Bahrain Seminar on Accounting and Auditing Standards

Transcription

1 Bahrain Seminar on Accounting and Auditing Standards February 10, 1987 Manama, Bahrain Closing Speech The Harmonization of Arab Accounting Standards By Mr. Talal Abu-Ghazaleh President of the Arab Society of Certified Accountants

2 In his obviously superb address, Mr. John KirkPatrick, Chairman of the International Accounting Standards Committee, outlined the role, function and nature of IASC and the progress which has been made in getting international standards adopted all over the world. I would now like to turn to the question as to whether or not we, here in Bahrain, and also in the Gulf and perhaps even further throughout the Arab world, should in principle not only recommend but actively promote their adoption by the accounting profession and government. In the later sessions of the conference, we have examined some very specific issues and, therefore, I would like to concentrate not so much on the individual trees which are in need of attention but on the wood as a whole. I want to consider our whole approach to standards and whether, rather than adopt a firefighting approach by rushing to tackle each individual problem as it arises; we should be developing a more comprehensive and integrated program. I believe IASC and its sister institution IFAC can provide us with a good foundation for this. As many of you will be aware, my own personal philosophy is that no matter how difficult and unfortunate the circumstances are, we can always find something which can be turned to advantage and that we can learn something which will be of benefit for the future. This can be applied to those countries which have not yet developed a comprehensive and integrated set of accounting standards and guidelines and/or do not have an established and sophisticated accounting profession. They may currently lag behind but they do have the opportunity of avoiding the mistakes of those who entered this arena earlier they can choose the good, amend the defective and cut out the bad. It is my opinion therefore, that we should give serious consideration to the adoption of IASC accounting standards (and also IFAC auditing guidelines) especially when in many parts of the Arab world, we are seeing the establishment and development of economic groupings such as the GCC and further benefits would be derived if accounting practices were harmonized. There is little difficulty today in me convincing an audience such as this of the place, need and importance of accounting profession in contemporary business society. But it is not only us who are convinced of this; there is universal acceptance that an adequate accounting structure is an important factor in, and indeed some would say necessary condition for efficient economic growth. An integral part of an adequate accounting structure; however, is a clearly defined set of rules for the preparation of financial statements (accounting standards) and an independent auditing

3 function whose professional approach and practices are recognized as being at an internationally appropriate level (auditing guidelines) and thus able to give a credible attestation of these financial statements. A question we must ask ourselves is do we have an adequate accounting structure? Accounting standards or rules may exist and there may be an auditing function but if these are judged against international yardsticks, what is the result? If the verdict is less than satisfactory, then what can we do about it? It is, of course, a cliché and a truism to say that each year, the world gets smaller and trade becomes more and more international. Countries which do not wish even to trade or compete at the international level are forced to do so and along with those who do, like Bahrain, they have particular need to see the development of and to participate in international capital markets. However, just as national capital markets require financial statements prepared on a reliable and consistent basis, it is even more important when international capital is being sought or invested. However, reliable financial statements require reliable accounting standards. I am an optimist and I always like to end on a positive note, so let me deal with the negative aspects first. There are those who would argue against importing internationally developed standards. The arguments against importing international standards are usually based on two broad grounds. Firstly, all national countries to a greater or lesser extent have different social, cultural, legal and institutional factors from those which existed in the country or area where the standards were first developed. Secondly, they doubt the wisdom of imposing on such countries standards which have been developed for the industrialized nations and the sophisticated analysts and users who live there. The implication being that these factors are so different that to apply nonindigenous standards would be totally inappropriate. In addition, even if they are applicable, the preparers and users are technically not equipped to cope with them. At first sight, these arguments seem plausible and, of course, there is an element of substance to them. However, they are, in my opinion, mere words of caution about implementation and matters to be considered when so doing, rather than arguments against using such standards outright. They also display a very negative attitude and fail to take into account some other important factors.

4 We should not overemphasize the apparent differences social or otherwise and at the same time fail to look at the similarities. When we do so, we can see that there is a significant number of common features. Take for example the economies of both the developed and developing nations. They consist of a combination of private and public owned businesses which buy and sell for cash or on credit in national and international markets. Assets are owned and utilized, money is borrowed or lent and increasingly on an international scale. People are employed and receive a wage, taxes are paid and profits are distributed or utilized in some other fashion. Because of this, there are many parties (users) who are interested in the financial results of such businesses. Liquidity, profitability, asset and capital structure are of concern to groups such as shareholders private or public employees, customers, suppliers, bankers and other leaders of funds and, of course, governments. Surely in such circumstances, there must be considerable areas where common accounting standards must not only be applicable but also desirable. Similarly, concern about highly technical standards and unsophisticated users and their inability to apply analytical techniques to financial reports, even if it is true, is not an argument against the adoption of international standards. I say even if it is true because I am not aware of any work which supports this proposition and it does display a light arrogance on the part of those who make it. However, surely this is only an argument in favor of improving the abilities of preparers and users through education, training and other means so that they can make full use of the information contained in financial reports. It does not support any proposition which suggests that such reports should be of a lower quality than they need be. No one with any sense suggests that standards should be imposed, even if it were possible, if they are clearly not suited for the purpose. To try to do so would be obviously untenable. I will return to this point later, but we should bear in mind that it is not suitable for the purpose and should not confuse this with the personal likes, dislikes, or opinions about how particular issues should be dealt with. Accountants are proud of their independence and individualism and don't like to be told what to do. However, in order to achieve consensus and because we believe it is for the good of the community and the profession as a whole, minority views occasionally cannot be catered for. Individuals can participate as actively and vociferously as they like in the decision making process, but part of our commitment to our profession is that we accept its rules and code of conduct. To do otherwise would lead to anarchy. In addition, and I shall return to the question of suitability later, international agencies such as

5 the IFAC are well aware of these potential dangers and have sought to mitigate them by incorporating into their deliberations the expertise and experience of as wide a range of countries as possible. They have deliberately set out to produce standards which take material, national or regional differences into consideration. They have not attempted to develop rigid and inflexible standards but have been more concerned to eliminate obviously bad accounting practices through the production of basic standards with as universal an applicability as possible. Now let me turn to the more positive reasons why we should consider using international standards as a basis for our needs. The first is concerned with resources. Before embarking on a full scale program for the development of national standards from a "zero base", we should stop and think about what this implies in terms of resources. Even if these are available, is this the best use we can make of them? We keep advising our clients that they should optimize the use they make of their resources and that they should ask themselves whether they are really getting value for money. Surely, therefore, we have an obligation to do the same to ourselves. Does it really make sense to try to reinvent the wheel? All resources are scarce and you cannot get something for nothing. We all learned this when we studied economics at university, but you don t have to read economics to appreciate opportunity costs. You learn about these through the university of life. Is the cost of a totally independent line justified? When we talk about resources, of course, it is more than just those needed to produce standards we must consider. There is the equally important task of maintaining them and keeping them up-to-date. Unless we are convinced that we can do so, we might be better off not starting out in the first place. To do so could be jumping from the frying pan into the fire and might result in an even more harmful situation. Where there are no accounting standards then at least users are or should be aware of that fact, unfortunate as it may be. They may not be so aware of the position, however, where it is one of standards which are not kept up-to-date. In this context we have to ask ourselves whether we have the necessary educational and professional level in order to do the work required. This is a question to which we should seek answers. It is fundamental to whatever approach we adopt. It is absolutely crucial for trading nations that their standards have international acceptability. Without this, then, the facility to attract foreign capital and investment into the country becomes all the more

6 difficult and so is the ability of national institutions to trade in international capital markets considerably weakened. One way of getting such international recognition and acceptability is by applying standards which have been developed by an accredited body of good standing in other words international accounting standards. Multi-national companies and other transnational organizations are often required to comply with international standards. If we wish to attract and keep these organizations, then we must be able to cope with this and one way is to try to dovetail the national with the International. As I said earlier, I am not suggesting the blind acceptance of international standards and the subjugation of our independence. Those of you who know me well know that that would be a complete anathema to me and totally out of character. Such standards must be assessed and modified if they are incompatible with local needs and again I would repeat there is a difference between not liking and incompatibility". Of course, everything must be examined in light of particular country or region and the international may not, and my emphasis may not, be a direct substitute for the national. We must not forget domestic needs and domestic users but these can be catered for even with an international approach. National law is obviously paramount and international standards cannot be applied if they conflict with it. We all recognize and accept this. What we should also recognize is that simply because legislation incorporates specific accounting standards or practices; this does not necessary mean that they are good. It means nothing more than that they are a legal requirement, and it has no qualitative inference. We all know that you can get bad laws. Additionally, international accounting standards are a useful device against which we can critically examine current legal practice. In conclusion let me repeat that I believe that there is a strong economic case for adopting international standards as a basis for our professional work and that we should be encouraging governments to give serious consideration to this. Also, in the interests of closer economic cooperation between all of the Arab nations and the trading blocks within them, the adoption of international accounting standards and auditing guidelines should be encouraged on as wide a front as possible. When international standards require some modification because of a real special need or where a particular standard is not available and has to be developed by ourselves then this should be done on a truly Arab basis.

7 This can only be done if we have a strong and credible Arab accounting profession. This is one of the reasons why the Arab Society of Certified Accountants (ASCA) was formed, but I am sure you all know my views on this. It is also important that we have a say in the development of international standards and guidelines. Now that ASCA is a full member of the International Federation of Accountants, there is no reason why we cannot contribute to the work of IFAC and IASC. This will obviously require a commitment on our part to give of our time and resources but it is a commitment which I am sure we will be willing to make. I can assure you that the call of H.E Habib Kassim on us to undertake a responsibility in the harmonization of Arab Accounting Standards will be taken most seriously. As a matter of fact, ASCA Board will formulate this afternoon plans towards the realization of the minister's directive which I consider as an honor and a duty. It was a great pleasure and honor for me to be with you at this seminar. I have learned a great deal during these two days of excellent presentations and discussions. The opening address of H.E. The Minister lighted the path, clearly for our deliberations. Having known Mr. Kassim for a very long time, I have always admired his ability to look at the future while handling the demands of his great day-to-day responsibilities. It is indeed an honor for us to have been privileged with his valued sponsorship. The excellent organization of this seminar is a credit to the Bahrain Society of Accountants and Auditors who also overwhelmed us with kindness and hospitality. I am sure I speak for everybody when I register a note of thanks to you, Mr. Redha Faraj, and to all your distinguished colleagues on the board of Bahraini Society as well as its entire membership.