Ifrs Compliance and Audit Quality in Developing Countries: The Case of Income Tax Accounting in Egypt

INTRODUCTION The conventional wisdom in accounting literature is that the adoption and application of IFRS in developing countries will improve the quality of financial statement information in these countries, including its reliability and comparability (Ballas et al, 2010). However, it is also argued that no matter how high the quality of the accounting standards adopted, comparable and high quality accounting information will not be achieved without strict enforcement of these standards (Whitehouse, 2012). Although some countries may claim that they officially adopted IFRS and required companies to prepare financial statements accordingly, some companies may selectively implement IFRS recognition and disclosure requirements. Even with increasing IFRS adoption around the world, significant differences in financial reporting systems will remain due to regulatory, political, and institutional differences across countries, leading to imbalance in IFRS compliance between different jurisdictions (Soderstorm and Sun, 2007). Such imbalance hampers the main goal of developing a global set of accounting standards such that accounting information is comparable across countries. The concern about compliance with IFRS requirements is especially emphasized with regard to its application in developing markets that might have inadequate financial reporting environment and inefficient monitoring and enforcement mechanisms. The adoption of IFRS in developing markets always has its own shortfalls, application difficulties, and enforcement issues (Alp and Ustundag, 2009) that might cast doubts on the expected benefits of global harmonization of accounting standards. For example, Chen and Zhang (2010) provided empirical evidence from the Chinese market that the mere adoption of IFRS does not necessarily lead to the intended high-quality and comparable financial accounting information due to enforcement issues and lack of full compliance. As indicated by Nobes and Zeff (2008), many countries that proclaim to adopt IFRS are in reality following some national version of IFRS instead of the standards as enacted by IASB. Such inconsistency in the application and compliance with IFRS across different countries is always cited among the reasons why the SEC in the United States is reluctant to adopt IFRS for its registrants (SEC, 2012). As it was recently pointed out by the FASB Chairman "I would seriously question the cost-benefit of switching our country to a standard that we know is not applied consistently around the world" (Whitehouse, 2012). Therefore, it is necessary for accounting research to examine both the level of compliance with IFRS disclosure requirements and the different determinants of such compliance in different countries that proclaim to adopt and apply IFRS, especially in major emerging economies such as Egypt. This study focuses on Egypt as a major developing economy in the Middle East and North Africa (MENA) region that adopted IFRS. In addition to the significance of the Egyptian economy and population in its part of the world, Egypt has been used as a good representative of the developing countries in studies conducted on different parts of the world including the Arab world (Harabi, 2007), African countries (Nganga et al 2003), and the MENA region (Saidi, 2004). Egypt also represents an area of the world that is traditionally less examined in the international accounting literature. The study focuses on the effect of the independent audit process on compliance with recognition and disclosure requirements of IAS 12 by Egyptian public companies. Income tax accounting may offer the best context in which to examine how local professional development, regulatory, and financial reporting environments in developing countries can affect compliance with the requirements of IFRS. In addition to the complications and personal judgments involved in the income tax accounting topic, the application of income tax accounting is naturally influenced by the local tax code and the regulatory environment that enforces it. …