Development of Accounting and Auditing in Egypt: Origin, Growth, Practice and Influential Factors

Ahmed F. Elbayoumi, Emad A. Awadallah, Mohamed A. K. Basuony

The Journal of Developing Areas, Volume 53, Number 2, Spring 2019, pp.205-220 (Article)

Published by Tennessee State University College of BusinessDOI:

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https://doi.org/10.1353/jda.2019.0031

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T h e J o u r n a l o f D e v e l o p i n g A r e a s Volume 53 No. 2 Spring 2019

DEVELOPMENT OF ACCOUNTING AND

AUDITING IN EGYPT: ORIGIN, GROWTH,

PRACTICE AND INFLUENTIAL FACTORS

Ahmed F. Elbayoumi

Cairo University, Egypt

Emad A. Awadallah

Qatar University, Qatar

Mohamed A. K. Basuony

The American University in Cairo, Egypt

and

Ain Shams University, Egypt

ABSTRACT

The accounting and auditing profession is affected by the environment in which it operates. That

environment includes a variety of accounting and non–accounting factors. The influential factors

may provide a better understanding of present accounting practices, and its future improvement

tendencies and, consequently, may lead to the growth and development of the accounting and

auditing profession. The main objective of this paper is to identify and investigate the

environmental factors that affect the origin, growth, development, and practice of the accounting

and auditing profession in Egypt, as an emerging country. This paper explores a comprehensive set

of these influential factors such as existing laws and regulations, religious and cultural values,

economic and political conditions, financial markets, and privatization programs. The paper also

analyzes these factors to perceive their impact on the accounting and auditing profession in Egypt.

These factors do vary from one country to another. Notably, there are several reasons for choosing

Egypt to investigate the relation between the accounting and auditing profession and its

environment. One of these reasons is that Egypt is a country with an emerging economy that has

numerous foreign investment prospects. Moreover, the business environment in Egypt encountered

a radical change throughout recent years. The Egyptian setting has been dynamic and developing

through various economic, financial, legal, cultural and political frameworks that, apparently,

influenced the accounting and auditing profession. Therefore, this paper aims to provide a better

understanding of the accounting and auditing profession and its environment in Egypt and other

similar countries experiencing economic and political reform with promising investment

opportunities. This study concludes that political, economic, institutional, legal and cultural factors

contribute to the development of the accounting and auditing profession in Egypt. Moreover,

privatization led to reforming Egypt’s financial reporting regulations and setting the corporate

governance policy framework. The conclusions of this study could be of interest to other countries,

particularly developing countries that desire to improve the quality of their accounting and auditing

profession.

JEL Classifications: M41, M42

Keywords: Accounting regulations; Influential factors; International Accounting Standards;

Auditing practices; Egypt.

Contact author’s email address: afelba@foc.cu.edu.eg

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INTRODUCTION

Many factors influence the accounting and auditing profession including political,

economic, legal, cultural, and financial systems (Radebaugh & Grey 1997). Some factors

are closely related to specific characters of a country (Al-Farah, Abbadi & Al Shaar

2015). Other factors originate from outside the country, such as its past trading and

colonial links and current patterns of foreign investment (Roberts, Weetman & Gordon

2005). The lower the economic development level the simpler the economic activities

and, accordingly, the accounting practice can be highly underdeveloped (Michas 2011).

In contrast, in more developed economies, accounting profession is considered as a

significant and sophisticated profession (HassabElnaby & Mosebach 2005). New owners

of a privatized company (i.e., shareholders) will demand a higher level of disclosure

compared to that level mandated by the government (the old owner) (Hassabelnaby, Epps

& Said 2003). Thus, privatization may have an impact on the accounting profession. The

demand for accounting increases with the increase of the stock market development

(Michas 2011). Along aside with the existence of financial market formal regulation, the

reliance on the accounting services increases with the increase of the number of both

domestic and international investors who call for more and higher quality disclosure

(Hassabelnaby, Epps & Said 2003). The legal system of a country affects the role of the

accountants and the way in which the accounting profession is regulated (Roberts,

Weetman & Gordon 2005). In code-law-countries, the accounting profession tends to be

regulated through a prescriptive, detailed and procedural code set by governments (Ebaid

2016). In common-law-countries, governments usually delegate the regulation of the

accounting profession to an independent authority (Roberts, Weetman & Gordon 2005).

Culture affects the way a person would like his/her society to be structured and how

he/she interacts with its substructure (Ebrahim 2014). The accounting profession may be

considered as one of the society’s substructures (Nobes & Parker 2008). At the time of

transformation, understanding the environmental factors that shape the accounting

practices, and assessing their impact, gains a great significance (Ebrahim 2014). Most of

the preceding international accounting research studied the accounting profession in

developed countries (Kleinman & Lin 2017). Studying the accounting and auditing

profession in developing countries has been relatively ignored, despite recent transforms

in their political, economic, and accounting environments.

Kamla (2004) stated that very little is known about accounting practices and

accounting regulations in the Arab Middle East countries. This paper fills a gap in the

literature by investigating major environmental factors and linking them to the

development of the accounting and auditing profession in Egypt, a country that has a long

history regarding the accounting and auditing profession. The paper also reviews factors

that initiate Egypt’s adoption of the international standards of accounting and auditing by

focusing on enforcement mechanisms that emphasize disclosure compliance. This paper

is organized as follows. Section 2 provides background information about Egypt. Section

3 presents the history of the accounting profession in Egypt followed by an analysis of

the factors affecting the development of the accounting profession in Egypt (Section 4).

The professional bodies controlling the accounting profession in Egypt are then discussed

in Section 5. Section 6 discusses the Egyptian revolution and its impact on the accounting

profession, and finally Section 7 concludes the paper.

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ARAB REPUBLIC OF EGYPT – AN OVERVIEW

Egypt is the cradle of an ancient civilization dating back to 3,000 BC. Egypt has a rather

stable mixed economy, which embarked on various stages of development during which

the public and private sectors played roles varying in relative importance (Dahawy &

Kamel 2006). Moreover, Egypt is one of the few developing countries that transformed

from a capitalist economy to planned economy, then returning once more to capitalist

economy. These changes have been dynamic, evolving through different professional,

legal, economic and political systems within a framework of continuous governmental

intervention (Hassan 2008). The major economic sectors that contribute to the Egyptian

economy are: banking; insurance and pension fund sectors; tourism; the Suez Canal;

telecommunications; and energy. Table 1 shows key indicators of the Egyptian real

economy for the period 2007-2015 inclusive.

TABLE 1: INDICATORS OF THE EGYPTIAN REAL ECONOMY

Indicators 200

7

200

8

2009 2010 2011 2012 2013 2014 2015

GDP at factor cost

(current prices) ( L.E

Billion)

710 855 994 1,15

1

1,310 1,695 1,908 2,178 2,459

GNP (L.E Billion ) 787 949 1,08

2

1,23

5

1,408 1,609 1,835 2,198 NA

Per capita income

(current prices) (L.E)

10,0

58

12,0

30

13,6

57

15,5

30

17,22

1

19,356 20,95

7

23,28

7

27,63

7

Private sector

contribution to GDP

(%)

61.3 61.6 62.1 62.7 62.3 60.8 60.8 60.6 NA

GDP real growth rate

at market prices and

constant prices (%)

7.1 7.2 4.7 5.1 1.8 2.2 2.1 2.2 4.2

Total public domestic

debt/GDP (%)

84.7 73.5 72.5 73.6 76.2 74.7 82.8 86.4 86.5

Source: Egypt’s Information Portal (http://www.eip.gov.eg)

THE HISTORICAL DEVELOPMENT OF THE

ACCOUNTING AND AUDITING PROFESSION IN EGYPT

The Commerce Act was issued in 1883. Consequently, a class of bookkeepers emerged

but without requiring formal qualifications. In 1939, the Income Tax Act requested all

companies to provide financial statements supporting income tax returns to avoid ad-hoc

assessments. The demand for accounting services increased in that period but the number

of qualified accountants was inadequate due to the small number of university graduates,

and this gap was filled by foreign accountants living in Egypt (Farag 2009). The Egyptian

Royal Society for Accountants and Auditors was established in 1946. The first act

organizing accounting and its practices in Egypt was issued in 1951. In 1955, the

Syndicate for Accountants and Auditors was established. In 1958, a code of professional

conduct and ethics for practicing accountants and auditors was issued by the syndicate.

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By the early 1960s, a nationalization movement started in Egypt affecting several

economic sectors. Consequently, the activity of the Egyptian Stock Exchange (EGX)

decreased progressively until it became inactive for about thirty years (Dahawy, Shehata

& Ransopher 2011). In that period, the Central Auditing Organization (CAO) became

virtually the only and prevalent audit organization in Egypt when it was designated by the

government to audit all Public Sector companies and all governmental entities

(Anonymous 1981; KPMG 2010). In 1966, the Unified Accounting System (UAS) was

approved according to Presidential Decree No. 4723. The UAS was applied by the Public

Sector, which was audited by the CAO. In the mid1970s, Egypt applied a policy for

liberalizing its economy (Dahawy, Shehata & Ransopher 2011). Consequently, the

private sector companies started taking a considerable share of the economy. Then, the

Generally Accepted Accounting Principles (GAAP) and the Generally Accepted Auditing

Standards (GAAS) were applicable to the private sector which was audited by private

auditing firms and individual auditors (KPMG 2010). Issued in 1981, the Companies Law

mandated the auditing of private companies for the first time (Dahawy, Shehata &

Ransopher 2011). By the mid 1980s representatives of the "Big Eight" firms were

operating in Egypt, boosting the implementation of the International Accounting

Standards (IAS) and the International Standards on Auditing (ISA) (KPMG 2010).

In 1992, the Capital Market Law was issued requiring listed companies to apply

the IAS. The law also requires the auditors of such companies to follow the ISA (KPMG

2010). By the end of the 1990s, Egypt started to apply an economic reform program

guided by the World Bank (WB) and the International Monetary Fund (IMF). The major

purpose of that program was to boost privatization and to develop the stock market

(Dahawy, Shehata & Ransopher 2011). In 1997, the Permanent Committee for

Accounting and Auditing Standards was formed to issue the Egyptian Accounting

Standards (EAS). EAS were based on IAS which were adapted for local environment.

Starting from 1998, the new EAS were required to be applied by all listed companies

(UNCTAD 2008). In 2006, a new set of EAS were issued (UNCTAD 2008). A more

recent package of the EAS was issued in 2015. Reviewing the historical development of

the accounting and auditing profession in Egypt reveals that there is a significant relation

between the economic reforms and the development of the accounting and auditing

profession.

FACTORS AFFECTING THE DEVELOPMENT

OF THE ACCOUNTING PROFESSION IN EGYPT

The Egyptian Capital Market

The EGX, previously named the Cairo and Alexandria Stock Exchange (CASE), was

established more than 100 years ago. Alexandria Stock Exchange was established in 1883

while Cairo Stock Exchange was established in 1903. In the 1950s the EGX was

recognized as the fifth most active stock market in the world but, due to nationalization

movement started in the early 1960s, the activity of it continued to decline until it became

inactive for about thirty years (Dahawy, Shehata & Ransopher 2011). Due to economic

reforms; privatization program and changes in the regulatory environment, the EGX

started to grow again in the early 1990s (UNCTAD 2008).

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Regulatory Bodies

Before 2009, the financial regulatory bodies in Egypt were: the Capital Market Authority

(CMA), the Central Bank of Egypt (CBE), the Egyptian Insurance Supervisory Authority

(EISA), and the Mortgage Finance Authority (MFA) (Afify 2009). The CMA’s role was

to oversee the compliance of listed companies with disclosure rules to promote market

transparency; enforce the Capital Market Act; review and investigate disclosure

misconduct, and to ensure timely filing of financial reports (UNCTAD 2008). The CBE

is authorized to take certain actions against any bank that violates the law, whereas the

EISA had the authority to take certain actions against any violating insurance company

(UNCTAD 2008). In 2009, three of the former regulators (i.e. the CMA, the EISA and

the MFA) were unified into one single regulator, which is the Egyptian Financial

Supervisory Authority (EFSA). The EFSA did not introduce significant changes to the

legal roles of the above mentioned authorities (Tahat et al. 2016).

Privatization in Egypt

The Egyptian privatization program was initiated in the early 1990s motivated by the

disappointing performance of public sector companies, and the pressure imposed by the

WB and the IMF. The objective of the program was to introduce market-oriented

economic policies and to create a new economic environment in which the private sector

takes the lead (Kamel & Elbanna 2010). Afifi (2009) argues that the Egyptian

privatization program accelerated the growth of the market and that market capitalization

grew exponentially, from LE 5 billion in 1990 to LE 815 billion in 30 June 2008. Table 2

shows the number of privatized companies during the period from 1991 to 2004.

TABLE 2: NUMBER OF PRIVATIZATIONS FROM 1991 TO 2004

Year Majority

Privatizations

Partial

Privatizations

Total

Privatizations

Proceed (LE

Millions)

1991 4 0 4 0

1992 1 0 1 0

1993 1 0 1 0

1994 12 1 13 664

1995 6 6 12 1,216

1996 18 7 25 2,791

1997 23 5 28 3,148

1998 28 4 32 2,358

1999 21 12 33 2,785

2000 9 14 23 2,476

2001 7 4 11 1,093

2002 4 4 8 71

2003 0 9 9 110

2004 1 4 5 585

Total 135 70 205 17,297

Source: Privatization Implementation Project (2004)

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The Legal Framework

Egypt is classified as a code-law-country where companies are usually financed by banks

that regularly have access to the company’s financial and non-financial information. The

Egyptian legal structure is based on the French Civil-law. Nevertheless, in the capital

markets, Anglo-American common-law concepts prevail (ROSC 2004)

Corporate Governance

In 2005, the Egyptian Institute of Directors responded to the growing attention

surrounding corporate governance by reforming the Egypt Code of Corporate

Governance, which was based on the principles set by the Organisation for Economic

Cooperation and Development (OECD). The objectives of issuing the code are to

enhance the financial reporting quality; increase foreign investors’ confidence of the

Egyptian capital market; and encourage economic development (Samaha & Dahawy

2011). The code focuses on various aspects of corporate governance, especially boards of

directors, audit committees, internal audit departments, external auditors, disclosure of

social policies and avoiding conflicts of interest. Ebaid (2011) states that the main

difference between corporate governance environment in Egypt and corporate

governance in other developed markets is that the Egyptian Code was introduced neither

on a mandatory basis (such as in the USA) nor on a comply-or-explain basis (such as the

UK). The Egyptian code is voluntary, and there is no obligation for listed firms to follow

it or to offer any explanation about their failure to apply it. In an institutional setting

where the adoption and monitoring of corporate governance practices is not mandatory,

such as Egypt, it is not clear how auditors would react to client’s voluntary adoption of

corporate governance practices (Sharma, Boo & Sharma 2008). In 2001, the WB and the

IMF assessed the corporate governance practices in Egypt, revealing that Egypt applied

62% of the OECD principles. A re-assessment was conducted in 2004, reporting that

Egypt applied 82% of the OECD principles (Dahawy 2008). The CMA formed a

Corporate Governance Department and the EGX began to constantly impose its listing

rules. Changes to the regulatory framework aimed to limit insider trading; enhance

disclosure; activate the role of audit committees; and comply with IAS and ISA (ROSC

2009).

Culture

Hofstede (1984) defined and scored four basic dimensions of culture namely: large versus

small power distance (PDI); individualism versus collectivism (IDV); masculinity versus

femininity (MAS); and strong versus weak uncertainty avoidance (UAI). Gray (1988)

developed the following pairs of contrasting accounting values: Professionalism versus

Statutory Control; Uniformity versus Flexibility; Conservatism versus Optimism; and

Secrecy versus Transparency. Rodriguez (2009) summarized the relationships of Gray’s

(1998) accounting values with Hofstede’s (1984) culture values as reported in Table 3.

211

TABLE 3: RELATIONSHIPS OF GRAY’S (1998) ACCOUNTING VALUES

WITH HOFSTEDE’S (1984) CULTURE VALUES

Accounting Value Relationship Strength IDV PDI UAI MAS

Professionalism Strong Positive

Negative

Vs. Less Strong

Negative

Statutory Control Weak

Positive

Uniformity Strong Negative

Positive

Vs. Less Strong

Positive

Flexibility Weak

Conservatism Strong

Positive

Vs. Less Strong Negative

Negative Optimism Weak

Secrecy Strong Negative Positive Positive

Vs. Less Strong

Negative

Transparency Weak

Source: Rodriguez (2009), page 14.

Egypt’s score related to the basic dimensions of culture are shown in figure 1. Egypt’s

high score of power distance and low score of individualism reflect society with high

level of collectivism, high level of masculinity; and high level of uncertainty avoidance

(Dahawy, Shehata & Ransopher 2011). Societies with high level of uncertainty

avoidance, large power distance are likely to be secretive. High level of secrecy has direct

effect on information disclosure practices (Dahawy, Shehata & Ransopher 2011).

Egyptians tendency for secrecy conflicts with the adequate disclosure mandated by the

IAS (Dahawy, Merino & Conover 2002). Many managers in Egypt believe that the

increased disclosure will entail them to disclose unfavourable information to the tax

authorities and competitors (Dahawy & Conover 2007). The low score of individualism

observed in the Egyptian case refers to very strong family relations, which conflicts with

the disclosure of related party transactions required by IAS (Dahawy, Merino & Conover

2002).

FIGURE 1: HOFSTEDE’S CULTURAL DIMENSIONS OF EGYPT (Hofstede

2012)

THE PROFESSIONAL BODIES CONTROLLING

THE ACCOUNTING PROFESSION IN EGYPT

Consistent with the Egyptian laws, only Egyptian natural persons are permitted to

practice the auditing profession (KPMG 2010). Two groups of auditors practicing the

profession in Egypt can be recognized. The qualified members of the Egyptian Society of

Accountants and Auditors represent the first group. Members of international

212

professional bodies such as AICPA, ACCA, and ICAEW represent the second group

(Samaha & Hegazy 2010). The accountant may obtain a license to audit sole

proprietorships and partnerships after three years of work experience in an accounting

firm. After additional five years of experience, the accountant can be certified to audit

corporations (UNCTAD 2008). The professional bodies controlling the accounting

profession in Egypt are as follows:

Egyptian Society of Accountants and Auditors

Founded in 1946, the Egyptian Society of Accountants and Auditors (ESAA) is

responsible for developing the accounting and auditing standards. ESAA is a member of

the International Federation of Accountants (UNCTAD 2008). The ESAA formed the

Oversight Board to keep records of the auditors and to supervise their work. The

Oversight Board performs its duties through appointing highly qualified inspectors

associated with the preparation of programs needed to performing their task (KPMG

2010).

Central Auditing Organization (CAO)

The CAO audits state-owned entities including companies in which the government owns

25% or more of its share capital. The CAO reports directly to the Egyptian Parliament as

it is considered an independent public organization (Anonymous 1989). To ensure public

accountability, three types of audits are performed: financial, performance, and legal.

Financial audits examine the integrity of the records and the legality of transactions of

governmental agencies. Performance audits observe the implementation of the national

plan and evaluate the economy, efficiency, and effectiveness of audited entities. Legal

audits examine the actions taken by the entities under its jurisdiction with regard to

financial violations committed by their members (Anonymous 1995:16). Notably, the

CAO has exerted important efforts to harmonize accounting and auditing rules applied by

the public sector with the IAS and the ISA (Wahdan et al. 2006).

Syndicate for Accountants and Auditors

The Syndicate membership is obtainable for all accounting degree holders (Anis 2017).

Some jobs are considered equivalent to the work for an auditor. These jobs are: auditor

works for the CAO, tax inspector, social insurance inspector, accountant working for the

Ministry of Finance, the Ministry of Foreign Trade inspector, and the staff of financial

departments in governmental units (UNCTAD 2008).

Auditing and Accounting Standards Due Process

In 1997, the Ministry of Foreign Trade established the Permanent Committee for

Accounting and Auditing Standards. The main responsibility of the committee is to set

the accounting and auditing standards. The ESAA has adopted the IAS and the ISA

applicable to the Egyptian situation and translated them into Arabic. In 2002, Egypt had

six auditing standards. At that time, the Egyptian Standards on Auditing (ESA) only

213

covered the auditor’s report on financial statements (Wahdan et al. 2006). In 2008, new

ESAs were issued (Khlif & Samaha 2014). A framework was introduced to complete the

ESA and make it consistent with the ISA (Bremer, Hegazy & Sabri 2011). The ISA are

applicable in the absence of the ESA (Wahdan et al. 2006). The ESA compared with the

ISA as reported by the Egyptian_Financial_Supervisory_Authority (2017) are shown in

Table 4.

TABLE 4: EGYPTIAN STANDARDS OF AUDITING (ESA) VS.

INTERNATIONAL STANDARDS OF AUDITING (ISA)

ESAs Number Subject ISA

200 “Overall Objectives of the Independent Auditor and the Conduct of an

Audit in Accordance with International Standards on Auditing” ISA 200

210 “Agreeing the Terms of Audit Engagements” ISA 210

220 “Quality Control for an Audit of Financial Statements” ISA 220

230 “Audit Documentation” ISA 230

240 “The Auditor's Responsibilities Relating to Fraud in an Audit of

Financial Statements” ISA 240

250 “Consideration of Laws and Regulations in an Audit of Financial

Statements” ISA 250

260 “Communication with Those Charged with Governance” ISA 260

300 “Planning an Audit of Financial Statements” ISA 300

315 “Identifying and Assessing the Risks of Material Misstatement through

Understanding the Entity and Its Environment” ISA 315

320 “Materiality in Planning and Performing an Audit” ISA 320

330 “The Auditor's Responses to Assessed Risks” ISA 330

402 “Audit Considerations Relating to an Entity Using a Service

Organization” ISA 402

500 “Audit Evidence” ISA 500

501 “Audit Evidence-Specific Considerations for Selected Items” ISA 501 505 “External Confirmations” ISA 505

510 “Initial Audit Engagements-Opening Balances” ISA 510

520 “Analytical Procedures” ISA 520 530 “Audit Sampling” ISA 530

540 “Auditing Accounting Estimates, Including Fair Value Accounting

Estimates, and Related Disclosures” ISA 540

545 “Reviewing and disclosing the fair value measurement” ISA 545

550 “Related Parties” ISA 550

560 “Subsequent Events” ISA 560 570 “Going Concern” ISA 570

580 “Written Representations” ISA 580

600 “Using the Work of Other Auditor” ISA 600 610 “Using the Work of Internal Auditors” ISA 610

620 “Using the Work of an Auditor's Expert” ISA 620

700 “Forming an Opinion and Reporting on Financial Statements” ISA 700 701 “Some amendments to the auditor’s report” ISA 705

710 “Comparative Information-Corresponding Figures and Comparative

Financial Statements” ISA 710

720 “The Auditor's Responsibilities Relating to Other Information in

Documents Containing Audited Financial Statements” ISA 720

800 “Special Considerations-Audits of Financial Statements Prepared in

Accordance with Special Purpose Frameworks” ISA 800

1005 “Egyptian guide no. 1005 - Special considerations in auditing small

enterprises” IAPS 1005

2410 “Limited review of periodical financial statements of an institution

performed by its auditor” ISRE 2410

214

3000 “Ensuring tasks other than auditing and reviewing historical financial

information” ISAE 3000

3400 “Ensuring the potential financial information” ISAE 3400

4400 “Tasks concerning agreed procedures related to financial information” ISRS 4400

4410 “Tasks concerning the preparation of the Financial Statements” ISRS 4410 Source: http://www.efsa.gov.eg/content/efsa_en/audit_pages_en/auditing_standards_en.htm

A new package of the EAS was issued in 2015, applicable starting January 2016. The

new EAS are mostly compatible with the international standards. Table 5 shows the EAS

compared with IAS, and International Financial Reporting Standards (IFRS).

TABLE 5: EGYPTIAN ACCOUNTING STANDARDS (EAS) VS.

INTERNATIONAL ACCOUNTING STANDARDS (IAS) &INTERNATIONAL

FINANCIAL REPORTING STANDARDS (IFRS)

EASs Number Subject IAS &

IFRS

Frame Work “Framework for Preparation and Presentation

of Financial Statements” The Conceptual Framework for

Financial Reporting

1 “Presentation of Financial Statements” IAS 1

2 “Inventories” IAS 2 4 “Statement of Cash Flows” IAS 7

5 “Accounting Policies, Changes in Accounting

Estimates and Errors” IAS 8

7 “Events after the Reporting Period” IAS 10

8 “Construction contracts” IAS 11

10 “Fixed assets and its depreciation” IAS 16 11 “Revenue” IAS 18

12 “Government Grants and Disclosure of

Government Assistance” IAS 20

13 “The Effects of Changes in Foreign Exchange

Rates” IAS 21

14 “Borrowing Costs” IAS 23 15 “Related Party Disclosures” IAS 24

17 “Separate Financial Statements” IAS 27

18 “Investments in Associates” IAS 28

20 “Accounting rules and standards related to

Financial Leasing” IAS 17

21 “Accounting and Reports on Retirement

Benefits Systems” IAS 26

22 “Earnings per Share” IAS 33

23 “Intangible Assets” IAS 38 24 “Income taxes” IAS 12

25 “Financial instruments: Presentation” IAS 32

26 “Financial Instruments: Recognition and

Measurement” IAS 39

28 “Provisions, Contingent Liabilities and

Contingent Assets” IAS 37

29 “Business Combinations” IFRS 3

30 “Periodical Financial Statements” IAS 34 31 “Impairment of Assets” IAS 36

32 “Non-current Assets Held for Sale and

Discontinued Operations” IFRS 5

34 “Real Estate Investment” IAS 40

35 “Agriculture” IAS 41

36 “Exploration for and Evaluation of Mineral IFRS 6

215

Resources”

37 “Insurance Contract” IFRS 4 38 “Employee Benefits” IAS 19

39 “Share-based Payment” IFRS 2

40 “Financial Instruments: Disclosures” IFRS 7 41 “Operating Segments” IFRS 8

42 “Consolidated Financial Statements” IFRS 10

43 “Joint Arrangements” IFRS 11 44 “Disclosure of Interests in Other Entities” IFRS 12

45 “Fair Value Measurement” IFRS 13

EAS and ESA are developed and reviewed by a professional body, discussed and adopted

by a ministerial committee, and issued by ministerial decrees. The Permanent Committee

for Standards of Accounting and Auditing is officially responsible for developing and

reviewing the EAS and the ESA but, in practice, the ESAA drafts them. The ESAA

adopts the IAS, IFRS, and the ISA applicable to the Egyptian environment. When an

international standard is adopted, it is translated into Arabic and used for drafting an

Egyptian standard. The draft is then submitted to the Permanent Committee for

discussion, finalization, and adoption. The final version of the standard is then issued by

a ministerial decree (ROSC 2002).

The Egyptian Revolution and the Accounting Profession

On January 25, 2011, huge demonstrations and civil unrests began against Mubarak

(Egypt’s ex-president) and his government. As a result, Mubarak resigned on February

11, 2011 (Baker & McKenzie 2011). Table 6 shows the effect of Egyptian revolution on

some influential factors by comparing these factors before revolution (years 2005–2010)

and after revolution (years 2011–2015). Table 6 includes indicators of

World_Economic_Forum (2017) that represent five categories: accounting and auditing

standards, legal, economics, financial markets and corporate governance. It has been

noticed that most of the indicators declined after the revolution. The dropping phase

lasted for at least three years and then started to pick momentum again.

216

TABLE 6: INFLUENTIAL FACTORS BEFORE AND AFTER THE EGYPTIAN

REVOLUTION

Before Revolution After Revolution

Year

Number of Countries

Score Rank Score Rank Score Rank Score Rank Score Rank Score Rank Score Rank Score Rank Score Rank Score Rank Score Rank

Auditing & Accounting Standards

Strength of auditing and reporting standards 4.5 69 4.6 70 4.8 66 5.1 50 4.8 58 4.3 99 4.1 104 3.8 122 3.8 117 4.3 88 4.3 84

Legal

Judicial independence 4.8 38 4.9 41 5.0 42 3.9 64 3.9 63 4.8 41 4.1 53 3.5 82 4.0 57 4.5 45 4.5 47

Efficiency of legal framework in settling disputes NA NA NA NA NA NA 4.3 39 4.3 40 3.9 60 3.4 86 3.2 106 3.3 105 3.4 82 3.4 81

Effectiveness of anti-monopoly policy 3.5 79 3.5 80 3.3 98 3.4 95 3.5 106 3.2 124 3.2 133 3.2 132 3.5 111 3.6 92 3.6 78

Total tax rate, % profits 59.6 88 50.4 78 47.9 80 46.1 79 43.0 78 42.6 83 43.6 87 42.6 92 42.6 90 45.0 98 45.0 96

Education

Quality of the education system 2.7 101 2.5 119 2.4 126 2.6 123 2.5 131 2.3 135 2.3 139 2.2 145 2.2 141 2.1 139 2.1 135

Quality of management schools 3.5 87 3.5 100 3.2 116 3.3 114 3.3 122 3.0 133 2.8 137 2.3 145 2.0 144 2.5 139 2.5 138

Economic

General government debt, % GDP 104.3 106 101.2 116 105.8 124 85.9 121 80.1 119 73.8 119 76.4 122 80.2 129 89.2 125 90.5 124 87.7 117

Exports as a percentage of GDP 31.0 80 31.3 88 31.5 87 45.8 65 37.8 68 23.0 115 21.0 129 19.7 134 17.4 134 16.5 131 11.2 132

Financial Market

Availability of financial services NA NA NA NA NA NA NA NA 4.8 60 4.4 79 4.2 88 3.8 112 3.4 129 3.4 129 4.5 54

Affordability of financial services NA NA NA NA NA NA NA NA 4.2 69 4.0 76 4.1 71 3.7 106 3.3 126 3.3 126 3.8 72

Soundness of banks 4.6 99 4.7 106 4.7 111 5.0 86 5.3 61 4.6 102 4.3 123 4.0 125 4.2 110 4.8 70 4.8 70

Corporate Governance

Efficacy of corporate boards 4.4 64 4.4 87 4.4 93 4.6 64 4.4 82 4.0 122 3.8 136 3.6 141 3.6 136 3.9 133 3.9 131

Protection of minority shareholders’ interests 4.4 60 4.5 61 4.5 68 4.6 60 4.6 46 4.4 61 4.1 75 3.8 97 3.5 109 3.9 82 3.9 83

Strength of investor protection 4.3 78 4.3 87 5.0 67 5.3 55 5.3 59 5.3 60 5.3 65 5.3 69 3.7 117 4.4 113 4.5 101

Reliance on professional management 4.0 82 4.0 94 3.5 124 3.7 106 4.1 86 3.5 121 3.3 134 3.1 137 3.1 134 3.1 133 3.1 133

2005 2006 2007 2008 2009 2010

142 144 148 144

2011 2012 2013

140 138

2012 - 2013 2013 - 2014 2014 - 2015 2015 - 2016 2016 - 2017

2014 2015

125 134 131 133 139

2011 - 20122006 - 2007 2007 - 2008 2008 - 2009 2009 - 2010 2010 - 2011

So

urce: World_Economic_Forum (2017) http://reports.weforum.org/global-competitiveness-index/downloads

As shown in figure 2, before the revolution, the indicator that measures the strength of

auditing and reporting standards starts from 4.6 at year 2006 and increases to 5.1 in year

2008 and reaches 4.3 in 2010 just before the revolution. After revolution, it starts from

4.1 at year 2011, then decreases to reach 3.8 in year 2013 and starts again to increase to

achieve 4.3 in years 2014 and 2015.

FIGURE 2: STRENGTH OF AUDITING AND REPORTING

STANDARDS

CONCLUSIONS

The primary objective of this

paper is to analyse factors

influencing the accounting

and auditing profession in

Egypt. The paper also

investigates the origins of the

accounting and auditing profession in Egypt since the early days of the Egyptian history,

and traces the growth and development of it up to 2017. The accounting and auditing

profession in Egypt is influenced by several factors. These factors were analysed to

4.6 4.8 5.1 4.84.3

4.1 3.8 3.84.3 4.3

0.0

2.0

4.0

6.0

1 2 3 4 5 6

Before R

After R

217

observe their impact on the profession. This paper argues that Egypt exhibits the

characteristics of a code-law-country. Those characteristics include lack of investor

protection, legal inefficiencies, and weak enforcement mechanisms. In addition, the paper

observes that political and economic factors had a major impact on Egypt’s accounting

and auditing practices. Privatization, in turn, has influenced the accounting and auditing

profession significantly by emphasising governance and disclosure regulatory reforms.

Furthermore, the paper provides information about accounting and auditing

regulatory reforms in Egypt, particularly the adoption of the international standards of

accounting and auditing, introducing the governance policy framework, and unifying

former regulators of financial market sector into one single regulator. Although Egypt’s

reforms are on the right track, more efforts are still needed to improve the quality of the

accounting and auditing practices and enhance the enforcement of accounting and

auditing standards. The outcome of this study is expected to have policy implications for

similar developing countries. It may help other countries’ regulatory bodies when taking

into account the changes in their economic and regulatory policies that could affect their

countries’ investment environments. Notably, the paper revealed various important

insights into the accounting and auditing profession in the public and private sectors of

Egypt. First, Egypt’s relatively late transformation into a market economy makes

comparison with the developed markets difficult. Second, in Egypt, the dominance of the

public sector can be seen in accounting and auditing regulations, which are not market

oriented. Third, Egypt’s privatization program illustrated the relative absence of

harmonization between UAS and IAS. That inconsistency created a discrepancy in the

evaluation of privatized companies. Fourth, increased foreign investment has led to a

revival of the accounting and auditing profession in Egypt. However, regulation still lags,

as there is still no monitoring of accounting and auditing practices. Additionally, there is

no time limit on contracts between companies and auditors. All that exists is a general

framework, forbidding the auditor from investing in the audited company.

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