Financial Reporting and Compliance by Oil and Gas Companies in UAE
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November 4st, 2013.
Financial Reporting and Compliance by Oil and Gas Companies from United Arabs Emirates (UAE)
Abstract
This study proposal intends to investigate the level of financial reporting and compliance with the IASs (International Accounting Standards) by oil and gas companies from the UAE. Based on the study sample of 60 oil and gas companies, the study establishes that financial reporting and compliance has improved overtime, from 60% in late 90S to 90% in 2010. In spite of strong cultural and economic ties among UAE states, there was considerable variation in financial reporting and compliance among oil and gas corporations based on the internationality, leverage and size. The study offers de jure evidence as opposed to de facto harmonization within the region.
Introduction
Speedy globalization of financial markets has resulted to increased demands for more globally comparable accounting and financial reporting. Harmonization of financial and accounting reporting is one approach of promoting a more consistent and transparent reporting and in that aspect, IASB (International Accounting Standards Board) generates global accounting standards for utilization by private sector companies or entities across the globe. Generally from 2005, there has been extensive adoption of International Accounting Standards Board standards on compulsory basis. Accordingly, there is growing interest in reporting comparability being attained as well as the role of enforcement bodies and auditor promoting compliance.
This paper aims to investigate the level of financial reporting and compliance with the IASs by gas and oil companies from UAE and the factors related to compliance. The UAE states has from 1986 progressively made IASs mandatory for all or some listed companies. This background enables us to examine the application of IASs in various economically important states that were early IASs’ adopters. Compulsory use within the UAE states offers an opportunity to explore the role of enforcement bodies and external auditors in promoting IASs financial reporting and compliance.
The UAE setting has a number of features that are important for the study of compliance. Some states within the region have been early compulsory IASs adopters, which imply their firms have greater experience with the application of IASs in a compulsory as opposed to voluntary environment. Within the UAE setting the study can examine the relationship of the state regulatory frameworks and compulsory compliance over a period of time. In some nations such as the European Union, companies have more recently adopted the IASs or their application has been voluntary as in the case of Germany and Switzerland in the early 90s. This study contributes to the literature by examining financial reporting and compliance within a mandatory setting. Moreover, it offers useful insights regarding the relationship of compliance levels, IASs adoption and the effectiveness of enforcement bodies and independent auditors. As a result of the extensive adoption of the IASs, the focus has now been geared toward the level upon which firms comply with IASs within the mandatory setting. This study is among the few if not first to offer empirical evidence regarding this matter. Although the study only looks at UAE states, the findings highlight issues that may be equally important in other nations where the IASs have been utilized.
The rest of the paper is structured as follows. The following section explores the institutional framework for financial reporting and compliance within the UAE member states, literature reviews as well as the research question. Section three describes data collection, sample selection and statistical methods. The last section summarizes the study.
Literature Review
Earlier studies examining the adoption of IASs indicate that differences between firms in the level of financial reporting and compliance reflect their state of origin, meaning that there are important elements within the frameworks of national financial reporting that affects their compliance. The framework of a nation’s financial reporting (that is the practices and laws that govern or regulate financial reporting) has a fundamental role in outlining the requirements of financial reporting, creating a due process for enforcing and monitoring accounting and financial reporting standards, and in influencing the level of compliance with such standards. Oil and gas companies within the UAE share a number of common features, for instance company law require that audited accounting and financial reports be developed and submitted to a department of the government. The enforcement bodies, such as the central banks, stock exchanges and government departments are in place and there are provisions within the law for noncompliance penalties. Likewise auditors must be licensed and could be culpable for penalties for violation of the company law.
Jensen and Meckling (1976) agency-theory model argues that minimizing information asymmetry between firms manages (insiders) and capital providers (outsiders) reduce agency costs (residual loss, bonding, and monitoring). The purpose for reducing agency costs offers an incentive for IASs adoption because adoption results to more transparency and greater disclosure in comparison to the situation within the GAAP. Nonetheless, to optimize benefits from implementing higher quality standards, firms have to exhibit compliance to the standards. The incentive to seek compliance benefits may systematically differ between oil and gas companies, founded on their individual features. The study explores below various firm features that could be associated with the compliance level. Large oil and gas firms are more visible and hence, could be highly expected to comply with IASs. Hussain, Islam, M Gunasekaran & Maskooki (2008) state thatlLarge oil and gas firms act to avoid state intervention and to safeguard their reputation. Whereas the scholars base their arguments on advanced markets, they as well apply in UAE states, where large oil and gas corporations are economically important and politically visible. The privatization of large state-owned oil and gas corporations imply that are a focus of investor and government attention. Besides, large oil and gas corporations have huge resources to utilize on compliance and are less probable to be affected by proprietary information disclosure as opposed to their smaller counterparts. The other important point is that large oil and gas firms could be older, with well developed financial and accounting reporting systems, implying that compliance is affordable to them.
In addition, large oil and gas companies are more likely to be international, meaning, to have more international sales, foreign investors, or have international listing on stock exchanges. Ahmed (2009) demonstrate that oil and gas companies cross-listed have greater compliance levels. Within the UAE most oil and gas companies are not cross listed outside their region, nevertheless, they seek international investors. This could offer motivation for greater compliance, to render accounting and financial reporting more comparable and transparent and to enhance the credibility of the company. Oil and gas companies with greater leverage could be anticipated to disclose more financial and accounting information minimize agency cost, thus reassuring debt-holders that the company safeguards their interests.
Within the UAE setting, three shareholder entities characteristically have significant ownership equity in oil and gas companies list on the UAE stock exchanges. These shareholder groups include the institutional investors, dominant families and government together with its agencies all of whom can influence the quality and level of disclosure and IASs compliance level. In UAE these shareholder groups are considered insiders since they normally have representatives in the board of directors of these companies and hence have greater access to the companies’ internal information. As a result, this study anticipates that oil and gas companies with more insiders (i.e. greatly held ownership) has little incentive for financial reporting compliance to the IASs that oil and gas companies with extensively held ownership share.
Method and Data
Selection of Sample
The purpose of this research study is to investigate financial reporting and compliance to the IASs by oil and gas companies from the UAE during the period between 2001 and 2010. We selected 2000 as the beginning point because all the UAE states had adopted the IASs.
Financial Reporting and Compliance Measurement
Financial reporting and compliance with the IASs is evaluated using self-developed compliance index, as this is in conformity with prior financial reporting and compliance studies( Hussain, Islam, Gunasekaran, & Maskooki, 2008).. The checklist is founded on 14 standards comprising, IAS 1, 10, 14, 16, 18, 21, 23, 24, 27, 28, 30, 32, 33 and 37. Initially, all the IASs were considered to be factored in, but some were omitted since they were not applicable to the UAE oil and gas companies (such as IAS 12, 15, 19, 26, 34, 20, 11, 38, 35, 31). Since a number of reporting years for every state were factored in the study, various standards were applicable for every state. Each applicability standard to companies’ annual financial report was established and the relevant section of the checklist was applied in data collection. The entire financial annual report was perused and data obtained. Every disclosure item within the checklist was allocated a value of (1) when it was disclosed and (0) when it was to disclosed by applied. The items, which were apparently not applicable, were assigned N/A. The items that did not have sufficient information were provided to determine applicability was denoted as do not know (DK). The principal index is the general compliance measure, with the DK and N/A items excluded, and comprising a measurement and disclosure-compliance measure. Robustness test were conducted to establish the results’ sensitivity to the treatment of possible ambiguous DK and N/A items. The checklist items were not weighted since this procedure could introduce bias and subjectivity.
A multivariate evaluation was deployed to analyze differences between states in levels of compliance as well as relationships and time trends between the compliance level and company features. Due to the fact that dependent variable (compliance index score) ranges between 0 and 1, it was rearranged by taking the odds ration logarithm. For instance, if the overall compliance level to the IASs for firm is given by P, then the odd ratio logarithm Y is given by;
Summary
The study has established that the average level of financial reporting and compliance by oil and gas companies in 85% of the checklist index items in the study period, but the level of compliance has steadily increased. In spite of the strong cooperative economic and cultural ties, there is considerable variation in compliance level by the oil and gas companies across the UAE member’s states. Oil and gas companies from Saudi Arabia recorded the highest level of financial reporting and compliance. Companies from Oman and Kuwait substantially improved their compliance than any other states, and this could be attributed to improved enforcement and monitoring in Oman and Kuwait.
Conclusion
The International Accounting Standards Board standards have been established for application as national standards in nations across the globe regardless of the economic development level and culture. Since extensive compulsory adoption is comparatively new, not much is known concerning the effectiveness of IASs adoption in different nations. Investigating the financial reporting and compliance by oil and gas companies within the UAE is of great interest due its distinctive characteristics for instance strong association between UAE member states, developing country statue accompanied with significant wealth and considerable cultural differences in relations to most western nations. The study shows that financial reporting and compliance of oil and gas companies within UAE is de jure as opposed to de facto, implying that IASs as implemented by law as opposed to practice, a significant noncompliance is imminent.
The financial reporting and compliance framework by oil and gas companies within the region are established on company-law regulations that are enforced by government agencies and has penalty provisions for violation for those requirements. Their framework places excessive dependence on independent auditors and feature just only limited operations by the stock exchanges as well as enforcement agencies in compliance checks and taking measures for non-compliance.
References
Ahmed, K. (2009). Disclosure policy choice and corporate characteristics: Journal of
Accounting, 3(1), 183-203.
Hussain, M., Islam, M. M., Gunasekaran, A., & Maskooki, K. (2008). Accounting standards and
practices of financial institutions in GCC member countries. Managerial Auditing Journal, 17(7), 350
International Accounting Standards Board (IASB) (2010). International Accounting Standards
and SIC interpretations. London: IASC
