4 The Background of Accounting in Saudi Arabia

339 Pages·2010·1.82 MB·English

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Author's declaration

This thesis has been constructed completely through my own work except for
quotations and citations that have been acknowledged. This thesis has not been
accepted or submitted for any other degree. Work and analysis in this thesis has
been conducted separately except when approved otherwise.

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Acknowledgement

I would first like to express my gratitude to God Almighty for giving me power,
patience and strength during my studies.

I would like to extend my thanks to my supervisors, Professor Lisa Evans and
Professor Ian Fraser, who provided me with friendly and efficient supervision and
advice during my studies. I would like also to thank all staff in the Accounting and
Finance Division who provided assistance and advice during my studies,
particularly all members of the departmental office.

My special thanks to those people who assisted me during the data collection period.
I would like to thank Mr. Mansor Al Shahrani, and Mr. Abdulmohsin Qatami.

Finally, I am deeply grateful to my family and parents for their patience while I was
in United Kingdom for the period of study. My warm love and thanks go to my wife
Albandary for the support, encouragement and sacrifice she showed while I
completed my PhD, and for her patience in living away from her family during my
studies in the United Kingdom.
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Abstract

This thesis investigates the suitability of International Financial Reporting
Standards (IFRSs) for Saudi Arabia by examining the perceptions of accounting
users and preparers. It explores the information needs of the main users of
accounting, the factors that represent barriers to the adoption of IFRSs, and the costs
and benefits of the adoption of IFRSs.

The study compares Saudi Accounting Standards (SASs) and IFRSs. In addition, a
questionnaire survey was conducted and semi-structured interviews were carried out
to examine the issues in greater depth in order to answer the research questions. The
political nature of accounting standards is investigated, as well as theories of
accountability and decision usefulness in order to interpret the results and explore to
what extent and in what manner these frameworks function in the Saudi
environment.

The Islamic accountability framework would suggest that companies represented by
owners and managers are accountable to their stakeholders’ interests, and owners
and managers must protect those interests and disclose everything that may help
them to discharge their accountability. However, the findings presented in this
thesis suggest that practice of the Islamic accountability framework is limited. The
influence of religious factors on the accounting system is limited in some cases as
there is inadequate disclosure and transparency, such as a lack of information
required for Sharia compliance; this affects users’ ability to make decisions. The
results also reveal some evidence that accounting standard setting is dominated by
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political (rather than ‘user-needs’) considerations. Furthermore, economic factors
override social and cultural factors, including religion, in terms of their influence on
the accounting system. The results suggest inter alia that religious factors will not
represent a barrier to the use of other standards such as IFRSs.

The findings suggest that the adoption of IFRSs would contribute to enhancing the
quality of financial reporting. The results also reveal that financial reporting
prepared on the basis of IFRSs provides more of the information required for
decision-making. The results also suggest that there is, to some extent, agreement
among participants as to the suitability of IFRSs to Saudi Arabia, and that their
benefits would eventually overcome the difficulties and problems that may arise
from their adoption, although it is still be necessary to consider certain specific
requirements, such as those related to Sharia law.
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Abbreviations

AAA American Accounting Association
AAOIFI Accounting and Auditing Organization for Islamic Financial
Institutions
CFO Chief Financial Officer
CMA Capital Market Authority
DZIT Department of Zakat and Income Tax
EU European Union
FASB Financial Accounting Standards Board
FDI Foreign Direct Investment
GAAP Generally Accepted Accounting Principles
GCC Gulf Cooperation Council
GCCAAO Gulf Cooperation Council Accounting and Auditing
IAS International Accounting Standards
IASC International Accounting Standards Committee
IFRS Intentional Financial Reporting Standards
IOSCO International Organization of Securities Commissions
Organization
SAGIA Saudi Arabian General Investment Authority
SBB Saudi British Bank
SOCPA Saudi Organization for Chartered Public Accountants
Tadawul Saudi Stock Exchange
WTO World Trade Organisation
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List of tables

Table 2-1 Relationships between Gray's accounting dimensions and Hofstede's cultural
dimensions ........................................................................................................................... 19
Table 4-1 Main variations between Islamic and Western accounting systems .................... 89
Table 4-2 Number of listed companies in the Saudi stock market ....................................... 94
Table 4-3 SASs up to the present ....................................................................................... 110
Table 5-1 Respondent groups and Response rate............................................................... 135
Table 5-2 Number of interviewees ..................................................................................... 142
Table 6-1 Information about respondents to the questionnaire surveys ............................. 148
Table 6-2 Information about interviewees ......................................................................... 149
Table 6-3 Significant users of financial statements of the banking sector ......................... 150
Table 6-4 Perceptions about groups that may be served by IFRSs .................................... 151
Table 6-5 Views of respondents to the questionnaire survey regarding elements that should
be included in balance sheets from an Islamic perspective ................................................ 152
Table 6-6 Ways of providing information for Zakat, according to respondents ................ 153
Table 6-7 Perceptions about the suitability of IFRS balance sheets for the calculation of
Zakat .................................................................................................................................. 153
Table 6-8 Significant users of financial statements of other listed companies .................. 156
Table 6-9 Perceptions about groups that may be served by SASs ..................................... 157
Table 6-10 Perceptions about groups that may be served by IFRSs .................................. 157
Table 6-11 Perceptions of financial analysts concerning financial statements prepared under
IFRSs .................................................................................................................................. 158
Table 6-12 Perceptions of financial analysts concerning financial statements prepared under
SASs. .................................................................................................................................. 158
Table 6-13 Deficiencies in required information ............................................................... 159
Table 6-14 Perceptions concerning the comparison of financial statements prepared under
SASs and IFRSs, in terms of facilitating auditing work .................................................... 161
Table 6-15 Reasons for respondents’ answers about their choice of SASs or IFRSs ........ 161
Table 6-16 Issues related to IFRSs or SASs ...................................................................... 161
Table 6-17 Perceptions of questionnaire respondents regarding overall problems and costs
of the transition to IFRSs ................................................................................................... 164
Table 6-18 Perceptions of questionnaire respondents regarding problems and costs of
transition to IFRSs ............................................................................................................. 165
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Table 6-19 Perceptions of questionnaire respondents regarding costs that banks incurred
during IFRS implementation .............................................................................................. 166
Table 6-20 Perceptions of questionnaire respondents regarding costs that other listed
companies may incur when implementing IFRSs .............................................................. 166
Table 6-21 Suggestions by interviewees for overcoming problems that may result from
transition to IFRSs ............................................................................................................. 168
Table 6-22 Overall views of questionnaire respondents on cultural issues that may act as
barriers to full adoption of IFRSs....................................................................................... 170
Table 6-23 Views of questionnaires respondents on cultural issues that may act as barriers
to full adoption of IFRSs .................................................................................................... 172
Table 6-24 Opinions of questionnaire respondents about SOCPA's decision.................... 173
Table 6-25 Opinions of questionnaire respondents about SAMA's decision ..................... 173
Table 6-26 Perceptions of questionnaire respondents of SOCPA’s and SAMA’s motivations
for IFRS adoption ............................................................................................................... 175
Table 6-27 Perceptions of questionnaire respondents on influences on SAS development177
Table 6-28 Perceptions of questionnaire respondents on influences on IFRS adoption in
Saudi Arabia ....................................................................................................................... 178
Table 6-29 Perceptions of questionnaire respondents about groups that will benefit from
IFRS adoption .................................................................................................................... 179
Table 6-30 Perceptions of questionnaire respondents about the quality of financial reporting
based on IFRSs................................................................................................................... 182
Table 6-31 Perceptions of questionnaire respondents about benefits of IFRSs in Saudi
Arabia ................................................................................................................................. 184
Table 6-32 Perceptions of questionnaire respondents of advantages resulting from the
adoption of IFRSs in Saudi Arabia .................................................................................... 186
Table 6-33 Perceptions of questionnaire respondents on the neutrality of IFRSs and some
key differences between SASs and IFRSs ......................................................................... 188
Table 6-34 Perceptions of the respondents regarding use of fair value and historical cost in
Saudi Arabia ....................................................................................................................... 189
Table 6-35 Reasons for respondents’ answers concerning an appropriate method in
investment property in Saudi Arabia .................................................................................. 189
Table 6-36 Perceptions of questionnaires respondents regarding the timing of IFRS
adoption .............................................................................................................................. 190
Table 6-37 Respondents’ reasons for their answers concerning the timing of IFRS adoption
............................................................................................................................................ 190
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List of figures

Figure 2-1: Environmental Influences on Accounting Development. ................................. 13
Figure 7-1 Growth of FDI in Saudi Arabia from 2004 to 2008 ......................................... 204
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