The global institutionalization of financial reporting: The case of the ...

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Irvine, Helen J. (2008) The global institutionalization of financial reporting: The case of the United Arab Emirates. Accounting Forum 32(2):pp. 125-142.

© Copyright 2008 Elsevier

The global institutionalization of financial reporting: the case of the United Arab Emirates by Helen Irvine School of Accounting & Finance University of Wollongong Northfields Avenue Wollongong NSW 2522 Australia. Phone: 61 2 42215919 Fax 61 2 42214297 Email: [email protected]. Abstract. Almost 100 countries have agreed to adopt or work towards convergence with the International Accounting Standards Board’s International Financial Reporting Standards (IFRS). Applying an institutional theory framework at a nation state level, and using publicly available data about the emerging economy of the United Arab Emirates (UAE) as a case, this paper identifies some of the global coercive, normative and mimetic pressures which have contributed to this widespread adoption. The challenge for emerging economies such as that of the UAE is whether the reality of IFRS implementation can match the image of IFRS adoption. Keywords: International Financial Reporting Standards; globalization; emerging economy; institutional theory

… as capital roams the world, nation states are obliged to provide regulatory and other frameworks to bring it under political control not merely to protect the interests of citizens, but also to facilitate and foster the conditions in which private accumulation can take root and flourish (Arnold and Sikka, 2001, p. 492) 1. Introduction The “sudden rush” of the international community to converge national Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS) (Fontes et al, 2005, p. 416) represents the outworking of economic and political factors, demonstrates the power and ubiquitous nature of globalization (Neu and Ocampo, 2007, p. 364), and has resulted in the institutionalization of a new regulatory regime. This paper uses the United Arab Emirates (UAE), a Middle Eastern Federation of seven states, and a member of the Gulf Cooperation Council (GCC)1 as an example of IFRS adoption by an emerging economy2, offering an institutional interpretation within a global context. The need for high quality “global GAAP” (Ampofo and Sellani, 2005, p. 228) was officially recognized in 1966, when professional accounting bodies first began working towards a set of international accounting standards (IASC/IASB Chronology, 2006). Since

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The other states making up the GCC are Bahrain, Kuwait, Oman, Qatar and Saudi Arabia. This paper defines emerging economies as those which, although they are not classified as “developing” in terms of wealth, are characterized by their recent emergence into global financial markets, the development of regulatory processes, the opening of stock exchanges, and the breaking down of trade barriers as they become more sophisticated economically. Standard and Poor’s Emerging Market Data Base indices focus on the GCC markets, classifying them as “not yet fully open for foreign investment” (Standard & Poor’s, 2006). Emerging and developing economies, while vastly different in terms of wealth, both face similar challenges in their adoption of the economic policies and regulatory systems of western nations.

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then world capital markets have become increasingly tied to one another (Turner, 2001, p. 1), and so “integrated and interdependent” that “the stability of one market affects others” (UNCTAD, 2005, p. 5). As the barriers between nations have become more “porous” (Harris, 2002, pp. 417 – 418), domestic economies have become increasingly vulnerable to the “external shocks” caused by an “expanding world economy”, necessitating the adoption of globalized practices if they are to function effectively (Lehman, 2005, p. 979). This level of integration meant that the financial crises of the late 1990s affected all nations, resulting in a heightened recognition of the benefits of having “one set of high-quality globally recognized financial reporting standards” (UNCTAD, 2005, p. 5) and a call for the development of such standards (IASC/IASB Chronology, 2006). Furthermore, as labour and capital flows have been freed up over the last decade, there have been “huge increases in foreign direct investment (FDI) flows across countries” (Floyd, 2001, p. 109), arguably driven by the dominant nation-states as they have pursued “intentional politics and policies” designed to enhance their wealth and economic standing (Arnold and Sikka, 2001, p. 478). Whereas some countries have attempted to avoid the “cultural imperialism” of globalization (Steger, 2003, p. 70), emerging and developing nations, if they wish to participate in the wealth enjoyed by the developed nations, have had no choice but to embrace its logic and realities. The development of IFRS is one manifestation of that institutional logic, with the globalization of IFRS described as “part of a general wave of standardization that has taken place in broader, non-accounting contexts over the last 150 years” (Rodrigues and Craig, 2007, p. 740). For the purposes of this paper, globalization is defined as “a worldwide pressure for change” (Granell, 2000, p. 89), as the “closer

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integration of the countries and peoples of the world” (Stiglitz, 2001, p. 9), and is interpreted as a universal process of institutionalization that both relies on and results in greater interdependence between economies, political systems, culture and societies. This is illustrated in the case of the UAE. Each of the seven Emirates of the UAE retains control of its own natural resources and directs its own commercial activity. Formed in 1971 as a coalition of sheikhdoms, and relying primarily on revenue from oil and gas (DIFC, 2006j), the UAE in the last few years has expanded its economy significantly through trade and finance, has been active in seeking commercial partnerships, and is currently experiencing a high level of business optimism and strong revenue growth. Sheikh Khalifa bin Zayed Al Nahyan, the President of the UAE since his father died in 2004 (The World Factbook, 2006), has maintained his father’s pro-western thinking, with an “aggressive approach to marketing the country as an attractive destination for business as well as residence” (Global Investment House, 2005). While it is an Islamic country, Islamic banking has not dominated the UAE. A “niche” market in the 1990s (Wilson, 1995), Islamic banking is now expanding to countries other than Islamic states (Kowsmann and Lane, 2007; De Teran, 2007; Wright and Yuniar, 2007), but still claims a small segment of the UAE’s banking industry. Al-Tamimi and AlMazrooei (2007) quantified Islamic banks’ share of total UAE commercial bank assets at just 11.1% in 2004. Changes in the structure of banking systems in GCC countries to greater economic integration and deregulation (Ariss et al, 2007), and UAE plans for a “mega merger” of two of its commercial banks to create “a national and regional champion” (Timewell, 2007), are further indications of the UAE’s pro-western emphasis.

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The UAE’s expansion has increased its need for the adoption of IFRS, which in turn has increased the legitimacy of the UAE as a worthy site of FDI3. The UAE currently requires the application of IFRS for its banks and for domestic companies listed for trading at the recently formed Dubai International Financial Centre (DIFC) (DIFC, 2006a; DIFC, 2006e; DIFC, 2006f; IAS Plus, 2006a). Prior to and following its adoption of IFRS, the government of the UAE has faced the task of attempting to reform its regulatory, legal and economic structures in order to provide the necessary infrastructure for the adoption of western-style financial reporting standards. From an institutional perspective, the focus of this paper is both global and societal. The UAE, like many other emerging or developing countries, has responded to powerful global pressures to develop economic and political systems that conform to those of western developed nations, and to adopt IFRS in order to be seen as legitimate participants in international capital markets. Rather than focusing at the organizational field level within the UAE, and investigating the way in which institutional practices are embedded in individual organizations, this study steps up a level, paying attention to the global pressures for IFRS adoption to which the UAE has responded. The UAE is therefore identified as part of a field in which each nation state faces global institutional pressures to establish legitimate regulatory financial reporting systems. Following its adoption of IFRS, the UAE, like other emerging economies and developing nations, will face difficulties in implementing those reporting standards at a societal level, and ensuring that the image of legitimacy gained by adopting IFRS is matched by the reality of IFRS implementation.

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UAE adopted International Accounting Standards as early as 1999, initially for banks (Jose, 2004).

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This paper first offers an interpretation of institutional theory from a global perspective, identifying the development and adoption of IFRSs as a global institutionalized practice. Following this, the legitimizing power of IFRS is outlined, particularly for emerging economies and developing nations. The focus then shifts to the UAE, and its adoption of IFRS is analyzed in institutional terms. This is accomplished by considering the various global pressures that contributed to the UAE’s adoption decision. Challenges faced by the UAE and other emerging economies in adopting and implementing IFRS are outlined next, and the potential for a decoupling of the image presented by the adoption of IFRS from the reality of actual IFRS implementation is raised. The paper concludes with an explanation of the significance of global IFRS adoption, and outlines opportunities for further institutionally-informed studies of IFRS adoption and implementation at a global and societal level. 2. A global perspective of institutional theory Traditional accounting, based on the assumption that “economic growth promises a better world” (Cooper et al, 2003, p. 361), has been integral to the process of globalization, as world-wide, emerging economies and developing countries have succumbed to a process of economic “homogenization and standardization”, including the imposition of westerncentric accounting standards and regulations (Cooper et al, 2003, pp. 359 - 360). The diffusion of these practices has been accomplished through organizations such as The World Bank, the IMF and the Organization for Economic Co-operation and Development (OECD) (Neu et al, 2006; Neu and Ocampo, 2007, p. 367), through related economic strategies (Stiglitz, 2001, pp. 12 – 13), through accounting requirements (Lodhia and

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Burritt, 2004, p. 348), and through professional bodies and professional accounting firms (Mir and Rahaman, 2005). Multinational corporations have also contributed to this phenomenon, and with western governments relying on accounting for the regulation of enterprises (Arnold and Sikka, 2001, p. 476), similar systems of regulation are expected of developing and emerging economies wishing to attract FDI. Adopting these acceptable western-centric global accounting technologies, including IFRS, provides developing nations with legitimacy (De Lange and Howieson, 2006, p. 1009; Mir and Rahaman, 2005, p. 817). Similarly, emerging economies, if they wish to gain credence in global capital markets, need to adopt western accounting technologies. The integrity and usefulness of an institutional approach to explain and interpret accounting activity have been acknowledged (Dillard et al, 2004; Hussain and Hoque, 2002; Hines et al, 2001; Feeney, 1997; Ang and Cummings, 1997; Covaleski and Dirsmith, 1995; Carruthers, 1995; Mezias and Scarselletta, 1994; Covaleski et al, 1993; Carpenter and Feroz, 1992; Mezias, 1990). Institutional theory focuses on the assumed values and beliefs of social and organizational life. Organizational conformity with these values and beliefs provides much more than technical benefits, bestowing powerful legitimizing attributes, thereby granting those organizations access to resources (DiMaggio and Powell, 1983) and ensuring their survival in an increasingly organized and inter-connected society. Operating as forces for institutional isomorphism, the process by which organizations adopt similar practices and therefore look the same (DiMaggio and Powell, 1983; Covaleski et al, 1993, p. 66), institutional pressures can be identified as coming from three sources. Coercive institutional pressures are represented by rules enshrined in regulatory systems, and can

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also include pressures from the global networks of multinational corporations (Guler et al, 2002, pp. 212 – 213). Normative pressures refer to taken for granted organizational behaviour, manifest in the workings of professions, and also in “interorganizational networks” (Haunschild, 1993, p. 564). A study of the adoption of a defence used by companies at risk of a hostile takeover highlighted the influence of contacts’ adoption, so that a practice would come to seem “normatively appropriate, whatever its technical merit” (Davis, 1991, p. 594). Mimetic pressures refer to the copying of successful organizational behaviour by other organizations (DiMaggio and Powell, 1983), particularly in situations of uncertainty, when organizations replace “technical rules” with the “institutional rule ‘imitate similar/large/successful organizations’” (Haveman, 1993, p. 623). They thus mimic the behaviour of “other organizations in their environment” (Galaskiewicz and Wasserman, 1989, p. 454). Together, these three separately identified institutional forces contribute in “interdependent and mutually reinforcing ways, to a powerful social framework” (Scott, 1995, p. 34). While a variety of responses to these pressures has been identified as possible, institutional theory has nevertheless endured criticism for neglecting the dynamics of power (Dillard et al, 2004; Carruthers, 1995, p. 325; Davis and Powell, 1992, p.363) and for focusing on institutionalized behaviour as a state rather than a process4. Scott (1995, p. 52), however, identified cultures, structures and routines as the “carriers” of institutions, i.e. the

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If institutionalization is seen as a entity, i.e. a “cultural or social system” (Scott, 1995, p. 64), the question that can be asked is why this has occurred. If, on the other hand, it is seen as a process, then how that process occurred is a more relevant question. Institutionalization, according to Zucker (1977, p. 728) is both “a process and a property variable”, with questions of why and how both relevant to an understanding of institutionalized behaviour.

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mechanisms by which institutions were actually embedded in organizations5. Institutional theory recognizes the possibility, in cases where perceived compliance with institutional requirements is essential for survival, that organizational image may be “decoupled” or “loosely coupled” from the reality behind that image. In cases where institutional conformity is desirable but there are technical challenges to actual implementation of institutionally desirable practices, rather than the institutional practice being embedded in organizational cultures, structures and routines, it can be adopted as a kind of “symbolic window-dressing” (Carruthers, 1995, p. 315) for its legitimizing power, without the organization’s following through with thorough implementation. Normally institutional analysis is undertaken at the level of the organizational field, a grouping which is identified as occurring in a four stage structuration process (DiMaggio and Powell, 1983). An increase in the interaction among similar organizations is followed by sharply defined inter-organizational structures of domination and patterns of coalition, an increase in the information load for organizations, and eventually a mutual awareness in a set of organizations of a common purpose. During this process, organizations are said to develop “a concern for self-maintenance” (Scott, 1995, p. 18), seeing themselves as part of an organizational field competing for scarce resources. Once this occurs, the stage is set for increasing institutionalization of these organizations. Dillard et al (2004), incorporating a structural perspective into their interpretation of institutional theory, expanded the level at which institutions came into being. They

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This notion rested on Giddens’ theory of structuration, which emphasized “the reciprocal relation of structure and action in all social behavior” (Scott, 1995, p. 52).

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suggested that individual organizations and organizational fields exist in an economic and political context, and that this context provides the foundation for institutional practice. According to this view, actors in the institutionalization process exercise influence at different levels, with “governmental officials, regulators and legislators” as the “primary agents at the economic and political level”, industry leaders, unions and consultants exercising influence at the organizational field level, and workers and managers exercising influence at the organizational level (Dillard et al, 2004, p. 513). The result, they suggested, is “continual, dynamic change” through multiple levels, from societal political and economic settings, through organizational fields to individual organizations (Dillard et al, 2004, p. 512). This view incorporates an organizational field focus, with a societal setting in which that field exists (political and economic) at a level above, and below at the level of the individual organization. This paper pushes that viewpoint further, suggesting that in an increasingly globalized world, powerful institutional forces operate at an international level on individual nation states, which then become a field for the transmission and adoption of acceptable institutional practices. According to Guler et al (2002, pp. 207 - 208) “neoinstitutional theorists have explicitly argued that isomorphism occurs at the country level of analysis as well as at the level of the organizational field or the industry”. They identify two categories of such research as comparative studies on a number of countries, or as studies based on evidence from many countries, but “dealing with practices adopted by governments or nation-states as opposed to by organizations or firms” (Guler et al, 2002, p. 208). The European Union was shown to play a crucial role in the adoption of ISO9000, an

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international quality certification, illustrating the fact that “states are key in the diffusion of new practices borrowed from other countries” (Guler et al, 2002, p. 212, citing Westney, 1987, Guillen, 1994, Arias and Guillen, 1998). These practices, legislated (or developed) at a nation state level, are then transmitted through to more specific organizational fields, and then to individual organizations. In other words, applying DiMaggio and Powell’s (1983) four stage structuration process, in a globalized environment, there has been an increase in interaction between nation states, mediated through international organizations such as the World Bank, multinational corporations, trade organizations, professional accounting firms, and the IASB. Globally, structures of domination and patterns of coalition have been set up as a result of these interactions. One example of this is in the classification of nation states as developed, developing or emerging. Developed nations, the leaders in global capital markets, are in a position to enforce their culture and regulatory systems either directly or indirectly, and developing and emerging economies, desirous of entering those markets, are faced with the necessity of embracing increasingly globalized technologies of trade, investment, regulation and accountability. In the case of global capital markets, particularly with corporate collapses and scandals over recent years, there has been an increase in information load, and an increasing awareness between all nations, developed, developing and emerging, not only that they are competing for a share of global FDI, but that there are certain “rules of the game” (Mouck, 2004) that need to be adopted if they are to be seen as legitimate recipients of such investment.

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In the case of the UAE, the World Bank identifies it as part of the Middle East and North Africa (MENA) region, a group of 21 countries (World Bank MENA, 2007d), with their own specific geographic and economic concerns (World Bank MENA, 2007a), opportunities for funding (World Bank MENA, 20007b), and need for reform (World Bank MENA, 2007c). The emphasis in the region is on sustaining and deepening reforms “to improve the climate for private investment”, with opportunities for more trade and better governance mechanisms and accountability (World Bank MENA 2007d). In the global context, while this establishes a nation state field, it is part of a wider global field. As a member of the MENA field, on the global stage, the UAE is subject to coercive, normative and mimetic global institutionalizing pressures from the World Bank, capital markets, the Big 46 international accounting firms and the IASB. All these can be identified as factors that have influenced the UAE’s adoption of IFRS. The development of new regulatory systems for more specific organizational fields, for example banks and companies listed on the DIFX, has followed. Through these systems, new financial reporting regimes, having been adopted at a nation state level, will be pushed down to individual organizations that are directly required to conform with IFRS, and to other organizations which operate in the same environment and are subject to coercive pressures of a formal or informal nature, and to normative and mimetic expectations of what constitutes acceptable financial reporting practice. The extent to which IFRSs are adopted at the organizational level will depend on the effectiveness of the regulatory system and the willingness of those organizations to respond positively to institutional pressures.

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These are PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young.

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Institutional theory recognizes the possibility that there may be a decoupling or loose coupling of the image created by the adoption of IFRS from the reality of the actual financial reporting practices at organizational level. The way this change is actually embedded in organizational practice can only be discerned by an examination of the workings of the regulatory structures and the actual reporting behaviour of individual organizations, which is outside the scope of this paper. Institutional theory has emphasized the “outcome” rather than the “process” of institutionalization, with little attention paid to the way institutional practices are actually established, appropriated, or eventually de-institutionalized (Dillard et al, 2002, p. 510). Consequently, the role of power has been neglected, and the “recursive” nature of institutionalization neglected. This can be explored by applying DiMaggio and Powell’s (1983) structuration process at several levels. The nation states become increasingly aware, in the global arena, of the need to adopt institutionally appropriate behaviour in the form of IFRS. This is then drilled down through organizational fields, to individual organizations. Figure 1 encapsulates these concepts, setting the scene for political and economic institutionalizing forces to operate at a global level on a nation state field, then down to an organizational field within that nation state, and ultimately, down to the level of the individual organization. For the purposes of this study, the focus is on IFRS adoption at the nation state level, in response to a variety of institutional influences. The embedding of these institutions in organizational fields and individual organizations would investigate the implementation phase of IFRS, which, in the context of the UAE, will be shown to be potentially problematic. Another issue is the reflexive nature of institutionalizing forces,

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which some pushing up from individual organizations, through organizational fields, to the nation state level. Take in Figure 1. 3. The legitimizing power of IFRS in a global context This reflexive relationship between IFRS and a global institutionalized system means that IFRS is both a manifestation of that institutionalization process, and at the same time, a technology through which it is mobilized. Dillard et al (2002, p. 512) outlined three levels of institutional dynamics, the economic and political level (for the purposes of this paper, the nation state level), the organizational field level (for example, UAE banks, which are required to implement IFRS), and the organizational level (which would consider individual banks and their IFRS implementation). The various institutions and actions at the various levels were described as “recursive” in nature, “reciprocally related” (Dillard et al, 2002, p. 513), and cascading both down and up, as institutionally acceptable practices are pushed down from the political/economic level, or up as “the actions taken by knowledgeable, reflexive agents within the organizations rise up through the three levels”, causing changes in the “established order” (Dillard et al, 2002, p. 514). Since in the UAE, members of the government are also owners of many of the powerful individual organizations, this seems inevitable. IFRS have been developed intentionally as a global language for accounting across international boundaries, a significant achievement in a process that began in the 1960s, saw the formation of the International Accounting Standards Committee (IASC) in 1973 to

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address concerns about the lack of comparability of financial reports between countries (Alfredson et al, 2005, p. 7), and still continues as the reconstituted IASC, now the International Accounting Standard Board (IASB)7 seeks to make partnerships with national accounting standard-setters and encourage the adoption of IFRS. Sir David Tweedie, the chairman of the IASB (IASB, 2006f), identified four reasons why this ought to be a priority, highlighting the reality that national standard setters operate in an increasingly globalized environment: 1. there is a “recognized and growing need for international accounting standards”; 2. “no individual standard setter has a monopoly on the best solutions to accounting problems”; 3. “no national standard setter is in a position to set accounting standards that can gain acceptance around the world”; and 4. there are “many areas of financial reporting in which a national standard setter finds it difficult to act alone”. The last ten years have seen a tremendous boost to the influence and achievements of the IASC/IASB. Before the 1990s it had no “meaningful relationship” with national accounting standard setters from the major industrialized countries (Jacob and Madu, 2004, p. 358), but

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The IASB was reconstituted in 2000 (IASC/IASB Chronology, 2006).

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now the IASB represents the major trading nations8, with the first Chinese and Indian trustees being appointed to the IASC Foundation9, the IASB’s Statement of Best Practice on working with other accounting standard-setters released10, and over 100 countries now either converging or adopting IFRS (IASB, 2006i)11. Many emerging economies and developing nations have moved to adopt IFRS, recognizing their need to share in the benefits promised by such adoption. Guler et al (2002, p. 211), in their paper on the global spread of ISO 9000, propose that while initially relatively few members of a “social system” take up a new innovation in its early stage, the mimetic effect means that the rate of adoption of the new institutional practices increases, until saturation point is reached, when it slows down again. These benefits of adoption could be technical, or they may be symbolic. On a technical level, the prospect of greater mobility of capital at a decreased cost, more efficient allocation of resources, improved quality of financial reporting, a decline in earnings management (UNCTAD, 2005, pp. 5 -6), and avoidance of the necessity of having

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The “geographic balance” of the IASB is interesting (Jacob and Madu, 2004, p. 359). Its 14 members include representatives from Europe, North America, Australia, Japan and South Africa (IASB, 2006c), and until July 2007, when a Chinese member joined, none from developing nations. Not surprisingly, all board members have links with multinational corporations and/or the Big 4 international accounting firms (IASB, 2006d; IASB, 2006e; IASB, 2006g; IASB, 2006h) 9 The IASC Foundation oversees the IASB. It is comprised of 22 trustees from North America, Europe, AsiaOceana, South Africa and Brazil (IASC Foundation, 2006a; IASC Foundation, 2006b). 10 The IASB released its “Statement of Best Practice: Working Relationships between the IASB and other Accounting Standard-Setters” on 6 April 2006. The document states the aim of developing a set of high quality global accounting standards, and also acknowledges the need to take account of “the special needs of small and medium-sized entities and emerging economies” (IASB, 2006i). 11 In 2005, an “unprecedented” number of countries adopted IFRS for financial reporting (IAS Plus, 2006b), including China (38 new accounting standards) (IASB, 2006b), Brazil (requiring IFRS for financial institutions), the Slovak Republic and Bulgaria (extending the use of IFRS), India (“moving to align its GAAP” with IFRSs), Uruguay (requiring IFRS) (IAS Plus, 2006c). In addition, Chile and Israel have now embarked on a programme of convergence with IFRS (IASB, 2006a; Tweedie, 2006).

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to develop their own accounting standards, against a backdrop of the accountability demands of the World Bank and IMF (Neu and Gomez, 2006; Stiglitz, 2001, pp. 12 – 13), are all compelling incentives for the adoption of IFRS by developing countries and emerging economies wishing to participate in global capital markets. The United Nations Conference on Trade and Development (UNCTAD) has acknowledged the need to “mobilize investment for financing economic and social development”, and the essential role of a “global set of high-quality financial reporting standards” in that development (UNCTAD, 2005, p. 3). Globally, the adoption of IFRS will save multinational corporations the expense of preparing more than one set of accounts for different national jurisdictions, the professional status of accounting bodies will be enhanced (Chand, 2005, p. 211), and the big international accounting firms will benefit in their efforts to expand the global market for their services (Cooper et al, 1998, p. 532). The western economic power blocks, dominated as they are by the interests of multinational corporations, and over-represented on the IASB relative to developing countries, have instituted a system of international accounting standards that “erase the local in the interest of harmonizing the global” (Cooper et al, 2003, p. 359). Even though there are opportunities arising from the adoption of international standards (Ampofo and Sellani, 2005, pp. 228 – 9), there are also difficulties involved in accommodating a variety of cultures and overcoming the challenges faced by emerging and developing countries in the introduction, interpretation and regulation of IFRS (Ampofo and Sellani, 2005, p. 229; World Accounting Summit, 2005; Turner, 2001; IASB, 2006i; IASB, 2006a, pp. 13 - 14).

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In spite of the western-centric nature of IFRS and of the barriers and challenges to adoption and implementation, developed, developing and emerging economies have enthusiastically adopted IFRS. In recognizing their vulnerability, and concerned about their ability to maintain or improve their position in capital markets, they realize that IFRS adoption offers much more than technical benefits. A powerful legitimizing force, with symbolic power, IFRSs give adopting nation states the credibility to compete for FDI in world capital markets. Significantly, the US, with the largest capital market in the world, while it has a strong (IASB, 2006c; IASB, 2006g; IASB, 2006h) even dominating (Dzinkowski, 2006, p. 54) presence on the IASB, has been more cautious in converging with IFRS (IASB, 2006j; UNCTAD, 2005, p. 8)12. Its strong global position means that its need to rely on the legitimizing power of IFRS is considerably less than that of other nations. In international terms, the UAE is a wealthy country13, committed to rapid industrialization and investment, with a bright future. The government of the UAE, committed to further globalization in order to encourage DFI, has recognized the benefits of the adoption of an international accounting language, both technical and symbolic, and has set in motion the adoption of IFRS, in response to coercive, normative and mimetic institutional pressures at a global level.

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The US Financial Accounting Standards Board (FASB) signed a Memorandum of Understanding (IASB, 2006k) with the IASB in 2002, indicating the commitment of both bodies to work towards the development of “high-quality, compatible accounting standards” (De Lange and Howieson, 2006). It has been reinforced by the protocol signed by the IASB and FASB in 2006 (IASB, 2006j) with a view to abolishing, by 2008, the requirement for US-listed companies using IFRS to comply with US GAAP (Agence Europe, 2006; Accountancy Ireland, 2006). 13 The World Bank (2006e) ranked the UAE as 34th in terms of Gross National Income per capita in 2005, and has classified it as a “high income, non OECD” country (World Bank, 2006d).

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4. The UAE’s IFRS adoption: a response to globalized institutional pressures The adoption of IFRS is a vital factor in the UAE’s ambition to attract global capital, with further calls being made for an extension of the federation’s current requirement for banks and DIFX listed companies to report under IFRS (Sharif, 2006). The UAE, while it plays an important role in Middle Eastern affairs and takes a leading role in the GCC, lags behind most of the other GCC countries. With the exception of Saudi Arabia, the four other GCC states all require IFRS adoption by law (IAS Plus, 2006a; Gulf News, 2005a)14. The GCC, originally formed in 1981 because of the threat of the Iran-Iraq war, has not been economically integrated, with the UAE’s trade with other GCC countries significantly less than that with western industrial economies (Looney, 2003). Several key institutional players behind the UAE’s move to adopt IFRS include the World Bank and capital markets, the Big 4 international accounting firms, and the UAE’s trade partners and multinational corporations. 4.1 Coercive pressures: World Bank and capital markets Formal coercive institutional pressures are the most obvious, since in an institutionalized environment there is an “elaboration of rules and requirements” including “pressures for conformity to public expectations and demands” (Oliver, 1997, p. 101). Organizations gain and maintain legitimacy by conformity with these rules and regulations, and by being acceptably organized, from a legal point of view, even if the changes made in response to those regulations are more ceremonial than actual (DiMaggio and Powell, 1983, p. 150).

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This can be achieved not only by conforming to externally imposed regulations, but ultimately by internalizing similar regulatory systems. In a global setting, not only will nation states comply with international rules and regulations, but if they are desirous of competing in global capital markets, they will change isomorphically to adopt the regulatory systems deemed appropriate and desirable by other participants in that market. A major player in world capital markets, the World Bank and its sister organization, the IMF, are “deeply embedded in the structures of capitalism” (Annisette, 2004, p. 316), providing loans and assisting in economic development, arguably from beneficial motives. These two organizations represent a major global institutional force. Neu et al (2002), in their study of the World Bank’s role in higher education, identified the organization as a facilitator of globalization, positioned as it is uniquely “within the web of international institutions and connections to the world’s major economic powers” (Neu et al, 2002, p. 276). There is no doubt that the World Bank has “pushed countries to adopt IASs (International Accounting Standards) or develop national standards based on IASs”, in some cases making the adoption of IASs a requirement of their loans (Alfredson et al, 2005, p. 9). The bank has identified public sector efficiency and governance, for example, as “one of the most effective leverages for sustaining competitiveness and securing equity in society” (World Bank, 2006b), and provides ratings of nations based on their economic strength, the ease of starting a business, dealing with licences, and other business-related outcomes (World Bank, 2006c). The drive towards the adoption of IFRS, also promoted by the World Bank (Mir and Rahaman, 2005, p. 835), is based on economic rationalist 14

Bahrain, Kuwait, Oman and Qatar require IFRS adoption by all domestic listed companies (IAS Plus,

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principles designed to achieve “global harmonization” (Lehman, 2005, p. 976). It is a mechanism by which globalization practices are “diffused”. The UAE joined the World Bank in 1972, and since then has been working on a Technical Cooperation Program, developing infrastructure, industrial policy and economic planning (World Bank, 2006a), and following World Bank guidelines15. In 2006 its World Bank rating was 69th overall out of 155 countries, and 6th best in terms of paying taxes (World Bank, 2006c). Strong revenue growth in Arab businesses, together with optimism and the active seeking of commercial partnerships (PricewaterhouseCoopers and Moutamarat, 2006) are factors which have contributed to the UAE’s aspirations to establish itself as an international capital market able to attract FDI16. In this environment, a globalized set of accounting standards gives assurance of trustworthy, reliable financial information about corporations (AME Info, 2005e), and provides the legitimacy necessary to encourage investment and optimism. The role of Islamic banking, highlighted earlier, is not dominant in the UAE at the development bank level either. The Islamic Development Bank (2007), established in 1975 to foster Islamic financing of long-term investments, has 56 members, with the UAE holding 5.56% of its capital (Islamic Development Bank, 2007). It has established a relationship with the World Bank, through a Memorandum of Understanding signed in 2002 (Memorandum of Understanding, 2002).

2006a). 15 In 2003 Dubai, UAE, hosted the annual meetings of the Boards of Governors of the World Bank Group and the International Monetary Fund (DIFC, 2006j). 16 This desire to enter world capital markets and attract FDI is not limited to developed and emerging economies. Suttle (2003) identified a shift among developing nations from debt financing to attracting FDI.

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The informal coercive pressures of multinational corporations and capital markets are evidenced in the opening of the DIFX (DIFC, 2006g) in September 2005. This event further established the UAE as a globalized nation, providing investment opportunities on the world market, and competing outside the MENA region with stock exchanges in New York, London and Hong Kong (DIFC, 2005). The attraction of this onshore capital market, according to its publicity, is “zero tax on income and profits, 100 per cent foreign ownership, no restrictions on foreign exchange or capital profit repatriation, operational support and business continuity facilities” (DIFC, 2005). Not only does the establishment of the DIFX facilitate the growth of foreign investment in the UAE (DIFC, 2006c), but it also reinforces the need for the UAE to demonstrate integrity and transparency in financial reporting (DIFC, 2006b; DIFC, 2006d) by adopting a set of IFRS and developing a regulatory regime to accompany them (AME Info, 2005c). The establishment of the DIFC therefore has been accompanied by a realization that “unified accounting and reporting standards” were needed in order to uphold the centre’s “integrity, efficiency and transparency” (Al Mulla, 2005). To this end, the UAE has been undergoing a process of overhauling its legislation (DIFC, 2006d; DIFC, 2006h), courts (DIFC, 2006i) regulatory requirements (DIFC, 2006d) and regulator (DIFC, 2006k), since the old company law resulted in a number of obstacles and challenges for the UAE (Al Mulla, 2004). The ruler of Dubai, Shaikh Maktoum Bin Rashid Al Maktoum, recently issued new laws dealing with “legal, employment and security issues in the Dubai International Financial Centre”, in order to provide the “legal certainty” required by the

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world’s financial communities (Gulf News, 2005b). These developments are in keeping with World Bank practices. Dubai Financial Services Authority Chairman, Dr Habib Al Mulla, stressed the necessity of implementing IFRS in the UAE: (s)trong regulations are an incentive for the financial sector. Serious financial institutions look to the places where there are strong regulations, because at the end of the day they’re a guarantee for institutions and shareholders. It may be difficult initially to adopt them, but finally everybody will be pleased to have strong regulations in place” (AME Info, 2005c). According to the PwC Arab Business Intelligence Report (PricewaterhouseCoopers and Moutamarat, 2006), based on interviews with 140 business and state leaders from 14 countries in the Arab world, including the UAE, most were actively seeking commercial partnerships, and 73% of senior executives believed there should be a regional standard for governance, risk management and compliance. In order to achieve these partnerships and to participate in global capital markets, the adoption of IFRS plays a vital legitimizing role for all nation states, and particularly for emerging economies such as the UAE. 4.2 Normative pressures: Big 4 accounting firms Normative influences emphasize “the stabilizing influence of social beliefs and norms that are both internalized and imposed by others” (Scott, 1995, p. 40), values that may be unspoken, or expectations that have gained general acceptance. Perhaps the most striking

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demonstration of normative institutional pressures is in the growth of a large, professionally trained labour force. DiMaggio and Powell (1983, pp. 152 – 153) suggested that “the collective struggle of members of an occupation to define the conditions and methods of their work” had led to a similarity with their counterparts in other organizations. Professional accountants played a significant role in the implementation of market-oriented public sector practices in Fiji (Sharma and Lawrence, 2005), and were instrumental in the adoption of international accounting standards in Bangladesh (Mir and Rahaman, 2005). The World Bank requirement that projects financed by the bank be “certified by internationally reputable firms of accountants” (Annisette, 2004, p. 318) has aided in the proliferation of the international operations of the Big 4 international accounting firms. Responding to the possibilities presented by a “liberalized global market place” (Jacob and Madu, 2004, p. 362), international accounting firms have demonstrated themselves to be a powerful institutionalizing force, as “international organizations which invest in systems of global coordination and control” (Cooper et al, 1998, p. 531). International accounting firms, by establishing bases in different locations around the world, have played a significant role in the globalization of accounting (Perera et al, 2003, p.27). Within the UAE, all of the Big 4 accounting firms have a presence17, and have pitched themselves to add value to Arab businesses18. They require clients to present their financial reports under IFRS, while other accountancy firms operating in the UAE “have 17

KPMG (2006) has operated in the UAE since 1973, Deloitte (2006) since 1964, PricewaterhouseCoopers (2006b) for over 30 years, and Ernst & Young (2006a) has been serving clients there since 1952. 18 Some examples are The Arab Business Intelligence Report (PricewaterhouseCoopers and Moutamarat, 2006), the 9th Global Fraud Survey of fraud risk in emerging markets (Ernst & Young, 2006b), the KPMG

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been encouraging their clients, with considerable success, to prepare accounts under IASs” (IFRS) (Khanna, 1999, p. 78). In doing this they have both driven the adoption of IFRS, and benefited from that adoption. They have been identified as one of many international forces behind the process of harmonization of accounting standards (Chand, 2005, p. 223), and are the backbone of globalized business (AME Info, 2005d). In 2005, the UAE hosted the first World Accounting Summit, involving leaders from multinational corporations such as Coca-Cola, with industry speakers and accountants from over 190 countries, and representatives of the Big 4 accounting firms (AME Info, 2005b), including Deloitte, UK, Deloitte, Middle East, KPMG, UAE, PwC, Middle East (World Accounting Summit, 2005). Speaking at the Summit, Abbas Ali Mirza, a partner of Deloitte in Dubai and chairman of UNCTAD’s19 Intergovernmental Working Group of Experts on International Standards of Accounting & Reporting, stated that “given the dramatic changes to the global corporate landscape where the world is rapidly changing into a global village, there is an imperative need to have a common medium of communication between the international accounting bodies and multinational companies” (AME Info, 2005b). The summit highlighted both the new opportunities for professional accountants, as well as the difficulties involved in “consistent application” of international accounting standards (World Accounting Summit, 2005).

(2004) GCC Fraud Survey and the PricewaterhouseCoopers (2006a) report entitled Doing business in the DIFC. 19 UNCTAD, the United Nations Conference on Trade and Development, was a patron of the World Accounting Summit of 2005.

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4.3 Mimetic pressures: trade partners and multinational corporations According to an institutional perspective, organizations modeled after other organizations in their field are perceived to be more legitimate and successful (DiMaggio and Powell, 1983, p.152), and this is especially important in situations of uncertainty. Organizations do not want to stand out as being different, and they therefore behave in ways that are socially acceptable. The more organizations (or nations) that exhibit particular forms of behaviour, the more pressure there will be on other organizations (or nations) to copy that behaviour. The more uncertain the relationship between means and ends, or the more ambiguous the goals of an organization (or a nation), the greater the reliance that organization will be placed on modeling the example provided by “successful” organizations (or nations), in order to conceal that uncertainty. Conversely, there is also the possibility that an organization or nation with a strong sense of identity and culture may resist pressures to copy other nations if they do not conform to that defined and understood identity. The mimetic view therefore stresses conformity with orthodox structures and identity, particularly in times of uncertainty. As successful multinational corporations have expanded their “global reach”, they have instituted sophisticated systems of “financial coordination” of their subsidiaries (Cooper et al, 1998, pp. 531, 532), and have modeled to other organizations the desirability of the global harmonization of financial reporting. Intimately connected with the regulatory regimes of the dominant nation states, they have reinforced the desirability, for developing and emerging economies, of conformity with the practices both of multinational corporations and of nations’ trading partners.

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After its formation in 1971, the UAE’s economy expanded because of the huge oil reserves in the region. The UAE is a “major player” in the global oil industry, with the Abu Dhabi emirate alone containing 10% of the total oil reserves in the world (United Arab Emirates, 2006). Increasingly, however, the UAE’s wealth is attributable not only to its oil reserves, but also to its non-oil sector. That grew from $US 626 million in 1972 (and a 35.4% share in GDP) to $US54.2 billion in 2003 (a 70% share of GDP), leading to a multiplication of the GDP of the UAE by more than 43 times since the country was established, and bringing the country to the point where it is the third largest Arab community, with one of the highest incomes per capita in the world (Kawach, 2003). Described as “tiny in size but limitless in ambition”, the UAE’s development of the $20 billion Burj Dubai (Reed, 2006, p. 34) with its series of “free zones” has been designed to capture investment from a rush of “petrodollars” from the second international oil boom20. The existence of a global trading system has been identified as important in the diffusion of globally acceptable practices, as in the case of the global adoption of ISO 9000, an international quality certification. In that case, trading relationships were shown strongly to influence the adoption of the certificates (Guler et al, 2002). UAE’s trading partners, both in the oil industry and non-oil industry sectors, provide motivation to further diffuse globally desirable practices. Currently the UAE is more diversified, dependent not only on oil and gas, but on “international trade, banking, tourism, real estate and manufacturing”, with opportunities for FDI, particularly since the opening of the DIFC (PricewaterhouseCoopers, 2006a, pp. 20

It has been reported that the first oil boom (1973 – 1985) saw the Arab states investing money offshore, but the second boom (2000 – 2006) has been characterized by greater investment in the Middle East itself, with

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10 - 11). The establishment of “free trade” zones by the UAE represents an attempt to arrest the decline in trade with industrial countries, and to establish the UAE as a desirable site for the activities of multinational corporations and for trading in the Middle East. Through the “free trade” arrangements, foreign companies benefit from access to tax free ports with few regulatory requirements and substantially lower employment costs. For several years, ports such as Jebal Ali Free Zone and Port Rashid, both in Dubai, have ranked among the world’s ten busiest ports (DP World, 2006). With 75% of imports entering the UAE duty free, and no tariffs on exports, the UAE represents an attractive place for multinational companies to establish their Middle East headquarters. The UAE’s openness to its globalized environment and its increasing reliance on international trade having been established, it is inevitable that these relationships bring a pressure on the UAE to adopt westernized forms of accountability and financial reporting, particularly those of its “influential trading partner(s)” (Haswell and McKinnon, 2003, p. 8). In 2003 the UAE’s trade in non-oil products with European Union (EU) countries was over $US9.5 billion, while trade with the US was only a little over $US2 billion (Dubai Chamber of Commerce and Industry, 2003), indicating the growing strength of its links with Europe. With the EU requiring that the consolidated accounts of all its listed companies adopt IFRS from 1 January 2005, the UAE’s requirement that banks and companies listed with its DIFX should apply IFRS is understandable. Acting mimetically on the adoption of IFRS by its trading partners, the UAE instituted its own system of regulatory requirements for companies trading on the DIFX, seeing the benefit of “strong

various overseas ventures being undertaken and improvements being made in the “purchasing and financial

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reporting requirements”, which “will act as a powerful incentive for firms wishing to access the capital markets of the world to ensure that they prepare high quality accounts in accordance with international benchmarks” (Al Mulla, 2005). Even though companies in the UAE generally are not yet required to adopt IFRS, many do “as part of their best practices procedures” (AME Info, 2005a; Gulf News, 2005a). At the nation state level, for the UAE, coercive pressures highlight legitimizing authority on the basis of conformity with globally acceptable formal rules and regulations or the informal expectations of multinational corporations. Normative pressures rest their claims for legitimacy on deeper, moral values and the prevalence of international professional accounting firms, while mimetic institutional forces work towards the conformity of nation states’ financial reporting behaviour with that of other successful nation states, often their trading partners. While these pressures sound distinct, in reality they are not easily disentangled (Guler et al, 2002, p. 228). For the UAE as a nation state, demonstrating conformity with these pressures has involved participating in the global diffusion of IFRS by their direct adoption, and by the culture of regulation and financial accountability, arguably a western construct, that by necessity has had to accompany them at an organizational field and organizational level. These institutional pressures contribute to the pervasive global diffusion of IFRS. As the UAE moves increasingly into globalized value systems, it cannot be assumed that the transition to the complete adoption and implementation of IFRS will be problem-free. The actual implementation of IFRS in the UAE or any other emerging or developing

controls” of most Mideast oil countries (Reed, 2006, pp. 35, 37).

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economy, will be a huge challenge, given the variety of political and cultural settings, and the reality that globalization is “a complex process affecting organizations and countries in different ways and to different degrees” (Guler et al, 2002, p. 227). While “sold” on the basis of technical benefits, these may not eventuate if implementation is not effective, but irrespective of that, there will, at least initially, be symbolic benefits. It may eventuate that IFRS adoption and implementation will be separated, with the possibility of decoupling or loose coupling of IFRS reality from IFRS image. 5. IFRS adoption and implementation: image and reality? Meyer and Rowan, drawing on the work of Berger and Luckmann (1966), proposed that institutional rules functioned as myths, which were adopted at the expense of organizational efficiency: Institutionalized products, services, techniques, policies, and programs function as powerful myths, and many organizations adopt them ceremonially. But conformity to institutionalized rules often conflicts sharply with efficiency criteria and, conversely, to coordinate and control activity in order to promote efficiency undermines an organization’s ceremonial conformity and sacrifices its support and legitimacy. To maintain ceremonial conformity, organizations that reflect institutional rules tend to buffer their formal structures from the uncertainties of technical activities by becoming loosely coupled, building gaps between their formal structures and actual work activities (Meyer and Rowan, 1977, pp. 340 – 341).

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The adoption of new accepted practices can be viewed in technical or institutional terms. From a technical point of view, organizations are rewarded for “effective and efficient control of the work process”, while from an institutional point of view, the adoption of new practices “creates imperatives for conformity in order to gain legitimacy” (Guler et al, 2002, p. 211). This tension may be resolved by the idea of “loose coupling” introduced above, or, even more extremely, by decoupling, whereby practices are not attached to technical aspects at all, but have a “symbolic significance” (Guler et al, 2002, p. 228). Sharma and Lawrence (2005, p. 150) studied public sector reforms in Fiji, and identified an act that enshrined public sector reforms as “an institutional prescription which may be myth, enforced by law”. This study has focused on the adoption of IFRS by the UAE, not on its implementation. The possibility that the adoption may be symbolic would need to be the subject of a more detailed study of individual organizations within the UAE. While the view of international bodies such as the World Trade Organization (WTO), OECD (Organization for Economic Development), IMF and World Bank seems to be that “measurement and reporting problems faced by accountants are the same throughout the world” (Rodrigues and Craig, 2007, p. 745), it may on the other hand be naïve to assume that there can be one single regulatory framework for “all financial reporting needs of all societies” (Rodrigues and Craig, 2007, p. 753). Deegan (2002, p. 43) suggested that “accounting policies and practices adopted within particular countries are to some extent a direction reflection of the culture and individual values and beliefs in those countries”. In some quarters a concern about developing countries has been that national culture, social and political structures have not be taken into consideration in the adoption of IFRS. A

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study of corruption in the National Bank of Fiji, for example, exposed the “undesirable consequences” of attempting to impose westernized accounting systems without considering “local contextual elements”, and questioned the ability of countries in the South Pacific to deliver the “good governance, transparency, and effective regulation and enforcement” required for public sector reform (Lodhia and Burritt, 2004, p. 348, p. 354). For developing coujntries, there is a danger that institutionalized global trends may impose structures and practices that do not accommodate local differences and needs (Sharma and Lawrence, 2005, p. 160). Problems of IFRS implementation in the developing nations of Fiji and Papua New Guinea (Chand, 2005, p. 222), Bangladesh and Pakistan, and the emerging economy of Kuwait indicate that the process of IFRS implementation for non-western countries seems to be the “most problematic aspect” of adopting IFRS rather than the decision to adopt (Mir and Rahaman, 2005, p. 833). Perhaps the flaws of institutionalized global financial reporting, and the effort of “trying to force every country into the same template” have become obvious, and a more “enlightened consensus” is needed (Engardio and Belton, 2000, p. 45). In spite of an awareness of these difficulties, opposition to the adoption of IFRS in UAE has been quite limited in comparison with other countries around the world, even other GCC countries. Al Rashed (2005), Chairman of the Board of the GCC Accounting and Auditing Organisation, identified the concern that the integration of accounting standards to suit the requirements of local business would not eventuate, and that GCC countries would not have their culture and beliefs reflected within IFRS, since the UAE government was concerned with attracting FDI rather than the concerns of local businesses. Some

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companies in the UAE have not yet been required to conform to IFRS. These companies include those not listed on the DIFX, non-banking companies and those who do not report under IFRS as part of their best practice policy. Such companies are often majority owned by UAE nationals who are yet to embrace the benefits of higher disclosure in financial reporting. This is due to the fact that “only a handful of UAE companies are open to foreign investment” (Khaleej Times, 2005). The westernized culture of UAE, and its commitment to globalization, has no doubt contributed to the relative ease with which the decision to adopt IFRS has been made, but there will be significant difficulties in its ongoing implementation, given the unique culture and infrastructure of UAE. It has been recognized that while the Middle Eastern oil countries possess huge resources, and consequently large amounts of capital, their authoritarian governments are “racing demands for greater accountability and wider political participation” (Reed, 2006, p. 40). The UAE has not had a culture of public accountability and transparency, with much of the country’s wealth held by powerful private interests21. The President is elected by the Federal Supreme Council, which is composed of the seven Emirate rulers, but there is no general suffrage in the country (The World Factbook, 2006), and therefore no political participation or accountability to the general public. Many regulations do not fit with western paradigms. If further regulation is established for employment, for example, the UAE may find it difficult to keep the costs of labour low enough to compete with other developing economies. Emanating from this political structure, the culture of secrecy, common in countries that have not previously

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been required to report financial information to a regulatory body22, is likely to be a challenge in the UAE. Even without a tradition of financial reporting, the UAE has embraced IFRS enthusiastically, and may have to rely significantly on imported expertise. This may not be difficult, since of an estimated population of 2.6 million in July 2006, less than 20% are actually UAE citizens (The World Factbook, 2006). The openness of UAE to external global influences, coupled with its wealth, will assist it also to establish new technologies and acquire necessary information to make the transition to IFRS implementation. Fraud and money laundering are frequently a problem in developing economies and emerging markets23, particularly bribery and corruption (Ernst & Young, 2006b, p. 6), and the UAE is no exception. According to a study of 297 organizations across the six GCC countries conducted by KPMG (2004), 37% of respondents believed fraud was a major problem for business. Within the UAE, the top frauds committed by management and junior staff alike were misappropriation of funds, while management also participated in kickbacks or procurement fraud (KPMG, 2004). While the adoption of IFRS has been put forward as a means of controlling fraud (AME Info, 2005c), with newly instituted regulators this may not be as successful as hoped. In 2000, the UAE suffered a “series of insider trading and market manipulation scandals (that) dented the credibility of the UAE’s over-the-counter market” (Khaleej Times, 2005), and unless these negative perceptions can

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Members of the UAE Royal family hold most of the important positions in government, and there is no elected representation, leading to a difficulty in criticizing the actions of the sheikhs. 22 Some countries have “cultural attributes that suggest they tend more toward secrecy than transparency, and their accounting disclosure requirements may reflect this cultural bias” (Deegan, 2002, p. 43). 23 The Ernst & Young (2006b) survey was conducted across 19 countries, and included eight emerging markets.

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be overcome, it is doubtful that the mere adoption of IFRS will achieve the goal of increased FDI proposed for it (AME Info, 2005e). It has been suggested that if the adoption of IFRS negatively impacts financial results, this may increase financial statement fraud (Ernst & Young, 2006b, p. 6). This paper does not suggest that the UAE will decouple or loosely couple its IFRS adoption from implementation, but raises the issue that as an emerging economy, it faces significant challenges in ensuring that transparency and integrity in its implementation of IFRS is a reality and not merely an image. 6. Conclusions Taking a global institutional view, this paper acknowledges the existence of powerful pressures for conformity with IFRS at a nation state level. Emerging and developing nations have rushed to converge their financial reporting requirements with international accounting standards, in order to gain legitimacy in global markets and thereby access capital markets, achieve economic development, and increase their wealth. In the case of the UAE, IFRS adoption has been made in response to coercive, normative and mimetic pressures including the regulatory regimes of the World Bank and multinational corporations, the IASB, the influence of the Big 4 accounting firms, and relationships with nations’ trading partners. At this level, once the adoption decision is made, a new set of institutional expectations is passed on to organizational fields and individual organizations, which are faced with the task of embedding these institutionally acceptable practices into their cultures, structures

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and routines. Emerging and developing nations they face particular challenges relating to their culture, political and regulatory systems, as they implement IFRS at an organizational field level, and in individual organizations, since international standards have not been developed with the needs, culture and regulatory infrastructure of unique countries in mind. The institutional concept of decoupling or loose coupling suggests that in such situations, actual organizational behaviour could be significantly different from the image portrayed by the adoption of institutionally legitimizing practices. Instead of developing its own set of financial reporting standards, the UAE has elected to adopt and implement IFRS, in order to position itself to experience higher levels of FDI. While it is a heavily globalized economy, with wealth in the form of oil resources, with aspirations to become a significant international financial centre, and with multinational corporations and international accounting firms operating within it, the UAE has a limited history of accountability and regulation. The issue for the UAE will be whether, in spite of these factors, recent regulatory changes will be sufficient to ensure genuine transparency of financial reporting so that the reality of IFRS implementation will match the image of IFRS adoption. This paper has identified global institutional pressures for IFRS adoption that have impacted on the UAE and other emerging economies. Further research will be needed to determine whether the legitimizing image offered by IFRS adoption has been matched by IFRS implementation. This can be undertaken at a nation state regulatory level, by analyzing the reasons for making the adoption decision and for the institution of new regulatory regimes, at an organizational field level for determining the effectiveness of

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compliance mechanisms, and at the level of individual organizations, by determining the extent to which institutionally mandated practices have been embedded into existing organizational practices. Acknowledgements: Thanks are due to Natalie Lucas who, as an undergraduate student in the Faculty of Commerce at the University of Wollongong, took part in a Faculty-organized study tour to Dubai, UAE, in 2005 and contributed to an earlier version of this paper. References Al Mulla, H. (2004). Bankers’ Speech. Available at http://www.emiratesbank.ae/ebg/corporatecenter/news/habibalmulla.htm. Accessed on 19th April 2006. Al Mulla, H. (2005). World Accounting Summit Welcome Speech, November 17. Available on http://www.ameinfo.com/72880.html. Accessed 19th April 2006. Accessed on 19th April 2006. Al Rashed, A. R. I. (2005). “Accounting standards should have a regional flavour”, Khaleej Times. 30th May, p. 68. Available at http://www.khaleejtimes.com/Displayarticle.asp?section=business&xfile=data/busin ess/2005/may/business_may563.xml. Accessed on 17th October 2005. Alfredson, K., Leo, K., Picker, R., Pacter, P. & Radford, J. (2005). Applying International Accounting Standards, John Wiley & Sons Australia, Ltd, Milton, Queensland. Al-Tamimi, H. and Al-Mazrooei, F. M. (2007). Banks’ risk management: a comparison tudy of UAE national and foreign banks. The Journal of Risk Finance. 8, 4. 394 – 409. AME Info. (2005a). Middle East needs representation on International Accounting Standards Board. Available at http://www.ameinfo.com/58559.htm. Accessed on 28th August 2006. AME Info. (2005b). First global accounting summit to be held in Dubai. Available at http://www.ameinfo.com/56451.htm. Accessed on 28th August 2006. AME Info. (2005c). Uniform accounting standards will fight fraud. Available at http://www.ameinfo.com/60978.htm. Accessed on 28th August 2006.

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Figure 1. A global institutional framework

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