Introduction
International Accounting Standards (IAS) are a set of accounting standards adopted by various countries around the world, with the aim of harmonising and internationalising accounting standards and practices. This study aims to explore the benefits of achieving compatibility between Saudi Accounting Standards and IAS. This will be achieved by highlighting the Generally Accepted Accounting Principles (GAAP). Moreover, credible sources will be used to support the study’s arguments. The sources will also prove significant for analysing any weaknesses in the study’s arguments.
Aims of this study
The aim of this research project is to assess the development of accounting standards in Saudi Arabia in terms of achieving compatibility with IAS. This project will evaluate how the differences between local accounting standards and IAS could affect the financial situations of companies operating in the country.
Objectives of the study
The main objective of this study is to clarify the benefits of achieving compatibility between Saudi accounting standards and IAS.
The secondary objectives are to:
- Evaluate how differences between local accounting standards and IAS could affect the financial situations of companies.
- Assess the development of accounting standards in Saudi Arabia in terms of their compatibility with IAS.
Research questions
The principal research question is: what are the benefits of achieving compatibility between Saudi accounting standards and IAS?
The secondary questions are:
- 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?
Methodology
This chapter will focus on various aspects of the research development. It includes methods for data collection, its analysis and presentation procedures. Each research project applies a particular research method in order to achieve its objectives depending on its stated goals. The methods that will be used to conduct the research in this project will be based on the methods proposed in this project proposal (Pedhazur 1991, p. 78). This is necessary because the project proposal must demonstrate that the objectives are workable. According to Mouton (1996, p. 92), in research, design deals primarily with the aims, uses, purposes, intentions, and plans within the practical constraints of time, location, money, and the availability of staff. It is true that in social sciences, surveys often play a very important role, especially in cases where there is a need to conduct quantitative data analysis.
As Pedhazur (1991, p. 67) notes, surveys are helpful for validating research because they allow for empirical testing of the data. However, the scope of this research is rather limited in nature. The researcher will base this study on empirical research that has been conducted by other researchers on this topic. To some extent, all research draws upon the findings and experiences of previous investigations. For this study therefore, the researcher believes that there are competent scholars who have previously conducted research in this field and compiled their reports. The empirical literature that will be selected will be those studies that have used valid methods. These must be research works that were conducted empirically, thereby making them authentic research documents in this field. The majority will be recent peer-reviewed journals on this topic.
To this extent, the researcher will try to compare a number of previous studies that have examined this topic. In order to eliminate any form of bias, the researcher will incorporate studies that have divergent views as well as those of similar views to that of the researcher. The analysis will then be based on the facts put forward by each group and the validity they claim to have. This will help to identify research works based purely on speculation and those that are valid and thus can be relied upon. The chapter returns to the research hypotheses. This is important because it is at this stage that the researcher gets into the process of gathering information. It is therefore necessary that the research hypotheses are brought into focus because they act as a guiding light in the process of gathering data (Pedhazur, 1991, p. 56), with the researcher seeking to confirm the hypotheses. In order to eliminate criticism, this chapter clearly states the scope of the study. There are limits beyond which this research may not hold because of the selected method for data collection and analysis. It is therefore important that these limitations are clearly identified so as to make it clear to the reader of this material the extent to which this research reveals what it purports to.
As previously mentioned, data collection is to be limited to previous research conducted by other scholars in this field. The researcher will use these findings to confirm or reject the hypothesis developed for this research. Based on the number of previous researchers who have accepted or rejected the stated hypothesis, and how valid their research is found to be, it will be possible to validate or reject the hypothesis. In so doing, the researcher hopes to bring into focus the channel through which data can be collected. This is not only meant to bring clarity to this study but also to help future researchers who will be interested in further investigation into this field to develop the steps necessary to realise the desired results. The researcher has ensured that the methodology is not only applicable to professionals in the financial sector but also to other related sectors such as insurance, marketing and procurement.
Reliability and validity of the method
Validity refers to the appropriateness, applicability and truthfulness of a study. It is the ability of research instruments to produce results that are in agreement with theoretical and conceptual values (Mouton, 1996, p. 78). In this study, internal validity was assured by checking how representative the sampled secondary sources of data were. The researcher ensured that the sample captured all of the important aspects of the topic, including articles with divergent views. During the data collection process and subsequent analysis, the researcher steered away from any form of bias. This ensured that the data collected were not in any way influenced by the opinion of the researcher. The researcher found the literature review to be very important in this regard because the opinions formed are already moderated. Reliability means that the study is consistent and lacks any ambiguity. It is the ability to trust something to provide information that addresses the issue at hand. Mouton (1996, p. 67) explains that it is related to the accuracy of instruments; how accurate the measuring device is in measuring what it claims to measure. In this study, it was achieved by increasing the verifiability of the perspective in order to ensure reliability. The researcher adopted the principles of coherence, openness and discourse in order to ensure reliability.
Brief Literature Review
The debate surrounding the need for countries to adopt and comply with international standards has led to the passing of numerous legislations. These legislations required publicly traded companies domiciled in member countries of the European Union to implement International Financial Reporting Standards (IFRS) in 2005. However, countries elsewhere in the world have been reluctant to comply with and implement IFRS (Gannon & Ashwal 2004). Saudi Arabia, among other countries, should have the motivation to implement the internationally accepted standards in order to facilitate access to capital markets. However, issues such as the size and sophistication of the industry have led to the emergence of certain accounting practices (Taplin et al., 2002). The adoption of standards and compliance by the country should be informed by factors such as the economics of Saudi Arabia, the business environment, the political environment, and the social and legal structures of the country. Globally, organisations such as the IASB, WTO, OECD, IMF and World Bank have adopted and are committed to global standardised practices. Complying with IAS will enable Saudi Arabia’s accounting standards to be on a par with the required standards brought about by globalisation (Graham & Neu, 2003).
Compliance with Global GAAP will help the country to avoid duplicative costs. These duplicative costs arise due to transactions involving national accounting standards as well as IAS. Accounting standards setting attracts additional costs for companies operating in the country. This goes a long way to explaining why it is that IAS is increasingly being adopted in many countries rather than GAAP (Tang, 2000). The application of both IAS and GAAP 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 (Chen et al., 1999).
IAS is more effective when applied to a particular business environment. It also plays a significant role in facilitating the application of accounting standards in countries that have unique business environments. For instance, Saudi Arabia’s business arrangements may require more sophisticated accounting standards. This will prove critical for addressing the country’s specific business issues. GAAP may be more effective in the Saudi Arabian business environment compared to IAS owing to the uniqueness of the country’s business environment (Ampofo and Sellani, 2005).
International trade standards not only facilitate trade but also facilitate investment decision-making. Compliance with international accounting standards will help the country and its various business sectors to make better and informed decisions. Global GAAP 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 (Wahlen et al., 2000). In the quest for the harmonisation and internationalisation of accounting standards, 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 national as well as international standards (Murphy, 2000).
Large companies have existing reporting systems which give them leverage over smaller companies (Marsden, 2002). They are able to comply at minimal costs compared to smaller companies which lack an existing reporting system. The Saudi government’s decision to privatise state-owned corporations has shifted attention onto private companies. This has attracted attention to the level of compliance among private companies (Al-Shammari, Brown & Tarca, 2008).
Investment by large companies in a country is likely to be influenced by the business environment of that country. Large companies attract foreign investment and often acquire foreign stock exchange listings (Pagano, Roell & Zechner, 2002). In order to avoid government intervention and damage to their reputation, large companies are more likely to comply with international accounting standards. Therefore, Saudi Arabia must strive to create an optimal business environment that offers low operating costs by complying with and implementing IAS.
The political system of Saudi Arabia plays a central role in influencing the level of compliance and the adoption of IAS among the various business sectors. Government involvement and regulation of the various business sectors seeks to achieve commonality. Businesses in the same industry will typically seek to achieve the same level of compliance, leading to improvements in national accounting standards (Glaum and Street, 2003).
To achieve this, the various industries in Saudi Arabia must embrace a common practice of disclosure when it comes to financial issues. This is in order to meet the regulatory requirements of the national accounting standards. To comply with IAS, businesses from the various sectors must align their compliance practices according to the international standards that apply in their sector. The state is therefore expected to experience a different level of compliance due to the particularities of the industries in the country. For instance, the banking industry is likely to achieve a higher level of compliance than the manufacturing sector. This is attributed to the need for banks to maintain exemplary records in their reporting, as required by law. Participants in the banking industry have a higher profile and cannot risk damaging their reputation by failing to comply with accounting standards. They must also build investor confidence by fulfilling legal requirements to avoid the possibility of government intervention (Al-Shammari, Brown & Tarca, 2008).
It should be noted that the internationalisation and harmonisation of IAS and national accounting standards will depend on the following issues. Firstly, it will depend on the capabilities of the Saudi Arabian government and the regulatory bodies charged with the responsibility of overseeing accounting policies and implementation. This is to properly introduce and offer guidance on the legal and accounting requirements of IAS. This is also to offer guidance on the requirements of the national accounting standards versus the requirements of the IAS in the process of compliance. It also depends on the ability of IAS to handle complex transactions including cross-border transactions in different sectors (Al-Shammari, Brown & Tarca, 2008).
The implementation of IAS should be executed without displacing the existing accounting system. This is because of the negative implications that the process may have for local investors and the citizens of that country. In cases where the international standards were introduced without much success in terms of compliance, the IAS lacked the capacity to deal with complex transactions without denying the citizens their rights as provided by the law. For instance, while the national accounting standards are formulated specifically to suit the business environment of that particular country, the introduction of IAS may affect the current business order by overlooking important areas such as pension schemes and the retirement benefits of the citizens of that country. The nature of this transaction according to the environment of that country may be the contributing factor for this problem (Al-Shammari, Brown & Tarca, 2008).
Resources needed/Access to primary and secondary data
Periodicals will be used to gather secondary data for the study. Trade organisations’ journals and magazines will be used to gather information about the changing trends in accounting standards. The study will also include the use of journals and articles as secondary sources of data. These sources will be accessed in academic publications posted on the institution’s virtual library.
Project Schedule
References
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