“Accounting in our Contemporary World”


A Blast from the Past

A lecture given by Dr. Talal Abu-Ghazaleh - Claremont University, California - USA - Arab Accountant Magazine -  Issue 1-11 for 1986

In the past, the objective of auditing was to detect fraud and approve the authenticity of records, while the first goal has now become to express an opinion about the fair presentation of the closing statements of accounts, ensure that such accounts conform to the laws and regulations, and enhance the administrative performance to capture whether an organization or a project is being managed in an effective economic manner...

The history of the accounting profession goes back to the days of the Sumerians, Chinese, and Romans. We have the right, as Arabs, to claim that we are the innovators of the accounting profession, just as we claim that we invented the wheel; the Sumerian clay tablets were basically accounting records. 

To those who haven’t studied history, we say that the most ancient cuneiform manuscript was used by the ancient Sumerians; it dates back to 3000 BC, the Sumerians were the inhabitants of Mesopotamia or present-day Iraq. These cuneiform manuscripts were found in the same ancient Sumerian sites. When deciphering that language at the beginning of this century, it was discovered that these documents relate directly to the history of law and the accounting treatment of contracts, the recognition of debts, receipts, merchandise and accounts, as well as judicial procedures and diplomatic exchanges.

Moreover, in evidence of that, the wheel, whose discovery was the beginning of the human civilization, was widely used in ancient Sumer, and it was found in the tombs of the Sumerians (Iraq also) and dates back to the year 3500 BC. The wheel was widely used in chariots in both Syria and Egypt around 2000 BC.

From the Past to the Present 

The function of auditing had changed over time, while the objective of auditing was to detect fraud and approve the authenticity of records; the first goal of auditing has now become to express an opinion about the fair presentation of the closing statements of accounts. Moreover, the objective of auditing the performance of management has shifted from the task of ensuring the conformity of such performance to the laws, policies, and regulations to improving the managerial performance to capture whether an organization, a project, or a program is being managed in an effective economic manner.

In the past, the audit work was carried out at the request of the owners who wished to ensure the accuracy of bookkeeping and cash calculation. However, with the development of partnerships, auditing has become useful in determining the profit share of each partner. The industrial revolution created gigantic entities that need external financing to supplement the owner's capital so that expensive equipment can be purchased. Therefore, in that stage particularly, the importance of auditing had emerged, as third parties superseded projects’ owners; they became the major beneficiaries of the audit services.

The Egg or the Chicken?

Academic argument still exists among historians about whether accounting or capitalism emerged first. Many historians, especially the Germans, believe that accounting created capitalism. Indeed, the question of whether the chicken or the egg came out first is irrelevant as long as we make a profit from selling both!

Accounting between internationalization and localization...

We are currently going through a very important stage at the international level, with the proliferation of multinational companies; we notice a trend towards the internationalization of accounting and auditing rules through bodies such as the International Federation of Accountants (IFAC), and the International Accounting Standards Committee (IASC). However, on the other hand, there is a tendency towards “indigenization” or “localization”.

With the international development of the accounting profession through multinational companies and others, we note the growth of international companies such as the Big Eight or the Big Ten or others, and this has called for developing international rules for accounting and auditing, for financial and control reporting. In the last few years, the eminent effort exerted by the IFAC and the IASC to draw the baselines of the rules of accounting was obvious. Despite these efforts, two issues emerged:

1.The impression that the accounting profession exists only within the scope of the private sector, and that the ethics and independence of the auditor and the advertisements and so on are based on the Anglo-Saxon principles of professional ethics applied in Western industrial countries. It is an unquestionable fact that in the Arab world, which is part of the developing countries, government institutions play a leading role in determining the shape of national economies. Moreover, the diversity of cultures, religions and social standards constitutes a basis for what is considered “acceptable” or “unacceptable” for developing countries. Of course, this is reflected in the principles of accounting and auditing. Therefore, relying only on the concepts of the “Industrial West” leads to many dilemmas.

2.The second issue is an outcome of the first one, as the topic of the principles of audit practicing presupposes the availability of a certain level of investment awareness, which did not receive serious attention from developing countries. Some of the developing countries are getting to become fully aware of the importance of the national educational plans that produce doctors, nurses, and engineers, however, such developing countries, including the Arab world, suffer from a severe shortage of accountants.

It is only the beginning...

In addition to the tendency to internationalize the accounting profession, there is a growing tendency that emphasizes the importance of not leaving the accounting profession in the hands of foreigners. Therefore, the competent authorities in many developing countries have reduced their reliance on foreign accountants and accounting institutions. The reason behind that is the national pride and the desire for self-reliance, in the first place, in addition to the prevailing belief that those who control the accounting information control confidential information.

The combination of these matters together has led to a dangerous trend in the developing world, namely, that the easiest way to find the largest number of specialists urgently required in a particular field is to lower the level, which consequently leads to the existence of professional institutions at levels that are not up to the required level, and this has also occurred in the Arab world.

I will not be able to delve into more details due to time constraints; despite there are other essential elements that affect the accounting profession worldwide.  However, the implications of the economic recession and inflation currently prevailing should be mentioned, as they led to the alteration of the dimensions of the role of professional accountants and placed additional and increasing burdens on their shoulders.

From Auditing to Fraud Investigation...

Auditors were mainly interested in verifying the validity of customers’ records by relying on the evidence available within the scope of the profession. However, with the increasing demand for reliable financial information by the parties that provide credit facilities or capital to companies seeking to expand; auditors tended to actively provide management-consulting services. Despite the emphasis on the importance of auditing, it was considered as one of the boring and unpleasant accounting work. Even though the importance of the auditors’ role has increased regarding the investigation of fraud and failure, the fraud is increasing. In 1983 in the USA, where there are statistics about almost any topic, administrative fraud amounted to $40 billion. As for the years from 1973-1983, the total of the largest 10 fraud transactions through computer manipulation amounted to $2.75 billion.  There is a prevailing belief that this trend will increase due to the lack of achievement of the desired social goals, especially in light of the economic recession.  Hence, some, especially the smart ones, will resort to fraud.

Deeper than Traditional?

The other development that should to be highlighted is that auditors are legally obligated, in some industrial countries, to do more than traditional audit work, and by that, we mean auditing the effectiveness and economic efficiency of the concerned entity. Therefore, the role of the auditor was to detect ineffectiveness, inefficiency, infeasibility of projects, in addition to the detection of fraud.

No doubt that the information revolution through technology will change the horizons of the profession and open new doors. In this regard, the following question arises: Is the profession capable of carrying out the job perfectly? In fact, the extent of that change is such that ordinary accounting and monitoring skills alone cannot fulfill the expected tasks, as there is a need for specialization from other systems. In a decade, I expect that multidisciplinary firms that include engineers and IT experts, along with other skillful staff, will take the place of the traditional auditing firms.   The future will demonstrate the impact of this on the structuring of the profession.  Computers are divine to the developing countries, as they will enable them of keeping pace with the more developed countries, at least in the field of accounting. This will take us back to the topic of auditors’ ethics and independence.

Advertisement Scourging!!?

Ethical issues, such as advertisements by auditors as well as the provision of management and engineering consultancy services, among other issues, have become irrelevant in a word of fierce competition among audit firms to attract new clients and keep existing ones. Currently, the evidence of fierce competition is demonstrated in the profession, where great attention has been directed to advertising, professional development, and service marketing...etc.

Regarding the independence issue, all the academic studies and professional principles indicate that independence is a basic professional accounting principle.  Independence is a state of mind characterized by the adoption of an objective manner in the professional field.  Theoretically wise, we cannot reproach auditors, as they should be free to act with regard to any task assigned to them, and they should also avoid any conflict of interests, whether the interests of shareholders, managements, or their own interests.

Missing Links?...

As a whole, this is perfect, but in practice, there is no regular communication between auditors and shareholders. Indeed, there is an actual divergence between them, as managements are the clients of auditors, in addition, some accountants believe that the practice of the profession is their path to higher ranks; therefore, they believe that they should leave a good impression with managements to be able to find jobs.  

Using the accounting information by different groups of beneficiaries is a matter of question, regarding the delay, unreliability, and lack of understandability of information.  Moreover, the major obstacle in the Arab world is the absence of a specific and reliable set of accounting principles. We are on opposite sides, the first is the shortage in the number of domestic accountants, meanwhile, some international companies provide a unique quality of audit work, according to the principles prevailing in the West, the second is,  the existence of accountants with poor professional level incapable of providing this excellent quality of services. The essential reasons do not lie in the lack of coherence and harmony due to the lack of professional competence alone, but the absence of a defined set of accepted accounting principles.

Disadvantages, but incentives...

During the last few years, the bankruptcies that occurred and spread in light of the economic recession along with the dissatisfaction with tax revenues, all prompted the competent financial authorities to take an action regarding the organization of the profession. Arab professionals responded positively to the increasing pressure to improve. Instead of committing to systems imposed by bureaucracy, the profession has taken a step forward and showed its desire to contribute to the development of systems and principles higher than the threshold set by the law. 

The countries of the Gulf Cooperation Council (consisting of Saudi Arabia, Kuwait, Bahrain, the United Arab Emirates, Qatar and Oman) have authorized a special committee to assess the potential use of a comprehensive set of accounting principles developed by the Saudi General Auditing Bureau.

We were up to the Challenge...

The main event in this regard is the establishment of the Arab Society of Certified Accountants (ASCA). In short, ASCA is a body concerned with developing a set of professional principles along with their outlines in the Arab world, as well as providing educational, exams, and training facilities to improve the profession worldwide.

Despite the Obstacles...

Since its establishment in January of the last year, ASCA has exerted huge effort; however, we are looking forward to an upcoming period of active and diligent work.

Indeed, as Arab accountants, we exert the maximum effort to change the prevailing impression that we perform routine and unnecessary work.