to that end the International Accounting Standards Board (IASB) produces international accounting standards for use by private sector entities throughout the world. Since 2005 there has been widespread adoption of IASB standards on a mandatory basis. Consequently, there is increased interest in the comparability of reporting being achieved as well as the role of auditors and enforcement bodies in promoting compliance (Securities and Exchange Commission (SEC), 2000, Committee of European Securities Regulators (CESR), 2003, Schipper, 2005).

The aim of this paper is to investigate the level of compliance over time with international accounting standards (IASs) in the six Gulf Cooperation Council (GCC) states, namely Bahrain, Oman, Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates (UAE) and the factors associated with compliance. The GCC countries made IASs mandatory progressively since 1986 for some or all listed companies. This setting allows us to explore the use of IASs in a number of economically important developing countries, which were early adopters of IASs. Mandatory use in the GCC countries provides an opportunity to examine the role of external auditors and enforcement bodies in promoting compliance with IASs.

Using a self-constructed compliance checklist, we measure the extent of 137 listed companies' compliance with 14 relevant IASs over the period 1996–2002 (436 company-years).1 For the GCC as a whole, the average level of compliance for all years was 0.75; for disclosure it was 0.69 and for measurement 0.81. The level of compliance increased over time in each state, with overall measures increasing from 0.68 in 1996 to 0.82 in 2002, indicating that compliance has been improving in the region.

Despite strong links between member states, compliance varies among them. Since diversity could reflect differences in each country's regulatory framework, we provide a self-constructed enforcement score (encompassing legal requirements, quality of the audit function, and activities of enforcement bodies) for each country. The highest average compliance level for all years is in the UAE (0.80), followed by Saudi Arabia (0.78), Kuwait (0.75), Oman (0.74), Bahrain (0.73) and Qatar (0.70). Differences in compliance levels are generally consistent with national enforcement scores. Compliance also varies by industry, being lower among financial-sector firms. It is higher for larger companies and those with higher leverage and a greater international presence.

Compliance with IASs has been measured in several settings in prior research. For example, disclosure compliance is reported in Australia (0.94; Tower, Hancock, & Taplan, 1999), Germany (0.81; Glaum & Street, 2003) and Switzerland (0.74; Street & Gray, 2001). Measurement compliance is reported for Germany (0.86) and Switzerland (0.92; Street & Gray, 2001). Our study adds to this literature in two significant ways. First, it considers countries from a developing region which has considerable economic and political importance but has been the subject of relatively little research. Prior studies, such as Abdelrahim, Hewaidy, and Mostafa (1997), Abdelrahim and Mostafa (2000) and Joshi and Al-Mudhahki (2001), have not examined compliance in depth, across countries and over time. Our study achieves this and provides empirical evidence about the progress of harmonization in the region. The results are, therefore, of interest to academics and practitioners following the development of more comparable financial reporting on a global scale.

Second, the GCC setting has several features which are useful in a study of compliance. Some countries in the region have been early mandatory adopters of IASs, which means their companies have considerable experience with use of IASs in a mandatory rather than voluntary environment. In the GCC setting we can investigate the relationship of national regulatory frameworks and mandatory compliance over time. In other countries companies have adopted IASs more recently (for example, in the European Union) or their use has been voluntary (as in Switzerland and Germany in the early 1990s). Most previous IAS-compliance studies have been in settings where use of IASs is voluntary or not subject to national enforcement (Nobes, 1990, Street et al., 1999, Tower et al., 1999, Street and Bryant, 2000, Street and Gray, 2001, Glaum and Street, 2003). Our study adds to the literature by considering compliance in a mandatory setting. Further, it provides useful insights about the relationship of IASs adoption, compliance levels, and the effectiveness of independent auditors and enforcement bodies. Following widespread adoption of IASs, attention has now focused on the extent to which companies comply with IASs in a mandatory setting (Schipper, 2005, Brown and Tarca, 2005). Our study is one of the first to provide empirical evidence about this issue. Although we consider only one region and six countries, our results highlight issues which may be equally relevant in other countries where IASs have been adopted more recently.

The remainder of the paper is organized as follows. The next section presents the institutional framework for financial reporting in the GCC member states, reviews relevant literature and outlines the research question. The third section describes sample selection, data collection and statistical method. Results, robustness checks, and limitations are reported in the fourth section. The final section concludes the study.

Section snippets

Background and research question

The six countries included in this study are members of the GCC, formed in 1981 to promote economic cooperation and development in the region. They have strong religious and economic ties, a shared Muslim culture and together hold 45% of the world's oil reserves. The countries have experienced strong economic growth in recent years with combined gross domestic product (GDP) per capita increasing from US$11,000 in 2002 to US$14,208 in 2006. The stock exchanges have experienced rapid growth with

Sample selection

The aim of the study is to investigate the level of compliance with IASs in GCC countries during the period 1996–2002, the latter being the most recent year available when the data was collected. We chose 1996 as the starting point because by that year four of the six countries, Bahrain, Kuwait, Oman and Saudi Arabia had begun to use IASs. Qatar and the UAE adopted IASs in 1999, and the last year for which data were available when we began our study was 2002. Thus the majority of our data are

Level of compliance

The level of mandatory compliance (measurement and disclosure) with the 14 IASs, averaged over all companies and all years, was 0.75. The mean level of disclosure compliance was 0.69 and measurement compliance was 0.81. The level of compliance averaged over all companies increases over time, from 0.68 in 1996 to 0.82 in 2002 (Table 6). This indicates that compliance with IASs has been improving in the region; however, no company in any year within the study period fully complied with all

Conclusions

We show that the level of mandatory compliance with IASs differed among companies from the Gulf Co-Operation Council (GCC) member states (Bahrain, Oman, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates) over the period 1996–2002. Although these countries had progressively made IASs mandatory for all or selected companies since 1996, and compliance improved over the period, no company achieved full compliance with either IASs measurement or disclosure requirements during the period. Our

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