A Case For MENA Representation On The IASB

By Jamal Ibrahim Haidar

The following article was written for MEESby Jamal Ibrahim Haidar, a graduate student in International Accounting and Finance at the Cass Business School, City University, London. It presents the case for MENA representation on the International Accounting Standards Board (IASB). Email: abbf652@city.ac.uk

Out of the 21 Middle Eastern and North African (MENA) countries, the financial authorities of 15 require or allow companies to use the globally-known International Financial Reporting Standards (IFRS). Moreover, only three of the 18 that are the subject of this study have developed their national Generally Accepted Accounting Principles (GAAP), and are still asking companies to follow them and not use other standards. In addition, two out of three MENA countries are members of the International Federation of Accountants (IFAC – see table).

Despite the widespread use of the IFRS, MENA countries are not represented on the IASB or its affiliated committees. The current regional representatives on the IASB are mainly from North America, EU, Australia, South Africa and Japan. MENA countries say their region’s concerns should be raised in order to achieve better convergence in understandable and enforceable accounting standards around the globe. According to ΄Abbas ΄Ali Mirza, Chairman of United Nations Conference on Trade and Development’s (UNCTAD) working group of experts on International Standards on Reporting, “it is imperative that standard-setters from the emerging markets, such as the GCC countries, are represented on the International Accounting Standards Board so that their inputs are taken into consideration while formulating the IFRS standards.” This opinion is backed by IASB board member and International Financial Reporting Interpretations Committee (IFRIC) Chairman Robert Garnett who said: “With oil revenues being directed into large investments, the region is increasingly being seen as a potential partner.”

The IASB’s 14 members are appointed and governed by the International Accounting Standards Committee Foundation’s (IASCF) 22 trustees. The IASB reviews the activities of the International Accounting Standards (IAS) and IFRS. The IASB’s goal is to see the business world follow one set of accounting standards. Each standard must be approved by at least eight of the IASB’s 14 members, in order to be considered for issuance.

IFRS adaptation problems can arise because of differing environments. Usually, the standard chosen will depend on culture, the legal system, taxation, business organizations and ownership, as well as on the accounting profession inside a country or a region. Previous research shows these factors are different between the MENA region and other parts of the world. If the IASB is aiming for global convergence of accounting standards, then it needs to understand that that there are vibrant and evolving markets in other parts of the world, other than Europe and North America, that have special features which need to be addressed.

MENA Accounting

Countries

IFAC Membership

Accounting Principles

Notes

Morocco 

Yes

National GAAP

IFRS  permitted

Tunisia

Yes

National GAAP

IFRS permitted

Algeria

No

National GAAP

IFRS permitted

Libya

Yes

National GAAP

IFRS permitted

Malta

Yes

IFRS

Egypt

Yes

IFRS

Djibouti

No

No information

West Bank & Gaza

No

IFRS

Israel

Yes

National GAAP

 IFRS  not permitted

Jordan

Yes

IFRS

Lebanon

Yes

IFRS

Syria

Yes

National GAAP

 IFRS not permitted

Iraq

Yes

No information

Iran

Yes

National GAAP

 IFRS not permitted

Saudi Arabia

Yes

IFRS

Oman

No

IFRS

Yemen

No

No information

UAE

No

IFRS

Qatar

No

IFRS

Bahrain

Yes

IFRS

Kuwait

Yes

IFRS

Emergence Of Islamic Finance

Islam’s role in the world is becoming much more influential. Muslims number 1.6bn people, representing 25% of the world’s population. Among the 18 oil-producing states, 10 are Islamic countries providing 40% of the aggregate world production. In addition to the substantial role of Islamic countries in international trade, Islamic finance is a growing force in the banking and investment world. Global players are coming to the industry and recognition is increasing. Islamic Bank of Britain, Amana Mutual Funds Trust, American Finance House-LARIBA Bank, MSI Financial Services Corporation, and Manzil are just a few examples of institutions that engage in this field of finance across the five continents.  

MENA’s Economic Significance

While the MENA region is known for its economic diversity, with both resource rich and poor countries, in aggregate it is doing well, and many parts are in the midst of an economic boom. If IASB is choosing to base its representation criteria on the economic significance of global regions, then MENA should have a seat. Investment in MENA is growing. With the establishment of new industrial cities and new property holding laws, Abu Dhabi is likely to attract $4bn in Foreign Direct Investment (FDI) during 2006 and much more in subsequent years, according to Shaikha Lubna al-Qasimi, UAE Minister of Economy. Also Oman, Saudi Arabia, and Qatar have been attracting billions of dollars of FDI. Moreover, the market capitalization of MENA companies is growing, with some such as the UAE’s Emaar, now amongst the world’s largest. And despite the recent slip in some stock values, the region’s stock markets are in an expansion phase, attracting new entrepreneurs.

Despite the economic importance of the MENA region and the expansion of Islamic finance, among the 49 members of the IASB’s Standard Advisory Council (SAC), MENA is represented, nominally, by only one professional accountant, Adir Inbar (Chairman of Israel’s Professional Board of the Institute of Certified Public Accountants and Senior Audit Partner at Deloitte Israel) whose country does not recognize the IFRS and does not communicate with most of the other 20 MENA countries due to the Arab-Israel conflict.

SAC And Islamic Financial Institutions

At present, Islamic financial institutions are represented on the SAC by an Islamic Financial Services Board (IFSB) member, with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) absent. Both the IFSB and the AAOIFI should be represented: while the former is concerned with finance issues related to Islamic financial institutions, the latter deals directly with accounting standards. At the moment, the IFSB representative on the IASB is from Pakistan. Both the IFSB and AAOIFI should be represented by a member from the MENA countries because most of their members are from the region. Only three come from South East Asia, while 13 out of the total 27 AAOIFI countries are from MENA and 42 out of the 88 IFSB members are from MENA. The AAOIFI standards differ from those set by the IASB in a number of main areas, such as leases, restricted contracts, specialty investment accounts, interpreting conventional standards and Mudaraba and Murabaha financing contracts (where the investors bear part of the business risk). The IASB needs to bring in a representative who understands these differences and MENA nations’ common sources of finance, accounting regulations and framework, and level of industrial development.

Effect Of Culture

Accounting standards – IFRS or GAAP – are influenced by culture. After 1972, the main concern of the accounting world professionals has been to reduce the variation among differing worldwide accounting principles. The IASCF and the IASB were created for this purpose. MENA states, along with others, regardless of their representation status on the IASB, should have the right to bring up their concerns and discuss them with one of the IASB affiliates (mainly IASCF, IFRIC, and SAC).

One area of concern for MENA countries is that IAS 24 requires all the transactions with “close family members of a related party” to be disclosed. Differences in cultures and family bonds make it more challenging for the MENA accountants to adopt these standards. Bringing such differences to the IASB’s attention should convince the organization to include a MENA representative in its governing structure. IASB needs to recognize that much of MENA’s financial resources are held by small and medium enterprises (SMEs) which may require tailored reporting standards. This issue must be addressed, even if the IFRS is targeting listed companies, because many SMEs, in addition to other larger MENA corporations, are aware of the advantages of listing and are looking to go public. Neither micro nor macro-economic structural features of MENA match the West’s business model where large firms and private finance strategies are most common. It would be appropriate if these differences were considered, along with their effects on the additional information disclosures that are required by the IFRS.

Foreign Investment Concerns

The number of listed companies in the MENA countries is increasing rapidly – there are now more than 2,000 in total. However, the degree of internationalization in these stock exchanges is low because the majority of the listed companies are domestic. While MENA governments are in the process of developing their stock markets and shifting cultures from privately held and financed to publicly held and financed, foreign investors are unlikely to show interest if obliged to comply with the assorted MENA accounting systems. Therefore, in order to attract foreign investment, MENA countries need to adopt a universal standard, which would reduce confusion, increase transparency and improve corporate governance. However, this brings difficulties because the countries must then comply with standards that are not tailored to their needs. Nevertheless, it would be an advantage for the MENA countries to follow IFRS rather than establishing their own set of united reporting standards.

Further Challenges

IASB requires each organization to fully comply with IFRS in order to follow IAS. Full compliance with IFRS is a challenge at present for MENA countries. Compliance would indicate that MENA countries were ready to abandon their idiosyncrasies, reform their business reporting culture, lose control of standard setting, and embrace the one accepted by the IASB. However, the MENA region lacks a sufficient number of qualified IFRS auditors and accounting staff. And so far the IFRS are not proving to be workable within the MENA context of national standards, such as those related to information reflecting the effects of changing prices (IAS 15), reporting in hyperinflationary economies (IAS 29), and agricultural property (IAS 41).

Conclusion

Until MENA’s unique environment is considered, the challenges of fully complying with IFRS will remain. This will reduce the degree of success of the IASB in the long run, as a board with the goal of establishing a unique set of financial standards to satisfy the need of providing a basis for financial reporting for the world’s rapidly integrating capital markets. On the basis of any representation criteria (geographical location, GDP level, or population) MENA should gain a seat on the IASB structure. Its countries are already represented in international financial organizations such as the World Bank and the IMF. IASB representation would be advantageous to both MENA countries and the board. If the MENA countries were to support the alternative notion of establishing GCC or MENA accounting systems this would be a blow to the IFRS’ acceptability worldwide. The IASB and MENA have to recognize and respect each other because each represents a benefit for the other.