The Routledge Companion to Accounting in Emerging Economies

Pauline Weetman, Ioannis Tsalavoutas, Pauline Weetman, Ioannis Tsalavoutas

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351128483
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Buchhaltung

As researchers reveal the increasing complexities of accounting practices in emerging economies, there is a growing need for an overview of the topic. The Routledge Companion to Accounting in Emerging Economies is a prestige work offering an introduction to current scholarship in the field, with indications of future directions for enhancing the contribution to knowledge.

With regional coverage of key emerging economies such as Brazil, Russia, India and China, the team of contributors analyse issues in accounting in detail, while shedding light on the role of the accounting profession in providing accountability and governance across the developing world. Each chapter is headed up by an internationally recognised author who is a leading expert in designing and implementing research approaches to the topic. Within the team of authors, some are experienced senior contributors while others are developing new avenues of exploration on the basis of high-quality doctoral study. This range of author experience has been deliberately chosen to allow the reader to envisage working in such a team while growing in confidence.

This unique reference offers a comprehensive guide to advanced students, academics, practitioners and policy makers on the current state of, and potential developments in, accounting in developing economies globally. This work will be of particular interest to students and researchers looking to identify topics in emerging economies, academics and practitioners seeking convenient access to an unfamiliar area, and established researchers seeking a single repository on the current state of knowledge, current debates and relevant literature.

1

INTRODUCTION

Ioannis Tsalavoutas and Pauline Weetman

‘Accounting is the process of identifying, measuring and communicating financial information about an entity to permit informed judgements and decisions by users of the information’ (American Accounting Association, 1966, cited in Weetman, 2016: 6). As such, accounting is multi-dimensional. Its principles and regulations are shaped and developed by human behaviour and the characteristics of the context in which it is practised. Accounting is also influenced by defining the expected or known users of accounting information, and the intended use. Moreover, accounting communication, to be effective, requires robust accountability and governance.

Countries around the world are usually classified into dichotomous groups such as developed contrasted with less developed, or advanced economies contrasted with emerging economies. The most commonly used reference for such a classification is the International Monetary Fund’s (IMF) World Economic Outlook. The IMF explains (2018: 130) that it divides the world into two major groups: one described as ‘advanced economies’ and the other described collectively as ‘emerging markets and developing economies’. It explains that the classification is not based on strict criteria and has evolved over time. It first of all identifies 39 advanced economies, using such key indicators as their relative size (GDP valued at purchasing power parity, total exports of goods and services, and population). The remainder (155 countries in total) are classed as ‘emerging markets and developing economies’.¹ The countries covered in this book are constituents of this latter group and we use the shorter phrase ‘emerging economies’ for this group of countries.

The majority of the countries regarded as emerging economies, taken individually, are relatively small in terms of the global economy and have one or more characteristics of weak institutional environments, non-existent or underdeveloped capital markets, and a lack of suitably valid and reliable data for research purposes. Those factors have hitherto limited the scope for researchers to provide sufficient valid evidence to support high-quality research, and consequently academic research on accounting in these countries has only recently begun quickening its pace. We are now seeing initiatives to recognise the field of study, such as the Journal of Accounting in Emerging Economies and the Accounting and Finance in Emerging Economies Special Interest Group of the British Accounting and Finance Association. However, it remains the case that many high-quality academic papers are spread across a range of journals, which may prevent quick and easy access for those seeking to enter this field of study or to locate the relevant body of work on a specific topic.

To provide access to the range of research output and future potential of accounting in emerging economies, this book provides readers with chapters written by an international selection of authors who are experts in the relevant subject. These chapters shed light on the current state of, and potential developments in, accounting across a diverse range of emerging economies. Each chapter draws on the unique nature of one country or a group of countries, showing the scope for further development of study within that country, but at the same time demonstrates the potential for extending the research topic to other countries which may have similar, or different, characteristics. The volume assists academics and students seeking convenient access to an unfamiliar area as well as established researchers seeking a single repository on the current state of knowledge, current debates and relevant literature. In this way, we aspire to stimulate further research and debates in this area.

The chapters encompass four themes. Part I concentrates on the state of adoption of and/or convergence to International Financial Reporting Standards (IFRS) in a variety of emerging economies. Part II examines issues around the formal establishment of the accounting profession as well as education and training of accountants in emerging economies. Part III focuses on the fundamental aspects of audit, governance and accountability. A particular feature of the chapters covering these three themes is that they draw on relevant academic literature as well as local regulations. Shedding light on the specific socio-economic contexts of these countries allows for a better understanding of how accounting regulations develop, how accountants are trained, how accounting is practised, and how the issues of audit, accountability and governance complement accounting in emerging economies. Part IV is primarily addressed to scholars who want to embark on conducting research on emerging economies. Authoritative colleagues with a wealth of research experience in those settings share these experiences and personal reflections in an attempt to inform future researchers on the potential challenges as well as opportunities for conducting research in these countries.

Overall, this volume complements other recent Routledge Companions in Business Management and Accounting² such as those edited by Hoque et al. (2017), Livne and Markarian (2018), van Mourik and Walton (2013) and Zhou (2018). It also complements the Handbook of Accounting and Development edited by Hopper et al. (2012). In offering a combination of covering technical issues and offering reflections on the potential avenues for future research in emerging economies, we envisage that this volume will be of interest to academics but also a wider audience such as practitioners, investors and regulators.

IFRS in emerging economies

According to the IFRS Foundation, as of 2018, 144 jurisdictions around the world required IFRS for all or most companies.³ This wide implementation of IFRS around the world really began in the mid-2000s when the European Union imposed on listed companies in its member states the requirement to apply IFRS in the preparation of consolidated accounts. Aiming at greater accounting comparability and harmonisation, other countries around the world, such as South Africa and Australia, moved in the same direction at the same time.

Although it appears as a natural step for governments around the world to follow a similar approach and either adopt IFRS or converge national accounting standards with IFRS, it has been argued that such a decision in emerging economies in particular has been mainly driven by pressures from various institutional bodies with significant power (e.g. the World Bank, the IMF, the Organisation for Economic Co-operation and Development (OECD), the World Trade Organisation (WTO) and the Asian Development Bank (ADB), as discussed in Perera, 2012). Moving to IFRS would involve significant costs in these countries given the substantial differences between local accounting standards and IFRS, along with the unfamiliarity of auditors and accountants with IFRS.

Reflecting this background, Chapters 2–6 draw on the relevant regulations and academic literature and inform readers about the processes around the adoption of IFRS in key emerging economies: Brazil, India, Russia, China and Malaysia. Although they are emerging economies, these countries play an important role in the world’s economic growth. China effectively reached convergence in 2007, while Brazil, India, Russia and Malaysia have more recently aligned with IFRS in varying ways, as described and analysed in the respective chapters. This analysis is complemented by Chapter 7, which explores accounting issues in Vietnam, and Chapter 8, which provides an overview of the corporate reporting environments and adoption of IFRS in the countries of the South Asian Association for Regional Cooperation (SAARC) (i.e. Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka). Chapter 9 reflects on the extent to which professional investors in China appreciate financial reporting information differently, following the move to IFRS. The key messages from each chapter are summarised in the following paragraphs.

Empirical evidence, according to Lourenço and Braunbeck (Chapter 2), suggests that the positive effects of IFRS adoption in Brazil are confined to entities with better governance and those with incentives to opt out of the weak institutional and poor governance environment. The evidence also indicates that Brazilian firms show a lower level of accounting quality than Continental European and Anglo-Saxon firms. Despite applying IFRS as a set of high quality accounting standards, country-specific characteristics still affect the implementation of IFRS.

After many delays the phased implementation of IFRS in India was scheduled to apply to accounting periods from 1 April 2019 onwards. Verma and Krishnan (Chapter 3) discuss how delays have been attributed to a lack of preparedness, taxation and legislative issues raised by industry, unworkable deadlines and ambiguity. Delays have occurred despite the efforts of the professional body, ICAI, which has worked towards convergence with IASs/IFRSs, and has played a significant role in influencing IASs/IFRSs through ongoing negotiations with the International Accounting Standards Board (IASB).

The development of accounting in Russia is at the government’s initiative and under its control. Use of IFRS took effect under law from 2011. A significant and growing body of work published in Russian is identified by Sokolov et al. (Chapter 4). One challenge is the potential for conflict between IFRS and the Russian accounting and legal tradition. Another challenge is translating IFRS into Russian. The authors point out that the Russian language does not have a strict word order, and the words have no clear hierarchy, which contrasts with the structure of IFRS in English. Initial research is largely descriptive but is identifying new topics such as applying standards in the state sector.

In the development stages, fair value accounting was a notable impediment to the full adoption of IFRS in China and hence received special attention from both standard setters and accounting academics. Peng and Bewley (Chapter 5) offer a critical perspective on the institutional, political and social environments that may act as drivers of China’s IFRS adoption and the implementation of fair value accounting, along with contrasting aspects that may impede convergence or challenge its fundamental appropriateness.

Despite Malaysia’s experience of slow progress to IFRS convergence, respondents to research surveys have supported IFRS adoption and perceive that the new standards help to improve comparability and transparency in reporting. Abdullah and Minhat (Chapter 6) focus on three areas that are unique in the context of Malaysia: the application of MFRS 141 Agriculture; the IC Interpretation 15 Agreements for the Construction of Real Estate; and the question of accounting for Islamic financial instruments that has not been given adequate attention but matters significantly to Malaysia as a pioneer country in Islamic finance.

In response to significant changes in the accounting environment in Vietnam, reform was carried out in 1995 that established an accounting system moving towards a private capitalist accounting model. Phuong (Chapter 7) observes that the co-existence of IFRS-type accounting standards and a Uniform Accounting System in Vietnam reflects the specific circumstances of a ‘socialist market-oriented economy’ where the State-Party plays a supreme and pervasive role in leading and controlling society. While changes are made in legal and policy documents in Vietnamese accounting, it takes longer to change the social values and beliefs needed for effective implementation of new regulations based on the IASB’s standards.

SAARC was established in 1985 by Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, to be joined later by Afghanistan. The South Asian Federation of Accountants, a forum of professional accountancy bodies in the SAARC region, works towards positioning, maintaining and developing the accountancy profession in the region. It is expected that financial reporting practices will be improved after adoption of the whole set of IFRS standards by 2021 in the region. Ali et al. (Chapter 8) provide detailed insight into developments, which are of particular value in respect of those smaller countries, where institutional developments are relatively rarely researched.

Although China is one of the largest recipients of inward investment and one of the largest outward investors, it is challenging for researchers to collect evidence about investors’ information needs and the decision usefulness of reporting in this emerging economy. Hu et al. (Chapter 9) report results from a survey of professional investors in China. The authors find that accounting information, particularly where it is forward looking, is most important for an investment decision or an investment recommendation. Buy-side analysts favour accounting information while sell-side analysts view non-accounting information as more important. An overwhelming majority consider accounting information to have both confirmative and predictive value.

The accounting profession in emerging economies

Various countries which gained independence, some in the postcolonial era and others following the dissolution of the Soviet Union, have faced important dilemmas and challenges in relation to the formation of the accounting profession and future training and certification of accounting professionals. Even though many countries opted for adopting Western models of the profession or curricula from universities based on Western and developed countries, it has been documented in the literature that the original formation and further development of ‘the audit profession in an emergi...