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).
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
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
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
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
21 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.
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
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
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.
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