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Irvine, Helen J. (2008) The global institutionalization of financial reporting: The case of the United Arab Emirates. Accounting Forum 32(2):pp. 125-142.
© Copyright 2008 Elsevier
The global institutionalization of financial reporting: the case of the United Arab Emirates
by Helen Irvine School of Accounting & Finance University of Wollongong Northfields Avenue Wollongong NSW 2522 Australia. Phone: 61 2 42215919 Fax 61 2 42214297 Email: hirvine@uow.edu.au. Abstract. Almost 100 countries have agreed to adopt or work towards convergence with the International Accounting Standards Board’s International Financial Reporting Standards (IFRS). Applying an institutional theory framework at a nation state level, and using publicly available data about the emerging economy of the United Arab Emirates (UAE) as a case, this paper identifies some of the global coercive, normative and mimetic pressures which have contributed to this widespread adoption. The challenge for emerging economies such as that of the UAE is whether the reality of IFRS implementation can match the image of IFRS adoption. Keywords: International Financial Reporting Standards; globalization; emerging economy; institutional theory
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… as capital roams the world, nation states are obliged to provide
regulatory and other frameworks to bring it under political control not
merely to protect the interests of citizens, but also to facilitate and foster
the conditions in which private accumulation can take root and flourish
(Arnold and Sikka, 2001, p. 492)
1. Introduction
The “sudden rush” of the international community to converge national Generally Accepted
Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS)
(Fontes et al, 2005, p. 416) represents the outworking of economic and political factors,
demonstrates the power and ubiquitous nature of globalization (Neu and Ocampo, 2007, p.
364), and has resulted in the institutionalization of a new regulatory regime. This paper uses
the United Arab Emirates (UAE), a Middle Eastern Federation of seven states, and a
member of the Gulf Cooperation Council (GCC)1 as an example of IFRS adoption by an
emerging economy2, offering an institutional interpretation within a global context.
The need for high quality “global GAAP” (Ampofo and Sellani, 2005, p. 228) was
officially recognized in 1966, when professional accounting bodies first began working
towards a set of international accounting standards (IASC/IASB Chronology, 2006). Since
1 The other states making up the GCC are Bahrain, Kuwait, Oman, Qatar and Saudi Arabia. 2 This paper defines emerging economies as those which, although they are not classified as “developing” in terms of wealth, are characterized by their recent emergence into global financial markets, the development of regulatory processes, the opening of stock exchanges, and the breaking down of trade barriers as they become more sophisticated economically. Standard and Poor’s Emerging Market Data Base indices focus on the GCC markets, classifying them as “not yet fully open for foreign investment” (Standard & Poor’s, 2006). Emerging and developing economies, while vastly different in terms of wealth, both face similar challenges in their adoption of the economic policies and regulatory systems of western nations.
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then world capital markets have become increasingly tied to one another (Turner, 2001, p.
1), and so “integrated and interdependent” that “the stability of one market affects others”
(UNCTAD, 2005, p. 5). As the barriers between nations have become more “porous”
(Harris, 2002, pp. 417 – 418), domestic economies have become increasingly vulnerable to
the “external shocks” caused by an “expanding world economy”, necessitating the adoption
of globalized practices if they are to function effectively (Lehman, 2005, p. 979).
This level of integration meant that the financial crises of the late 1990s affected all nations,
resulting in a heightened recognition of the benefits of having “one set of high-quality
globally recognized financial reporting standards” (UNCTAD, 2005, p. 5) and a call for the
development of such standards (IASC/IASB Chronology, 2006). Furthermore, as labour
and capital flows have been freed up over the last decade, there have been “huge increases
in foreign direct investment (FDI) flows across countries” (Floyd, 2001, p. 109), arguably
driven by the dominant nation-states as they have pursued “intentional politics and
policies” designed to enhance their wealth and economic standing (Arnold and Sikka, 2001,
p. 478). Whereas some countries have attempted to avoid the “cultural imperialism” of
globalization (Steger, 2003, p. 70), emerging and developing nations, if they wish to
participate in the wealth enjoyed by the developed nations, have had no choice but to
embrace its logic and realities. The development of IFRS is one manifestation of that
institutional logic, with the globalization of IFRS described as “part of a general wave of
standardization that has taken place in broader, non-accounting contexts over the last 150
years” (Rodrigues and Craig, 2007, p. 740). For the purposes of this paper, globalization is
defined as “a worldwide pressure for change” (Granell, 2000, p. 89), as the “closer
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integration of the countries and peoples of the world” (Stiglitz, 2001, p. 9), and is
interpreted as a universal process of institutionalization that both relies on and results in
greater interdependence between economies, political systems, culture and societies. This is
illustrated in the case of the UAE.
Each of the seven Emirates of the UAE retains control of its own natural resources and
directs its own commercial activity. Formed in 1971 as a coalition of sheikhdoms, and
relying primarily on revenue from oil and gas (DIFC, 2006j), the UAE in the last few years
has expanded its economy significantly through trade and finance, has been active in
seeking commercial partnerships, and is currently experiencing a high level of business
optimism and strong revenue growth. Sheikh Khalifa bin Zayed Al Nahyan, the President
of the UAE since his father died in 2004 (The World Factbook, 2006), has maintained his
father’s pro-western thinking, with an “aggressive approach to marketing the country as an
attractive destination for business as well as residence” (Global Investment House, 2005).
While it is an Islamic country, Islamic banking has not dominated the UAE. A “niche”
market in the 1990s (Wilson, 1995), Islamic banking is now expanding to countries other
than Islamic states (Kowsmann and Lane, 2007; De Teran, 2007; Wright and Yuniar,
2007), but still claims a small segment of the UAE’s banking industry. Al-Tamimi and Al-
Mazrooei (2007) quantified Islamic banks’ share of total UAE commercial bank assets at
just 11.1% in 2004. Changes in the structure of banking systems in GCC countries to
greater economic integration and deregulation (Ariss et al, 2007), and UAE plans for a
“mega merger” of two of its commercial banks to create “a national and regional
champion” (Timewell, 2007), are further indications of the UAE’s pro-western emphasis.
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The UAE’s expansion has increased its need for the adoption of IFRS, which in turn has
increased the legitimacy of the UAE as a worthy site of FDI3. The UAE currently requires
the application of IFRS for its banks and for domestic companies listed for trading at the
recently formed Dubai International Financial Centre (DIFC) (DIFC, 2006a; DIFC, 2006e;
DIFC, 2006f; IAS Plus, 2006a). Prior to and following its adoption of IFRS, the
government of the UAE has faced the task of attempting to reform its regulatory, legal and
economic structures in order to provide the necessary infrastructure for the adoption of
western-style financial reporting standards.
From an institutional perspective, the focus of this paper is both global and societal. The
UAE, like many other emerging or developing countries, has responded to powerful global
pressures to develop economic and political systems that conform to those of western
developed nations, and to adopt IFRS in order to be seen as legitimate participants in
international capital markets. Rather than focusing at the organizational field level within
the UAE, and investigating the way in which institutional practices are embedded in
individual organizations, this study steps up a level, paying attention to the global pressures
for IFRS adoption to which the UAE has responded. The UAE is therefore identified as part
of a field in which each nation state faces global institutional pressures to establish
legitimate regulatory financial reporting systems. Following its adoption of IFRS, the UAE,
like other emerging economies and developing nations, will face difficulties in
implementing those reporting standards at a societal level, and ensuring that the image of
legitimacy gained by adopting IFRS is matched by the reality of IFRS implementation.
3 UAE adopted International Accounting Standards as early as 1999, initially for banks (Jose, 2004).
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This paper first offers an interpretation of institutional theory from a global perspective,
identifying the development and adoption of IFRSs as a global institutionalized practice.
Following this, the legitimizing power of IFRS is outlined, particularly for emerging
economies and developing nations. The focus then shifts to the UAE, and its adoption of
IFRS is analyzed in institutional terms. This is accomplished by considering the various
global pressures that contributed to the UAE’s adoption decision. Challenges faced by the
UAE and other emerging economies in adopting and implementing IFRS are outlined next,
and the potential for a decoupling of the image presented by the adoption of IFRS from the
reality of actual IFRS implementation is raised. The paper concludes with an explanation of
the significance of global IFRS adoption, and outlines opportunities for further
institutionally-informed studies of IFRS adoption and implementation at a global and
societal level.
2. A global perspective of institutional theory
Traditional accounting, based on the assumption that “economic growth promises a better
world” (Cooper et al, 2003, p. 361), has been integral to the process of globalization, as
world-wide, emerging economies and developing countries have succumbed to a process of
economic “homogenization and standardization”, including the imposition of western-
centric accounting standards and regulations (Cooper et al, 2003, pp. 359 - 360). The
diffusion of these practices has been accomplished through organizations such as The
World Bank, the IMF and the Organization for Economic Co-operation and Development
(OECD) (Neu et al, 2006; Neu and Ocampo, 2007, p. 367), through related economic
strategies (Stiglitz, 2001, pp. 12 – 13), through accounting requirements (Lodhia and
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Burritt, 2004, p. 348), and through professional bodies and professional accounting firms
(Mir and Rahaman, 2005). Multinational corporations have also contributed to this
phenomenon, and with western governments relying on accounting for the regulation of
enterprises (Arnold and Sikka, 2001, p. 476), similar systems of regulation are expected of
developing and emerging economies wishing to attract FDI. Adopting these acceptable
western-centric global accounting technologies, including IFRS, provides developing
nations with legitimacy (De Lange and Howieson, 2006, p. 1009; Mir and Rahaman, 2005,
p. 817). Similarly, emerging economies, if they wish to gain credence in global capital
markets, need to adopt western accounting technologies.
The integrity and usefulness of an institutional approach to explain and interpret accounting
activity have been acknowledged (Dillard et al, 2004; Hussain and Hoque, 2002; Hines et
al, 2001; Feeney, 1997; Ang and Cummings, 1997; Covaleski and Dirsmith, 1995;
Carruthers, 1995; Mezias and Scarselletta, 1994; Covaleski et al, 1993; Carpenter and
Feroz, 1992; Mezias, 1990). Institutional theory focuses on the assumed values and beliefs
of social and organizational life. Organizational conformity with these values and beliefs
provides much more than technical benefits, bestowing powerful legitimizing attributes,
thereby granting those organizations access to resources (DiMaggio and Powell, 1983) and
ensuring their survival in an increasingly organized and inter-connected society. Operating
as forces for institutional isomorphism, the process by which organizations adopt similar
practices and therefore look the same (DiMaggio and Powell, 1983; Covaleski et al, 1993,
p. 66), institutional pressures can be identified as coming from three sources. Coercive
institutional pressures are represented by rules enshrined in regulatory systems, and can
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also include pressures from the global networks of multinational corporations (Guler et al,
2002, pp. 212 – 213). Normative pressures refer to taken for granted organizational
behaviour, manifest in the workings of professions, and also in “interorganizational
networks” (Haunschild, 1993, p. 564). A study of the adoption of a defence used by
companies at risk of a hostile takeover highlighted the influence of contacts’ adoption, so
that a practice would come to seem “normatively appropriate, whatever its technical merit”
(Davis, 1991, p. 594). Mimetic pressures refer to the copying of successful organizational
behaviour by other organizations (DiMaggio and Powell, 1983), particularly in situations of
uncertainty, when organizations replace “technical rules” with the “institutional rule
‘imitate similar/large/successful organizations’” (Haveman, 1993, p. 623). They thus mimic
the behaviour of “other organizations in their environment” (Galaskiewicz and Wasserman,
1989, p. 454). Together, these three separately identified institutional forces contribute in
“interdependent and mutually reinforcing ways, to a powerful social framework” (Scott,
1995, p. 34).
While a variety of responses to these pressures has been identified as possible, institutional
theory has nevertheless endured criticism for neglecting the dynamics of power (Dillard et
al, 2004; Carruthers, 1995, p. 325; Davis and Powell, 1992, p.363) and for focusing on
institutionalized behaviour as a state rather than a process4. Scott (1995, p. 52), however,
identified cultures, structures and routines as the “carriers” of institutions, i.e. the
4 If institutionalization is seen as a entity, i.e. a “cultural or social system” (Scott, 1995, p. 64), the question that can be asked is why this has occurred. If, on the other hand, it is seen as a process, then how that process occurred is a more relevant question. Institutionalization, according to Zucker (1977, p. 728) is both “a process and a property variable”, with questions of why and how both relevant to an understanding of institutionalized behaviour.
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mechanisms by which institutions were actually embedded in organizations5. Institutional
theory recognizes the possibility, in cases where perceived compliance with institutional
requirements is essential for survival, that organizational image may be “decoupled” or
“loosely coupled” from the reality behind that image. In cases where institutional
conformity is desirable but there are technical challenges to actual implementation of
institutionally desirable practices, rather than the institutional practice being embedded in
organizational cultures, structures and routines, it can be adopted as a kind of “symbolic
window-dressing” (Carruthers, 1995, p. 315) for its legitimizing power, without the
organization’s following through with thorough implementation.
Normally institutional analysis is undertaken at the level of the organizational field, a
grouping which is identified as occurring in a four stage structuration process (DiMaggio
and Powell, 1983). An increase in the interaction among similar organizations is followed
by sharply defined inter-organizational structures of domination and patterns of coalition,
an increase in the information load for organizations, and eventually a mutual awareness in
a set of organizations of a common purpose. During this process, organizations are said to
develop “a concern for self-maintenance” (Scott, 1995, p. 18), seeing themselves as part of
an organizational field competing for scarce resources. Once this occurs, the stage is set for
increasing institutionalization of these organizations.
Dillard et al (2004), incorporating a structural perspective into their interpretation of
institutional theory, expanded the level at which institutions came into being. They
5 This notion rested on Giddens’ theory of structuration, which emphasized “the reciprocal relation of structure and action in all social behavior” (Scott, 1995, p. 52).
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suggested that individual organizations and organizational fields exist in an economic and
political context, and that this context provides the foundation for institutional practice.
According to this view, actors in the institutionalization process exercise influence at
different levels, with “governmental officials, regulators and legislators” as the “primary
agents at the economic and political level”, industry leaders, unions and consultants
exercising influence at the organizational field level, and workers and managers exercising
influence at the organizational level (Dillard et al, 2004, p. 513). The result, they suggested,
is “continual, dynamic change” through multiple levels, from societal political and
economic settings, through organizational fields to individual organizations (Dillard et al,
2004, p. 512). This view incorporates an organizational field focus, with a societal setting
in which that field exists (political and economic) at a level above, and below at the level of
the individual organization.
This paper pushes that viewpoint further, suggesting that in an increasingly globalized
world, powerful institutional forces operate at an international level on individual nation
states, which then become a field for the transmission and adoption of acceptable
institutional practices. According to Guler et al (2002, pp. 207 - 208) “neoinstitutional
theorists have explicitly argued that isomorphism occurs at the country level of analysis as
well as at the level of the organizational field or the industry”. They identify two categories
of such research as comparative studies on a number of countries, or as studies based on
evidence from many countries, but “dealing with practices adopted by governments or
nation-states as opposed to by organizations or firms” (Guler et al, 2002, p. 208). The
European Union was shown to play a crucial role in the adoption of ISO9000, an
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international quality certification, illustrating the fact that “states are key in the diffusion of
new practices borrowed from other countries” (Guler et al, 2002, p. 212, citing Westney,
1987, Guillen, 1994, Arias and Guillen, 1998).
These practices, legislated (or developed) at a nation state level, are then transmitted
through to more specific organizational fields, and then to individual organizations. In other
words, applying DiMaggio and Powell’s (1983) four stage structuration process, in a
globalized environment, there has been an increase in interaction between nation states,
mediated through international organizations such as the World Bank, multinational
corporations, trade organizations, professional accounting firms, and the IASB. Globally,
structures of domination and patterns of coalition have been set up as a result of these
interactions. One example of this is in the classification of nation states as developed,
developing or emerging. Developed nations, the leaders in global capital markets, are in a
position to enforce their culture and regulatory systems either directly or indirectly, and
developing and emerging economies, desirous of entering those markets, are faced with the
necessity of embracing increasingly globalized technologies of trade, investment,
regulation and accountability. In the case of global capital markets, particularly with
corporate collapses and scandals over recent years, there has been an increase in
information load, and an increasing awareness between all nations, developed, developing
and emerging, not only that they are competing for a share of global FDI, but that there are
certain “rules of the game” (Mouck, 2004) that need to be adopted if they are to be seen as
legitimate recipients of such investment.
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In the case of the UAE, the World Bank identifies it as part of the Middle East and North
Africa (MENA) region, a group of 21 countries (World Bank MENA, 2007d), with their
own specific geographic and economic concerns (World Bank MENA, 2007a),
opportunities for funding (World Bank MENA, 20007b), and need for reform (World Bank
MENA, 2007c). The emphasis in the region is on sustaining and deepening reforms “to
improve the climate for private investment”, with opportunities for more trade and better
governance mechanisms and accountability (World Bank MENA 2007d). In the global
context, while this establishes a nation state field, it is part of a wider global field.
As a member of the MENA field, on the global stage, the UAE is subject to coercive,
normative and mimetic global institutionalizing pressures from the World Bank, capital
markets, the Big 46 international accounting firms and the IASB. All these can be identified
as factors that have influenced the UAE’s adoption of IFRS. The development of new
regulatory systems for more specific organizational fields, for example banks and
companies listed on the DIFX, has followed. Through these systems, new financial
reporting regimes, having been adopted at a nation state level, will be pushed down to
individual organizations that are directly required to conform with IFRS, and to other
organizations which operate in the same environment and are subject to coercive pressures
of a formal or informal nature, and to normative and mimetic expectations of what
constitutes acceptable financial reporting practice. The extent to which IFRSs are adopted
at the organizational level will depend on the effectiveness of the regulatory system and the
willingness of those organizations to respond positively to institutional pressures.
6 These are PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young.
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Institutional theory recognizes the possibility that there may be a decoupling or loose
coupling of the image created by the adoption of IFRS from the reality of the actual
financial reporting practices at organizational level. The way this change is actually
embedded in organizational practice can only be discerned by an examination of the
workings of the regulatory structures and the actual reporting behaviour of individual
organizations, which is outside the scope of this paper.
Institutional theory has emphasized the “outcome” rather than the “process” of
institutionalization, with little attention paid to the way institutional practices are actually
established, appropriated, or eventually de-institutionalized (Dillard et al, 2002, p. 510).
Consequently, the role of power has been neglected, and the “recursive” nature of
institutionalization neglected. This can be explored by applying DiMaggio and Powell’s
(1983) structuration process at several levels. The nation states become increasingly aware,
in the global arena, of the need to adopt institutionally appropriate behaviour in the form of
IFRS. This is then drilled down through organizational fields, to individual organizations.
Figure 1 encapsulates these concepts, setting the scene for political and economic
institutionalizing forces to operate at a global level on a nation state field, then down to an
organizational field within that nation state, and ultimately, down to the level of the
individual organization. For the purposes of this study, the focus is on IFRS adoption at the
nation state level, in response to a variety of institutional influences. The embedding of
these institutions in organizational fields and individual organizations would investigate the
implementation phase of IFRS, which, in the context of the UAE, will be shown to be
potentially problematic. Another issue is the reflexive nature of institutionalizing forces,
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which some pushing up from individual organizations, through organizational fields, to the
nation state level.
Take in Figure 1.
3. The legitimizing power of IFRS in a global context
This reflexive relationship between IFRS and a global institutionalized system means that
IFRS is both a manifestation of that institutionalization process, and at the same time, a
technology through which it is mobilized. Dillard et al (2002, p. 512) outlined three levels
of institutional dynamics, the economic and political level (for the purposes of this paper,
the nation state level), the organizational field level (for example, UAE banks, which are
required to implement IFRS), and the organizational level (which would consider
individual banks and their IFRS implementation). The various institutions and actions at the
various levels were described as “recursive” in nature, “reciprocally related” (Dillard et al,
2002, p. 513), and cascading both down and up, as institutionally acceptable practices are
pushed down from the political/economic level, or up as “the actions taken by
knowledgeable, reflexive agents within the organizations rise up through the three levels”,
causing changes in the “established order” (Dillard et al, 2002, p. 514). Since in the UAE,
members of the government are also owners of many of the powerful individual
organizations, this seems inevitable.
IFRS have been developed intentionally as a global language for accounting across
international boundaries, a significant achievement in a process that began in the 1960s,
saw the formation of the International Accounting Standards Committee (IASC) in 1973 to
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address concerns about the lack of comparability of financial reports between countries
(Alfredson et al, 2005, p. 7), and still continues as the reconstituted IASC, now the
International Accounting Standard Board (IASB)7 seeks to make partnerships with national
accounting standard-setters and encourage the adoption of IFRS. Sir David Tweedie, the
chairman of the IASB (IASB, 2006f), identified four reasons why this ought to be a
priority, highlighting the reality that national standard setters operate in an increasingly
globalized environment:
1. there is a “recognized and growing need for international accounting
standards”;
2. “no individual standard setter has a monopoly on the best solutions to
accounting problems”;
3. “no national standard setter is in a position to set accounting standards
that can gain acceptance around the world”; and
4. there are “many areas of financial reporting in which a national
standard setter finds it difficult to act alone”.
The last ten years have seen a tremendous boost to the influence and achievements of the
IASC/IASB. Before the 1990s it had no “meaningful relationship” with national accounting
standard setters from the major industrialized countries (Jacob and Madu, 2004, p. 358), but
7 The IASB was reconstituted in 2000 (IASC/IASB Chronology, 2006).
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now the IASB represents the major trading nations8, with the first Chinese and Indian
trustees being appointed to the IASC Foundation9, the IASB’s Statement of Best Practice
on working with other accounting standard-setters released10, and over 100 countries now
either converging or adopting IFRS (IASB, 2006i)11.
Many emerging economies and developing nations have moved to adopt IFRS, recognizing
their need to share in the benefits promised by such adoption. Guler et al (2002, p. 211), in
their paper on the global spread of ISO 9000, propose that while initially relatively few
members of a “social system” take up a new innovation in its early stage, the mimetic effect
means that the rate of adoption of the new institutional practices increases, until saturation
point is reached, when it slows down again. These benefits of adoption could be technical,
or they may be symbolic.
On a technical level, the prospect of greater mobility of capital at a decreased cost, more
efficient allocation of resources, improved quality of financial reporting, a decline in
earnings management (UNCTAD, 2005, pp. 5 -6), and avoidance of the necessity of having
8 The “geographic balance” of the IASB is interesting (Jacob and Madu, 2004, p. 359). Its 14 members include representatives from Europe, North America, Australia, Japan and South Africa (IASB, 2006c), and until July 2007, when a Chinese member joined, none from developing nations. Not surprisingly, all board members have links with multinational corporations and/or the Big 4 international accounting firms (IASB, 2006d; IASB, 2006e; IASB, 2006g; IASB, 2006h) 9 The IASC Foundation oversees the IASB. It is comprised of 22 trustees from North America, Europe, Asia-Oceana, South Africa and Brazil (IASC Foundation, 2006a; IASC Foundation, 2006b). 10 The IASB released its “Statement of Best Practice: Working Relationships between the IASB and other Accounting Standard-Setters” on 6 April 2006. The document states the aim of developing a set of high quality global accounting standards, and also acknowledges the need to take account of “the special needs of small and medium-sized entities and emerging economies” (IASB, 2006i). 11 In 2005, an “unprecedented” number of countries adopted IFRS for financial reporting (IAS Plus, 2006b), including China (38 new accounting standards) (IASB, 2006b), Brazil (requiring IFRS for financial institutions), the Slovak Republic and Bulgaria (extending the use of IFRS), India (“moving to align its GAAP” with IFRSs), Uruguay (requiring IFRS) (IAS Plus, 2006c). In addition, Chile and Israel have now embarked on a programme of convergence with IFRS (IASB, 2006a; Tweedie, 2006).
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to develop their own accounting standards, against a backdrop of the accountability
demands of the World Bank and IMF (Neu and Gomez, 2006; Stiglitz, 2001, pp. 12 – 13),
are all compelling incentives for the adoption of IFRS by developing countries and
emerging economies wishing to participate in global capital markets. The United Nations
Conference on Trade and Development (UNCTAD) has acknowledged the need to
“mobilize investment for financing economic and social development”, and the essential
role of a “global set of high-quality financial reporting standards” in that development
(UNCTAD, 2005, p. 3).
Globally, the adoption of IFRS will save multinational corporations the expense of
preparing more than one set of accounts for different national jurisdictions, the professional
status of accounting bodies will be enhanced (Chand, 2005, p. 211), and the big
international accounting firms will benefit in their efforts to expand the global market for
their services (Cooper et al, 1998, p. 532). The western economic power blocks, dominated
as they are by the interests of multinational corporations, and over-represented on the IASB
relative to developing countries, have instituted a system of international accounting
standards that “erase the local in the interest of harmonizing the global” (Cooper et al,
2003, p. 359). Even though there are opportunities arising from the adoption of
international standards (Ampofo and Sellani, 2005, pp. 228 – 9), there are also difficulties
involved in accommodating a variety of cultures and overcoming the challenges faced by
emerging and developing countries in the introduction, interpretation and regulation of
IFRS (Ampofo and Sellani, 2005, p. 229; World Accounting Summit, 2005; Turner, 2001;
IASB, 2006i; IASB, 2006a, pp. 13 - 14).
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In spite of the western-centric nature of IFRS and of the barriers and challenges to adoption
and implementation, developed, developing and emerging economies have enthusiastically
adopted IFRS. In recognizing their vulnerability, and concerned about their ability to
maintain or improve their position in capital markets, they realize that IFRS adoption offers
much more than technical benefits. A powerful legitimizing force, with symbolic power,
IFRSs give adopting nation states the credibility to compete for FDI in world capital
markets. Significantly, the US, with the largest capital market in the world, while it has a
strong (IASB, 2006c; IASB, 2006g; IASB, 2006h) even dominating (Dzinkowski, 2006, p.
54) presence on the IASB, has been more cautious in converging with IFRS (IASB, 2006j;
UNCTAD, 2005, p. 8)12. Its strong global position means that its need to rely on the
legitimizing power of IFRS is considerably less than that of other nations. In international
terms, the UAE is a wealthy country13, committed to rapid industrialization and investment,
with a bright future. The government of the UAE, committed to further globalization in
order to encourage DFI, has recognized the benefits of the adoption of an international
accounting language, both technical and symbolic, and has set in motion the adoption of
IFRS, in response to coercive, normative and mimetic institutional pressures at a global
level.
12 The US Financial Accounting Standards Board (FASB) signed a Memorandum of Understanding (IASB, 2006k) with the IASB in 2002, indicating the commitment of both bodies to work towards the development of “high-quality, compatible accounting standards” (De Lange and Howieson, 2006). It has been reinforced by the protocol signed by the IASB and FASB in 2006 (IASB, 2006j) with a view to abolishing, by 2008, the requirement for US-listed companies using IFRS to comply with US GAAP (Agence Europe, 2006; Accountancy Ireland, 2006). 13 The World Bank (2006e) ranked the UAE as 34th in terms of Gross National Income per capita in 2005, and has classified it as a “high income, non OECD” country (World Bank, 2006d).
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4. The UAE’s IFRS adoption: a response to globalized institutional pressures
The adoption of IFRS is a vital factor in the UAE’s ambition to attract global capital, with
further calls being made for an extension of the federation’s current requirement for banks
and DIFX listed companies to report under IFRS (Sharif, 2006). The UAE, while it plays
an important role in Middle Eastern affairs and takes a leading role in the GCC, lags behind
most of the other GCC countries. With the exception of Saudi Arabia, the four other GCC
states all require IFRS adoption by law (IAS Plus, 2006a; Gulf News, 2005a)14. The GCC,
originally formed in 1981 because of the threat of the Iran-Iraq war, has not been
economically integrated, with the UAE’s trade with other GCC countries significantly less
than that with western industrial economies (Looney, 2003). Several key institutional
players behind the UAE’s move to adopt IFRS include the World Bank and capital markets,
the Big 4 international accounting firms, and the UAE’s trade partners and multinational
corporations.
4.1 Coercive pressures: World Bank and capital markets
Formal coercive institutional pressures are the most obvious, since in an institutionalized
environment there is an “elaboration of rules and requirements” including “pressures for
conformity to public expectations and demands” (Oliver, 1997, p. 101). Organizations gain
and maintain legitimacy by conformity with these rules and regulations, and by being
acceptably organized, from a legal point of view, even if the changes made in response to
those regulations are more ceremonial than actual (DiMaggio and Powell, 1983, p. 150).
20
This can be achieved not only by conforming to externally imposed regulations, but
ultimately by internalizing similar regulatory systems. In a global setting, not only will
nation states comply with international rules and regulations, but if they are desirous of
competing in global capital markets, they will change isomorphically to adopt the
regulatory systems deemed appropriate and desirable by other participants in that market.
A major player in world capital markets, the World Bank and its sister organization, the
IMF, are “deeply embedded in the structures of capitalism” (Annisette, 2004, p. 316),
providing loans and assisting in economic development, arguably from beneficial motives.
These two organizations represent a major global institutional force. Neu et al (2002), in
their study of the World Bank’s role in higher education, identified the organization as a
facilitator of globalization, positioned as it is uniquely “within the web of international
institutions and connections to the world’s major economic powers” (Neu et al, 2002, p.
276). There is no doubt that the World Bank has “pushed countries to adopt IASs
(International Accounting Standards) or develop national standards based on IASs”, in
some cases making the adoption of IASs a requirement of their loans (Alfredson et al,
2005, p. 9). The bank has identified public sector efficiency and governance, for example,
as “one of the most effective leverages for sustaining competitiveness and securing equity
in society” (World Bank, 2006b), and provides ratings of nations based on their economic
strength, the ease of starting a business, dealing with licences, and other business-related
outcomes (World Bank, 2006c). The drive towards the adoption of IFRS, also promoted by
the World Bank (Mir and Rahaman, 2005, p. 835), is based on economic rationalist
14 Bahrain, Kuwait, Oman and Qatar require IFRS adoption by all domestic listed companies (IAS Plus,
21
principles designed to achieve “global harmonization” (Lehman, 2005, p. 976). It is a
mechanism by which globalization practices are “diffused”.
The UAE joined the World Bank in 1972, and since then has been working on a Technical
Cooperation Program, developing infrastructure, industrial policy and economic planning
(World Bank, 2006a), and following World Bank guidelines15. In 2006 its World Bank
rating was 69th overall out of 155 countries, and 6th best in terms of paying taxes (World
Bank, 2006c). Strong revenue growth in Arab businesses, together with optimism and the
active seeking of commercial partnerships (PricewaterhouseCoopers and Moutamarat,
2006) are factors which have contributed to the UAE’s aspirations to establish itself as an
international capital market able to attract FDI16. In this environment, a globalized set of
accounting standards gives assurance of trustworthy, reliable financial information about
corporations (AME Info, 2005e), and provides the legitimacy necessary to encourage
investment and optimism. The role of Islamic banking, highlighted earlier, is not dominant
in the UAE at the development bank level either. The Islamic Development Bank (2007),
established in 1975 to foster Islamic financing of long-term investments, has 56 members,
with the UAE holding 5.56% of its capital (Islamic Development Bank, 2007). It has
established a relationship with the World Bank, through a Memorandum of Understanding
signed in 2002 (Memorandum of Understanding, 2002).
2006a). 15 In 2003 Dubai, UAE, hosted the annual meetings of the Boards of Governors of the World Bank Group and the International Monetary Fund (DIFC, 2006j). 16 This desire to enter world capital markets and attract FDI is not limited to developed and emerging economies. Suttle (2003) identified a shift among developing nations from debt financing to attracting FDI.
22
The informal coercive pressures of multinational corporations and capital markets are
evidenced in the opening of the DIFX (DIFC, 2006g) in September 2005. This event
further established the UAE as a globalized nation, providing investment opportunities on
the world market, and competing outside the MENA region with stock exchanges in New
York, London and Hong Kong (DIFC, 2005). The attraction of this onshore capital market,
according to its publicity, is “zero tax on income and profits, 100 per cent foreign
ownership, no restrictions on foreign exchange or capital profit repatriation, operational
support and business continuity facilities” (DIFC, 2005). Not only does the establishment
of the DIFX facilitate the growth of foreign investment in the UAE (DIFC, 2006c), but it
also reinforces the need for the UAE to demonstrate integrity and transparency in financial
reporting (DIFC, 2006b; DIFC, 2006d) by adopting a set of IFRS and developing a
regulatory regime to accompany them (AME Info, 2005c).
The establishment of the DIFC therefore has been accompanied by a realization that
“unified accounting and reporting standards” were needed in order to uphold the centre’s
“integrity, efficiency and transparency” (Al Mulla, 2005). To this end, the UAE has been
undergoing a process of overhauling its legislation (DIFC, 2006d; DIFC, 2006h), courts
(DIFC, 2006i) regulatory requirements (DIFC, 2006d) and regulator (DIFC, 2006k), since
the old company law resulted in a number of obstacles and challenges for the UAE (Al
Mulla, 2004). The ruler of Dubai, Shaikh Maktoum Bin Rashid Al Maktoum, recently
issued new laws dealing with “legal, employment and security issues in the Dubai
International Financial Centre”, in order to provide the “legal certainty” required by the
23
world’s financial communities (Gulf News, 2005b). These developments are in keeping
with World Bank practices.
Dubai Financial Services Authority Chairman, Dr Habib Al Mulla, stressed the necessity of
implementing IFRS in the UAE:
(s)trong regulations are an incentive for the financial sector. Serious financial
institutions look to the places where there are strong regulations, because at the
end of the day they’re a guarantee for institutions and shareholders. It may be
difficult initially to adopt them, but finally everybody will be pleased to have
strong regulations in place” (AME Info, 2005c).
According to the PwC Arab Business Intelligence Report (PricewaterhouseCoopers and
Moutamarat, 2006), based on interviews with 140 business and state leaders from 14
countries in the Arab world, including the UAE, most were actively seeking commercial
partnerships, and 73% of senior executives believed there should be a regional standard for
governance, risk management and compliance. In order to achieve these partnerships and to
participate in global capital markets, the adoption of IFRS plays a vital legitimizing role for
all nation states, and particularly for emerging economies such as the UAE.
4.2 Normative pressures: Big 4 accounting firms
Normative influences emphasize “the stabilizing influence of social beliefs and norms that
are both internalized and imposed by others” (Scott, 1995, p. 40), values that may be
unspoken, or expectations that have gained general acceptance. Perhaps the most striking
24
demonstration of normative institutional pressures is in the growth of a large, professionally
trained labour force. DiMaggio and Powell (1983, pp. 152 – 153) suggested that “the
collective struggle of members of an occupation to define the conditions and methods of
their work” had led to a similarity with their counterparts in other organizations.
Professional accountants played a significant role in the implementation of market-oriented
public sector practices in Fiji (Sharma and Lawrence, 2005), and were instrumental in the
adoption of international accounting standards in Bangladesh (Mir and Rahaman, 2005).
The World Bank requirement that projects financed by the bank be “certified by
internationally reputable firms of accountants” (Annisette, 2004, p. 318) has aided in the
proliferation of the international operations of the Big 4 international accounting firms.
Responding to the possibilities presented by a “liberalized global market place” (Jacob and
Madu, 2004, p. 362), international accounting firms have demonstrated themselves to be a
powerful institutionalizing force, as “international organizations which invest in systems of
global coordination and control” (Cooper et al, 1998, p. 531).
International accounting firms, by establishing bases in different locations around the
world, have played a significant role in the globalization of accounting (Perera et al, 2003,
p.27). Within the UAE, all of the Big 4 accounting firms have a presence17, and have
pitched themselves to add value to Arab businesses18. They require clients to present their
financial reports under IFRS, while other accountancy firms operating in the UAE “have
17 KPMG (2006) has operated in the UAE since 1973, Deloitte (2006) since 1964, PricewaterhouseCoopers (2006b) for over 30 years, and Ernst & Young (2006a) has been serving clients there since 1952. 18 Some examples are The Arab Business Intelligence Report (PricewaterhouseCoopers and Moutamarat, 2006), the 9th Global Fraud Survey of fraud risk in emerging markets (Ernst & Young, 2006b), the KPMG
25
been encouraging their clients, with considerable success, to prepare accounts under IASs”
(IFRS) (Khanna, 1999, p. 78). In doing this they have both driven the adoption of IFRS,
and benefited from that adoption. They have been identified as one of many international
forces behind the process of harmonization of accounting standards (Chand, 2005, p. 223),
and are the backbone of globalized business (AME Info, 2005d).
In 2005, the UAE hosted the first World Accounting Summit, involving leaders from
multinational corporations such as Coca-Cola, with industry speakers and accountants from
over 190 countries, and representatives of the Big 4 accounting firms (AME Info, 2005b),
including Deloitte, UK, Deloitte, Middle East, KPMG, UAE, PwC, Middle East (World
Accounting Summit, 2005). Speaking at the Summit, Abbas Ali Mirza, a partner of Deloitte
in Dubai and chairman of UNCTAD’s19 Intergovernmental Working Group of Experts on
International Standards of Accounting & Reporting, stated that “given the dramatic changes
to the global corporate landscape where the world is rapidly changing into a global village,
there is an imperative need to have a common medium of communication between the
international accounting bodies and multinational companies” (AME Info, 2005b). The
summit highlighted both the new opportunities for professional accountants, as well as the
difficulties involved in “consistent application” of international accounting standards
(World Accounting Summit, 2005).
(2004) GCC Fraud Survey and the PricewaterhouseCoopers (2006a) report entitled Doing business in the DIFC. 19 UNCTAD, the United Nations Conference on Trade and Development, was a patron of the World Accounting Summit of 2005.
26
4.3 Mimetic pressures: trade partners and multinational corporations
According to an institutional perspective, organizations modeled after other organizations
in their field are perceived to be more legitimate and successful (DiMaggio and Powell,
1983, p.152), and this is especially important in situations of uncertainty. Organizations do
not want to stand out as being different, and they therefore behave in ways that are socially
acceptable. The more organizations (or nations) that exhibit particular forms of behaviour,
the more pressure there will be on other organizations (or nations) to copy that behaviour.
The more uncertain the relationship between means and ends, or the more ambiguous the
goals of an organization (or a nation), the greater the reliance that organization will be
placed on modeling the example provided by “successful” organizations (or nations), in
order to conceal that uncertainty. Conversely, there is also the possibility that an
organization or nation with a strong sense of identity and culture may resist pressures to
copy other nations if they do not conform to that defined and understood identity. The
mimetic view therefore stresses conformity with orthodox structures and identity,
particularly in times of uncertainty. As successful multinational corporations have
expanded their “global reach”, they have instituted sophisticated systems of “financial
coordination” of their subsidiaries (Cooper et al, 1998, pp. 531, 532), and have modeled to
other organizations the desirability of the global harmonization of financial reporting.
Intimately connected with the regulatory regimes of the dominant nation states, they have
reinforced the desirability, for developing and emerging economies, of conformity with the
practices both of multinational corporations and of nations’ trading partners.
27
After its formation in 1971, the UAE’s economy expanded because of the huge oil reserves
in the region. The UAE is a “major player” in the global oil industry, with the Abu Dhabi
emirate alone containing 10% of the total oil reserves in the world (United Arab Emirates,
2006). Increasingly, however, the UAE’s wealth is attributable not only to its oil reserves,
but also to its non-oil sector. That grew from $US 626 million in 1972 (and a 35.4% share
in GDP) to $US54.2 billion in 2003 (a 70% share of GDP), leading to a multiplication of
the GDP of the UAE by more than 43 times since the country was established, and bringing
the country to the point where it is the third largest Arab community, with one of the
highest incomes per capita in the world (Kawach, 2003). Described as “tiny in size but
limitless in ambition”, the UAE’s development of the $20 billion Burj Dubai (Reed, 2006,
p. 34) with its series of “free zones” has been designed to capture investment from a rush of
“petrodollars” from the second international oil boom20. The existence of a global trading
system has been identified as important in the diffusion of globally acceptable practices, as
in the case of the global adoption of ISO 9000, an international quality certification. In that
case, trading relationships were shown strongly to influence the adoption of the certificates
(Guler et al, 2002). UAE’s trading partners, both in the oil industry and non-oil industry
sectors, provide motivation to further diffuse globally desirable practices.
Currently the UAE is more diversified, dependent not only on oil and gas, but on
“international trade, banking, tourism, real estate and manufacturing”, with opportunities
for FDI, particularly since the opening of the DIFC (PricewaterhouseCoopers, 2006a, pp.
20 It has been reported that the first oil boom (1973 – 1985) saw the Arab states investing money offshore, but the second boom (2000 – 2006) has been characterized by greater investment in the Middle East itself, with
28
10 - 11). The establishment of “free trade” zones by the UAE represents an attempt to arrest
the decline in trade with industrial countries, and to establish the UAE as a desirable site for
the activities of multinational corporations and for trading in the Middle East. Through the
“free trade” arrangements, foreign companies benefit from access to tax free ports with few
regulatory requirements and substantially lower employment costs. For several years, ports
such as Jebal Ali Free Zone and Port Rashid, both in Dubai, have ranked among the
world’s ten busiest ports (DP World, 2006). With 75% of imports entering the UAE duty
free, and no tariffs on exports, the UAE represents an attractive place for multinational
companies to establish their Middle East headquarters.
The UAE’s openness to its globalized environment and its increasing reliance on
international trade having been established, it is inevitable that these relationships bring a
pressure on the UAE to adopt westernized forms of accountability and financial reporting,
particularly those of its “influential trading partner(s)” (Haswell and McKinnon, 2003, p.
8). In 2003 the UAE’s trade in non-oil products with European Union (EU) countries was
over $US9.5 billion, while trade with the US was only a little over $US2 billion (Dubai
Chamber of Commerce and Industry, 2003), indicating the growing strength of its links
with Europe. With the EU requiring that the consolidated accounts of all its listed
companies adopt IFRS from 1 January 2005, the UAE’s requirement that banks and
companies listed with its DIFX should apply IFRS is understandable. Acting mimetically
on the adoption of IFRS by its trading partners, the UAE instituted its own system of
regulatory requirements for companies trading on the DIFX, seeing the benefit of “strong
various overseas ventures being undertaken and improvements being made in the “purchasing and financial
29
reporting requirements”, which “will act as a powerful incentive for firms wishing to access
the capital markets of the world to ensure that they prepare high quality accounts in
accordance with international benchmarks” (Al Mulla, 2005). Even though companies in
the UAE generally are not yet required to adopt IFRS, many do “as part of their best
practices procedures” (AME Info, 2005a; Gulf News, 2005a).
At the nation state level, for the UAE, coercive pressures highlight legitimizing authority
on the basis of conformity with globally acceptable formal rules and regulations or the
informal expectations of multinational corporations. Normative pressures rest their claims
for legitimacy on deeper, moral values and the prevalence of international professional
accounting firms, while mimetic institutional forces work towards the conformity of nation
states’ financial reporting behaviour with that of other successful nation states, often their
trading partners. While these pressures sound distinct, in reality they are not easily
disentangled (Guler et al, 2002, p. 228). For the UAE as a nation state, demonstrating
conformity with these pressures has involved participating in the global diffusion of IFRS
by their direct adoption, and by the culture of regulation and financial accountability,
arguably a western construct, that by necessity has had to accompany them at an
organizational field and organizational level. These institutional pressures contribute to the
pervasive global diffusion of IFRS.
As the UAE moves increasingly into globalized value systems, it cannot be assumed that
the transition to the complete adoption and implementation of IFRS will be problem-free.
The actual implementation of IFRS in the UAE or any other emerging or developing
controls” of most Mideast oil countries (Reed, 2006, pp. 35, 37).
30
economy, will be a huge challenge, given the variety of political and cultural settings, and
the reality that globalization is “a complex process affecting organizations and countries in
different ways and to different degrees” (Guler et al, 2002, p. 227). While “sold” on the
basis of technical benefits, these may not eventuate if implementation is not effective, but
irrespective of that, there will, at least initially, be symbolic benefits. It may eventuate that
IFRS adoption and implementation will be separated, with the possibility of decoupling or
loose coupling of IFRS reality from IFRS image.
5. IFRS adoption and implementation: image and reality?
Meyer and Rowan, drawing on the work of Berger and Luckmann (1966), proposed that
institutional rules functioned as myths, which were adopted at the expense of organizational
efficiency:
Institutionalized products, services, techniques, policies, and programs function
as powerful myths, and many organizations adopt them ceremonially. But
conformity to institutionalized rules often conflicts sharply with efficiency
criteria and, conversely, to coordinate and control activity in order to promote
efficiency undermines an organization’s ceremonial conformity and sacrifices
its support and legitimacy. To maintain ceremonial conformity, organizations
that reflect institutional rules tend to buffer their formal structures from the
uncertainties of technical activities by becoming loosely coupled, building gaps
between their formal structures and actual work activities (Meyer and Rowan,
1977, pp. 340 – 341).
31
The adoption of new accepted practices can be viewed in technical or institutional terms.
From a technical point of view, organizations are rewarded for “effective and efficient
control of the work process”, while from an institutional point of view, the adoption of new
practices “creates imperatives for conformity in order to gain legitimacy” (Guler et al,
2002, p. 211). This tension may be resolved by the idea of “loose coupling” introduced
above, or, even more extremely, by decoupling, whereby practices are not attached to
technical aspects at all, but have a “symbolic significance” (Guler et al, 2002, p. 228).
Sharma and Lawrence (2005, p. 150) studied public sector reforms in Fiji, and identified an
act that enshrined public sector reforms as “an institutional prescription which may be
myth, enforced by law”. This study has focused on the adoption of IFRS by the UAE, not
on its implementation. The possibility that the adoption may be symbolic would need to be
the subject of a more detailed study of individual organizations within the UAE.
While the view of international bodies such as the World Trade Organization (WTO),
OECD (Organization for Economic Development), IMF and World Bank seems to be that
“measurement and reporting problems faced by accountants are the same throughout the
world” (Rodrigues and Craig, 2007, p. 745), it may on the other hand be naïve to assume
that there can be one single regulatory framework for “all financial reporting needs of all
societies” (Rodrigues and Craig, 2007, p. 753). Deegan (2002, p. 43) suggested that
“accounting policies and practices adopted within particular countries are to some extent a
direction reflection of the culture and individual values and beliefs in those countries”. In
some quarters a concern about developing countries has been that national culture, social
and political structures have not be taken into consideration in the adoption of IFRS. A
32
study of corruption in the National Bank of Fiji, for example, exposed the “undesirable
consequences” of attempting to impose westernized accounting systems without
considering “local contextual elements”, and questioned the ability of countries in the
South Pacific to deliver the “good governance, transparency, and effective regulation and
enforcement” required for public sector reform (Lodhia and Burritt, 2004, p. 348, p. 354).
For developing coujntries, there is a danger that institutionalized global trends may impose
structures and practices that do not accommodate local differences and needs (Sharma and
Lawrence, 2005, p. 160).
Problems of IFRS implementation in the developing nations of Fiji and Papua New Guinea
(Chand, 2005, p. 222), Bangladesh and Pakistan, and the emerging economy of Kuwait
indicate that the process of IFRS implementation for non-western countries seems to be the
“most problematic aspect” of adopting IFRS rather than the decision to adopt (Mir and
Rahaman, 2005, p. 833). Perhaps the flaws of institutionalized global financial reporting,
and the effort of “trying to force every country into the same template” have become
obvious, and a more “enlightened consensus” is needed (Engardio and Belton, 2000, p. 45).
In spite of an awareness of these difficulties, opposition to the adoption of IFRS in UAE
has been quite limited in comparison with other countries around the world, even other
GCC countries. Al Rashed (2005), Chairman of the Board of the GCC Accounting and
Auditing Organisation, identified the concern that the integration of accounting standards to
suit the requirements of local business would not eventuate, and that GCC countries would
not have their culture and beliefs reflected within IFRS, since the UAE government was
concerned with attracting FDI rather than the concerns of local businesses. Some
33
companies in the UAE have not yet been required to conform to IFRS. These companies
include those not listed on the DIFX, non-banking companies and those who do not report
under IFRS as part of their best practice policy. Such companies are often majority owned
by UAE nationals who are yet to embrace the benefits of higher disclosure in financial
reporting. This is due to the fact that “only a handful of UAE companies are open to foreign
investment” (Khaleej Times, 2005).
The westernized culture of UAE, and its commitment to globalization, has no doubt
contributed to the relative ease with which the decision to adopt IFRS has been made, but
there will be significant difficulties in its ongoing implementation, given the unique culture
and infrastructure of UAE. It has been recognized that while the Middle Eastern oil
countries possess huge resources, and consequently large amounts of capital, their
authoritarian governments are “racing demands for greater accountability and wider
political participation” (Reed, 2006, p. 40). The UAE has not had a culture of public
accountability and transparency, with much of the country’s wealth held by powerful
private interests21. The President is elected by the Federal Supreme Council, which is
composed of the seven Emirate rulers, but there is no general suffrage in the country (The
World Factbook, 2006), and therefore no political participation or accountability to the
general public. Many regulations do not fit with western paradigms. If further regulation is
established for employment, for example, the UAE may find it difficult to keep the costs of
labour low enough to compete with other developing economies. Emanating from this
political structure, the culture of secrecy, common in countries that have not previously
34
been required to report financial information to a regulatory body22, is likely to be a
challenge in the UAE. Even without a tradition of financial reporting, the UAE has
embraced IFRS enthusiastically, and may have to rely significantly on imported expertise.
This may not be difficult, since of an estimated population of 2.6 million in July 2006, less
than 20% are actually UAE citizens (The World Factbook, 2006). The openness of UAE to
external global influences, coupled with its wealth, will assist it also to establish new
technologies and acquire necessary information to make the transition to IFRS
implementation.
Fraud and money laundering are frequently a problem in developing economies and
emerging markets23, particularly bribery and corruption (Ernst & Young, 2006b, p. 6), and
the UAE is no exception. According to a study of 297 organizations across the six GCC
countries conducted by KPMG (2004), 37% of respondents believed fraud was a major
problem for business. Within the UAE, the top frauds committed by management and
junior staff alike were misappropriation of funds, while management also participated in
kickbacks or procurement fraud (KPMG, 2004). While the adoption of IFRS has been put
forward as a means of controlling fraud (AME Info, 2005c), with newly instituted
regulators this may not be as successful as hoped. In 2000, the UAE suffered a “series of
insider trading and market manipulation scandals (that) dented the credibility of the UAE’s
over-the-counter market” (Khaleej Times, 2005), and unless these negative perceptions can
21 Members of the UAE Royal family hold most of the important positions in government, and there is no elected representation, leading to a difficulty in criticizing the actions of the sheikhs. 22 Some countries have “cultural attributes that suggest they tend more toward secrecy than transparency, and their accounting disclosure requirements may reflect this cultural bias” (Deegan, 2002, p. 43). 23 The Ernst & Young (2006b) survey was conducted across 19 countries, and included eight emerging markets.
35
be overcome, it is doubtful that the mere adoption of IFRS will achieve the goal of
increased FDI proposed for it (AME Info, 2005e). It has been suggested that if the adoption
of IFRS negatively impacts financial results, this may increase financial statement fraud
(Ernst & Young, 2006b, p. 6).
This paper does not suggest that the UAE will decouple or loosely couple its IFRS adoption
from implementation, but raises the issue that as an emerging economy, it faces significant
challenges in ensuring that transparency and integrity in its implementation of IFRS is a
reality and not merely an image.
6. Conclusions
Taking a global institutional view, this paper acknowledges the existence of powerful
pressures for conformity with IFRS at a nation state level. Emerging and developing
nations have rushed to converge their financial reporting requirements with international
accounting standards, in order to gain legitimacy in global markets and thereby access
capital markets, achieve economic development, and increase their wealth. In the case of
the UAE, IFRS adoption has been made in response to coercive, normative and mimetic
pressures including the regulatory regimes of the World Bank and multinational
corporations, the IASB, the influence of the Big 4 accounting firms, and relationships with
nations’ trading partners.
At this level, once the adoption decision is made, a new set of institutional expectations is
passed on to organizational fields and individual organizations, which are faced with the
task of embedding these institutionally acceptable practices into their cultures, structures
36
and routines. Emerging and developing nations they face particular challenges relating to
their culture, political and regulatory systems, as they implement IFRS at an organizational
field level, and in individual organizations, since international standards have not been
developed with the needs, culture and regulatory infrastructure of unique countries in mind.
The institutional concept of decoupling or loose coupling suggests that in such situations,
actual organizational behaviour could be significantly different from the image portrayed
by the adoption of institutionally legitimizing practices.
Instead of developing its own set of financial reporting standards, the UAE has elected to
adopt and implement IFRS, in order to position itself to experience higher levels of FDI.
While it is a heavily globalized economy, with wealth in the form of oil resources, with
aspirations to become a significant international financial centre, and with multinational
corporations and international accounting firms operating within it, the UAE has a limited
history of accountability and regulation. The issue for the UAE will be whether, in spite of
these factors, recent regulatory changes will be sufficient to ensure genuine transparency of
financial reporting so that the reality of IFRS implementation will match the image of IFRS
adoption.
This paper has identified global institutional pressures for IFRS adoption that have
impacted on the UAE and other emerging economies. Further research will be needed to
determine whether the legitimizing image offered by IFRS adoption has been matched by
IFRS implementation. This can be undertaken at a nation state regulatory level, by
analyzing the reasons for making the adoption decision and for the institution of new
regulatory regimes, at an organizational field level for determining the effectiveness of
37
compliance mechanisms, and at the level of individual organizations, by determining the
extent to which institutionally mandated practices have been embedded into existing
organizational practices.
Acknowledgements: Thanks are due to Natalie Lucas who, as an undergraduate student in
the Faculty of Commerce at the University of Wollongong, took part in a Faculty-organized
study tour to Dubai, UAE, in 2005 and contributed to an earlier version of this paper.
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