QUT Digital Repository: http://eprints.qut.edu.au/

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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Figure 1. A global institutional framework