The Kingdom of Saudi Arabia is opening up to international trade. Globalization has proven to be an important development that cannot be ignored by countries irrespective of their governance structure or foreign policies. Business units are forced to operate beyond borders as a way of increasing their market share and profitability. To achieve this, it has become apparent that the local accounting standards be made compatible with International Accounting Standards (IAS). This is because large firms in this country operate beyond the borders of the country. For these firms to operate successfully in the global market, they must adopt accounting standards that are compatible with IAS. It is by doing so that these firms can gain access to financing in the global capital markets. For this reason, there has been a concerted effort from various stakeholders to achieve compatibility between Saudi accounting standards and IAS.
This dissertation is the culmination of a highly challenging but very interesting journey towards the completion of my Masters degree. The journey was long and full of twists and turns that I may not have been in a position to overcome without the support of several individuals. These people played direct roles in ensuring that this dissertation was a success.
I would like to sincerely acknowledge the support that I received from my lecturers who, as a team, ensured that I successfully completed my Master’s degree. I would like to specifically acknowledge the effort made by my supervisor, Mr. Price, who guided me through the entire dissertation process. Without you all, this dissertation would not have taken the form that it has.
Introduction and Background to the Study
Accounting is considered a very important tool for the operation of business in modern society. According to Mourra (2008, p. 82), a business unit cannot operate without proper accounting documents. The need for accounting in organizations (both for-profit and non-profit making organizations) emerges due to the need to be accountable. Human beings have many shortcomings naturally. When put in a position of authority, there is always the temptation to benefit unfairly by stealing what one is trusted to protect. This means that for a firm to be able to operate properly, all of its officers that are assigned various duties must be responsible for the top management. When one is handling his or her own business, it is assumed that discipline would come naturally. It would be assumed that such an individual would exercise restraint when handling the resources of the firm. However, this is not always the case. For this reason, accounting becomes a very important tool at all levels of management and for every organization. It is a way of ensuring accountability within the firm. This helps in eliminating any possible pilferage that may be witnessed if the employees are left to operate merely on trust.
Accounting standards refers to the specific items that should be present in an accounting document and its acceptable format. For instance, a balance sheet has specific details that must be expressed clearly for it to be considered as to be a valid balance sheet. For instance, a balance sheet without capital would not pass as a valid balance sheet. In this regard, achieving accounting standards would mean having a document that has all of the standard details that accounting documents should have in a format that is acceptable to the responsible regulatory body. It is important for a country to achieve IAS for various reasons, as explained below. Attaining IAS involves achieving accounting standards that can be easily recognized and used within the international community (Murphy 2000, p. 489). For a country that has liberalized its markets, achieving IAS is one of the key tools for attracting investors. It also helps local firms to operate in the international markets with minimal difficulty in terms of standardized accounting culture within the organization.
The Kingdom of Saudi Arabia is one of the fastest developing economies in the Middle East. This country is well known for its rich oil reserves and is the largest oil producer in the world. For this reason, it has attracted many investors, particularly those who are interested in the oil industry. However, Newcombe (2009, p. 68) says that the Saudi market is fast opening up for businesses other than oil. Various other investors are interested in venturing into other industries and sectors such as transport and agriculture. This is a positive indication that the economy of this country is destined to grow even further. Some of the local firms of this country are also contemplating venturing into overseas markets outside of the Middle East. For instance, Samba Financial Group (one of the leading banks in the country) is already operating in the United Kingdom and plans to expand into other European nations and possibly to the United States.
However, this bright future for the country is in jeopardy because of the lack of compatibility between local accounting standards and IAS. According to Salacuse (2010, p. 48), the accounting standards within Saudi Arabia have been developed with the advancement in education sectors and other sectors of the economy. However, Salacuse also states that it is unfortunate that these standards do not comply with IAS. The scholar blames this on the region being very reserved when it comes to embracing international standards if the standards are proposed and supported by the West. This effort has seen the region and other affiliated countries trying to come up with unique standards that are particular to these countries. However, recent research has shown that the standards used in this country do not meet international requirements. Sasse (2011, p. 78) says that in accounting, neither politics nor political affiliation have any influence. He says that accounting is a game of numbers, and irrespective of one’s affiliation, numbers never lie.
For this reason, there is an urgent need to ensure that the local accounting standards are in conformity with international standards. This would make it easier for international investors to come to this country and help improve its economy. Local firms that are eying the international market will also find it easier to manage their accounts. They will also find it easier in terms of gaining the necessary permits to operate in these foreign countries because the authorities in the international market will easily understand their accounts.
Research questions are very important when conducting research. According to Al-Shammari, Brown and Tarca (2008, p. 445), conducting research is a complex process that needs a detailed understanding of the problem statement. When one decides to conduct research, there is a need to have some principles that would guide the process very keenly. This is because once in the field to collect data, one can easily become overwhelmed and collect data that are not relevant to the current research being undertaken. This is because there are very many interesting details that one may be subjected to, most of which may not be important to the research. Such data would only waste the time of me instead of being used for conducting productive elements of the research. Research questions therefore serve to guide the research to focus strictly on what is relevant in the current study. When armed with research questions, a researcher would strictly go to the field with the aim of finding answers to those questions. Any unnecessary details that are not directly related to the question would therefore be ignored. I developed one main research question and a number of supportive questions to help guide the research. The main research question used in this study is as stated below:
What are the benefits of achieving compatibility between Saudi accounting standards and international standards?
Two supportive research questions are included to help me to explore further the main research question:
- How will the differences between local accounting standards and IAS affect the financial situations of companies?
- How will the accounting standards in Saudi Arabia be compatible with IAS?
These questions are used to assist in the collection of data. Given that I intend to use secondary sources of data, I hope to answer these questions by comparing previous research and determining how they responded to these questions.
Justification of the Research
Conducting research is an expensive process in terms of money and the time spent by the person or people involved in it. For this reason, it is always very important to ensure that there is a justifiable reason to conduct the research. This research is justified by a number of facts. As was explained when stating the research problem, it is apparent that accounting standards in Saudi Arabia are not yet fully compatible with IAS. A great deal needs to be done to ensure that there is compatibility between local and international accounting standards because this country is opening up to international trade (Sauvant, 2009, p. 15). However, much remains to be done in this field because the responsible forces have failed to act with speed to implement the already suggested policies that would help to ensure compatibility. This research will add to the forces that are aimed at ensuring that the accounting standards of this country are transformed in order to be compatible with international standards. This piece of research will exert pressure on the local policymakers, persuading them of the importance of achieving compatibility. This research will use secondary sources in order to demonstrate to the policymakers that adequate proposals have been made, and it is now their responsibility to ensure that the policies are implemented as speedily as possible. As such, conducting the research is therefore justified.
Objectives of the Research
According to Ampofo and Sellani (2005, p. 225), it is important to clearly state the objectives of a given research. Doing so helps the readers to understand what the research seeks to achieve and why this achievement is important. The objectives of the research will also help critics when reviewing the research to determine whether the objectives of the research have been successfully achieved. In this study, I had one main objective with a number of supportive objectives. The aim of this research project is to assess the development of accounting standards in Saudi Arabia in terms of their compliance with IAS. The other supportive objectives include the following.
- To clarify the benefits of achieving compatibility between Saudi accounting standards and IAS
The above are the objectives that I seek to achieve by the end of the study. To help realise these objectives, I will use credible secondary sources including peer-reviewed journals, books and other reliable sources of information.
The Scope of the Research
According to D’Aveni (2008, p. 89), when conducting research, it is important to define the scope of the study. This is because various stakeholders will use and rely on the research. Policymakers, researchers, students and other stakeholders rely on pieces of research to form their decisions. For this reason, it is important to make the scope of the project known so that readers will be appropriately informed. In this research, the scope will be defined on two fronts. The first definition of the scope will be on the data collection and the second will be on the relevance of the research in terms of the country of focus. In terms of data collection, this research was limited to secondary data sources. I devoted time to compare the empirical research in this field in order to come up with a response to some of the questions and to achieve the objectives of the research. Primary data collection and analysis was therefore beyond the scope of this research. In terms of the application of this research, the decision was taken to limit the study to Saudi Arabia. This research looks specifically at how the accounting standards in Saudi Arabia compare with IAS. For this reason, any application of the findings of this research to a country other than Saudi Arabia should be done with considerable caution.
This chapter has given a detailed focus of what this research intends to achieve. It has given the background of the issue under discussion. It has pointed out that there is need to make Saudi accounting standards compatible with international accounting standards. This chapter has also focused on the research problem. In this section, I have indicated the reason why it is believed that the country may be affected negatively if this compatibility is not achieved. Research question has also been brought out clearly in this chapter in order to guide this research in the entire process of data collection and analysis. This chapter also looks at why it is justified to conduct this research. It is important to note that a research process is costly and time consuming. This section explains the importance of this research. Aims and objectives of this research are also discussed in this section. Finally, this chapter gives the scope within which this research will be relevant. The above issues have been brought out very clearly in chapter one of this dissertation.
The need to have local accounting standards that are compatible with international accounting standards has attracted considerable attention among governments, firms and scholars alike. This has resulted in considerable research being conducted in this field as a way of speeding up the process. According to Chen, Gul and Su (1999, p. 110), various countries around the world have resorted to legislation as a way of forcing their firms and other stakeholders to develop and adopt local accounting standards that are compatible with international accounting standards. While some countries have applied considerable pressure to achieve compatibility, others have been slow to develop clear mechanisms that would ensure that their accounting standards are compatible with IAS (Hancock, 2010, p. 98). Saudi Arabia is one of the countries that had previously been slow to achieve compatibility but in the recent past, there has been a clear indication that the country has realized the importance of compatibility. This has seen efforts being made by various stakeholders to ensure that the country’s accounting standards are compatible with IAS.
Firms in this country are under intense pressure to ensure that their accounting standards are compatible with those of international standards in order to access international capital markets (Marsden 2002, p. 25). However, issues such as the size and sophistication of the industry have led to the emergence of certain accounting practices (Graham & Neu 2003, p. 455). The adoption and compliance by the country should be informed by factors such as the economics of Saudi Arabia, its business environment, political environment, and the social and legal structures of the country. Various international organizations have put pressure on countries and firms to adopt IAS (Murphy 2000, p. 489). For instance, the World Trade Organization, International Monetary Fund and World Bank have all demanded that firms and countries should adopt IAS before they can consider giving out loans or grants. This is because it enables these bodies to understand the financial capacity of firms or governments. It also helps in understanding how they intend to use the amount of money being extended to them. According to Gannon and Ashwal (2004, p. 44), Complying with international accounting standards will enable Saudi Arabia’s accounting standards to be on a par with the required standards brought about by globalisation. He further says that in the current society, technology has made globalization a necessity rather than an issue of choice.
According to Glaum and Street (2003, p. 74), compliance with Global Generally Accepted Accounting Principles (GAAP) has been the focus of many countries around the world. This is because it helps the country to avoid duplicative costs. These duplicative costs would otherwise arise due to transactions involving the national standards and IAS. For instance, when a local Saudi firm is operating both in the United Kingdom and locally, there will be considerable duplicative costs when it comes to the presentation of accounting documents. When issuing statements from the local office to the office in the United Kingdom, there would be a cost for converting the statements into international standards, which is acceptable in the United Kingdom. Similarly, when such a firm receives documents from the United Kingdom it would incur a cost of converting them to local standards that are acceptable locally. Setting domestic accounting standards incurs additional costs for the country. These costs would otherwise be eliminated if the local accounting standards were compatible with IAS. This explains why IAS is increasingly being adopted in many countries rather than GAAP (Tang, 2000). The application of both IAS and GAAP is guided by a set of two different regulations. Compliance with both IAS and GAAP attracts additional costs involved in the preparation of two or more sets of financial statements required by the two accounting bodies. GAAP compliance encourages trade within and outside the country as well as cross-border listings.
It is a fact that Saudi Arabia remains unique in various ways. Shariah laws have strict rules that define various principles in the financial sector. This has had a direct effect on the accounting principles used within the borders of Saudi Arabia. According to Marsden (2002, p. 25), international accounting standards are more effective when applied in a particular business environment. It is also significant in facilitating the application of accounting standards in countries with unique business environments. Saudi Arabia’s business environment may require sophisticated accounting standards. This will be critical for addressing the country’s specific business issues. For this reason, many may consider GAAP more effective than IAS in the Saudi Arabian business environment owing to the unique nature of the country’s business environment. However, the business world is rapidly becoming more global in nature and issues about the uniqueness of a market are being overtaken by this drive towards globalization. Various international firms are now operating in Saudi Arabia and various Saudi firms are already operating overseas.
This global interaction is expected to increase and issues about the uniqueness of the market may cease to be relevant issues. As Murphy (2000, p. 489) states, it is important to note that international trade standards not only facilitate trade but also facilitate investment decision-making. For this reason, compliance with IAS will help the country and its various business sectors to make better-informed decisions. He further notes that GAAP facilitates the process of decision-making owing to its ability to simplify the process of interpreting and comparing financial statements. Therefore, the country may experience more growth in the business sector, resulting from better accounting standards and informed decision-making (Pagano, Roel & Zechner, 2002, p. 2655). In the quest for harmonisation and internationalisation of accounting standards, they note that the regulatory bodies should take into account the differences that are evident between the countries involved. This means that the country should introduce a system that facilitates the application of national as well as international standards.
According to Pedhazur (1991, p. 76), large companies within Saudi Arabia are more likely to adopt IAS than smaller firms. This is due to a number of reasons. The first reason why these firms are particularly keen to adopt international standards is the need to operate in the international market. When a firm operates in the global market, there is additional pressure to comply with global standards in order to operate with ease. On the other hand, smaller companies do not have any pressure to comply with these international standards because their operations are limited to the local market within their own country (Graham & Neu 2003, p. 455). Large companies are able to attract foreign investments in order to expand their operations through foreign stock exchange listings. In order to increase the chances of attracting these foreign investments, however, large firms are forced to adopt international standards that will be easily understood by the international community. Small firms have found it very challenging to adopt international standards because of the associated costs. For this reason, the Saudi government through various agencies must strive to create an optimal business environment that offers low operating costs by complying with and implementing IAS.
As previously referred to, the political system of Saudi Arabia has played a significant role in influencing the rate at which this country complies with IAS. According to Mouton (1996, p. 56), government involvement and regulation of the various businesses sectors seeks to achieve commonality. Businesses in the same industry will typically seek to achieve the same level of compliance, leading to improvements in national accounting standards. To achieve this, the various industries in Saudi Arabia must embrace a common practice of disclosure where financial issues are concerned. This is in order to meet the regulatory requirements of the national accounting standards. In order to comply with IAS, businesses from the various sectors must align their compliance practices according to the international standards that apply to their sector. The state is therefore expected to experience a different level of compliance due to the particularities of the industries in the country. Doucet (2011, p. 119) gives an example of the banking industry, which he says is likely to achieve a higher level of compliance than the manufacturing sector.
This is attributed to the need for banks to maintain exemplary records in their reporting, as required by law. Participants in the banking industry have a higher profile and cannot risk damaging their reputation by failing to comply with accounting standards. They also need to build investor confidence by fulfilling legal requirements to avoid the possibility of government intervention. To this extent, the government must realize its role in promoting IAS among local firms. According to Grantham (2007, p. 28), the majority of firms understandably opt for the easiest and locally accepted standards in order to minimize the associated cost and avoid the need to retrain their staff. They consider this a waste of their limited time and resources. However, it is important for the government to ensure that even the smaller local firms use accounting standards that are compatible with international standards in order to increase their chances of expanding into the global market. Without any form of regulation, firms will always be reluctant to comply with policies that they consider to represent an avoidable extra cost to them.
This explains the reason why various firms around the world have adopted IAS while the majority of the Saudi firms have failed to do so. In order to ensure that Saudi accounting standards are compatible with IAS, there is a need for the government to compel local firms to adopt IAS. For this to be possible, the government must adopt policies that firms will have to follow in order for their accounting documents to be accepted as valid by the local authorities. This should be accompanied by punitive measures for firms that fail to comply with the policy. This would involve the government making a deliberate effort to ensure that the national accounting standards are compatible with IAS. In the process of achieving compatibility between local accounting standards and IAS, Daft (2009, p. 81) warns that considerable care should be taken to avoid radical shifts without considering the local forces. The agencies responsible for this shift should not forget that despite the increasingly global business environment, Saudi Arabia continues to be self-governing and many factors remain unique to the country. For instance, the government should not ignore important areas such as pension schemes and the retirement benefits of the citizens of this country during this process. It is important to develop a systematic approach to this issue in a way that will ensure that the process is not disruptive. The government should be conscious of the prosperity of smaller, newly formed companies. The policy should be gentle to these firms, providing alternatives that are not too costly for them.
Theoretical Perspectives to International Accounting Standards
Theories are often developed to explain various phenomena in life. The need to make Saudi accounting standards compatible with IAS is a clear indication that Saudi society has come to appreciate that globalization is a force that cannot be ignored despite some of the unique factors in their domestic environment. Ignoring globalization would be like isolating oneself in a society where survival is pegged to the ability of individuals to work as a team. The deliberate effort by the government of Saudi Arabia to make national accounting standards compatible with IAS is an indication that this government appreciates the need for international relations and the importance of globalization (Sornarajah, 2010, p. 56). In this regard, it is important to analyze some of the theories of globalization in order to shed light on why globalization is so important that a country such as Saudi Arabia cannot afford to ignore it. A number of theories have been put forth by various scholars to explain globalization as a force that unites various countries in a single community where people must interact and commonness in various approaches to life is the key to success. Some of these theories consider globalization to be a process, while others consider it a condition.
One of the theories that have been used in relation to globalization is realism theory. This theory was developed after the Second World War when it was remarked that the world had effectively become a global village. This theory holds that state power is by no means subject to the influence of people, terrorists, multinational corporations or international organizations (Taplin, Tower & Hancock, 2002, p. 175). This theory holds that the state is a supreme power subject to no force. To this extent, this theory holds some truth because Saudi accounting standards have not been compatible with IAS for some considerable time due to a lack of goodwill from the government. The government of Saudi Arabia is convinced that as long as what it does meets its local needs, then it does not matter how strong the external forces are, and this explains why it has not pushed for a change in its accounting standards. The government of Saudi Arabia feels that it is not bound by any powers to change its financial structure which is a realist approach of reasoning. The government of this country has embraced policies that follow strict Islamic principles common in other Islamic states. Despite the pressure applied by international organizations, individual businesspeople and other local firms operating, globally urging the government to develop policies that would encourage the compatibility of Saudi accounting standards with IAS, the government has continued to allow non-compatible standards to be practiced locally (Ampofo, & Sellani 2005, p. 67). This is a clear indication that in order for globalization to be achieved there must be a direct effort by the government to make it a reality.
A government can very easily frustrate attempts by various stakeholders to implement IAS if its policies do not support it. Coulter (2009, p. 71) says that realism was challenged by neo-realists who argued that the influence of international organizations, multinational corporations, terrorists or individuals must be considered by the state. They held that a state can decide to ignore these forces but not for very long. There comes a time when these forces are so strong that the power of the state can no longer hold them. The state would be forced to cave in to this pressure and allow these forces to have their way. This is possibly, what is currently being witnessed in this country. The Saudi government has realized that globalization is a force that it must embrace for its own survival. This has resulted in the government developing policies that are more accepting of globalization and specifically IAS. The government that have been interpreted as direct efforts to make Saudi accounting standards compatible with IAS has made efforts. This means that this government has come to appreciate the neo-realism principles in its governance. It has come to appreciate that it cannot operate as an island, and for that reason, must embrace changes brought about by external forces as explained in neo-realism theory. Another common theory relating to globalization is liberalism. This is one of the contemporary theories of globalization. According to this theory, nongovernmental organizations, multinational corporations and international institutions play an important role in influencing international relations. To this extent, this theory seeks to dispute the realism theory, which held that a state is a supreme force that cannot be influenced by other forces. This theory holds that in a state there is always competition, building of coalitions, conflicts and compromise. These are the four main factors that have promoted globalization in the business world. Various business units are in constant competition (Van 2007, p. 90). In order for them to increase their market share, they must look beyond their national market. This means that they cannot avoid international markets.
Firms have also realized that forming coalitions is part of gaining a competitive advantage. For this reason, mergers and takeovers are common in the current globalized business world. Firms that are competing in the market will always find themselves in conflict with one another for market share, sources of supply or distribution channels. For instance, Apple Inc and Samsung Corporation have found themselves in conflicts on several occasions over the patent for their products. Each has accused the other of infringing on their patents. Finally, there is a compromise in the global business environment (Wahlen, Boatsman, Herez, Jonas & Palepa, 2000, p. 485). A compromise is a common ground where each firm considers it fair after ceding some ground for a rival and gaining some favour in return. In the business environment, this is important to ensure that there is harmony and a healthy competitive environment where each firm respects its competitors. These four principles put forth by this theory can only be realized if globalization is embraced. Part of embracing globalization is to have national accounting standards that comply with IAS. This theory therefore supports the need to ensure that Saudi accounting standards are compatible with IAS. It is only by ensuring this that firms will be able to operate in this market.
The third and final theory that will be analyzed in this study is the constructivist theory. Hemsath (2007, p. 58) states, “Constructivists understand the process of globalization as having been shaped by the motivations, interests, values and, ultimately, ideas of various social, economic and political actors.” This theory holds such issues as the values, interests and ideas of various stakeholders as motivating globalization. This means that for globalization to be achieved, the concerned stakeholders must develop some interest and values that can make it a reality. As was mentioned in the definition of this theory, the political actors have a central role to play in enhancing globalization. This means that the Saudi Arabian government will have considerable responsibility for ensuring that Saudi accounting standards are compatible with IAS (Sassen, 2000, p. 79). The government must involve other relevant stakeholders with interests in this area and those who believe that this process would yield some value in making this process a success. Saudi multinational corporations should be at the vanguard in encouraging the relevant stakeholders to ensure that local accounting standards are compatible with IAS. They should play this role for two reasons (Hitt, 2011, p. 116). The first reason is that given the fact that they have a global market experience, they understand the need to achieve this compatibility. The second reason is that given their influence on the local economy, they are in the best position to influence the government to act in a specific desirable manner. This is besides the fact that they are the market leaders in their respective industries. This compatibility should start in the banking sector as it spreads to other sectors of the economy.
This chapter focuses on the literatures available in this field. International accounting standards is a topic that has remained very important both to the corporate world and to governmental bodies. This research looked into what other researchers have been saying about this topic. It was at this chapter that I tried to look at how the literatures provided valid answers to the questions raised in the first chapter of this dissertation. The chapter looked at how Global Generally Accepted Accounting Principles has been of benefit to the countries that have achieved it and why Saudi Arabia was yet to realize this. The chapter also looked into the theoretical perspective of this research. In this regard, I analyzed some of the theories that have been raised relevant to this field, and their possible application in a practical situation. This chapter has successfully shed light into this topic by bringing in the findings of others scholars.
This chapter focuses on various aspects of research development. It includes methods of data collection, its analysis and presentation procedures. Every research project applies a certain research method in order to achieve its objectives depending on its stated goals. The methods that will be used to conduct the research in this project will be based on the methods proposed in the project proposal. This is so because the project proposal has to be proven workable. Andrzej and Buchaman (2007, p. 92) remark that “in research, design deals primarily with aims, uses, purposes, intentions and plans within the practical constraints of time, location, money and availability of staff.” It is true that in social sciences, surveys are very important, especially in cases where there is a need to conduct quantitative data analysis. In this research, surveys would have been important for the empirical analysis of data that would have helped with verifying certain facts. In social science, just like pure science, there is always the need to have empirical analysis as a way of authenticating some of the facts in the research. The empirically tested hypothesis is always considered to hold some degree of authority (Raiz, 2012, p. 11). However, there are cases where research may rely on secondary sources of data such as peer-reviewed journals, books, articles, government websites and other reliable sources of data.
The scope of this research is rather limited in nature, based on data collection and subsequent analysis. I have based this study on previous research conducted by other researchers exploring this topic. Research cannot claim to be based on a vacuum. For the purposes of this study, therefore, I believed that there are competent scholars who have previously conducted investigations into this field and compiled their reports. The empirical literature selected is strictly comprised of studies that have used valid methods. These must be research works that were conducted empirically, making them authentic research documents in this field (Vandevelde, 2010, p. 72). I several selected peer-reviewed journals that had received approval from the relevant authorities for their validity. I appreciated that empirical data analysis is very important in any social research for ensuring the validity and reliability of research. Having understood that the scope of this research was limited to comparing previous research papers, I was keen to identify those studies that had commanded some sense of authority in this particular field. Their use would give this research some sense of authority as well. The majority of the empirical studies used in this paper were the recent peer reviewed journals on this topic.
When a research is limited to secondary data analysis, Hommel (2012, p. 68) advises that considerable care should be taken by researchers to ensure that the sources used provide adequate details that are needed. A researcher must confirm that the available literatures satisfy the objectives of the research and that the research questions will be fully answered by the available data. Only by doing so can researchers confirm that, their research will be within the planned limits. I was conscious of this fact and was therefore, keen to collect all of the relevant data that would answer the research questions and satisfy the objectives of this research as stated in the research proposal (Nolan, 2003, p. 88). To this extent, I will try to compare a number of empirical studies on this topic and explain how they answer the research questions developed for this particular investigation. I was also keen to ensure that these sources had the capacity to make the stated objectives of this research a reality. In order to eliminate any form of bias, I will incorporate research works with divergent views and similar views to that of mine (Amonrat, 2004, p. 29). The analysis will then be based on the facts put forward by each group and the validity they claim to have.
This will help to identify research papers based purely on speculation and those that are valid and thus can be relied upon. This is important because by allowing works with divergent views, I am allowing freedom into the process of data collection process. This is because when in the field collecting primary data, there is always a possibility of gathering data having diverging views. It is through analysis that a researcher will be able to determine factual views and the number of respondents sharing the views. Similarly, I will take in all of the views and only select those that are supported by empirical research. In order to eliminate criticism and improve the usability of this study, this chapter clearly states the scope of the study. There are limits beyond which this research may not hold because of the method used for the purposes of data collection and analysis. It is therefore important that limitations be clearly stated to demonstrate to readers of this material how far this research reveals what it purports to (Sadler & Craig, 2003, p. 47). The secondary sources of data used have focused on either IAS or Saudi accounting standards. Any application of this research should be focused on these two contexts. An application beyond these two contexts should incorporate considerable caution because I did not focus on any specific country other than Saudi Arabia, which is under investigation.
Findings from previous research conducted by other scholars in this field are to be used to answer the research questions and satisfy the objectives set for this research. Based on the number of previous researchers who accept or reject the line of thinking of I in this study, and how valid their research is, it will be possible to validate this research. I focused on the channel through which needed data was collected. This is not only intended to ensure the clarity of this research but also help future researchers who will be interested in furthering research in this field to understand the steps that must be taken in order to answer the research questions. I have ensured that the investigation is not only important to professionals in the financial sector but also to other related sectors such as insurance, marketing, human resource and procurement. As Clement and Henry (2010, p. 89) remark, when relying purely on secondary sources of data, it is important to accommodate various views before making a conclusion. Clement and Henry note that in the majority of cases there is an attempt by other researchers to focus on only those literatures that support his or her line of thinking. This is an equivalent tolerating bias when collecting primary data. Biased data collection cannot yield comprehensive data. For this reason, I was keen to ensure that this study would be comprehensive in nature with all relevant views being taken into consideration during analysis.
Reliability and Validity of the Research
It is important to confirm to various stakeholders that a given research is valid. This is because there are possibilities that it may be use in various fronts. It is therefore, important to assure them that the piece of research they are using is valid, and that it meets all of the requirements of a standard research paper. I must therefore confirm the validity and reliability of the research. Validity refers to the appropriateness, applicability and truthfulness of a study. According to Cobb (2011, p. 78) it is the ability of research instruments to produce results that are in agreement with theoretical and conceptual values. In this study, internal validity was censured by checking how representative the sampled secondary sources of data were. I ensured that the sample used captured the all-important aspects of the topic, including articles with diverging views. During the data collection process and analysis, I steered away from all forms of bias as was mentioned earlier. This ensured that the data collected were not in any way influenced by my personal opinions. I found the empirical literature review to be very important parting this regard because the opinions expressed have already been moderated.
Reliability means that the study is consistent and lacks any form of ambiguity (Akgul, 2011, p. 90). It is the ability of something to deliver on what is expected within a suitable timeframe. It is related to the accuracy of instruments: how accurately the device measures what it claims to measure. In the current study, this was achieved by increasing the verifiability of the perspective to ensure reliability. I adopted the principles of coherence, openness and discourse in order to guarantee reliability. This confirms that the data generated from this research can be trusted to address the issues raised in a comprehensive manner and in an approach, which satisfies the expectations of stakeholders. The results of this research can therefore be applied if the defined scope is maintained.
Ethical Issues with this Research
According to Tanke (2010, p. 41), in every research study there is a given code of conduct that should be followed in order to ensure that the research commands some sense of authority. Research ethics are important for ensuring that data collection and subsequent analysis is performed in a professional manner. In most cases, ethics is important when going into the field to collect data. It is at this stage that a researcher will need to conduct himself with decorum when dealing with respondents to increase the likelihood that he will derive suitable results from the sampled population. For this reason, many have associated ethical considerations with primary data collection and analysis (Witcher, 2010, p. 47). However, this is not always the case because ethical considerations are important even when using secondary data as the only source. Ethics should not be narrowly looked at as a process that should be applied only when collecting data. It is ethical to ensure that the report only ever portrays the truth. This is because fabricating information and then purporting it to be a valid piece of information is not ethical behaviour.
The research would mislead the users, which may have serious negative consequences. In this research, the focus was on achieving compatibility between Saudi accounting standards and IAS. It is evident from the empirical literature review given in Chapter 2, that the government is finally bending to pressure from various stakeholders to encourage compatibility (Wall, 2010, p. 67). This means that various policymakers in the government and other relevant stakeholders are depending on this information in order to make sound judgments. I had this in mind. Therefore, I have maintained an ethical stand from the planning stage, to the process of writing the proposal, and finally in developing and compiling this dissertation. The report can be relied upon because I took the time necessary to select authoritative sources of data to back the claims made in this research.
Chapter 3 describes the methods of research used to collect the data for this research, conduct analysis and arrive at conclusions. In this chapter, I clearly stated that the research method would rely on the secondary data sources. This meant that the data would be taken from books and journals of good repute in order to arrive at the desired answer. This decision was taken when I realized that there was limited time to conduct this research. This chapter also reflects on the reliability and validity needed in this research. Although this research does not use primary sources of data to arrive at its conclusion, there is still a need to confirm that it is a valid piece of research that can be relied upon by various policymakers and other researchers. This is stated when explaining the validity of this research. This chapter also talks about ethical issues relating to the research. Ethics define the principles that I used to arrive at the stated conclusions. Ethics will help me to eliminate any possible bias that he or she might have towards the topic at hand. It will help to ensure that the research is based on valid evidence rather than merely the opinions of mine. This was successfully achieved in this chapter.
Results, Analysis and Discussion
This chapter analyzes some of the research that has been conducted in this field in order to arrive at the desired conclusion. The analysis will be based purely on the secondary sources of data available in this field. This research will attempt to understand why it is very important for the Saudi accounting standards to be compatible with IAS. In Chapter 1, it was noted that there has been considerable pressure on the government and other agencies to help achieve compatibility. The Saudi Organization for Certified Public Accountants, being the body entrusted with regulating accounting standards in this country, has been trying to find a way through which it could respond to this pressure in order to ensure that the local standards are compliant with international standards (Taplin, Tower & Hancock, 2002, p. 187). This chapter will give a detailed explanation why this pressure has continued to mount as the world becomes increasingly global in its outlook. This chapter will also look at some of the benefits that Saudi Arabia is missing because its accounting standards are not compliant with IAS. To achieve this, the research analyzes various studies that have discussed the issue of Saudi accounting standards at both local and international levels. This is given comprehensively in the successive sections of this chapter.
The Opening of the Saudi Market to Foreign Investors
According to Amonrat (2004, p. 78), Saudi Arabia has operated like a closed state for a very long time, especially following the strained relationship between the United States and the Islamic society due to the war on terror. Many of the multinational firms that were previously operating in Saudi Arabia before the deterioration of this relationship were forced to leave the country because they felt that the local environment was no longer friendly. Cobb (2011, p. 90) also elaborates on this issue by identifying Citibank as one of the major financial institutions in Saudi Arabia in 1960s and 1970s. However, things started to change in the 1980s and 1990s as the relationship between Saudi Arabia and the West became strained. Citibank was finally forced out of the country and sold all of its shares to the locals, thereby creating the current giant Samba Financial Group. This was not the only foreign firm to be forced out of the country. Other firms were forced to leave due to the increasingly hostile environment. Following the departure of these multinationals, there was an attempt by people in the financial sector to make accounting standards as local as possible. Coulter (2009, p. 63) says that key personnel in the financial sector and other relevant government agencies were determined to make their mark in this sector that had been dominated by foreigners for a long time. Coulter states that the accounting standards were made in such a way that reflects the needs of the national government and local business needs. As the world adopted new international accounting standards, Saudi Arabia remained reluctant to follow suit because it considered its accounting standards to be adequate to offer the services they needed.
Globalization has slowly changed this perception as people came to realize that they could not live in a closed state. Various stakeholders have come to realize that the world is turning into a small global village and that trade is at the centre stage of this globalization. A number of Saudi firms have managed to acquire market share within this region and internationally. For instance, the Saudi Arabian Oil Company is a large firm with global market coverage. Samba Financial Group has also expanded into the Middle East and has now opened branches in London. This is a clear indication that national firms in this country have gone beyond local market coverage (Clement & Henry, 2010, p. 98).
International firms are once again finding their way back to Saudi Arabia. The xenophobic behaviour witnessed in the past two decades is slowly ending as Saudi society opens up to the world. Daft (2009, p.56) says that the Saudi market has been attracting foreign investors who consider this region to be a rich trading zone. He further says that although it is argued that foreign investors may come to offer locals stiff competition in the various industries in which they operate, the truth is that they are the engines that this economy needs in order to grow in double digits. Hamia (2011, p. 29) says that some sectors in this economy have remained dormant because the locals are either disinterested in them or lack the capacity to venture into them. Foreign investors can propel this sector once they consider the opportunity viable.
Although the local environment has increasingly become friendlier than before, these investors are still not enthusiastic about investing locally as would have been expected. They are still slow to address issues relating to investing in the Saudi economy for various reasons. However, some investors have clearly stated that the main reason why they find it challenging to invest locally is that the accounting standards practiced locally do not meet IAS. Most of these firms, as D’Aveni (2008, p. 36) says, are multinational corporations with various other branches in other regions of the world. They prefer operating in countries with accounting standards that are compliant with IAS. This makes it easier for them to make comparisons and determine financially viable projects. When a global firm is forced to operate in a country whose accounting standards are not compatible with IAS, auditing the accounts of the firm in the new branch will be more costly and less accurate (Ampofo, & Sellani 2005, p. 54). This is because the firm will be forced to adjust its accounts from the local standards to international standards before finally submitting the accounts to the responsible offices. This will consume a considerable period and will force the firm to employ additional labour to undertake this task. When the head office issues financial statements, these officers will then be forced to adjust the statements from IAS to the local standards. This is a cumbersome process and Doucet (2011, p. 47) states that some facts may be lost during the adjustment process. When this happens, the true value of the accounting system will be lost.
This has forced some of the international firms operating in Saudi Arabia to operate two systems of reporting for their accounts. They use Saudi accounting standards to report to the local government or other agencies that may require the local accounting standards. Meanwhile, IAS is used for their normal internal operations and for reporting to their head offices in other countries (Taplin, Tower & Hancock, 2002, p. 191). This is also a challenging task because the majority of the local employees do not understand IAS. The Saudi Organization for Certified Public Accountants has failed to familiarise its members with IAS. This has forced some firms to hire extra employees including some from other countries in order to help in crunching the numbers within their plants in the country (Gannon & Ashwal, 2004, p. 44). This has seriously discouraged other investors who consider operating locally to be too expensive.
Assessing the Development of Accounting Standards in Saudi Arabia
The research of Graham and Neu (2003, p. 450) assesses the development of accounting standards in Saudi Arabia in terms of their compatibility with IAS. According to these scholars, there has been mounting pressure from various quarters to ensure that local accounting standards are compatible with international standards. It is not only the foreign firms coming to Saudi Arabia that suffer due to the lack of compatibility but also the local Saudi firms. Saudi firms that operate globally such as Samba Financial Group are forced to make adjustments when reporting to their head office in Saudi Arabia from foreign markets. They have complained that this is costing them considerable time and financial resources. As such, the Saudi Organization for Certified Public Accountants and various other bodies in the financial sector have sought a lasting solution to this problem that seems to be growing bigger as society embraces globalization.
According to Grantham (2007, p. 89), the Saudi Organization for Certified Public Accountants has developed a series of recommendations that assist in making local accounting standards compatible with IAS. One of the moves that have been widely praised is a complete change in syllabus for accounting students who want to register with this body. Glaum and Street (2003, p. 75) note that this body is in the process of changing its syllabus to demand that all of the potential candidates who want to register with this organization must undertake a course that will make them conversant with IAS. Many scholars have described this as solving the problem from its roots. Under this new proposed syllabus, all institutions of higher learning will continue with their current syllabus. However, upon completion of their course, students will have to undertake a course with the Saudi Organization for Certified Public Accountants on IAS before the board can register them. Some critics have argued that the best approach to this would be to roll out this syllabus right from the colleges or even at high school levels. However, this body has responded by stating that this may take a longer time, and the responsible stakeholders may not be ready to wait this long. However, they have appreciated that a comprehensive change of the syllabus to the school level will be their long-term aim and that they will work with the relevant institutions to make this a reality (Hommel, 2012, p. 74). In order to meet the urgent need for compatibility that is currently being felt, this body has considered its approach to be most appropriate.
According to (Mouton, 1996, p. 78), the development of accounting standards in Saudi Arabia can be analyzed from two main fronts. The first front is to analyze how well these local accounting standards satisfy local accounting needs. This would involve assessing how well the standards work in order to enhance smooth reporting standards within a firm, between firms and between the government and the firms. It would involve determining how well a local investor will be informed about a local firm before making an investment. Graham and Neu (2003, p. 445) explains that it would also involve determining how well the government will determine the revenues of the firm in order to calculate the appropriate taxation. Credit offering institutions would also need to use these accounting documents in order to determine the financial position of a firm. It also helps them to determine how well the firm is able to repay the loan. An investor would want to use these documents to determine the rate of return if he were to invest in it. To this extent, Mourra (2008, p. 76) says that the Saudi accounting standards meet the threshold. They are able to provide the above-identified information.
The second approach of assessment will be to analyze how the local accounting standards satisfy international accounting needs. To this effect, Newcombe (2009, p. 58) says that analysis will focus on how well the accounting standards are able to provide all of the information that an international investor would need about a particular firm within the country. These investors may also want to determine how well their firms perform when they are brought to operate in the country. The assessment will also be performed to determine how well a local firm can use the local accounting standards in their global operations (Pagano, Roel & Zechner, 2002, p. 2656). Of interest would be to determine whether these firms would be forced to change their accounting documents when reporting to their head offices in order to be acceptable. Another area of assessment would be to determine how well the local accounting standards would enable a local firm to acquire loans from the international capital markets. It would be of interest to analyze whether the information that the Saudi accounting standards provide are always adequate to convince the international capital markets to offer local Saudi firms loans for expansion (Marsden 2002, p. 25). Similarly, it would be important to assess how well these documents enable local organizations to make investments in various other countries when supported by local accounting documents. Unfortunately, Nolan (2003, p. 288) confirms that the responses to all of these questions are negative. The current Saudi accounting standards may not be of much use to individuals or institutions planning global operations with some presence in this country.
This realization has created considerable need for the relevant stakeholders to ensure the answers to the above questions are positive. It has been stated by Raiz (2012, p. 11) that these standards must be compatible in order to make it easy for local firms to operate globally. The country stands to benefit considerably if compatibility can be achieved. According to him, the move by the Saudi Organization for Certified Public Accountants to introduce IAS in their syllabus is welcome. The responsibility is now pushed to the government. This argument is supported by Salacuse (2010, p. 71) who says that good policies cannot bear fruit unless they are implemented by the relevant authorities. The Saudi Organization for Certified Public Accountants and other accounting organizations may continue developing good policies that can bring the change that is desired. However, it is common knowledge that change is not easy to accept. Many local firms will be reluctant to implement these policies. Unless the government puts pressure on all of the local organizations, it may take a considerable time before the desired results are achieved. The government must take the lead by rejecting accounting documents that have been prepared using local accounting standards that do not meet international standards.
This will make these firms realize that they have no choice but to adopt IAS. It is logical that these firms would try to avoid making two parallel accounting documents (one for their own use and another for the government) because the process is too costly. With this knowledge, it is apparent that these firms would be forced to change from the local accounting standards to IAS. Through this process, the country can achieve economic growth at the expected rates. Local firms will be able to operate globally using the same accounting standards. They will find it easier to access capital markets, while their operating costs will be reduced. International investors will be attracted to the country because of the improved accounting standards. This is what the stakeholders are fighting to achieve.
The Differences between Local Accounting Standards and International Accounting Standards
According to Sasse (2011, p. 24), the Saudi accounting system differs from that of IAS. He further attributes the difference to a number of facts. An analysis conducted on the accounting standards of different countries reveals that there is divergence in these standards instead of the expected convergence. This is specifically so when the analysis is based on developed and developing economies. Saudi Arabia’s economy is considered a developing economy. Although this economy is one of the fastest developing economies in the region, it has yet to attain the level at which it can be considered a developed economy. Scholars have attributed the difference between Saudi accounting standards and IAS to a number of factors. This research focuses on some of these factors.
Sornarajah (2010, p. 78) identifies the first reason as the law of the land governing accounting bodies and other policies relating to the accounting system. She says that a country will develop laws and regulations that reflect local needs. This explanation has been supported by Murphy (2000, p. 480) who states that the reason why developing economies have diverging accounting standards is the divergent needs of their economies. When developing laws related to the local economy, there is always an attempt to make the law as local as possible for ease of implementation. For this reason, the local accounting standards in Saudi Arabia were specifically developed to address local needs. This explains why they have remained divergent from IAS. The impact of this has been massive and negative. The accounting society has become more relaxed in finding a way of making the local accounting standards match international accounting standards because the law is not strict on this issue (Ampofo, & Sellani 2005, p. 78). This is the same case in most of the Middle East countries such as the United Arab Emirates. This is not the case with developed countries because they have managed to make their local accounting needs match international needs. For this reason, the relevant stakeholders within Saudi Arabia must find a way of making the local accounting needs match international accounting needs. It is only by doing so that the law can be changed to this effect (Sadler & Craig, 2003, p. 115). This offers the best way of attaining compatibility between local accounting standards and IAS.
Another factor that has been identified as a contributor to the differences in accounting standards is ownership concentration. According to Tanke (2010, p. 97), there are some countries in which wealth is concentrated in the hands of a small number of people while the majority are wallowing in poverty. In such economies, the few would need much simpler methods to manage the accounts of their facilities. In Saudi Arabia, it is true to say that most of the country’s wealth is in the hands of a few individuals who are in power. This has affected negatively on the need to developed accounting system in this country. As long as the few affluent people can find a way of accounting for their wealth, the need to have standard accounting standards is not given any priority (Taplin, Tower & Hancock, 2002, p. 198). This may explain why local accounting standards have been much simpler as compared to IAS. Wall (2010, p. 45) explains that the IAS were developed with the assumption that wealth is not the preserve of the minority. For this reason, the relevant policymakers within this country should also adopt this assumption in order to facilitate the adoption of IAS.
The third factor is economic development. Vandevelde (2010, p. 112) observes that this factor was actually an offshoot of the wealth concentration factor explained above. In this case, it is explained that the needs of developed economies are different to those of developing economies. Developing economies have much simpler systems that may not need the sophistication presented by the developed economies. In order to make it simpler, governments in these economies have sought to apply IAS selectively. They have been keen to select the elements that they consider vital for the smooth management of their institutions. This has caused the difference in accounting standards experienced today. This does not only happen in this country, but also in other Middle East nations and in the developing countries (Graham & Neu 2003, p. 459).
Nolan (2003, p. 87) suggests that another factor is the importance of the accounting professionals. Nolan directly related the differences between the Saudi accounting standards and IAS to the lack of proper professionals in this field within the country. According to her, the Saudi Organization for Certified Public Accountants has not been able to produce professionals who are sophisticated enough to drive accounting in this country to the international level. Among the grandaunts in this field are people who fear statistics and would prefer to deal with much simpler figures (Wahlen, Boatsman, Herez, Jonas & Palepa, 2000, p. 490). These people are expected to bring the sophistication that is witnessed in the international forum. The Saudi Organization for Certified Public Accountants is aware of this fact. However, it is seemingly resigned to its fate, allowing the use of accounting standards that are not compliant with international standards. It knows that the professionals in the field may not be able to work to the international standards, and setting local and much simpler standards helps in ensuring that the country moves forward about making accounting records and reporting to the relevant authorities. Pedhazur (1991, p. 68) agrees with this argument and says that the Saudi Organization for Certified Public Accountants must coordinate closely with institutions of higher learning in the country in order to find a way of improving accounting standards. Limited number of well-trained professionals in this field has resulted into a scenario where the locals have to contend with the simplest accounting standards (Ampofo, & Sellani 2005, p. 67). This problem is also affecting various other nations in this region besides this country. It is by developing accounting professionals who can understand the sophisticated international standards that the country can achieve the much-desired compatibility of accounting standards.
The importance of equity markets is another factor that may be attributed to the lack of compatibility between local accounting standards and IAS (Sadler & Craig, 2003, p. 58). Sadler and Craig state that accounting information is always developed to help various users. In countries where equity market plays a pivotal role in the economy, there would be greater pressure to have local accounting standards comply with IAS (Marsden 2002, p. 78). This is because in equity markets, there is a need to have standardized figures that can help various players derive information that is relevant to them. In Saudi Arabia, equity markets have not gained their rightful position within the economy. This has reduced the amount of pressure on the relevant authorities to raise the accounting standards to the levels of IAS. This has made it difficult for these local firms to access capital from international sources.
In order to realize this compatibility, all of the responsible stakeholders must address the above-identified issues in a comprehensive manner. There must also be goodwill from the government agencies in order to achieve this compatibility.
How this Difference Affect the Financial Situations of Companies
In the above analysis, there are cases that expressly refer to how this difference affects the financial situation of companies. This section will focus specifically on this. According to Hommel (2012, p. 35), the difference between Saudi accounting standards and IAS has brought about a significant negative effect on the financial situation of companies. This can be analyzed on various fronts. Firstly, it is important to realize that for a firm to operate successfully, it should have access to the capital markets. Raiz (2012, p. 49) states that firms need funds to expand their operations and increase their market share. However, the lack of compatibility between Saudi accounting standards and IAS has denied most Saudi firms the chance to access international capital markets. This means that the borrowings of these firms are limited to the local capital market, which does not have the necessary capacity to support all of the local needs. Consequently, this is effectively choking off these local firms financially (Taplin, Tower & Hancock, 2002, p. 157).
It was mentioned that when a Saudi firm operates globally, there is a need to adjust the accounting reports when they are in the international market to match international standards. The process of changing the accounting records from the local standards to international standards is time consuming and expensive. Time spent doing this could also be used to generate more money for these companies. It is also worth noting, as Tang (2000, p. 119) observes, that this constant adjustments of the report creates loopholes through which unscrupulous officers can fleece money from these companies. It is therefore, injurious to these companies.
Newcombe (2009, p. 85) also reiterates the fact that this lack of compatibility has reduced the percentage of foreign investors who are willing to invest locally. He says that foreign investors boost the financial situation of firms, especially when they make large investments in existing firms. However, when they are scared off due to the local accounting standards, which do not comply with IAS, these companies are denied the opportunity to access sources of finance for their projects.
However, Sassen (2000, p. 68) is of a different opinion about the financial effect of the difference between local accounting standards and IAS on local companies. The cost of hiring professional accountants who understand IAS is relatively high. The scholar further states that most of the Saudi firms are mid-sized institutions, which do not need sophisticated accounting documents in order to be successful. Their operations are also limited within the borders of this country. Subjecting them to IAS may not only reduce their profitability but also make some consider working without these accounting documents. This may make their operations and financial position worse. The scholar therefore, says that using the local standards is of benefit to most medium-sized firms. Although Marsden (2002, p. 59) agrees with this argument, he cautions that this is a very simplistic reasoning because the ultimate aim of the business unit is not to remain small or medium-sized but grow to become multinational corporations. Ignoring this fact would yield short-term gains but ultimately the overriding effect would be negative. It is true to say that, this difference brings more harm to the finances of firms in the market than it brings advantages.
Benefits of Achieving Compatibility between Saudi Accounting Standards and International Standards
At this point, it is clear that achieving compatibility between Saudi accounting standards and IAS comes with some benefits. These benefits have been emphasised either by stating the consequences of failing to ensure compatibility or mentioning them directly. It is important to note that the core purpose of this research was to identify the benefits of achieving compatibility in accounting standards (Hatyi 2011, p. 78). For this reason, it is advantageous to bring into focus the findings of other researchers in order to enumerate directly the benefits of achieving accountability. This can be achieved in three tiers: the benefit to the government, to the domestic players and to international society.
Benefits to the government
According to Coulter (2009, p. 97) capitalism is quickly engulfing the world as people realize that amassing personal wealth is a sure way of gaining political power. He further suggests that globalization has been intertwined with capitalism. This gives business players a very important role within the leadership of a country. The situation is not different in Saudi Arabia. The government of Saudi Arabia cannot detach itself from the business players of this country. In fact, the government itself is part of the business units through the various government-owned corporations. It also depends on the business operations within this country to generate tax revenues. The government is arguably the biggest beneficiary of compatibility between local accounting standards and IAS (Hamia, 2011, p. 26). Through this standardized accounting system, the government of Saudi Arabia will be able to compare its taxation system to that of various other nations around the world. With this, it can easily select one successful country as a benchmark and try to make its taxation system equally as successful. This will help the government to increase its tax revenues while still offering firms operating locally the opportunity to be successful through a fair taxation system.
As previously mentioned, the government owns or co-owns some of the largest corporations in Saudi Arabia. Some of these corporations also operate outside the country. This taxation system will benefit them as previously described. These benefits would be realised by the government in the form of increased income (Karkouti, 2009, p. 89). The increased income would make it easier for the government to undertake its duties to the citizens without financial strain. Given that the business community’s fate is always tied to that of the government, any benefit to the business fraternity would yield direct benefits to the government. Business leaders would also find it easy to support government projects when they have a healthy environment in which to operate. This can be achieved through corporate social responsibilities such as building schools, planting trees, cleaning the cities or other social activities (D’Aveni, 2008, p. 72). This means that they will be undertaking duties that would have otherwise been the responsibility of the government. The resources that the government would have used in such projects could be transferred to other projects.
Benefits to domestic players
This dissertation has described the benefits that domestic players derive from achieving compatibility between local accounting standards and IAS. Hemsath (2007, p. 39) brings in a new approach to the benefits that the domestic players would realise by achieving compatibility. Some Saudi Arabian investors have not been able to expand their investments to other developed countries due to a lack of compatibility between local accounting standards and IAS. These investors have found it very challenging to understand the accounting documents used in these developed countries. Achieving compatibility between Saudi accounting standards and IAS will end this challenge (Pagano, Roel & Zechner, 2002, p. 2656). These local investors will be able to expand their businesses to various global markets.
The domestic players will benefit from increased access to sources of funding. If the local accounting standards are made compatible with IAS, Mourra (2008, p. 67) suggests that local firms will find it easier to access international capital markets for funding. This will boost their operations both locally and internationally. Local firms with global market coverage will also benefit from this when the need to adjust their books of account is eliminated. Once they make their financial reports, these reports could be used universally instead of having to make them relevant through adjustments.
Benefits to the international society
It is apparent that Saudi Arabia has become an attractive market to various global firms. Salacuse (2010, p. 88) observes that this is associated with the mineral wealth, especially the rich oil reserves that the country has. The country is also home to the city of Mecca, one of the most visited cities in the world due to its religious significance to Muslims. This helps to attract multinational corporations. They find it to be a lucrative market that can help them to expand their market share. A number of these foreign firms have already penetrated this market despite the problems experienced with local accounting standards. As was stated before, this comes at a cost. However, others have preferred to stay away from this market despite its attractions because of various other reasons including the local accounting standards that do not meet international levels (Ampofo, & Sellani 2005, p. 89). When the local accounting standards are made compatible with IAS, these foreign firms may be persuaded to enter the local market. Other investors who prefer entering into partnerships with pre-existing firms in the market will find it easier to evaluate the potential partners in order to determine the viability of their investments. They will be able to determine the precise net worth of these potential partners and this will help them in decision-making.
These three players are very important in the development of the country. Saudi Arabia is considered one of the emerging economic powers in this region. The country has been able to attract foreign investors and some of its firms have been trading abroad. Achieving this compatibility will realise significant benefits to this growing economy. It will be a major step towards having universal trading documents for the local firms trading abroad (Hancock, 2010, p. 89). The government will also have an easier time managing its local resources and benchmarking its financial policies with those of other countries in order to improve its policies.
This chapter has examined the need, the process, and benefits of achieving compatibility between Saudi accounting standards and IAS. The chapter started by looking at Saudi Arabia as a country that has been opening up to foreign investors and the impact that these foreign investors have in the local economy. The chapter then looked at the development of accounting standards in Saudi Arabia. To this extent, the research analyzed the bodies responsible for managing accounting standards in the country and their input in developing accounting standards. The chapter then looked at the differences between Saudi accounting standards and IAS. I analyzed some of the reasons that could have brought about these differences in accounting standards. The chapter also critically analyzed how differences between local accounting standards affect the financial situations of companies. In this analysis, I was keen to incorporate both the positive and negative impacts of these differences. From the analysis, it became apparent that the disadvantages arising from a lack of compatibility far outweigh the benefits.
The chapter went ahead to analyze the benefits of achieving compatibility between Saudi accounting standards and IAS. To achieve a detailed understanding of this, I looked at three players who stand to benefit from compatibility. The first player is the government. This chapter discusses the benefits that the government stands to realise from compatibility. The next party is international society. By making Saudi accounting standards compatible with IAS, international society will find it easier to operate in the Saudi market without having to adjust their books of account. Finally, this compatibility will be of great benefit to the domestic players. Local Saudi firms, which are currently operating globally, find it difficult to manage their accounts because they are forced on making adjustments when reporting to their headquarters in Saudi Arabia from other countries. This challenge will be eliminated. These firms will also have access to international capital markets. Therefore, this chapter has critically analyzed the benefits of achieving compatibility between local accounting standards and IAS.
Conclusions and Recommendations
The world is increasingly becoming global in nature due in part to developments in technology. The development of trade has been greatly enhanced by improved transport and communication infrastructures all over the world. This has seen firms going beyond their borders to invest in other countries throughout the world. The Kingdom of Saudi Arabia is one of the countries that have received considerable attention in terms of foreign investors who want to invest locally. The local Saudi firms such as Samba Financial Group are also operating globally. This is a clear indication that Saudi Arabia has opened up to the world. However, a positive move that would bring significant benefits to the country is under jeopardy because Saudi accounting standards are not compatible with IAS. This is a clear indication that the affected stakeholders must find a solution. The discussion demonstrates that this lack of compatibility is making some of the Saudi firms suffer, making it necessary for the government to respond.
This analysis has revealed that the main reason why compatibility has not been achieved is developments that can be traced back to several years ago. It all started when Saudi Arabia adopted a closed economy whereby foreign investors were forced to leave the country because of polices that was not friendly to them. The policies encouraged the growth of local firms. The focus was on finding a way for locals to trade locally with considerable ease. Policymakers realized that it was not necessary to use complex IAS locally. The stakeholders in this field slowly conformed to a simpler and less detailed accounting system that would fit with local needs. This was introduced into the syllabus at local schools. The approach was taken to find solve the problem of limited number of accounting professionals in this country. According to the analysis above, it is clear that the best way of achieving compatibility between Saudi accounting standards and international accounting standards is to come up with a syllabus in schools that is compliant to international accounting standards.
This has resulted in an entrenched local accounting standards system that does not comply with international standards. The main problem has been the fact that the responsible forces have realized that the professionals in this field lack knowledge in handling international accounting systems, which are more complex than those used locally are, are. This lack of compatibility has resulted in significant negative consequences for the government, international players and domestic players. They incur sizeable costs in trying to manage their accounts. Accessing international capital markets has also proved challenging when local firms rely on the local accounting system. In order to eliminate these challenges, there is a need to make Saudi accounting standards compatible with IAS. The preceding chapter has discussed the benefits of achieving compatibility in considerable detail. It is important to determine the best approaches that can be taken by the government and other stakeholders to ensure that this compatibility is achieved. The following recommendations should be adopted to ensure that compatibility is realised:
- The Saudi Organization for Certified Public Accountants must appreciate the fact that there is an urgent need to make local accounting standards compatible with IAS.
- This accounting body (in collaboration with the education department) should work as a unit to develop a syllabus that would systematically overhaul the current accounting standards taught in schools and introduce IAS.
- The Saudi Organization for Certified Public Accountants should develop a syllabus for those who are currently graduating from college to undertake before they can be certified as public accountants. This would help to ensure that there is swift adoption of the international system.
- The government of Saudi Arabia has a pivotal role to play in achieving compatibility. The government should enact laws demanding that all firms trading in this country must use IAS when reporting to the government. This will force these players to adopt international standards.
- The Saudi Organization for Certified Public Accountants should work together with other international accounting organizations in order to devise a comprehensive plan for achieving compatibility without causing disruption to the local economy.
List of References
Akgul, Z. (2011), The Development of International Arbitration on Bilateral Investment Treaties, John Wiley, New York.
Al-Shammari, B., Brown, P. & Tarca, A. (2008), ‘An investigation of compliance with international accounting standards by listed companies in the Gulf Co-Operation Council member states,’ The International Journal of Accounting, vol. 43, no. 4, pp. 425-447.
Amonrat, T. (2004), The Effects of Globalization on Marketing Strategy and Performance, ProQuest Information and Learning Company, New York.
Ampofo, A. & Sellani, R. (2005), ‘Examining the differences between United States Generally Accepted Accounting Principles (US GAAP) and International Accounting Standards (IAS): implications for the harmonization of accounting standards,’ Accounting Forum, vol. 29, no. 2, pp. 219-231.
Andrzej, A. & Buchaman, A. (2007), Organizational Behavior, Prentice Hall, London.
Chen, C., Gul, F. & Su, X. (1999), ‘A comparison of reported earnings under Chinese GAAP vs. IAS: Evidence from the shanghai stock exchange,’ Accounting Horizons, vol. 13, no. 2, pp.91–110.
Clement, M. & Henry, R. (2010), Globalization and the Politics of Development in the Middle East, Cambridge University Press, New York.
Cobb, C. (2011), Making Sense of Agile Project Management: Balancing Control and Agility, John Wiley & Sons, Hoboken.
Coulter, M. (2009), Strategic Management in Action, Pearson Higher Education, New York.
Daft, R. (2009), Organization Theory and Design, Cengage Learning, New York.
D’Aveni, R. (2008), Hypercompetitive rivalries: Competing in highly dynamic environments, The Free Press, New York.
Doucet, G. (2011), Coherency Management: Architecting the enterprise for alignment, agility and assurance, AuthorHouse, Bloomington.
Gannon, D. & Ashwal, A. (2004), ‘Financial accounting goes global: International standards affect U.S. companies and GAAP,’ Journal of Accountancy, vol. 198, no. 3, pp.43–45.
Glaum, M. & Street, D. (2003), Compliance with the disclosure requirements of Germany’s new market: IAS versus US GAAP, Journal of International Financial Management and Accounting, vol. 14 no.1, pp.64−100.
Graham, C. & Neu, D. (2003), ‘Accounting for globalization,’ Accounting Forum, vol. 27, no. 4, pp.449–471.
Grantham, C. (2007), Corporate agility: A revolutionary new model for competing in a flat world, AMACOM-American Management Association, New York.
Hamia, M 2011, Measuring and modeling core inflation for three GCC countries: Kuwait, Oman, and the UAE, Journal of International Finance & Economics, vol. 11, no. 2, pp. 1-30.
Hancock, M 2010, Central bank to tighten lending criteria under new rules, MEED: Middle East Economic Digest, vol. 54, no. 41, pp. 19.
Hatyi, B 2011, The Growing Middle East, MEED: Middle East Economic Digest, vol. 55, no. 27, pp. 38.
Hemsath, D. (2007), 301 Ways to Have Fun at Work, Berrett-Koehler Publishers, San Francisco.
Hitt, M. (2011), Strategic management: Competitiveness & globalization, South-Western Cengage Learning, Mason.
Hommel, U. (2012), The strategic CFO: Creating value in a dynamic market environment, Springer, Berlin.
Karkouti, M 2009, Dubai — getting by with a little help from its friends, Middle East, vol. 40 no. 10, pp. 54-55.
Marsden, C. (2002), ‘The new corporate citizenship of big business: Part of the solution to sustainability,’ Business and Society Review, vol. 105, no.1, pp.8-25.
Mourra, M. (2008), Latin American Investment Treaty Arbitration: The Controversies and Conflicts, Wolters Kluwer, Austin.
Mouton, J. (1996), Understanding Social Research, Van Schaik, Pretoria.
Murphy, A. (2000), ‘The impact of adopting international accounting standards on the harmonization of accounting practices,’ The International Journal of Accounting, vol. 35, no. 4, pp.471-493.
Newcombe, A. (2009), Law and Practice of Investment Treaties: Standards of Treatment, Wolters Kluwer, Austin.
Nolan, P. (2003), Globalization Challenge for Large Firms from Developing Countries: China’s Oil and Aerospace Industries European Management Journal, vol. 21, no. 3, pp. 285-99.
Pagano, M., Roel, A. & Zechner, J. (2002), ‘The geography of equity listing: Why do companies list abroad?’ The Journal of Finance, vol. 57, no. 6, pp. 2651-2694.
Pedhazur, E. (1991), Measurement, design and analysis, An integrated approach, Lawrence Erlbaum Associates, Hillside.
Raiz, H. (2012), Impact of Economic Globalization on Unemployment: Global and National Perspective, Interdisciplinary Journal of Contemporary Research in Business, vol. 3, no. 1, pp. 1-13.
Sadler, P. & Craig, J. (2003), Strategic management, Kogan Page, London.
Salacuse, J. (2010), The Law of Investment Treaties, Oxford University Press, Oxford.
Sasse, J. (2011), An Economic Analysis of Bilateral Investment Treaties, Gabler, Wiesbaden.
Sassen, S. (2000), The state and economic globalization: any implications for international law? Chicago Journal of International Law, vol. 1, no. 1, pp. 1-8.
Sauvant, K. (2009), The Effect of Treaties on Foreign Direct Investment, Oxford University Press, Oxford.
Sornarajah, M. (2010), The international law on foreign investment, Cambridge University Press, Cambridge.
Tang, Y. (2000), ‘Bumpy road leading to internalization: A review of accounting development china,’ Emerald Management Reviews, vol. 14, no. 1, pp.93–102.
Tanke, M. (2010), Human Resources Management for the Hospitality Industry, Cengage Learning, Albany.
Taplin, R., Tower, G. & Hancock, P. (2002), ‘Disclosure and compliance of accounting policies: Asia-Pacific evidence,’ Accounting Forum, vol. 26, no. 2, pp.172–190.
Van, G. (2007), Investment treaty arbitration and public law, Oxford University Press, Oxford.
Vandevelde, K. (2010), Bilateral Investment Treaties: History, Policy, and Interpretation, Oxford University Press, New York.
Wahlen, J., Boatsman, J., Herez, R., Jonas, J. & Palepa, G. (2000), ‘American Accounting Association’s Standards Committee: Response to the SEC concepts release on International Accounting Standards,’ Accounting Horizons, vol. 14, no. 4, pp.489–499.
Wall, S. (2010), Strategic Reconfigurations: Building Dynamics Capabilities in Rapid Innovation-based Industries, Edward Elgar Publishers, Cheltenham.
Witcher, B. (2010), Strategic management: Principles and practice, Cengage Learning, New York.