Our research provides evidence that when new regulations are introduced in emerging markets, less than full compliance is likely to occur in the first year of mandatory application. By separating the elements of each regulation, we reveal that the primary problems lie in those aspects of the new regulated disclosures that are not familiar from previous practice. Our findings further provide evidence that the force of mandatory regulation yields an improvement in compliance with IASs, even in those instances where there was some voluntary compliance prior to the formal implementation of new laws requiring IASs. We report the extent of the problem in a developing country and show that the greatest problem lies in new regulations that require education and training. Achieving education and training success is likely to be more problematic in developing countries where there are limitations on financial and technical resources.
A detailed subdivision of disclosure items reveals that compliance with relatively unfamiliar aspects of IASs was less complete than compliance with aspects of IASs appearing in previous local regulation. The legacy of the previous era of central planning, secrecy, and conservatism is reflected in the reluctance of Egyptian companies to disclose the market of value of investments and the market value of land in spite of the significant difference (as documented by inflation indices) between the market and book value.
This may reflect a continuation of the conservatism policy deeply rooted in the Egyptian culture. Non-compliance with related party disclosure also reflects continued secrecy. At this early stage of privatization and new regulations, non-compliance costs were lower than compliance cost due to the time needed by the CMA to adapt to the new regulations (new CML and IASs). Penalties for non-compliance were not fully applied in the first year.
Our findings supportCooke and Wallace (1990)in their conclusion that the effectiveness of financial disclosure regulation in a country is a function of regulatory requirements and the degree of enforcement. Our findings, if replicated in studies on other countries, could have implications for understanding the rate of achieving de facto internationalization of accounting standards. In spite of formally adopting IASs in Egypt, there was variation in the level of practice between different companies. In particular, our study supportsRahman et al. (2002)in that varying strengths of different national regulatory regimes and other environment differences may give rise to different practices and affect the level of de facto harmony between countries.
Our study overcomes two of the limitations of prior research highlighted byWallace et al. (1994). First the study focuses on the construction of the disclosure checklist and second it controls for the potential effect of the regression equation by comparing the results of several regression procedures (Cooke, 1998). The process of tailoring and analyzing the sub- sections of a disclosure list for mandatory requirements of listed companies in an emerging capital market makes a contribution to the literature on accounting disclosure by demonstrating that hypothesis testing and research design may be focused on the issues under investigation. Research design should not be excessively constrained by a desire only for replication and comparability with prior work, particularly when exploring issues specific to emerging markets. The complexity of change in the regulations of accounting disclosure and the accompanying complexity of change in the environment of those regulations and disclosures may be incorporated in the research design so that conclusions are robust in presenting detailed evidence and specific explanations of change.
Limitations of this study mainly reflect the practical problems of obtaining representative samples. In particular, we were constrained by the availability of annual reports for 1991–1992. Thus, the current results should be interpreted with caution. The scoring process may be limited by subjectivity that cannot be entirely eliminated. Finally, the results of this study are time-specific because of our focus on a unique event of major change in regulation. While it is recognized that research has its limitations, this exploratory study offers a contribution to the international accounting literature by providing a detailed analysis of accounting regulation in an emerging market during a period of complex change.
NOTES
1. Egypt is an important and influential country in the Middle East. ‘‘Egypt has traditionally played a pivotal role in Middle Eastern politics’’ (Merrill Lynch, 1996, June). Also, it has been a recognized leader of the Arab world (EIU, 1995). The EU is Egypt’s most active trading partner for both imports and exports (Arab-British Trade, 1999). The United States is Egypt’s second largest trading partner, after Europe. According to the U.S. Embassy in Cairo, approximately 230 U.S. companies are investing in Egypt. (ACCE, 2000). Egypt has been highlighted as the fifth cheapest market for investors worldwide (Flemings Global Emerging Markets Earnings Guide, 1999, June).
2. The CML No. 95 is issued by the Ministry of Finance and administered by the Capital Markets Authority (CMA).
3. This comparison takes into account the complexity that some or all of the new regulatory requirements may already be made available by some companies on a voluntary basis.
4. During the period covered by this research, employees of the supervisory body; the CMA, were only beginning to receiving training in the new regulations and the IASs from one of the major international accounting firms. For supervisory purposes, CMA was using a fairly basic disclosure checklist. Indeed the checklist was less detailed than the one used in this research. Accordingly, non- disclosure could easily escape the attention of the CMA staff. Mandating IAS in Egypt has required extensive training and updating for accountants, thereby resulting in relatively high costs of compliance compared with very low non- compliance costs.
5. Government ownership of public sector companies ranged from 51 to 100%.
These companies were listed in the Stock Exchange as a pre-stage for issuing securities for public subscription as part of the privatization program.
6. Listed companies were offered a number of tax exemptions. An amount was allowed equal to interest on the paid up capital of a listed joint-stock company at the prevailing interest rate on time deposits at banks in Egypt for one year. Capital gains on sales or transfers of securities were not taxable. Corporate dividends from shares and interest from debentures and bonds listed on the Egyptian Stock Exchange were
not taxable on condition that the company acquired the shares of the other company on its foundation (Moore, 1995).
7. AWorld Bank (2002)report noted that the pool of closely held companies had risen to approximately 900, with only another 100 shares being actively traded.
8. The law on financial reporting is separate from the law on tax reporting. Listed companies should prepare the balance sheet and other financial statements according to the accounting criteria referred to in the executive regulations of the CML and IASs. Income from the audited financial statements of corporations is then adjusted for any differences between tax law and financial reporting regulations to arrive at income for tax returns (McKee et al., 1999). However, in practice many companies are influenced by tax regulations. As stated in a report issued by the World Bank (2002)‘‘Tax accounting often takes precedence over sound general-purpose financial reporting. To ensure favorable tax outcomes, the tax partner, the audit partner, and the client work together to select accounting treatments and prepare appropriate disclosures for reporting in the financial statements’’.
9. During the twentieth century Egypt has had four different economic stages as follows:
a. Pre-1956 (large private ownership).
b. From 1956 to 1973 (nationalization and a socialist era).
c. From 1974 to 1991 (‘open door policy’ and encouraging foreign investment).
d. After 1991 up to the date of this research (privatization and revitalizing the capital market).
10. In developing countries, prevailing problems of culture, environment, and economy lead to an expectation that the reliability of financial disclosures will not be high unless legal disclosure regulations are set. If the disclosure of information in these countries is primarily left to individual companies supervised by the professional bodies, there appears to be a very small probability that this reliability can be improved.
The intervention of governments through accounting and disclosure regulation may be essential to ensure higher reliability of financial disclosure, which is vital for the expansion of a developing country’s capital market and industries (Jaggi, 1975).
11. Greater financial disclosure may be perceived by companies as reducing investor uncertainty and may allow that new capital be raised more cheaply (Choi, 1973;Firth, 1980;Cooke, 1993).
12. International Accounting firms can only operate in Egypt through an Egyptian partner (correspondent). In Egypt, the audit profession and auditor independence have been well regulated since the 1950s. At the time of this research, the IASs were newly mandated in Egypt. Previously there had been no great local interest in the IASs. It is expected, therefore, that major international audit firms would be more familiar with the IASs because of their international relations. In addition, only part of the IASs was translated into the native language at that time in Egypt.
13. In Egypt most manufacturing companies had a majority government ownership, as stated by McKee et al. (1999) ‘‘Egyptian industry is still largely controlled by the public sector’’.
14. Since sub-score 5 contained only five items that were infrequently relevant to the companies sampled, it is not reported in the empirical findings.
15. Space precludes publishing details of all regressions. They are available from the first-named author on request.
16. This improved later, after delisting a number of non-compliant companies in 1997 and opening a disclosure department where all annual reports can be collected after paying a nominal fee.
17. The 20 companies represented a good range of size, profitability, leverage, and liquidity. Seven of the companies were public sector, 18 were industrial companies and 17 were actively traded in the stock exchange.
18. The trade-off for greater insight is that the explanatory power in adjusted R2falls.
19. IAS 7 cash flow statement was issued in 1992, becoming effective in 1994. It replaced a previous standard IAS 7 statement of changes in financial position (issued 1977), which required a statement of source and application of funds. The move to a cash flow statement was a major change of direction but the CML retained the previous approach of source and application of funds. (http://www.iasplus.com/
standard/ias07.htm). The text has been reworded and made clearer.
20. There were six international audit firms at the time of this study.
ACKNOWLEDGMENTS
The authors thank Professor Donna L. Street, University of Dayton, USA, for helpful suggestions on earlier drafts of this work. They are also appreciative of the constructive comments of the reviewers.
REFERENCES
Abayo, A., Adams, C., & Roberts, C. (1993). Measuring the quality of corporate disclosure in less developed countries: The case of Tanzania.Journal of International Accounting, Auditing and Taxation,2, 145–158.
Abd Elsalam, O. H. (1999). The introduction and application of international accounting standards to accounting regulations of a capital market in a developing country: the case of Egypt. Unpublished Doctoral thesis, Heriot-Watt University, Edinburgh, Scotland, UK.
Abd Elsalam, O. H. (2002). Egypt. In: C. Roberts, P. Weetman & P. Gordon (Eds), International financial accounting: A comparative approach(2nd ed.). London: Financial Times Prentice Hall, Chapter 17.
ACCE (2000). American Chamber of Commerce in Egypt website.http://www.amcham.org.eg/
HTML/Amcham.htm
Ahmed, K., & Nicholls, D. (1994). The impact of non-financial company characteristics on mandatory disclosure compliance in developing countries: The case of Bangladesh.
International Journal of Accounting,29, 62–77.
Amer, M. B. (1969). Impact of public ownership on the UAR accounting profession.
International Journal of Accounting Education and Research,4(2), 49–61.
Arab-British Trade. (1999). Egypt. The Journal of the Arab-British Chamber of Commerce, 7(1 and 2), 20–24.
Bails, D., & Pepper, L. (1993).Business fluctuations, forecasting techniques and applications.
New Jersey: Prentice Hall International.
Belkaoui, A. (1994). Levels of financial disclosure by European firms and relation to country return and risk.Advances in International Accounting,7, 171–181.
Belkaoui, A., & Kahl, A. (1978). Corporate financial disclosure in Canada. Research Monograph. Vancouver: Canadian Certified General Accountants Association.
Botosan, C. (1997). Disclosure level and cost of equity capital.The Accounting Review,72(3), 323–349.
Buzby, S. L. (1975). Company size, listed versus unlisted stocks, and the extent of financial disclosure.Journal of Accounting Research,13(1), 16–37.
Cahan, S., Rahman, A., & Perera, H. (2005). Global diversification and corporate disclosure.
Journal of International Accounting Research,4(1), 73–93.
Cerf, R. A. (1961).Corporate reporting and investment decisions. Berkeley, CA: University of California Press.
Chang, L. S., Most, K., & Brain, C. (1983). The utility of annual reports: An international study.Journal of International Business Studies,14(1), 63–84.
Choi, F. (1973). Financial disclosure and entry to the European capital market.Journal of Accounting Research,11(2), 159–175.
Chow, C., & Wong-Boren, A. (1987). Voluntary financial disclosure by Mexican corporations.
The Accounting Review,62(3), 533–541.
Cooke, T. (1989).An empirical study of financial disclosure by Swedish companies. London:
Garland Publishing.
Cooke, T. (1991). An assessment of voluntary disclosure in annual reports of Japanese corporations.The International Journal of Accounting,26(3), 174–189.
Cooke, T. (1993). Disclosure in Japanese corporate annual reports.Journal of Business Finance and Accounting,20(4), 521–535.
Cooke, T. (1998). Regression analysis in accounting disclosure studies.Accounting and Business Research,28(3), 209–224.
Cooke, T., & Wallace, R. (1990). Financial disclosure regulation and its environment: A review and further analysis.Journal of Accounting and Public Policy,9, 79–110.
Craig, R., & Diga, J. (1998). Corporate accounting disclosure in ASEAN. Journal of International Financial Management and Accounting,9(3), 246–274.
Craswell, A., & Taylor, S. (1992). Discretionary disclosure of reserves by oil and gas companies: An economic analysis.Journal of Business Finance and Accounting,19, 295–308.
Dumontier, P., & Raffournier, B. (1998). Why firms comply voluntarily with IAS: An empirical analysis with Swiss data.Journal of International Financial Management and Accounting, 9(3), 216–245.
EFG. (1996).Egypt a new age: Guide to the Egyptian Capital Market(p.60). Egyptian Financial Group.
EIU (Economist Intelligence Unit). (1995).Country profiles.Egypt.
EIU (Economist Intelligence Unit). (1998).Country profiles.Egypt.
El-Modahki, J. (1995).An empirical study of accounting disclosure development in the Kingdom of Saudi Arabia. Unpublished Doctoral thesis, University of Exeter, UK.
Elsadik, Z. (1990). Reorganising the accounting and auditing profession in the Arab Republic of Egypt. Paper presented at the Second Conference of the Scientific Association of
Accounting, Systems and Auditing. Horizons of Accounting Developments in Egypt, Cairo, Egypt (April).
ESCWA (Economic and Social Commission for Western Asia). (2003). Responding to Globalization: Stock Market Networking for Regional Integration in the ESCWA Region. United Nations, New York, 7 October.
Ferguson, M., Lam, K., & Lee, G. (2002). Voluntary disclosure by state-owned enterprises listed on the Stock Exchange of Hong Kong. Journal of International Financial Management and Accounting,13(2), 125–152.
Firer, C., & Meth, G. (1986). Information disclosure in annual reports in South Africa.Omega International Journal of Management Sciences,14(5), 373–382.
Firth, M. (1979a). Impact of size, stock market listing and auditors on voluntary disclosure in corporate annual reports.Accounting and Business Research,9(36), 273–280.
Firth, M. (1979b). The disclosure of information by companies.Omega International Journal of Management Sciences,7(2), 129–135.
Firth, M. (1980). Raising finance and firms’ corporate reporting policies. Abacus, 16(2), 100–115.
Flemings Global Emerging Markets Earnings Guide. (1999, June).
Gray, S. J., Meeks, G., & Roberts, C. (1995). International capital market pressures and voluntary disclosures by U.S. and U.K. multinationals.Journal of International Financial Management and Accounting,11, 108–131.
HassabElnaby, H., & Mosebach, M. (2005). Culture’s consequences in controlling agency costs:
Egyptian evidence.Journal of Accounting International Auditing and Taxation,14(1), 19–32.
Hegazy, K. (1991). Accounting reforms as an aid to economic development in less developed countries: with special reference to Egypt. Unpublished Doctoral thesis, London School of Economics and Political Sciences, UK.
Hossain, M., Perera, M., & Rahman, A. (1995). Voluntary disclosure in the annual reports of New Zealand companies.Journal of International Financial Management and Accounting, 6(1), 69–87.
Hossain, M., Tan, L., & Adams, M. (1994). Voluntary disclosure in an emerging capital market:
Some empirical evidence from companies listed on the Kuala Lumpur Stock Exchange.
The International Journal of Accounting,29(4), 334–351.
Inchausti, B. (1997). The influence of company characteristics and accounting regulation on information disclosed by Spanish firms.The European Accounting Review,6(1), 45–68.
Jaggi, B. (1975). Impact of cultural environment on financial disclosures.International Journal of Accounting Education and Research,10(2), 75–84.
Kahl, A., & Belkaoui, A. (1981). Bank annual report disclosure adequacy internationally.
Accounting and Business Research,11(43), 189–196.
Lang, M., & Lundholm, R. (1993). Cross-sectional determinants of analysts’ ratings of corporate disclosures.Journal of Accounting Research,31(2), 246–271.
Leftwich, R., Watts, R., & Zimmerman, J. (1981). Voluntary corporate disclosure: The case of interim reporting.Journal of Accounting Research,19, 50–77.
Mahrous, A. (1987). Accounting systems applied in Egypt. Symposium on the importance of information and disclosure in Arabic Stock Exchanges. Union of Arab Stock Exchanges:
Cairo, Egypt, (November), pp. 15–17.
Malone, D., Fries, C., & Jones, T. (1993). An empirical investigation of the extent of corporate disclosure in the oil and gas industry.Journal of Accounting, Auditing and Finance,8(3), 249–273.
McKee, D., Garner, D., & McKee, Y. (1999).Accounting services, the Islamic Middle East, and the global economy. London: Quorum Books.
Mecagni, M., & Sourial, M. S. (1999).The Egyptian stock market: Efficiency tests and volatility effects. IMF Working Paper No. 99/48, Available at SSRN:http://ssrn.com/abstract=
880575
Meek, G., Roberts, C., & Gray, S. (1995). Factors influencing voluntary annual report disclosures by US, UK and continental European multinational corporations.Journal of International Business Studies,26(3), 555–572.
Merrill Lynch. (1996).Egypt: The investment, jewel on the Nile (pp. 7–8). London: Global Securities Research and Economic Group of Merrill Lynch.
Moore, P. (1995).Egypt investment and growth. London: Euromoney Publications.
Naser, K. (1998). Comprehensiveness of disclosure of non-financial companies listed on the Amman Financial Market.International Journal of Commerce and Management,8(1), 88–119.
Nicholls, D., & Ahmed, K. (1995). Disclosure quality in corporate annual reports of non-financial companies in Bangladesh.Research in Accounting in Emerging Economies, 3, 149–170.
Norusis, M. (1993).SPSS for Windows: Base system user’s guide. USA: SPSS, Inc., Release 6.0.
Owusu-Ansah, S. (1998). The impact of corporate attributes on the extent of mandatory disclosure and reporting by listed companies in Zimbabwe.The International Journal of Accounting,33(5), 91–103.
Patton, J., & Zelenka, I. (1997). An empirical analysis of the determinants of the extent of disclosure in annual reports of joint stock companies in the Czech Republic.European Accounting Review,6(2), 605–626.
Rahman, A., Perera, H., & Ganish, S. (2002). Accounting practice harmony, accounting regulation and firm characteristics.Abacus,38(1), 46–77.
Rathborne, D., Grosch, J., & Galloway, D. (1997).The LGT guide to world equity markets.
London: Euromoney Publication.
Samuels, J., & Oliga, J. (1982). Accounting standards in developing countries.The International Journal of Accounting,18(1), 69–88.
Schleicher, T. (1998).Developments in corporate financial disclosure over the period 1975–1996:
Evidence from UK annual reports. ACCA Occasional Research Paper no. 21, p. 57.
Shaffer, S. (1995, May/June). Rethinking Disclosure Requirements.Business Review, pp. 15–29.
Singhvi, S. (1968). Characteristics and implications of inadequate disclosure: A case study of India.International Journal of Accounting Education and Research,3(2), 29–43.
Singhvi, S., & Desai, H. (1971). An empirical analysis of the quality of corporate financial disclosure.The Accounting Review,46(1), 129–138.
Solas, C. (1994). Financial reporting practice in Jordan: An empirical test. Advances in International Accounting,7, 43–60.
Stanga, K. (1976). Disclosure in published annual reports.Financial Management,5(4), 42–52.
Street, D., & Bryant, S. (2000). Disclosure level and compliance with IASs: A comparison of companies with and without US listings and filings. The International Journal of Accounting,35, 305–329.
Street, D., & Gray, S. (2002). Factors influencing the extent of corporate compliance with International Accounting Standards: Summary of a research monograph.Journal of International Accounting Auditing and Taxation,11(1), 51–76.
Street, D., Nichols, N., & Gray, S. (2000). Segment disclosures under SFAS 131: Has business segment reporting improved?Accounting Horizon,14(3), 259–285.
Tai, B., Au-Yeung, P.-K., Kwok, M., & Lau, L. (1990). Non-compliance with disclosure requirements in financial statements: The case of Hong Kong companies. The International Journal of Accounting,25(2), 98–112.
Tawfic, M. (1992, March). The role of accounting standards in supporting the capital market and reforming the accounting approach to fulfilling the needs of investors.Proceedings of the Conference of the Ahly Egyptian Bank, Cairo, Egypt.
Wallace, R. (1987).Disclosure of accounting information in developing countries: A case study of Nigeria. Unpublished Doctoral thesis, University of Exeter, UK.
Wallace, R., & Naser, K. (1995). Firm-specific determinants of the comprehensiveness of mandatory disclosure in the corporate annual reports of firms listed on the Stock Exchange of Hong Kong.Journal of Accounting and Public Policy,14(4), 311–368.
Wallace, R., Naser, K., & Mora, A. (1994). The relationship between the comprehensiveness of corporate annual reports and firm characteristics in Spain. Accounting and Business Research,25(97), 41–53.
World Bank. (2002). Report on the Observance of Standards and Codes (ROSC). Egypt, Arab Republic.