Enforcement and compliance of mandatory accounting standards in emerging economies: the case of Pakistan

Transcription

1 200 Int. J. Managerial and Financial Accounting, Vol. 3, No. 2, 2011 Enforcement and compliance of mandatory accounting standards in emerging economies: the case of Pakistan Monirul Alam Hossain* Accounting and MIS Department, University of Hail, P.O. Box 2440, Hail, Saudi Arabia Fax: *Corresponding author Mohammad Nurunnabi University of Edinburgh Business School, University of Edinburgh, 8 Buccleuch Place, Edinburgh, EH8 9LW, UK Fax: +44 (0) M.Nurunnabi@sms.ed.ac.uk Abstract: The objective of this study is to analyse the status of accounting standard in Pakistan as an example of an emergency economy. This paper proposed to set up a separate Accounting Standards Board of Pakistan (ASBP), a private sector organisation that includes a wider participation in the adoption and issuance of the Pakistan Accounting Standards (PASs), which in turn reflects the views of different user groups of The study concludes that the compliance of mandatory PASs can be ensured by ensuring highly monitoring and enforcing policy. If a company fails to comply with the PASs, the Securities and Exchange Commission of Pakistan (SECP) should take punitive measures or disciplinary actions (fine or expulsion from the respective institutes) against the directors of the respective companies in order to revise their financial statements. Keywords: accounting standard; compliance; enforcement; International Financial Reporting Standards; IFRSs; emerging economy; Reference to this paper should be made as follows: Hossain, M.A. and Nurunnabi, M. (2011) Enforcement and compliance of mandatory accounting standards in emerging economies: the case of Pakistan, Int. J. Managerial and Financial Accounting, Vol. 3, No. 2, pp Biographical notes: Monirul Alam Hossain is a Faculty Member at the University of Hail, Kingdom of Saudi Arabia. He received his PhD in Accounting from the Manchester Business School, University of Manchester, UK. His current research focuses on financial reporting, international accounting standards, corporate governance and Islamic accounting and banking. He has published extensively in academic and professional journals and conference proceedings. Copyright 2011 Inderscience Enterprises Ltd.

2 Enforcement and compliance of mandatory accounting standards 201 Mohammad Nurunnabi is a research student at the University of Edinburgh, UK. He holds an Undergraduate degree in Accounting and Finance, an MSc degree in Accounting and Finance and a Postgraduate diploma in Social Science Research Methodology. He has presented papers in the British Accounting Association (BAA), the Irish Accounting and Finance Association (IAFA) and the Institute of Chartered Accountants of Scotland (ICAS). 1 Introduction The accounting standards are intended to describe methods of accounting or disclosure for the application to all adopted accounting statements expected to give a true and fair view of financial position and results. The establishment and enforcement of standards is an important issue for the accounting profession and its interested users. Determining the best mechanism to employ in establishment uniform accounting standards may be essential to the acceptability and usefulness of accounting standards (Belkaoui and Jones, 1996). The International Accounting Standards Committee (IASC) (the International Accounting Standards Board or IASB since 2001) that was established in 1973 as a standard setting body in the private sector to reduce the differences in accounting practices among countries whose objectives are: a to formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance b work generally for the improvement and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements. According to the IASC/IASB, the members are required to support the work of the IASC/IASB by publishing in their respective countries every IAS/International Financial Reporting Standards (IFRSs), approved for the issue by IASC/IASB. It has been argued that by adopting the IASs or IFRSs, the developing countries will be able to improve the quality of their accounting systems so that their specific financial information requirements will be better satisfied. The IFRSs were developed in advanced economies, but are increasingly being applied in emergent economies, potentially ignoring considerations of whether IFRS are appropriate or relevant to such economies (Tyrrall et al., 2007). The IASs/IFRSs are very important for emerging economies 1. It has been argued that IASs may be unsuitable or even detrimental to the needs of emerging economies (Briston and El-Aashker, 1984; Hove, 1989; Samuels and Oliga, 1982; Abd-Elsalam and Weetman, 2003). The growing acceptance of the IASs by emerging capital markets has encouraged empirical investigation of compliance with the requirements of the IASs (Abd-Elsalam and Weetman, 2007). There are a growing number of studies in the area of the IASs to developing and/or emerging economies (Samaha and Stapleton, 2008; Dahawy and Conover, 2007; Hossain et al., 2006; Islam, 2006; Akhtaruddin, 2005; Hossain, 2003; Abd-Elalam and Weetman, 2003; Joshi and Ramadhan, 2002; Hossain and Imam, 2002; Owusu-Ansah, 2000; Susela, 1999; Banerjee et al., 1998; Larson and Kenny, 1998, 1996; Watty and Carlson, 1998; Hassan, 1998; Al-Rai and Dahmash, 1998; Mirghani, 1998;

3 202 M.A. Hossain and M. Nurunnabi Carlson, 1997; Wallace and Briston, 1993; Larson, 1993; Wallace, 1993; Hove, 1990; Perera, 1989). However, there is a shortage of existing literature which has investigated the roles of the IASs/IFRSs in the context of an emerging economy like It has been argued that by adopting IASs the emerging economies will be able to improve the quality of their accounting systems so that their specific financial information requirements will be better satisfied. IASs are commonly known now as IFRSs. More than 113 countries have already adopted or announced intentions to adopt IFRS. Global adoption of IFRS will in many countries require a transition at every level. IFRS are used in many parts of the world, including the European Union, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore and Turkey. As of 27 August 2008, more than 113 countries around the world, including all of Europe, currently require or permit the IFRS reporting. Even for the emerging economies like Bangladesh, Pakistan, China and Egypt, the IFRS will be mandatory for financial statements. The IFRSs are standards, interpretations and the framework adopted by the IASB. Many of the standards forming part of the IFRS are known by the older name of IASs. The IASs were issued between 1973 and 2001 by the board of the IASC. On 1 April 2001, the new IASB took over from the IASC the responsibility for setting IASs. During its first meeting the new board adopted existing IAS and Standards Interpretation Committee (SICs). The IASB has continued to develop standards calling the new standards IFRS. The IFRSs comprise: a IFRSs standards issued after 2001 b IASs standards issued before The Framework for the Preparation and Presentation of Financial Statements states basic principles for IFRS. Hossain et al. (2006) argued that if the enterprises within IASB member countries do not comply with the promulgated accounting or financial reporting standards, global harmonisation will not be achieved. It can be argued here that some empirical studies show that the developing countries have not adopted the IASs with enthusiasm (e.g., Abd-Elalam and Weetman, 2003; Hossain et al., 2006; Islam, 2006; Dahawy and Conover, 2007; Samaha and Stapleton, 2008). In such a situation, there was a possibility that the adoption of the accounting standards did not bring any remarkable changes in the financial reporting practices of Pakistan unless and until the companies are not complying with the mandatory accounting standards. There are two accountancy bodies in Pakistan the Institute of Chartered Accountants of Pakistan (ICAP) and the Institute of the Cost and Management Accountants of Pakistan (ICMAP). Both the institutes are the members of the IASC. To date, the national committee for steering IASs of ICAP and the ICMAP has adopted all IASs/IFRSs as the Pakistan Accounting Standards (PASs). In preparing their accounts, limited companies follow Fifth Schedule of the Companies Ordinance In Pakistan, companies listed with stock exchanges are to prepare their accounts according to the Securities and Exchange Rules 1971 and the IASs by the ICAP. It may be argued that by adopting IASs, the emerging economies will be able to improve the quality of their accounting systems so that their specific financial information requirements will be better satisfied. The objective of this paper is to analyse the accounting standard situation (status) in an emergency economy, Pakistan, and to develop a mechanism wherein the enforcement

4 Enforcement and compliance of mandatory accounting standards 203 and compliance of the accounting standards can be ensured. Section 2 discusses the impact of IFRSs on emerging economies financial reporting practices as whole while Section 3 reviews the existing status of accounting standard in Section 4 reviews the existing framework of accounting standard in Pakistan and proposed what should be the nature of the mechanism for the standard setting process so that a wider acceptance can be achieved. Section 5 evaluates whether or not Pakistan needs a separate set of accounting standards. Section 6 outlines an appropriate mechanism for the enforcement of accounting standards in Pakistan followed by prescribing how to ensure the compliance of such accounting standards in Section 7. Finally, conclusion of the paper has been made in Section 8. 2 Impact of IFRSs in emerging economies financial reporting practices The IASB has taken wide-reaching measures by pronouncing more standards in response to perceived global needs that suggest further studies on compliance. It can be argued that many developing countries/economies do not have the economic and technological capacity and capability to develop their accounting and reporting standards. They have, therefore, accounting standards issued by a developed country or the IASs or IFRSs issued by the IASC/IASB. The desire to ensure a smooth flow of international investment may also be a factor for such adoption or adaptation. As follow-up to this, future research is needed among IFRSs adopting countries to examine whether harmonisation or compliance with IFRSs has been significantly improved after the adoption of IFRSs as their national standards. The IASC/IASB formulates and publishes IASs/IFRSs to be complied in the presentation of financial statements and to promote their worldwide acceptance and observance (El-Gazzar et al., 1999). The IASB has issued a single set of core standards which may provide relevant and reliable information to the users. Consistent with the efforts provided by the IASB and other international agencies, a large number of developing/emerging (and developed) economies have adopted IFRSs as their national accounting standards (Ali, 2005). Compliance appears to be gradually increasing both in developing and developed countries. One reason for the existing lower level of compliance with IFRSs may be that the mechanisms for monitoring and enforcing disclosure requirements in some countries were not stringent (Ali, 2005). It can be argued here that international adaptation and application of IFRSs will greatly improve corporate reporting in many developing and/or emerging economies like The researchers of this paper personally believe that the adoption of IFRSs by the emerging economies will produce many remarkable results. The development of national accounting standards in the light of the IASs/IFRSs is encouraging and may be referred to as revolution for the development of corporate financial reporting practice made by the companies in the emerging economies. While the IASC/IASB has no power to enforce IASs/IFRSs in its member countries, the International Organization of Securities Commissions (IOSCO) has provided significant support for the compliance with IASs/IFRSs. A large number of developing and developed countries around the world have accepted the IASs/IFRSs due to the efforts of IASB and several international organisations (Ali, 2005). However, some empirical studies show that the developing countries have not adopted the IASs/IFRSs

5 204 M.A. Hossain and M. Nurunnabi with enthusiasm. For example, there are evidences from some empirical studies like Samaha and Stapleton (2008), Dahawy and Conover (2007), Hossain et al. (2006), Akhtaruddin (2005), Abd-Elalam and Weetman (2003), Joshi and Ramadhan (2002) and Owusu-Ansah (2000) that have found that the companies of a number of developing countries are not following the mandatory accounting standards while preparing their financial reports or statement. More specifically, Islam (2006) in his study found that the percentage of compliance rate for Pakistani sample companies taking into consideration of 21 mandatory accounting standards was only 72.79%. The growing acceptance of the IASs/IFRSs by the emerging economies has already encouraged many researchers who are willing to investigate empirically the level of compliance with the requirements of IASB IFRSs after Like Pakistan, in many emerging economies, compliance with accounting standards is legally required. However, such practices of mandatory compliance have not always worked well even in developed countries. In most developed countries, compliance with accounting standards now has a legal basis for at least some categories of companies. Emerging economies should see that at least the large companies and multinationals are legally required to prepare their financial statements in accordance with national accounting standards. This can be done through amendments to companies acts of individual developing countries like Unless the compliance is made at the national level, there is little scope for effective global harmonisation of accounting standards. 3 Present status of IASs/IFRSs in Pakistan The World Bank (2005, p.1) notes that: Pakistan has made progress in closing the gap between local requirements for corporate financial reporting and international standards by adopting IFRSs. It can be observed that over the last 20 years, in an ongoing effort to converge with IFRSs, Pakistan has been adopting international standards promulgated by the IASB and Pakistani authorities have been making continuous efforts for the full adoption of IFRSs. The ICAP has adopted all but IFRS 1 and IFRS 4 (Shah, 2007). In addition, the presentation notes that the adoption of IFRS 4 is being actively considered by the ICAP insurance committee and IFRS 1 will be adopted following the adoption of all pending international standards. Concerning listed companies, the Fourth Schedule of the Ordinance lays down the form, content and certain disclosure requirements for preparing financial statements while the Fifth Schedule outlines the same for non-listed companies. All companies under the Companies Ordinance are obliged to present financial statements in line with IFRSs notified in the government gazette by the Securities and Exchange Commission of Pakistan (SECP). The Monitoring and Enforcement Department (MED) of the SECP is responsible for enforcing IFRS compliance by listed companies. Listed entities are required to prepare quarterly financial statements to be filed with the SECP, Registrar of Companies and the Stock Exchanges in Under the Securities and Exchange Commission of Pakistan Act, the SECP also issues listing requirements that specify disclosures applicable to listed entities. The ICAP in association with the regulatory authorities which has been working towards ensuring that Pakistani generally accepted accounting practices (GAAP) is fully compliance with IFRSs by year of 2009 for all listed companies. However, we feel that it is important to judge whether or not these companies are following the PASs while preparing their financial statements. This needs an extensive study by taking into account

6 Enforcement and compliance of mandatory accounting standards 205 the annual reports of all PIEs in Pakistan and the mandatory accounting standards in Right now, non financial companies in Pakistan are governed by the Non-Banking Finance Company Rules of 2003 which authorise the SECP to monitor and enforce accounting and auditing requirements. The World Bank (2005, p.11) observed that the ICAP lacks fulltime qualified professionals for undertaking efforts in effectively facilitating the standards setting process. According to the World Bank, ICAP members must follow the ICAP Code of Ethics which was revised in 2003 in accordance with the International Federation of Accountants Code (IFAC). According to the November 2007 ICAP report on adoption status of IFRSs in Pakistan, IAS 41 is effective for annual periods beginning on or after 1 January The SECP and the ICAP have agreed, in principle, to take urgent necessary steps so as to ensure full compliance with IFRSs, as far as the financial statements of the listed companies (other than banks and financial institutions) are concerned, for the year ending 31 December 2009 (only two IFRSs IFRS 1 and IFRS 4 remain to be legally adopted and some changes are required in an Ordinance). Currently, the ICAP has not adopted the Pakistani equivalents of IFRS 1 and IFRS 4, and the SECP the governmental body that must approve standards after ICAP adoption has not yet approved the Pakistani equivalents of IAS 29, IFRS 7 and IFRS 8. The SECP and the ICAP have agreed, in principle, to take urgent necessary steps so as to ensure full compliance with IFRS, as far as the financial statements of the listed companies (other than banks and financial institutions) are concerned, for the year ending 31 December Although the adoption of IASs/IFRSs in Pakistan is gradually increasing, the ICAP has already confirmed that they have adopted all IASs/IFRSs fully. A few other international standards, although adopted, are pending approval of the SECP. Earlier, in a 2005 assessment of accounting and auditing practices in Pakistan, the World Bank commended Pakistan for making progress in bringing national accounting requirements in line with IFRSs. Nonetheless, the World Bank (2005), as well as the United Nations Conference on Trade and Development (UNCTAD) (2007, 2009) report, identifies certain hindrances to the full adoption of international standards. For instance, IAS 39 and IAS 40 have been held in abeyance by the State Bank of Pakistan due to resistance to adoption. Other shortcomings observed by the World Bank include inadequacies in the technical capabilities of regulators, lack of implementation guidance for accounting and auditing practices and weak professional training and education. 4 A proposed framework for accounting standard-setting of Pakistan Most IASs are accepted in full and some are accepted with slight amendments to suit the needs of When the draft is finalised, an order is issued by the SECP directing that the IASs will be followed in regard to the accounts and preparation of balance sheet and profit and loss accounts of listed companies and subsidiaries of the listed companies. The authority for the issue of this Order is conferred by Subsection 3 of Section 234 of the Companies Ordinance, 1984 (XLVII of 1984), read with clauses (a) and (c) of section 43 of the Securities and Exchange Commission of Pakistan Act, 1997 (XLVII of 1997). On the receipt of an exposure Draft from the IASC, the ICAP advises its members of the contents of the draft either through publications in The Pakistan Accountant (the official journal of the ICAP) or by news letter. Comments are invited from members

7 206 M.A. Hossain and M. Nurunnabi on the draft. If considered, important enough, the draft standard is debated at a conference or seminar before a decision is made as to its acceptance. The standard-setting process adopted by the ICAP is eventually a closed-door process and interested users of accounting information (e.g., stock exchanges, chamber of commerce and other major users of accounting information) do not have to participate in the standard-setting process in It has already mentioned that the ICAP started working on the adoption of IASs since The national committee for steering IASs of ICAP and the ICMAP have the responsibility to make selection of IASs that are related to the national regulations in The national committee for steering IASs of ICAP and the ICMAP selects particular IASs for issuance in order of priority and the Committee reviews the IASs and where necessary adopts the IASs. The national committee for steering IASs prepare a draft standard for the adopted accounting standard subject to the consideration of the council. After getting approval for the draft accounting standard, the same is sent to the members of the ICAP for their comments and suggestions. The comments and suggestions received on the draft are examined by the committee and the standards are reviewed and modified where necessary to conform to local statutory regulations (Azizuddin, 1991). Finally, the council for approval forwards modified draft standards and upon approval it becomes operational from a specified date and the draft standard becomes national accounting standards in If a careful comparison between the accounting standards as adopted by the ICAP and IASs is made, it will be found that there is no deviation of the adopted accounting standards and the IASs. It can be argued that if the ICAP attempted to modify the accounting standards, the question of wholesale adoption of the IASs never arises. While reviewing the accounting and auditing standards in SAFA countries, Azizuddin (1991) opined that the SAFA countries (including Pakistan) should urge upon the national government for the creation of a mechanism (separate accounting standardssetting agency) which will be authorised to develop and promulgate accounting standards. It can be observed that the standards-setting process adopted by the ICAP is eventually a closed door process and interested users of accounting information do not have any chance to participate in the standard-setting process. This section outlines and proposed a separate structure of institutional arrangements for standard-setting mechanism of an emerging economy, It has been observed that where the standards-setting process is in the hand of the national accounting profession, they were accused of monopolising the standards for not representing the majority of the users of financial statements. Experiences from other countries have shown that this kind of arrangement (which is also referred to as self-regulation) cannot be appropriate for the development of sound accounting standard process (e.g., UK, USA and Australia ) (Hossain et al., 2006). In order to avoid the undue influence of the ICAP on the standard-setting process, a private sector organisation, the Accounting Standards Board of Pakistan (ASBP) should be established without any delay This paper has proposed to set up a separate ASBP, a private sector organisation. According to the proposal of the researchers that the ASBP should possess the authority to issue accounting standards on its own authority with representation of accounting profession, the major interested accounting groups and the users including the government. The SECP is the supreme corporate regulator in The SECP will delegate the responsibility for standard-setting to the proposed ASBP. The proposed ASBP will be created under the statute by virtue of the Securities and Exchange Act of

8 Enforcement and compliance of mandatory accounting standards 207 The members of the proposed ASBP should work on a full-time basis and they should be selected from a wide variety of relevant background (e.g., representatives from industry, Company Law Board, Central Board of Taxes and Controller and Auditor General of The accounting profession, the regulatory agency, stock exchanges, chamber of commerce and major users of Company Annual Reports (CARs) of Pakistan will participate in the reviewing the accounting standards in The researchers believe that this will ensure a wider participation in the adoption and issuance of PASs, which in turn reflects the views of different user groups of The ASBP should possess the authority to issue accounting standards on its own authority with representation of the accountancy profession, the major groups and the users including the government of The SECP is the supreme corporate regulator in The SECP should delegate the responsibility for standard-setting process to the said ASBP. The proposed ASBP should be created under the statute by virtue of the Securities Commission Act. The proposed ASBP should develop a conceptual framework which will set out the concepts that underlie the preparation of the financial statements for external users. At the same time, the proposed ASBP should constitute a committee to review all IASs to be adopted or already have adopted by the ICAP and after thorough review these IASs, these should be considered for the issuance. However, it should be noted that before the issuance, these IASs must be modified after due consideration of the specific requirements of Pakistan in the light of Indian experiences. The members of the ASBP should work on a full-time basis and they should be selected from a wide variety of relevant backgrounds. In India, the constitution of the standard-setting body Accounting Standards Board (ASB) gives adequate representation to all interested parties and at present it consists of 15 members including representatives of Industry, Company Law Board, Central Board of Direct Taxes and Controller and Auditor General of India. The accounting profession (the ICAP and the ICMAP), the regulatory agencies (i.e., SEC), stock exchanges, chamber of commerce and major users of corporate annual reports of Pakistan should participate in the reviewing the accounting standards and modify these accounting standards under consideration according to the requirements of This will ensure a wider participation in the adoption and issuance of accounting standards, which in turn reflect the views of different user groups in 5 Need for separate set of accounting standards in Pakistan There are some studies in the context of developing countries which have examined the relevance and importance of the IASs in those countries and most of these studies have either observed or recommended for modified adoption of IASs to meet local environmental factors (see for example, Hossain et al., 2006; Hossain and Imam, 2002; Choudhury, 2000; Christopher and Islam, 1999; Hassan, 1998; Al-Rai and Dahmash, 1998; Mirghani, 1998; Larson, 1993; Enthoven, 1969, 1973). Wallace (1993, p.135) argued that there are some developing countries that are using IASs as national standards without any modifications, and Pakistan is one of those developing countries. However, there is a shortage of existing literature which have investigated the roles and compliances of the IASs in those countries. The notable exception is Zimbabwe. Chamisa

9 208 M.A. Hossain and M. Nurunnabi (2000) investigated the adoption and compliance of IASs in Zimbabwe and found IASs to be largely relevant to Zimbabwe s accounting and financial environment. It is evident from the earlier section that the companies in Pakistan are expected to comply with the prescribed accounting standards adopted by the ICAP and those accounting standards are actually promulgated by the IASB. The ICAP is a member of the IASB and, as such, it has a responsibility to observe it that the standards promulgated by the IASC are duly implemented in The standards promulgated by the IASC are dealing with issues, which are expected to be of common concerns to all member countries. However, it is not possible for any international organisation to develop accounting standards appropriate to the local needs of each and every country and an international body can prescribe accounting standards covering only certain broad areas of financial reporting (Basu, 1986). Local conditions of the developing countries like Pakistan may not be similar to those of developed countries. In that case, Rashid (1990) has argued that the national standard-setting bodies rather than international body can formulate standards necessary to serve the local needs. The ICAP is not aware of the very need for separate accounting standards and its requirements with special reference to Azizuddin (1991) opined that before the international standards are adopted or integrated into national standard it is necessary for the accountancy institute to take inventory of different accounting practices and treatment that are in practice in a country. The ICAP always claim and demand the credit for just wholesale adoption of IASs as the national accounting standards. This is the high time for Pakistan to analyse and study its requirements of accounting standards, to meet its specific requirements to be determined by the financing arrangements, the capital market and the socio-economic environments in 6 Enforcement mechanism for the accounting standards in Pakistan The ICAP does not have any direct control over those responsible for preparation of annual financial reports. The members of the ICAP are requested to follow all accounting standards adopted by the institute irrespective of the type or size of the entity they are auditing. The ICAP have been trying to exercise indirect control through its members who are subject to its disciplinary jurisdiction by requesting them to qualify annual reports for compliance with the accounting standards adopted by the ICAP. Many members of the ICMAP are working as accountants in different entities in The ICMAP is also a member of the IASB. The ICAP never invited the ICMAP in the standard-setting process and its implementation. Rather, the ICAP tends to consider the ICMAP as a rival institute and fails to give proper share in the adoption and implementation of the national accounting standards. This type of negative attitude on the part of the ICAP is very harmful to ensure the enforcement and compliance of national accounting standards in Pakistan (Hossain, 1999). Apart from this, there are many company accountants who are not the member of the ICAP and they are engaged in the preparation of the company financial statements. In addition, the practising accountants are not likely to follow the voluntary accounting standards in the preparation of CARs in case the management has a reservation not to follow accounting standards (Hossain, 1999). Lastly, if the members of the ICAP do not comply with the adopted accounting standards in the preparation and auditing of the financial statements, the ICAP is not in a position to take any disciplinary action against such members as so far the

10 Enforcement and compliance of mandatory accounting standards 209 ICAP has not yet been able to adopt any disciplinary measure under the code of professional ethics for non-compliance of the instruction (Hossain, 1999). As a result, it is very difficult for the ICAP to ensure the compliance of the accounting standards on its own. In Pakistan, the adopted accounting standards have legal or statutory backing. Accounting standards are recommended to the Corporate Law Authority (CLA) as well as the SECP for the government of Pakistan to issue necessary notification for mandatory compliance by the listed companies under the Companies Ordinance It can be argued that some regulatory measures are necessary for ensuring full compliance with the standards prescribed by the regulatory body. In Pakistan any non-compliance reported to the ICAP should be fully investigated and actions are to be taken as per rules. In Pakistan, mandatory enforcement of the local accounting standards (PASs) has been ensured through the company law. The Companies Ordinance 1984 of Pakistan makes it obligatory for companies to prepare financial statements in the line with the PASs adopted by the ICAP. Although the Companies Ordinance 1984 in Pakistan is quite specific that the companies are to prepare their financial statements strictly in accordance with the PASs prescribed by the ICAP, this does not mean that compliance with the PASs has been ensured in The researchers like to argue here that some regulatory measures are necessary for ensuring full compliance with the PASs and any non-compliance with the standards prescribed must be reported to the regulatory body and proper actions must be taken based on the existing laws that may need some sort or modifications and amendments to accommodate that. 7 Compliance mechanism of accounting standards in Pakistan As Pakistan belongs to emerging capital markets, it is particularly relevant for them to comply with financial reporting requirements of the standards (Islam, 2006). It has been argued that there are many incentives for disclosure in emerging economies but there are also considerable reasons for not complying with mandatory disclosure requirements. It has been argued by Choudhury (2000) that without proper compliance mechanism, accounting standards become valueless and will lose their usefulness in market economy. Pakistan should consider like many developed and developing countries in the world an arrangement for compliance with accounting standards for the preparers and auditors while preparing and auditing financial statements of the companies in It is firmly believed by the researchers like Choudhury (2000) that compliance with accounting standards will be prudent for the preparers and auditors in endeavouring to satisfy their professional and legal responsibilities with respect to preparation and audit of financial statements. Ashraf and Ghani (2005) observed that weak enforcement mechanisms are more critical to explaining the state of financial reporting in Pakistan and they have opined that Pakistan s adoption of IFRSs as national standards has not led to improvement in the quality of financial reporting. There are situations where the limited companies do not comply with the PASs (Islam, 2006). No punishment has been made to the companies who do not comply with the PASs in the preparation of their financial statements as well as CARs. The researchers have proposed a model for such type of non-compliance of accounting standards in It has been argued by the researchers that the accounting standards

11 210 M.A. Hossain and M. Nurunnabi in Pakistan have legal backing where the accounting standards are to be compulsorily followed by the companies in the preparation of their financial statements. It can be argued that if the compliance in Pakistan is ensured by following the UK and the USA system where the regulation and high monitoring policy exist, then the compliance of Pakistan will be higher. In the UK, the standards are set by the ASB having power to issue accounting standards on its own authority. There is a legal sanction for companies that do not comply with the financial reporting standards in that any departures from accounting standards must be explained and the financial effects disclosed (Radebaugh and Gray, 1993). If it is found that a company (other than small and medium size companies as defined in the Companies Act 1989) does not comply with the UK accounting standards, and fails to provide the particulars and reasons for any departure, that company will be asked by the Financial Reporting Review Panel of the Financial Reporting Council to provide satisfactory explanation for such deviation from statutory requirement or to revised the financial statements appropriately. If not, the Review Panel and the Department of Trade and Industry can apply to the court for an order requiring financial statements to be compulsorily revised where they fail to comply with the requirements of the law. Similarly in the USA, corporations are required to follow FASB standards; otherwise the SEC will refuse registration and hence trading in their securities (Radebaugh and Gray, 1993). In Pakistan, the SEC can play such role for the companies those fail to comply with the local accounting standards and impose penalty against the directors of concerned companies for such non-compliance. If a company fails to comply with the accounting standards of the proposed BASP, the Securities Exchange Commission should take punitive measures against the directors of the respective companies in order to revise financial statements. The compliance of accounting standards can be achieved in another way. The professional accountancy bodies in Pakistan (for example, the ICAP and the ICMAP) should promulgate a professional accounting statement regarding conformity with accounting standards requiring members to comply with accounting standards compulsorily while preparing and auditing financial statements. Disciplinary actions must be taken if any member fails to comply with accounting standards (for example, fine or expulsion from the respective institutes). In the USA, if the standards have not been compiled with, the CPAs have to give an opinion of non-compliance in the audit reports. Failure to do so may lead to cancellation of a CPA s license to practice under Rule 203 of the code of Professional Ethics. However, in Pakistan, any non-compliance reported to the ICAP is fully investigated and actions are taken as per rule. It is worthwhile to mention that the ICAP and the ICMAP will take necessary actions to educate company accountants and auditors in relation to preparation and auditing of financial reports under the adopted IASs. 8 Summary and conclusions The main objective of this paper is to develop a mechanism wherein the enforcement and compliance of the accounting standards can be ensured. Empirical studies show that the developing countries have not adopted the IASs with enthusiasm (Christopher and Islam, 1999). In such a situation, there was a possibility that the adoption of the accounting standards did not bring any remarkable changes in the financial reporting practices of This study showed that the measures taken by the ICAP and the government of

12 Enforcement and compliance of mandatory accounting standards 211 Pakistan through its implementation Companies Ordinance 1984 in adopting accounting standards and or IFRSs in Pakistan have produced many remarkable results. The establishment and enforcement of standards is an important issue for the accounting profession and its interested users. It has been argued that by adopting the IASs/IFRSs, the emerging economies will be able to improve the quality of their accounting systems so that their specific financial information requirements will be better satisfied. The ICAP so far adopted all IASs/IFRSs as the national accounting standards of The attempt made by the ICAP in developing accounting standards in the light of the IASs/IFRSs is encouraging and may be referred to as revolution for the development of corporate financial reporting practice in It is important that the standard-setting process adopted by the ICAP is a closed-door process and interested users of accounting information do not have any chance to participate in the standard setting process. Like the UK, the USA and Australia, Pakistani Government or SEC should constitute a separate Financial Reporting Council (FRC). A separate standards setting board, suppose Pakistan Accounting Standards Board (PASB) consisting of members from government, SEC, ICAP, ICMAP, investors, academicians, lawyers, etc., should be formed and work independently under the auspices of FRC to adopt IASs and IFRSs for better disclosure and harmonisation. Government should give legal backing for compliance with the adopted standards and enforcement activities. This paper has proposed a structure of institutional arrangements for standard-setting in Pakistan and the board needs to be established in order to improve the enforceability of the accounting standards in The proposed PASB should be created under the statute by virtue of the Securities Commission Act. The accounting profession (the ICAP and the ICMAP), the regulatory agencies (i.e., SEC), stock exchanges, chamber of commerce and major users of corporate annual reports of Pakistan should participate in the reviewing the accounting standards and modify these accounting standards under consideration according to the requirements of This will ensure a wider participation in the adoption and issuance of accounting standards, which in turn reflect the views of different user groups in Local conditions of the developing countries may not be similar to those of developed countries (Rashid, 1990). In that case, it has been argued that the national standard-setting bodies rather than international body can formulate standards necessary to serve the local needs. This is the high time for Pakistan to analyse and study its requirements of accounting standards, to meet its specific requirements to be determined by the financing arrangements, the capital market and the socio-economic environments in In order to avoid non-compliance of the accounting standards in Pakistan, the author proposed that the Securities and Exchange Commission will take the responsibility. If a company fails to comply with the accounting standards of the proposed BASB, the Securities Exchange Commission should take punitive measures against the directors of the respective companies in order to revise financial statements. Lastly, the professional accountancy bodies in Pakistan (i.e., the ICAP and the ICMAP) should promulgate a professional accounting statement regarding conformity with PASs requiring members to comply with PASs compulsorily while preparing and auditing financial statements. Disciplinary actions must be taken if any member fails to comply with PASs (e.g., fine or expulsion from the respective institutes). In this way, the author considers that enforcement and compliance of the accounting standards will be ensured as the standard-setting will be broad-based, having legal backing and punitive measure for those

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