Comparison between Saudi Accounting Standards (SOCPA) and IFRS - Dissertation Example

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Overview of the PG Dissertation/Integrated Project area Family Given SRN: Programme: Academic area for research is as highlighted (in black): Marketing Accounting and Finance Economics Human Resource Management Tourism Project Management Strategy Information Systems OR/Mgt Science The key aims and objectives of the research are to: To establish the key areas of divergence and convergence linking the Saudi Organization for Certified Public Accountants (SOCPA) and the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) standards To discern the impact of the Islamic financial model vis-a-vis the IFRS standards Find out how far has SOCPA adopted the IFRS standards in their operations To investigate whether the SOCPA accounting practices have fully integrated the requisite international standards Table of Contents Introduction 2 Background 2 Research Question 3 Aims 3 The Objectives of the Research 3 Significance of the Study 3 Literature Review 4 Methodology 7 Secondary Research 8 Primary Research 8 Pilot Study 8 Ethical Considerations 9 Data Analysis 9 Limitations of the Study 9 Timescale 10 Conclusion 11 References 12 Introduction The present unrelenting global recession that originated from the US and extended globally revealed the nascent close links that existing amongst international financial and economic sectors. The wayward acts of business leaders aided by aberrant accountants as depicted in the Enron and WorldCom scandals in 2001 and the subprime mortgage crisis exposed that financial accounting practices have to be strictly scrutinized globally to avoid any such repetition. Subsequently the diverse local accounting associations in accord with the International Accounting Standards Board (IASB) led by the EU instigated the International Financial Reporting Standards (IFRS) (Yoon, 2009). These novel guidelines were intended to have harmonised standardized regulations to steer accountants and organisations worldwide. However, the implementation of IFRS has met a raft of challenges in assorted jurisdictions including the Kingdom of Saudi Arabia due to cultural, social-economic and religious beliefs. Background The accounting history in Saudi Arabia can be traced to the 14th Hijri century (1930) when through a royal decree it was established that accounting records should be upheld. The issuance of CPA regulations commenced in 1974 and the Saudi Organization for Certified Public Accountants (SOCPA) was initiated in 1992 through a royal decree No.M12 (SCOPA, 2011). SOCPA has been responsible for developing and setting accounting standards or compliance with the generally accepted accounting principles (GAAP) of Saudi Arabia as well as CPA exams, training, research, publications etc (Al-Aqeel, 2009). Keywords SOCPA-GAAP, Shariah and Islamic financial model, IAS/IFRS standards, standardisation Research Question What are the main areas of divergence and convergence between the Saudi Organization for Certified Public Accountants (SOCPA) and the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) standards? Aims This study aims at establishing a comparison between the SOCPA accounting standards and the IAS) and IFRS and probable evolution of SOCPA standards in view of the adoption of the universal international guidelines. The study will thus explore the convergence and divergence of the two standards in addition to examining the historical evolution of the accounting and auditing fields in Saudi Arabia. A critical scrutiny of the available literature as well as comprehensive field study will be conducted amongst organisations operating within the country. The Objectives of the Research This study will attempt to cover the gaps in previous studies that have scantily covered the region while offering recommendations on areas that can be transformed for more effective standardisation as well as for further studies. The study will therefore endeavour to understanding the convergence and divergence between SCOPA and IFRS by answering the following questions: To discern the impact of the Islamic financial model vis-a-vis the IFRS standards How far has SOCPA adopted the IFRS standards? Have the SOCPA accounting practices fully evolved into the requisite international standards? Significance of the Study Although the Saudi Organization for Certified Public Accountants (SOCPA) has indicated its willingness to establish and sustain the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), there are no clear reports on the compliance or upholding of the standards. Likewise, the seemingly conflicting reporting standards as opposed to Islamic finance or Shariah laws and cultural issues raise questions on compliance and area of conflict between them. There is a dearth of studies on the comparison of the Saudi Arabia GAAP standards and the IAS/IFRS standards on areas of convergence and divergence (eStandardsforum.org, 2010). This study therefore aims at breaching the gap amongst existing studies that have failed to address the discernable and inherent differences amongst the two standards. Literature Review The advent of many conflicting national financial reporting standards has generated diverse purposely-defective reports resulting in financial scandals and crisis due to fictitious statements. Due to the wayward operations of some firms propagating falsehoods or non-disclosure of vital accounting data in their financial reports, authorities have ratified stern statutes intended at restricting such misconducts while the frequently conflicting accounting reporting standards practiced in some countries has guided a steady harmonisation of international reporting standards under the International Financial Reporting Standards (IFRS). Instigated by the EU and steadily taken up by over 100 nations, this has currently turned into the fresh global standard (IASB, 2008). Although Saudi Arabia has not formally adopted the IFRS, SCOPA has now actively adopted the guidelines in line with other western states. According to Dr. Ahmed Bin Abdulla Al Moghames, SOCPA Secretary General, Saudi Arabia accounting standards are the best in the region asserting that, ‘“Our local standards are based on US, IFRS and British best practice, and where there are no local rules we follow IFRS." (Ameinfo.com, 2006). The ICC or International Chamber of Commerce (2005) has affirmed that accounting ‘information is the lifeblood of global capital markets’ (Pg.2). This means public, government and rival firms are profoundly reliant on professional, consistent, comparable and logical reporting by business enterprises. Financial information is an vital component of commerce which not only employ it to scrutinize how diverse divisions of their corporation are doing but also for yardstick reasons with top competitors in their trade both countrywide and globally (Oracle, 2008). SOCPA has managed to harmonise the Saudi Arabia’s accounting reporting standards in accordance with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) in conformity with the Saudi’s GAAP. The body has consequently established over twenty auditing and accounting standards (Halbouni, 2006). SOCPA has however maintained a cautious attitude in adopting the IFRS standards wholly asserting that there is inadequate ‘training and professionalism’ in the region to uphold the strict rules while maintaining the right to modify and amend the rules to rules to suit the local settings (Ameinfo.com, 2006). Nevertheless, SCOPA has urged firms to follow the IFRS rules with a stated objective of convergence with the IAS/IFRS standards in its 2009 report. However, the eStandards Forum, a financial standards foundation has rated Saudi Arabia in its Financial Standards Index 35 out of 100 at number 62 globally and 6.90 out of 12 at number 71 worldwide in its Business Indicator Index thus indicating the country is far behind in compliance with international standards (eStandardsforum.org, 2010). Some of the main principles advocated by the IAS/IFRS standards include: Chattels not allowed to be re-valued; Limited liability firms apart from depository firms barred from loaning their directors; Limited liability firms accruing losses of over 75 percent of their capital must convey a shareholders’ meeting to establish whether need for closure is necessary (Libby, 2007). Contemporary Islamic business emerged from a conviction that traditional structures of business may encompass fundamentals outlawed by Shariah. These particularly touch on gharar (vagueness or indistinctness), maisir (betting, gaming or guesswork) and above all riba (usury). Subsequently a multitude of Islamic financial groundbreaking products has been evolved that comply with the Shariah teachings for example wa’d (pledge), ibra’ (reimbursement) or tanazul (waiver). Amongst the strictly Islamic adhering nations, there has been some disquiet that the IFRS standards sometimes compromise the Shariah tenets (AOSSG, 2010). Nonetheless, PricewaterhouseCoopers stated that the IFRS is an idyllic global structure that does not clash with Islamic edicts as contrasted with erstwhile national GAAP standards demonstrated in the countries that have by now accepted IFRS though having Islamic practising banks and insurance firms plus the UK and Malaysia (PWC, 2010). One of the main issues in the reporting standards uneasiness with the IFRS standards has been the concept of ‘time value of money’ whereby the strict Shariah adherents deem it unacceptable. This is due to the Islamic financing prohibiting charging of interest hence indicative of no real profitability financial transaction. Another area criticised by the Islamic scholars is the emphasis of ‘substance over form’ insisting the legal status should be indicated rather than terming as a normal financial transaction. This view is shared by SOCPA, which advocates for separate reporting standards on some Islamic financial transactions that do not reflect the fair value and time value of money concepts as advocated by Shariah laws (SCOPA, 2011). However, Alkhtani (2010: 212) argues that contrary to the SOCPA assertion, most of the financial transactions in Saudi Arabia are heavily influenced by western concepts and social-economic issues that generally override any presumed cultural or religious precepts. The adoption of IFRS standards is therefore unlikely to encounter major impediments amongst Saudis firms. Nevertheless, Halbouni (2006: 73) suggests that adoption of the international standards by SCOPA is the best alternative in order to harmonize the diverse accounting and auditing standards practiced by Saudi firms. The main differences between the Saudi Arabia SOCPA GAAP and IASB’s IFRS are: SCOPA in line with Islamic financing abhors the IFRS ‘time value of money’ concept Following Shariah precepts, SCOPA also insists on the legal status of some transactions over ‘substance over form’ as advocated by the IFRS IFRS is less in depth with less guiding principles with negligible segmental outlines and regulations as contrasted to the elaborate SOCPA GAAP. IFRS employs a single-step practice for loss write-downs while the SOCPA GAAP utilises a two-step procedure IFRS uses a deviating probability admission and measurement point for contingencies In a study of firms operating in Saudi Arabia Alsaeed (2006: 496) concluded that the level auditing disclosure in their annual financial reports was lower than average in the country with a positive correlation dependent on the size of the firm. Methodology The research will embrace both quantitative and qualitative study plans to scrutinize the information gathered. These will encompass international and local firms, SMEs and public organisations as well as auditing and accounting firms. A dual process of blending both the quantitative and qualitative methods in study design is inclusive and logical as it uses all forms besides deciphering previously unfathomable problems. The quantitative methodology which is more focussed on the scientific empirical findings should be supported by the social sciences based qualitative analysis that seeks to establish the why (RDSU, 2004). Qualitative research methodology is therefore an invaluable tool in discerning indefinable issues, like societal customs, socio-economic standing, sex issues, culture, and creed, whose function in the study topic might not be otherwise easily evident. When applied alongside quantitative methods, it can assist to deduce and enhance grasp the intricate veracity of a set condition and the inference of quantitative statistics (Family Health International, 2006). The methodology will thus apply both secondary and primary study strategies. Secondary Research An exploratory study appraising the accessible writings on the topic matter, as well as relevant academic papers, scripts and diverse periodicals online will be undertaken. The key focus area of will be a check of the SOCPA’s website plus its reports and every substance on IFRS standards to gain an understanding of the any conformity or dichotomy amongst both the rules. Primary Research The primary research employed will entail administering questionnaires and semi-structured interviews to sampled organisations including those affiliated with the Saudi Organization for Certified Public Accountants (SOCPA). Nevertheless, a deliberate effort will be made to conduct interviews with key stakeholders in SOCPA including its officials to elicit their views on the convergence and divergence with the IFRS guidelines and statutes. The questionnaire questions will be set on a variable five-point Likert scale ranging from (1) “strongly disagree” to (5) “strongly agree”. The target cohorts will be a sample of either 100 organisations drawn from the diverse industries operating in the country both indigenous and international, publicly or private owned. Consent for conducting the study will have to be sought from the relevant authorities in case of SOCPA while other organisations will be consulted via phone or email where applicable. Nevertheless, individual interviews will be undertaken via arrangements with the selected executives or via phoning the respondents. Pilot Study A pilot study will be done using my fellow accounting students to eliminate any evident and inherent errors in the questionnaire preparation and thus can steer the researcher in enhancing the needed modifications. This pilot study will mainly involve financial students conversant with the subject matter prior to embarking on the main research study. Ethical Considerations Ethical considerations encompassing leakage of critical organisational data will be vigilantly upheld to circumvent any likely unpleasant outcome on the particular institutions or firm. Each existing step and care will be undertaken to guarantee prudence thus educing frank replies from the respondents who might not be so informative if wary of any indiscretion. Data Analysis The primary data from the filed analysis will be analysed by means of the Statistical Package for Social Sciences (SPSS) to produce desired results. This software is favoured owing to its ability of dissecting experiential statistics around practical data sufficiently, thus making it one of the best appropriate techniques of research data exploration. The interview questions will be examined qualitatively eliminating the poorly answered and vague answers to arrive at the most suitable or useful responses. Limitations of the Study There is lack of readily available published reports on the compliance levels from SCOPA and academic scholars hence the research will heavily rely on primary sources from firms operating in the country. The study is deeply dependent on the collaboration of SOCPA and other sampled firms who may otherwise refuse to fully cooperate or give lukewarm answers. The nature of the questionnaire requires critical assessment of the often-intimidating regulatory statutes thus may draw a neutral stance from the respondents hence greatly impeding the study. The study will also rely on responses through electronic mail which may make the respondents uneasy due to security issues hence will require inducing them to use alternative private mail. The researcher will also be hampered by the logistics of securing interviews with the respondent executives of large firms. Timescale The study is approximated to take at least two months and but not more than four months to gather the necessary data and undertake the data analysis. Thus the timescale can be scattered into six main stages, which include the preliminary information formulation of the vetting and studying of pertinent literature on the topic; preparing questionnaires; the pilot phase of testing the propositions and questionnaires; the exploration phase of dispersing the questionnaires and carrying out interviews; analysis of the information gathered; and the writing of the report. Figure 1: Timescale (Gantt chart) Conclusion The advent of globalisation has emphasized the need for standardised accounting practices in the wake of discrepancies accessioned by unscrupulous corporate executives and rogue accountants. However the adoption of the IFRS/IASB standards has met many challenges across regions due to the nature of social-economic and cultural norms existing locally thus negating the universal appeal of the standards. This has been further aggravated by the lack of clear enforcement and compliance by diverse jurisdictions. In Saudi Arabia with its nascent emerging economy, SOCPA has cautiously embraced the global standards as the country’s budding accounting standard evolve into the requisite international standardised practice. This study aims at examining the teething problems inherent in the implementation including the conflict with Islamic finance precepts, social-economic and education standards that SOCPA is trying to upgrade. The study will therefore seek to chart the way forward and advice on areas for further studies. References Al-Aqeel, E. (2009). Historical Introduction on Accounting and Auditing Profession in Saudi Arabia. Riyadah: King Saud University. Alkhtani, S. S. (2010). The Relevance of International Financial Reporting Standards to Saudi Arabia: Stakeholder Perspectives . University of Stirling . Alsaeed, K. (2006). The association between firm-specific characteristics and disclosure: The case of Saudi Arabia. Managerial Auditing Journal , Vol. 21 Iss: 5, pp.476 - 496. Ameinfo.com. (2006). Saudi Arabia financial standards lead Arab World. Retrieved January 28, 2011, from Ameinfo.com: AOSSG. (2010). Financial Reporting Issues relating to Islamic Finance. Report of the Islamic Working Group of the Asian Oceanic Standard Setters Group. eStandardsforum.org. (2010). International Financial Reporting Standards: Saudi Arabia. Retrieved January 28, 2011, from eStandardsforum.org: Family Health International. (2006). Qualitative Research Methods: A Data Collector’s Field Guide. London: Sage Publications. Halbouni, S. (2006). The Degree of Harmonization of Accounting Practices Within Saudi Arabia. Journal of Economic & Administrative Sciences , Vol. 22, No. 2, December (51 -76). ICC. (2005). ICC policy statement “Improving the Quality of Financial and Business Reporting”. Paris, France: International Chamber of Commerce. IASB. (2008). International Financial Reporting Standards (IFRS) FAQ. Retrieved January 28, 2011, from International Accounting Standards Board’s (IASB) : Libby, R. P. (2007). Financial Accounting. New York: McGraw-Hill/Irwin. Oracle. (2008). Integrating Operations and Finance: A Two-Way Street. An Oracle White Paper. PWC. (2010). Open to comparison: Islamic finance and IFRS. PricewaterhouseCoopers International Limited (PwCIL). RDSU. (2004). Qualitative Research Methods. Somerset: Peninsula RDSU (Exeter. SCOPA. (2011). Saudi Organisation for Certified Public Accountants (SCOPA). Retrieved January 28, 2011, from socpa.org: Yoon, N (2009) Advantages and Disadvantages of switching from U.S.GAAP to IFRS. Charles Center. Read More