Introduction and Background of the Study
Accounting is considered as a very important tool in operation of business in the current society. According to Mourra (2008, p. 82), a business unit cannot run without proper accounting documents in the current society. The need for accounting in organization (both for profit and nonprofit making organization) emerge due to the pressure to have accountability. Human being has many shortcomings naturally. When put in a position of authority, there is always the temptation to benefit unfairly by stealing what one is trusted with to protect. This means that for a firm to be able to run properly, all its officers assigned various duties must be responsible for the top management. When one is handling his or her own business, it would be assumed that discipline would come naturally. It would be assumed that such an individual would exercise some restrain when it comes to handling 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 the sure way of having accountability within the firm. This helps in elimination of possible pilferage that may be witnessed if the employees are left to run based on mere trust.In only 3 hours we’ll deliver a custom Saudi Accounting Standards and International Standards essay written 100% from scratch Get help
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 a valid balance sheet. A balance sheet without capital would not pass as a valid balance sheet. In this regard, achieving accounting standard standards would mean having a document that has all the standard details that accounting documents should have an in a format that is acceptable by the responsible regulatory body. It is important for a country to achieve international accounting standards for various reasons as explained below. Attaining international accounting standards involves achieving accounting standards that would be easily recognized and use in the international community. For a country that has liberalized its markets, achieving international accounting standards is one of the key tools of 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 has been known for its rich oil reserves. It is the largest oil producer in the world. For this reason, it has attracted many investors who are interested in the oil industry. However, Newcombe (2009, p. 68) says that Saudi market is fast opening up for other businesses other than oil. Various other investors are interested in venturing into other industries 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 the world market outside the Middle East. For instance, Samba Financial Group – one of the leading banks in this country- is operating in the United Kingdom and is planning to expand to other European nations and possibly to the United States.
This bright future for this country is at jeopardy because of lack of compatibility between the local accounting standards and international accounting standards. According to Salacuse (2010, p. 48), it is true that the accounting standards within Saudi Arabia has advanced with the advancement in the education sectors and other sectors of the economy. However, this scholar says that it is unfortunate that these standards do not meet the international accounting standards. The scholar blames this to the fact that this region has been 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 special to these countries. However, the recent research has shown that the standards used in this country do not meet the international requirements. Sasse (2011, p. 78) says that in accounting, politics or political affiliation do not matter an inch. This scholar says that accounting is a game of numbers and irrespective of one’s affiliation, numbers would 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 easy for the international investors to come to this country and help improve its economy. The local firms, which are eying the international market, will also find it easy when managing their books of account. They will also find it easy when it comes to gaining the necessary permits to operate in these foreign countries because authorities in the international market will easily understand their books of account.
Research questions are very important when conducting a research. According to Al-Shammari, Brown, and Tarca (2008, p. 445), conducting a research is a complex process that needs a detailed understanding of the problem statement. When one decides to conduct a 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 get lost and start collecting data that is not relevant to his or her research. 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 time for the researcher instead of being used in conducting activity relevant to the research. Research questions therefore, serves to guide the researcher to focus strictly on what is relevant to the research. When armed with research question, a researcher would strictly go to the field with the aim of finding answers to the question. Any unnecessary detail that is not directly related to the question would therefore be ignored. The researcher 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?Academic experts
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A number of supportive research questions to help the researcher further in this research supported this 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 would be used to guide in collection of data. Given that the researcher intends to use secondary sources of data, the researcher hopes to answer these questions by comparing previous research and determining how they responded to these or related questions.
Justification of the Research
Conducting a research is an expensive process, which involves expenditure of money and time for 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 a research. This research is justified by a number of facts. As was explained when stating the research problem, it is apparent that the accounting standards in Saudi Arabia are not yet fully compatible with international accounting standards. A lot needs to be done to ensure that there is compatibility between the local and international accounting standards because this country is opening up to international trade (Sauvant 2009, p. 15). However, a lot remain to be done in this field as the responsible forces have failed to act with speed to implement the already suggested policies that would ensure this compatibility. This research will be part of the forces that are aimed at ensuring that the accounting standards of this country are transformed in order to be compatible to international standards. This piece of research will exert pressure on the local policy makers on the importance of achieving this compatibility. This research will use secondary sources just to demonstrate to the policy makers that enough proposals have been made, and it is up to them to ensure that the policies are implemented as fast as possible. The research is therefore, justifiable.
Objectives of the Research
According to Ampofo and Sellani (2005, p. 225), it is important to clearly state the objectives of a given research. It helps the readers understand what the research seeks to achieve and why this achievement is important. Objectives of a research will also help critics when reviewing the research, to determine whether the objectives of the research have been successfully achieved or not. In this study, the researcher 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 achieving compatibility with international accounting standards. The other supportive objective included the following.
- To clarify the benefits of achieving compatibility between Saudi accounting standards and international accounting standards
The above are the objectives that the researcher seeks to achieve by the end of the study. To help achieve these objectives, the researcher will use credible secondary sources, which will include peer-reviewed journals, books, and other reliable sources of information.
The Scope of the Research
According to D’Aveni (2008, p. 89), when conducting a research, it is important to define the scope of the study. This is because various stakeholders always use research. Policy makers, researchers, students and other stakeholders always rely on pieces of research to make their decision. 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 in 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. The researcher devoted time to compare previous research in this field in order to come up with 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 researcher limited this research to Saudi Arabia. This research looks specifically at how the accounting standards in Saudi Arabia compares with the international accounting standards. For this reason, any application of this research in a country that is not Saudi Arabia should be with a lot of 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, the researcher has 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 the researcher 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.15% OFF Get your very first custom-written academic paper with 15% off Get discount
The need to have local accounting standards that is compatible to the international accounting standards has attracted a lot of attention among various governments, firms, and scholars alike. This has seen a massive research done 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 sure way of forcing their firms and other stakeholders to transform the local accounting standards to be compatible with international accounting standards. While some countries have applied a lot of pressure to achieve this compatibility, others have been slow in developing clear mechanisms that would ensure that their accounting standards is compatible to the international accounting standards. Saudi Arabia is one of the countries that had previously been slow in achieving this compatibility, but in the recent past, there is clear indication that the country has realized the importance of this compatibility. This has seen efforts by made by various stakeholders to ensure that this country’s accounting standards is compatible with international accounting standards.
Firms in this country are under intense pressure to ensure that their accounting standards are compatible with that of international standards in order to access capital markets. 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, the business environment, political environment, and the social and legal structures of the country. Various international organizations have put pressure on countries and firms to adapt to international accounting standards. For instance, World Trade Organization, International Monetary Fund and World Bank have demanded that firms and countries should achieve international accounting standards 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 the plan to use the amount of money 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. This scholar further says that in the current society, technology has made globalization a necessity other 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 arise due to transactions involving the national and international accounting standards. For instance, when a local Saudi firm is operating both in the United Kingdom and locally, there will be massive duplicative costs when it comes to presentation of accounting documents. When issuing the statements from the local office to the office in the United Kingdom, there would be a cost of converting the statements to international standards, which is acceptable in the United Kingdom. When such a firm receives documents from the United Kingdom, it would incur a cost of converting them to local standards that is acceptable locally. Accounting standards setting attracts additional costs for the country. These costs would be eliminated when the local accounting standards are compatible to international accounting standards. This explains why international accounting standards is increasingly being adopted in many countries rather than Global Generally Accepted Accounting Principles (Tang, 2000). The application of both international accounting standards and Global Generally Accepted Accounting Principles 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. The Shariah laws have strict rules that define various principles in the financial sector. This has had direct effect on the accounting principles used within the borders of Saudi Arabia. According to Marsden (2002, p. 25), international accounting standards is more effective when applied to 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 in addressing the country’s specific business issues. For this reason, many may consider GAAP more effective in the Saudi Arabian business environment compared to international accounting standards owing to the uniqueness of the country’s business environment. However, business world is fast being globalized, and issues about uniqueness of a market are being overtaken by this globalization. Various international firms are now operating in Saudi Arabia, and various Saudi firms are currently operating globally.
This global interaction is expected to increase, and issues about uniqueness on the market may cease to be a relevant issue. As Murphy (2000, p. 489) says, it is important to note that International trade standards not only facilitate trade but they also facilitate investment decision-making. For this reason, compliance with international accounting standards will help the country and its various business sectors to make better and informed decisions. This scholar further notes that Global Generally Accepted Accounting Principles 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, this scholar notes that the regulatory bodies should take into account the differences that are evident among the countries involved. This means that the country should introduce a system that facilitates the application of the national as well as international standards.
According to Pedhazur (1991, p. 76), large companies within Saudi Arabia are more likely to adopt to international accounting standards that smaller firms. This is because of a number of reasons. The first reason why these firms try to adopt international standards is the need to operate in the international market. When a firm operates in the global market, it will force such a firm 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 this country. Large companies are able to attract foreign investments in order to expand their operations through foreign stock exchange listings. In order to increase chances of attracting these foreign investments, large firms are forced to adopt the international standards that will be easily understood by the international community. Small firms have found it very challenging to adapt to the 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 international accounting standards.
As was previously mentioned, the political system of Saudi Arabia has played a major role in influencing the rate at which this country complies with the international accounting standards. 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 improvement in national accounting standards. To achieve this, the various industries in Saudi Arabia must embrace a common practice of disclosure involving financial issues. This is in order to meet the regulatory requirements of the national accounting standards. To comply with international accounting standards, 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.Get your customised and 100% plagiarism-free paper on any subject done for only $16.00 $11/page Let us help you
This is attributed to the need for banks to maintain exemplary records in their reporting, as required by law. Players 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 international accounting standards among the local firms. According to Grantham (2007, p. 28), most firms always go for the easiest and locally accepted standards in order to minimize the cost, and avoid subjecting their staff to further learning of new policies. They consider this a waste of time and resources. However, it is important for the government to ensure that even the smaller local firms use accounting standards that is compatible with the international standards in order to increase their chances of expanding into the world market. Without any form of regulation, firms will always be reluctant to comply with policies they consider as bringing in extra cost to them.
This explains the reason why various firms around the world have adopted international accounting standards while most of the Saudi firms have failed to do so. In order to ensure that the Saudi accounting standards are compatible with international accounting standards, there is need for the government to compel the local firms to adopt IAS. For this to be possible, the government must adopt policies that firms will have to follow for their accounting documents to be accepted as valid by the local authorities. This should be accompanied by punitive measures for firms, which fail to comply with the policy. This would mean that the government would be making a deliberate effort to ensure that the national accounting standards are compatible with international accounting standards.
In the process of achieving compatibility between the local accounting standards and international accounting standards, Daft (2009, p. 81) warns that a lot of care should be taken to avoid radical shift without considering the local forces. The agencies responsible for this shift should not forget that despite the globalized world society, the country remains Saudi Arabia with some factors remaining unique to it. 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. This scholar also warns that the government should also be conscious of the prosperity of the smaller newly started firms. The policy should be gentle on this firm by providing alternatives that would not be too costly for them.
Theoretical Perspectives to International Accounting Standards
Theories are always developed to explain various phenomena in life. The need to make Saudi accounting standards compatible with international accounting standards is a clear indication that the Saudi society has come to appreciate that globalization is a force that cannot be ignored despite some of the unique factors in the environment. Ignoring globalization would be like isolating oneself in a society where survival is pegged on 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 international accounting standards is an indication that this government appreciates the need for international relation, and 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 into a single community where people must interact and commonness in various approaches in life is a key to success. Some of these theories consider globalization as being a process, while others consider it a condition.
One of the theories that have been used in relation to globalization is the realism theory. This theory was developed after the Second World War when it was realized that the world had become a global village. This theory holds that state power is by no means subject to the influence of people, terrorists, multinational corporations, or the international organization (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 international accounting standard for a long time due to lack of goodwill from the government. The government of this country has embraced policies that follow strict Islamic principles common in other Islamic states. Despite the pressure by international organization, individual businesspeople and other local firms operating globally for the government to develop policies that would encourage compatibility of the Saudi accounting standards with the international accounting standards, the government has continued to allow the incompatible standards to be practiced locally. This is a clear indication that for globalization to be achieved there must be a direct effort by the government to make it a reality.
A government can frustrate an attempt by various stakeholders to implement international accounting standards if its policies do not support it. Coulter (2009, p. 71) says that realism was challenged by neorealist who argued that the influence of international organizations, multinational corporations, terrorists or individuals must be considered by a state. They held that a state can decide to ignore these forces, but this cannot be for long. It reaches a moment where these forces are so strong that the power of the state can no longer hold them. The state would be forced to curve in to this pressure and allow these forces to have their way. This is possibly, what is currently witnessed in this country. The Saudi government has realized that globalization is a force that it must curve in to for its own survival. This has seen it come up with policies that are friendlier to globalization and specifically, international accounting standards. There are efforts made by the government, which are seen as direct effort to make Saudi accounting standards compatible with international accounting standards.
Another common theory related 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 part in influencing the 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 coalition, conflicts, and compromise. These are the four main factors that have pushed for globalization in the business world. Various business units are in constant competition (Van 2007, p. 90). For them to increase their market share, they have to look beyond the national market. This means that they cannot avoid international markets.
Firms have also realized that forming coalitions is part of gaining competitive advantage. For this reason, mergers and takeovers are common in the current globalized business world. Firms, which are competing in the market, will always find themselves in conflict with one another for the market share, source of supply or a distribution channel. For instance, Apple Inc and Samsung Corporation have found themselves in conflicts in several occasions over the patent for their products. Each has been accusing the other of infringing into the patent of the other. 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 would consider as fair enough after ceding some ground for a rival and gaining some favor in return. In business environment, this is important to ensure that there is harmony and a healthy competing environment where each firm respects competitors. These four principles put forth by this theory can only be realized if there, globalization is embraced. Part of embracing globalization is to have national accounting standards, which are acceptable with international accounting standards. This theory is therefore, in support of the need to ensure that the Saudi accounting standards are compatible with the international accounting standards. It is only through this that firms will be able to operate in this market.
The third and last theory that will be analyzed in this study is the constructivist theory. Hemsath (2007, p. 58) says, “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 values, interests, and ideas of various stakeholders motivate that globalization. This means that for globalization to be achieved, the concerned stakeholders must develop some interest and values that would 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 government of Saudi Arabia will have a lot of responsibility in ensuring that the Saudi accounting standards is compatible with international accounting standards (Sassen 2000, p. 79).
The government must involve other relevant stakeholders with interest in this area, and those who believe that this process would yield some value in making this process a success. The multinational corporations from Saudi Arabia should play a pivotal role in encouraging the relevant stakeholders to ensure that the local accounting standards are compatible with international accounting standards. They should play this role because of 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 researchers have been saying about this topic. It was at this chapter that the researcher 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, the researcher 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 and making analysis on them in order to find answers to the questions raised in chapter one.
This research methodology will compare closely to the methodology that was explained in the research proposal of this paper. The 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 to achieve its objectives depending on its goals. The methods that will be used to conduct research in this project will be based on the methods proposed in this project proposal. This is so because the project proposal has to be proven workable. Andrzej and Buchaman (2007, p. 92) say, “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 need to conduct a quantitative data analysis. In this research, surveys would have been important in empirical analysis of data that would have helped in verification of some 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 than when this empirical analysis is missing (Raiz 2012, p. 11). However, there are cases where a research would rely on the 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 the subsequent analysis. The researcher has based this study on previous research done by other researchers on this topic. A research cannot claim to be based on a vacuum. In this research therefore, the researcher believed that there are competent scholars who have conducted research on this field before and compiled their reports. The literatures that will be selected will be strictly those done using valid methods. These must be research works that were done empirically, making them authentic research documents on this field (Vandevelde 2010, p. 72). The researcher took time to select peer reviewed journals that had received approval from the relevant authorities for their validity. The researcher appreciated that empirical data analysis is very important in any social research for ensuring the validity and reliability of the research. Having understood that the scope of this research was limited to comparing previous research papers, the researcher was keen on identifying those literatures that had commanded some sense of authority in this field. Their use would give this research some sense of authority as well. The bulk of these literatures 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 a lot of care should be taken by the researcher to ensure that the sources used would provide enough details needed. The researcher must confirm that the available literatures meet the objectives of the research and that the researcher questions will be fully responded to with the data. It is only through this that the researcher can confirm that his or her research will be within the planned limits. The researcher was conscious of this fact, and therefore, was keen on collecting all the relevant data that would answer all the research questions, and meet the objectives of this research as was stated in the research proposal (Nolan 2003, p. 88). To this extent, the researcher will try to compare a number of previous researches on this topic, and how they respond to the research questions developed for this research. The researcher was also keen to ensure that these sources had the capacity to make the set objectives of this research a reality. In order to eliminate any form of bias, the researcher will incorporate research works with divergent views and those of similar views to that of the researcher (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 identify research works based on pure speculations, and those that are valid and thus can be relied upon. This was important because by allowing works with divergent views, the researcher will be allowing freedom into the process of data collection. This is because when in the field collecting primary data, there is always a possibility of gathering data with 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, the researcher will take in all the views, and only pick those views that are validly supported through empirical research. In order to eliminate criticism and improve 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 in data collection and analysis. It is therefore, important that limitations be clearly stated to make it clear to readers of this material how far this research reveals what it purports to (Sadler & Craig 2003, p. 47). As was mentioned in the research proposal, this research was focused on Saudi Arabia. The secondary sources of data used have focused on either the international accounting standards or Saudi accounting standards. Any application of this research should be focused on these two contexts. An application beyond these two contexts should incorporate a lot of caution because the researcher did not focus on any specific country other than Saudi Arabia.
In the research proposal, it was mentioned that data collection would be limited to previous research by other scholars in this field. The researcher will use these findings to answer the questions and meet objectives set for this research. Based on the number of previous researchers who accept or reject the line of thinking of the researcher in this study, and how valid their research is, it will be possible to validate this research. The researcher focused on the channel through which data was collected. This is not only meant to bring clarity to this research but also help young researchers who will be interested in furthering research in this field to know the steps necessary to reach the desired results in a given research. The researcher has ensured that the research is not only important to the professionals in the financial sector, but also to other related sectors such as insurance, marketing, and procurement. As Clement and Henry (2010, p. 89) says, when relying purely on the secondary sources of data, it is important to accommodate various views before making a conclusion. This scholar says that in most of the cases, there is always an attempt by the researcher to focus on only those literatures in support of his or her line of thinking. This is an equivalent tolerating bias when collecting primary data. As was mentioned in the research proposal, biased data collection will never give a comprehensive data. For this reason, the reason, the researcher was keen to ensure that this research would be an all-round research with all views taken into consideration.
Reliability and validity of the research
As was mentioned in the research proposal, 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 the requirements of a standard research paper. The researcher must therefore confirm the validity and reliability of the research. Validity means 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 ensured through checking the representativeness of the sampled secondary sources of data. The researcher ensured that the sample used captured all-important aspects of the topic, including articles with divergent views. During data collection process and in analysis, the researcher steered away from any form of bias as was mentioned earlier. This ensured that data, which was collected, was not in any way, influenced by the opinion of the researcher. The researcher found literature review to be very important in this part because the opinions they have are already moderated.
Reliability means that the study is consistent and lacks any form of ambiguity (Akgul 2011, p. 90). It is the ability to something to deliver on what it is expected of within the right time. It is related to the accuracy of instruments that is, how accurate the measuring device is in measuring what it claims to measure. In this study, it was achieved through increasing verifiability of the perspective to verify reliability. The researcher 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 meets the expectations of the stakeholders. The result from this research can therefore, be put to application as long as the defined scope is maintained.
Ethical Issues in this Research
According to Tanke (2010, p. 41), in every research, there is a given code of conduct that should be followed by the researcher in order to ensure that the research commands some sense of authority. Research ethics are important in ensuring that data collection and subsequent analysis is done in a professional manner. In most of the cases, ethics is always important when going to the field to collect data. It is at this stage that a researcher will need to conduct him or herself with decorum when dealing with respondents to increase chances of getting the desired response from the sampled population. For this reason, many have associated ethical consideration 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 process that should be applied only when collecting data. It has been mentioned that various individuals in various capacities always use a piece of research. For this reason, it is ethical to ensure that the report has nothing but the truth. This is because fabricating information and then purporting it to be a valid piece of information is not an ethical behavior.
The research would mislead the users, which may have serious negative consequences. In this research, the focus was on achieving compatibility between the Saudi accounting standards and the international accounting standards. It is evident from the literature review given in chapter two, that the government is finally curving in to the pressure from various stakeholders to encourage this compatibility (Wall 2010, p. 67). This means that various policymakers in the government and other relevant stakeholders are depending on this piece of information to make sound judgment. The researcher had this in mind, and has therefore, maintained ethics from the planning stage, to the process of writing the proposal and finally in compiling this report. A report can be relied upon because the researcher took time to select authoritative sources of data to back the claims made in this research.
Chapter three entails the methods of research that was used to get data for this research, make analysis and arrive at conclusions. In this chapter, the researcher clearly stated that the research method would rely on the secondary sources of data. This meant that the data would be taken from books and journals of good reputation in order to arrive at the desired answer. This decision was arrived at when the researcher realized that there was limited time to conduct this research. This chapter also talks about reliability and validity of this research. Although this research did not use primary source of data to arrive at its conclusion, there is still need to confirm that it is a valid piece of research that can be relied upon by various policy makers and other researchers. This is stated when explaining the validity of this research. This chapter also talks about ethical issues about the research. Ethics define the principles the researcher used to arrive at the stated conclusions. Ethics will help a researcher eliminate possible bias that he or she might have towards the topic at hand. It will help ensure that a piece of research is based on valid evidence other than opinions of the researcher. This was successfully achieved in this chapter.
As mentioned in the previous chapter, this chapter will analyze some of the researches that have been conducted in this field in order to arrive at the desired conclusion. The analysis will be purely based on the secondary sources of data available in this field. This research will try to understand why it is very important for the Saudi accounting standards to be compatible with international accounting standards. In chapter one, it was mentioned that there has been a massive pressure on the government and other agencies to help achieve this compatibility in this country. 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 can respond to this pressure in order to ensure that the local standards are in line with the international standards. This chapter will give a detailed explanation why this pressure has continued to mount as the world is increasingly globalized. This chapter will also look at some of the benefits that Saudi Arabia is missing because its accounting standards have not met international accounting standards. To achieve this, the research analyzes various studies that have discussed the issue of Saudi accounting standards on 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 war on terror. Many of the multinational firms that were previously operating in Saudi Arabia before the deterioration of this relationship were forced to live 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 changing in 1980s and 1990s as the relationship between this country and the west strained. This scholar says that finally Citibank was forced out of this country and sold all its shares to the locals to make the current giant Samba Financial Group. This is not the only foreign firm forced out of this 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 people in the financial sector and other relevant government agencies were determined to make a mark in this sector that has been dominated by foreigners for a long time. This scholar says that the accounting standards were made to reflect on the needs of the national government and local business needs. As the world adopted new international accounting standards, this country remained reluctant as it considered its accounting standards as good enough to offer the services they needed.
Globalization has slowly changed this perception as people realize that they cannot live is 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 international markets within this region and internationally. For instance, Saudi Arabian Oil Company is a large firm with global market coverage. Samba Financial Group has also expanded in the Middle East and has now opened up branches in London. This is a clear indication that national firms in this country have gone beyond the local market coverage (Clement & Henry 2010, p. 98).
International firms are once again finding their way back to Saudi Arabia. The xenophobic behaviour that was witnessed in the past two decades is slowly ending as the Saudi society opens up to the world. Daft (2009, p.56) says that the Saudi market has been attracting foreign investors who considers this region as rich trading zones. This scholar says that although it is argued that foreign investors may come to offer locals stiff competition in various industries they get into, the truth is that they are the engines that this economy needs to grow in double digits. This scholar says that some sectors in this economy have remained dormant because the locals either are disinterested in them or lack the capacity to venture into them. The foreign investors can propel this sector once they consider the opportunity viable enough.
Although the local environment has increasingly become friendlier than before, these investors are still not enthusiastic in investing locally as would have been expected. They are sill slow to issues that relates to investing in the Saudi economy for various reasons. However, some investors have clearly stated that the main reason why they find it a challenge in local investment is that the accounting standards practiced locally do not meet international accounting standards. Most of these firms, as D’Aveni (2008, p. 36) says, are multinational corporation with various other branches in various parts of the world. They prefer operating in countries with accounting standards that meets international accounting standards. This makes it easy for them to make comparisons and determine projects that are more viable. This scholar states that when a global firm is forced to operate in country whose accounting standards are not compatible with international accounting standards, then auditing the books of account of the firm in the new branch will be more costly and less accurate. This is because the firm will be forced to adjust the accounts from the local standards to international standards before finally submitting the accountings to the responsible offices. This will consume a lot of time 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 the international standards to the local standards. This is a cumbersome process and Doucet (2011, p. 47) say that some facts may be lost during 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 system of reporting on their books of account. They use Saudi accounting standards to report to the local government or other agencies that may need the local accounting standards. The international accounting standards are used in their normal internal operations and in reporting to their head offices in other countries. This is also a challenging task because most of the local employees do not understand the international accounting standards. Saudi Organization for Certified Public Accountants has failed to make its members understand the international accounting standards. This has forced some firms to hire extra employees, some from other countries in order to help in crunching numbers within their plants in the country (Gannon & Ashwal 2004, p. 44). This has seriously discouraged other investors who consider operating locally as being too expensive.
Assessing the Development of Accounting Standards in Saudi Arabia
The research by Graham and Neu (2003, p. 450) assesses the development of accounting standards in Saudi Arabia in terms of their achieving compatibility with international accounting standards. According to these scholars, there has been a mounting pressure from various quarters to ensure that the local accounting standards are compatible with international standards. It is not only the foreign firms coming to Saudi Arabia that suffer due to lack of this compatibility but also the local Saudi firms. The Saudi firms that operate globally such as Samba Financial Group are forced to make adjustments when reporting to their head office in Saudi Arabian from foreign markets. They have complained that this is costing them a lot of time and financial resources. As such, Saudi Organization for Certified Public Accountants and various other bodies in the financial sector have come out to find a lasting solution to this problem that seems to be growing bigger as this society embraces globalization.
According to Grantham (2007, p. 89), Saudi Organization for Certified Public Accountants has developed a series of recommendations that would help in making the local accounting standards compatible with international accounting standards. One of the moves that have widely been praised is a complete change on syllabus on accounting students who wants to register with this body. Glaum and Street (2003, p. 75) say that this body is in the process of changing its syllabus to demand that all the potential candidates who want to register with this organization must undertake a course that will make them conversant with the international accounting standards. Many scholars have described this as solving the problem from its roots. In this new proposed syllabus, all institutions of higher learning will continue with their current syllabus. However, upon completion of their course, learners will have to undertake a course with Saudi Organization for Certified Public Accountants on international accounting standards 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 to this 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). To meet the urgent need for compatibility that is being felt currently, this body has considered its approach as the most appropriate.
According to (Mouton 1996, p. 78), development of accounting standards in Saudi Arabia can be analyzed from two main fronts. The first front will be to analyze how well these local accounting standards meet the 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 the investment. It would also involve determining how well the government will determine the revenues of the firm in order to come up with the appropriate taxation. Credit offering institutions would also need to use these accounting documents to determine the financial position of a firm. It also helps them determine how well the firm is able to repay the loan. An investor would want to use these documents to determine how well a firm may give back returns if one decides to make his or her investment in it. To this extent, Mourra (2008, p. 76) says that the Saudi accounting standards meets the threshold. They are able to provide the above-identified information.
This scholar says that the second approach of assessment will be to analyze how the local accounting standards meet international accounting needs. To this effect, Newcombe (2009, p. 58) says that analysis will be on how well the accounting standards are able to provide all the information that an international investor would need about a particular firm within this country. These investors may also want to determine how well their firms can perform when they are brought to operate in this country. The assessment will also be done to determine how well a local firm can use the local accounting standards in their global operations. Of interest would be to determine whether these firms would be forced to change the 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 acquire loan from international capital market. Of interest would be to analyze whether the information that the Saudi accounting standards provide are always enough to convince the international capital market to offer local Saudi firms loans for expansion. In the same breath, it would be important to assess how well these documents can enable local organizations to make investments to various other countries when supported by local accounting documents. Unfortunately, Nolan (2003, p. 288) confirms that the response to all of the questions are to the negative. This scholar says that the currently used Saudi accounting standards may not be of much use to an individual or institutions that plans for a global operation with some presence in this country.
This realization has mounted a lot of pressure on the relevant stakeholders to make the answers to the questions above positive. It has been stated by Raiz (2012, p. 11) that these standards must be compatible in order to make it easy for the local firms to operate globally. This scholar says that the country stands to benefit a lot if this compatibility can be achieved. According to him, the move by Saudi Organization for Certified Public Accountants to introduce international accounting standards 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 any good fruit unless it is implemented by the relevant authorities. 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 a common knowledge that change is not easy to accept. Many local firms will drag in implementing these policies. Unless the government- through its implementing departments- puts pressure on all the local organizations, it may take along while before the desired fruits can be achieved. The government must take the lead by rejecting accounting documents that have been prepared using the local accounting standards that do not meet international standards. This will make these firms realize that they have no choice but to adopt the international accounting standards in their document. It is logical that these firms would not try to make 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 the international accounting standards. It is through this that the country can achieve economic growth at the expected rates. Local firms will be able to operate globally using same accounting standards. They will find it easy accessing the capital market, while their operating costs will be reduced. International investors will be attracted to this 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 international accounting standards. This scholar attributes the difference to a number of facts. An analysis done on the accounting standards of different countries reveals that there is a divergence in these standards instead of the expected convergence. This is specifically so when the analysis is based on the developed and developing economies. Saudi Arabia’s economy is considered as a developing economy. Although this economy has been considered as one of the fastest developing economies in this region, it is still a fact that it has not attained the level at which it can be considered as a developed economy. Scholars have attributed the difference between Saudi accounting standards and international accounting standards to a number of reasons. This research focuses on some of these reasons.
Sornarajah (2010, p. 78) identifies the first reason as the law of the land governing accounting bodies and other policies related to the accounting system. This scholar says that a country will develop laws and regulations that reflect the local needs. This explanation has been supported by Murphy (2000, p. 480) who says that the reason why developing economies have diverging accounting standards is the divergent needs in their economy. 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 international accounting standards. This is not the case with developed countries as they have managed to make their local accounting needs to 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 through this that the law can be changed to this effect (Sadler & Craig 2003, p. 115). This will be the sure way of attaining compatibility between local accounting standards and international accounting standards.
Another factor that has been identified as a main contributor of the difference in accounting standards is ownership concentration. According to Tanke (2010, p. 97), there are some countries where ownership of wealth is concentrated among a few who are in power, while the majority are wallowing in poverty. In such economies, the few would need much simpler method to manage the accounts of their facilities. In Saudi Arabia, it is a fact that most of the country’s wealth is in the hands of a few individuals who are in power. This may explain why the local accounting standards have been much simpler as compared to the international accounting standards. Wall (2010, p. 45) explains that the international accounting standards was developed with one of its assumptions being that wealth is not a preserve of a few. For this reason, the relevant policy makers within this country should adopt this assumption as well in order to make it possible to adopt international accounting standards.
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 is different from that 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- through relevant departments- have tried to apply international accounting standards selectively. They have been keen to pick the elements that they consider vital for smooth management of their institutions. This has caused the difference in accounting standards experienced today.
Nolan (2003, p. 87) gives another factor as the importance of the accounting professionals. This scholar directly related the difference between the Saudi accounting standards and international accounting standards to lack proper professionals in this field within this country. According this scholar, 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 dealing 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. Saudi Organization for Certified Public Accountants knows this fact. However, it has resigned to its fate by allowing the use of accounting standards that do not meet 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 Saudi Organization for Certified Public Accountants must coordinate closely with institutions of higher learning in this country in order to find a way of improving accounting standards. It is through getting accounting professionals who can understand the sophisticated international accounting standards that this country can achieve the much-desired compatibility in the accounting standards.
Importance of equity markets is another factor that may be attributed to lack of compatibility between local accounting standards and international accounting standards (Sadler & Craig 2003, p. 58). This scholar says that accounting information is always developed to help various users. In countries where equity market plays a pivotal role in the economy, then there would be a higher pressure to have local accounting standards to meet international accounting standards. This is because in equity markets, there is need to have standardized figures that can help various players get information that is relevant to them. In Saudi Arabia, equity markets have not gained its 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 international accounting standards.
In order to realize this compatibility, all 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
It the above analysis, there are cases where it has been mentioned how this difference affects financial situation of companies. This section will focus specifically on this. According to Hommel (2012, p. 35), the difference between Saudi accounting standards and international accounting standards has brought massively negative effect on financial situation of companies. This can be analyzed in various fronts. First, it is important to realize that for a firm to operate successfully, it should have access to the capital market. Raiz (2012, p. 49) says that firms need funds to expand their operations and increase their market share. However, lack of compatibility between Saudi accounting standards and international accounting standards has denied most of the Saudi firm’s chances of getting into international capital market. This means that the borrowings of these firms are limited to local capital market, which does not have capacity to support all the local needs. This means that this difference is chocking these local firms financially.
It was mentioned that when a Saudi firm is operating globally, then there would be a need to adjust their 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. It costs these companies a lot of money. Time spent in doing this could also be used to generate more money to 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 use to fleece a lot of 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 the foreign investors willing to invest locally. This scholar says that foreign investors always boost the financial situation of firms, especially when they make heavy investment into the existing firms. However, when they are scared off due to the local accounting standards, which do not meet international accounting standards, then these companies are denied opportunity to have increased sources of finance for their projects.
Sassen (2000, p. 68) is of a different opinion about the financial effect of the difference between the local accounting standards and international accounting standards on local companies. This scholar says that the cost of hiring professional accountants who understands the international accounting standards is very 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 international accounting standards 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 of the 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 business unit not to remain small or medium sized, but grow to become multinational corporations. Ignoring this fact as this scholar does would yield short-term gains, but in the end, the effect will be massively negative. It is true to say that, this difference brings more harm to the financial benefits of firms in the market than it brings advantage.
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 international accounting standards come with some benefits. These benefits have been highlighted on several sections by either stating consequences of lack of this compatibility or mentioning them directly. It is important to note that the core of this research was to identify benefits of achieving this compatibility in accounting standards. For this reason, the researcher will bring in the focus of other researcher in this section in order to enumerate directly the benefits of achieving this accountability. This can be done in three tiers, which will be the benefit to the government, to the domestic players and to the international society.
Benefits to the government
According to Coulter (2009, p. 97) capitalism is fast engulfing the world as people realize that amassing personal wealth is a sure way of gaining political power. This scholar says 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 this country cannot detach itself from the business players of this country. In fact, the government itself is part of business units through various government-owned corporations. It also depends on business operations within this country to earn itself income in form of tax. The government is the biggest beneficiary of compatibility between local accounting standards and international accounting standards. 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 as successful as that of the benchmarked country. This will help the government increase its tax revenues while still offer firms operating locally opportunity to be successful through fair taxation system.
As was mentioned before, government owns or co-owns some of the largest corporations within this country. Some of these corporations operate outside the country. This taxation system will benefit them as was described in various sections of this paper. These benefits would go to the government as increased income. The increased income would make it easy for the government to undertake its duties to the citizens without financial strain. Given that business society’s fate is always tied with that of the government, any benefit to the business fraternity would yield direct benefit to the government. Business leaders would also find it easy to support government projects when they have a healthy environment to operate in within the country. This can be done 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 a responsibility of the government. The resources that the government would have used in such projects would be transferred to other projects.
Benefits to domestic players
This dissertation has described the benefits that domestic players would generate from achieving compatibility between local accounting standards and international accounting standards. Hemsath (2007, p. 39) brings in a new approach to the benefits that the domestic players would get by achieving this compatibility. This scholar says that there are some Saudi Arabian investors who have not been able to expand their investments to other developed countries due to lack of compatibility between local accounting standards and international accounting standards. These investors have found it very challenging to understand the accounting documents used in these developed countries. Achieving compatibility between Saudi accounting standards and international accounting standards will end this challenge. 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 to be compatible with international accounting standards, Mourra (2008, p. 67) says that the local firms will find it easy to access the international capital market for funding. This will boost their operations both locally and internationally. The 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 this country have. The country is also home to the city of Mecca, one of the most visited cities around the world due to its religious significance to the Muslims. This makes multinational corporations attracted to it. They find it a lucrative market that can help them expand their market share. A number of these foreign firms have already penetrated this market despite the problem experienced with the local accounting standards. As was stated before, this comes at a cost. However, others have preferred to stay away from this market despite the attractiveness of the market because of various other reasons including the local accounting standards that do not meet international levels. When the local accounting standards are improved to be compatible with the international accounting standards, these foreign firms will find it easy to enter the local market. Other investors who prefer entering into partnerships with already existing firms in the market will find it easy to evaluate the potential partners in order to determine the viability of their investments. They will be able to determine the exact net worth of these potential partners and this will help them in decision-making.
These three players are very important in the development of this country. Saudi Arabia has been considered one of the emerging economic powers in this region. This country has been able to attract foreign investors, and some of its firms have been trading abroad. Achieving this compatibility will bring massive benefits to this growing economy. It would be a major step towards having universal trading documents for the local firms trading abroad, and the multinational firms coming to invest locally. The government will also have an easy time managing its local resources, and benchmarking its financial policies with that of other countries in order to improve its policies.
This chapter has looked at the need, the process, and benefits of achieving compatibility between the Saudi accounting standards and international accounting standards. The chapter started by looking at the Saudi Arabia as country that has been opening up for foreign investors, and the impact of these foreign investors in the local economy. The chapter then looked at the development of accounting standards in Saudi Arabia. To this extend, the research analyzed the bodies responsible for managing accounting standards in this country and their input in developing accounting standards of Saudi Arabia. The chapter then looked at the difference between the Saudi accounting standards and international accounting standards. The researcher analyzed some of the reasons that could have brought about this difference in accounting standards. The chapter also analyzed critically how difference between local accounting standards affect financial situations of companies. In this analysis, the researcher was keen to incorporate both positive impacts and negative impact of this difference. From the analysis, it came out clearly that the disadvantages of this lack of compatibility far outweigh its benefits. The chapter went ahead to analyze benefits of achieving compatibility between Saudi accounting standards and international accounting standards. To bring a detailed understanding on this, the researcher looked at three players who stand to benefit from this compatibility. The first player is the government. This chapter discusses the benefits that the government stands to benefit from this compatibility. The next player is the international society. By making the Saudi accounting standards compatible with international accounting standards, the international society will find it easy operating 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, are finding it difficult to manage their books of account because they are forced to make adjustments when reporting to their headquarters in Saudi Arabia from other countries. This challenge will be eliminated. These firms will also have access to the international capital market. It is therefore, a fact that this chapter has critically analyzed benefits of achieving compatibility between local accounting standards and international accounting standards.
Conclusions and Recommendations
The world is increasingly being globalized due to the development in technology. Development of trade has been boosted greatly by improved transport and communication infrastructure all over the world. This has seen firms going beyond their borders to invest in other countries around the world. The Kingdom of Saudi Arabia is one of the countries that have witnessed massive 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 massive development to this country is under jeopardy because the Saudi accounting standards is not compatible with international accounting standards. This is a clear indication that the responsible stakeholders must find a way out.
This analysis has revealed that the main reason why this compatibility has not been achieved is because of numerous reasons that traces back to several years ago. It all started when this country adopted a closed economy where foreign investors were forced to leave this country because of polices that was not friendly to them. The policies encouraged growth of local firms. The focus was to find a way of making the local’s trade locally with a lot of ease. It was at this time that this country realized that it did not need to use the complex international accounting standards locally. The stakeholders in this field slowly conformed to a simpler and less detailed accounting system that would fit the local needs. This was introduced into the syllabus at the local schools.
This has resulted into an entrenched local accounting standards system that does not match the international standards. The main problem has been the fact that the responsible forces has realized that the professionals in this field lack knowledge in handling international accounting systems which is more complex than that which is used locally. This lack of compatibility has resulted into massive negative consequences to the government, international players, and domestic players. They incur many costs trying to manage their books of account. Accessing the international capital market has also been a challenge when local firms use local accounting system. In order to eliminate these challenges, there is needed to make Saudi accounting standards compatible with international accounting standards. The preceding chapter has discussed benefits of achieving this compatibility in details. The following recommendations details that which should be done to ensure that this compatibility is achieved.
- Saudi Organization for Certified Public Accountants must appreciate the fact that there is an urgent need to make the local accounting standards compatible with international accounting standards.
- 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 used in schools and introduce international accounting standards.
- Saudi Organization for Certified Public Accountants should develop a syllabus for those who are currently graduating from colleges to undertake before they can be certified as public accountants. This would help ensure that there is speedy adoption of the international system.
- The government of Saudi Arabia has a big task to play in achieving this compatibility. The government should enact laws that would demand that all firms trading in this country must use international accounting standards when reporting to the government. This will force these players to adopt international standards.
- Saudi Organization for Certified Public Accountants should work together with other international accounting organization in order to come up with a comprehensive plan on how this compatibility can be achieved without causing disruption in the local economy.
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