The development of public accounting transparency in selected Arab countries

Abstract

Points for practitioners

Keywords

Introduction

IPSASB and governmental accounting reform

Reforms to promote governmental financial transparency in Arab countries

Methodology

Results

Level 1 compliance

Level 2 compliance

Conclusion

Footnotes

References

Note

The aim of this article is to analyse the level of public financial information disclosed by certain Arab countries in the Middle East, in view of calls for greater transparency and international trends in this respect. Accordingly, we examined the financial reports published online by the selected countries, contrasting them with the financial statements and contents proposed in the International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants. The results show that the Arab countries analysed present a low level of public financial information. They all present similar degrees of compliance with IPSAS 1 and 2. Nonetheless, we can observe that aid-receiving countries are implementing the policies stipulated in the international recommendations in response to the demands of donors and international agencies. Countries with oil revenues experience less pressure to implement the IPSAS.

The findings of this article may be of interest to public managers in all the selected Arab countries, especially those in the public administrations of the Gulf Cooperation Council countries and to consulting companies in the Gulf region. The analysis made of financial legislation and of the IPSAS 1 and 2 indexes for the selected countries may encourage them to initiate a process of financial reforms.

administrative reforms Arab countries IFAC IPSAS public financial reporting transparency

Traditional government accounting, focused on the budget and mainly aimed at ensuring compliance with legal requirements, has proved inadequate in addressing the new challenges of public governance. In consequence, important reforms have been implemented in various countries (Caba and López, 2007; Nasi and Steccolini, 2008), in order to develop a public accounting system that is more informative and useful for decision making and accountability (Lüder, 1992).

As reported by Ouda (2004) and Broadbent and Guthrie (2008), the main reform carried out in government accounting systems has been the introduction of accrual accounting, which generates more and better information, and thus (implicitly) enhances transparency (Benito et al., 2007; Ouda 2007; Torres, 2004). The accruals principle is considered to be a means of improving the reporting of government activities (Paulsson, 2006), which is why it has been adopted by countries such as Australia, New Zealand and the UK (Saleh, 2007).

The introduction of accrual accounting has been urged, since 2000, by the International Federation of Accountants (IFAC). IFAC has established a number of boards and committees to develop international standards and guidance and to focus on specific sectors of the profession. The International Public Sector Accounting Standards Board (IPSASB) (formerly the Public Sector Committee) was established in May 1996. Thus, the IPSASB of the IFAC published International Public Sector Accounting Standards (IPSAS) calling for high quality public sector accounting information to be provided in year-end accounting reports (Christiaens et al., 2010). In this respect IPSAS 1 and 2 mainly concern the forms and types of year-end accounting reports to be presented.

According to Caba (2001), most research in the field of governmental accounting concerns Anglo-Saxon and European countries. Nevertheless, recent studies have addressed Latin America (Araya Leandro, 2010; Caba and López, 2009; Caba et al., 2009), Malaysia (Rakoto, 2008; Saleh, 2007) and China (Chang et al., 2008), while others have examined the situation in African countries (Godfrey et al., 1995, 1996, 1997; Merrouche et al., 1996). However, to date, there does not appear to have been any such work regarding the Middle East.

This article, therefore, provides an initial analysis of the reforms made in government accounting systems in the Middle East. From studies conducted in other contexts, it seems that developed countries have reformed their government accounting systems, in most cases by introducing accrual accounting and adopting IPSAS as the basis for their accounting regulations (Benito et al., 2007). At the same time, developing countries that are receiving external financial aid are being pressured by international agencies to introduce IPSAS into their accounting systems (Caba and López, 2009; Rakoto, 2008).

We examined the situation of public accounting systems in selected countries in the Middle East, both those enjoying a higher level of economic development and those in a poorer economic situation and in receipt of international financial aid. Specifically, we focus on two groups of Arab countries. Situated in the same geographic region; Islam is the religion of all the countries selected and Arabic is their official language (Hanna, 2006), and so we consider them to share similar sociocultural values. Nevertheless, these countries have different degrees of economic development.

The first group is comprises three of the most developed Arab countries, all three of which are members of the Gulf Cooperation Council (GCC). We chose to study Oman, Bahrain and Kuwait because they all publish year-end public accounting reports, whereas in the other GCC countries (Qatar, Saudi Arabia and United Arab Emirates), although year-end accounting reports are prepared, they are not generally disclosed, being intended for internal end-users within government.¹

The second group comprises countries which, although located in the same region and sharing a similar sociocultural background, are classified as developing economies and receive the highest percentage of Official Development Aid (ODA) of all countries in the region (Werlin, 2005): Palestine, Jordan and Egypt. Other countries, such as Syria or the Lebanon, could have been included, but we preferred to analyse those that received the highest levels of external assistance.

One of our aims in this study was to test the influence of ODA on the transparency of public financial reporting in three ODA-receiving countries (Palestine, Jordan and Egypt) and to compare this transparency with that prevailing in three non-ODA-receiving countries (Bahrain, Oman and Kuwait).

In summary, this study focuses on selected Middle East countries, analysing the changes and legislative reforms made concerning accounting transparency, and their impact on governmental accounting information systems. In order to achieve this objective, we examined the year-end governmental accounting reports published online by each country, to determine whether the reforms made comply with the recommendations of public accounting bodies, especially the IPSASB in its IPSAS 1 and 2.

In conducting this study, we used the methodology developed by Caba and López (2009) in analysing the question of transparency in the countries of the Common Market of the South (MERCOSUR – Argentina, Brazil, Paraguay and Uruguay). These authors created an index to reflect the transparency of published accounting information. This index is based on the IPSAS 1 and 2 recommended minimum information to be presented in final accounts. It has two levels: one, on the financial reports that should be presented by the reporting body, irrespective of their content, and the other, on the content that should be included in each financial report.

The rest of this article is structured as follows: first, we provide an overview of governmental accounting reforms regarding IPSAS, and their relationship with transparency. Second, we then describe recent reforms of accounting laws and procedures in the selected countries, after which the methodology applied is explained. Third, we then present the empirical work performed and the results obtained from our analysis, and finally some conclusions are drawn.

Calls for radical improvements in public sector performance have resulted in a global wave of organizational, managerial and accounting reforms in the public sector (Christiaens and Rommel, 2008). These reforms are aimed at enhancing accounting and financial reporting beyond cash considerations alone; in other words, they concern not just cash flows and balances, but also the question of how money is spent (Brusca and Montesinos, 2009; Prodjoharjono, 2009).

Several countries have adopted financial accounting reforms at one or more levels of the public sector, replacing or transforming their traditional cash accounting methods into systems that support accruals, an accounting basis that is widely used by business-like organizations, with the aim of increasing financial accountability and transparency, and improving the measurement of government sector performance (Stamatiadis, 2009). One of the main considerations of the reforms recommended was to change government accounting systems by the adoption of the accrual basis for accounting, control systems and management, replacing the traditional cash basis (Lapsley, 1999; Nasi and Steccolini, 2008).

The IPSASB recognized two accounting bases other than accruals and cash, namely the modified cash basis and the modified accrual basis (Christiaens et al., 2010). The cash basis of accounting measures financial results for a period as the difference between cash receipts and payments, while the modified cash basis takes into account the unpaid accounts and/or receivables at year end. In the accrual basis, transactions and events are recorded and recognized in the financial statements of the periods to which they relate, while the modified accrual basis system recognizes transactions and other events on an accrual basis, but not certain classes of assets or liabilities. A typical example of this is the expensing of all non-financial assets at the time of purchase (IFAC, 2008; IFAC PSC, 2000).

The main aim of introducing the accrual basis of accounting in the public sector is to achieve a more transparent, effective and informative system, and thus help decision makers obtain better cost control and accountability (Nasi and Steccolini, 2008). According to Christiaens et al. (2010) the trend towards accrual accounting is explained by the need for transparency, efficiency and performance management. Moreover, it helps improve the quality and consistency of the information provided to decision makers (US Government Accounting Office, 2000), and holds managers accountable for matching the cost of resources with the results obtained (Anthony, 2000; Katsikas et al., 2009). For Jones and Pendlebury (1996), the accrual basis of accounting makes it possible to comply with various requirements and offers more than the cash basis in terms of quantity and quality. Therefore, it is not surprising that most developed countries – and especially Anglo-Saxon and European countries – which formerly utilized a cash basis of accounting or a cash budget have now introduced forms of accrual basis accounting in their public sectors as part of an overall public sector reform (Prodjoharjono, 2009).

Since 2000, the IPSAS Board of the IFAC has developed a set of IPSAS to streamline and support these reforms in the area of governmental accounting and to ensure that governmental financial reports include information of sufficient quality to support decision-making by different users (Caba and López, 2009; Christiaens et al., 2010). The need for comparability among government accounting systems underlies a trend towards harmonization through international accounting standards, resulting in the development of IPSAS (Christiaens et al., 2010). Currently, there are 32 IPSAS applicable to accrual basis accounting and one applicable to cash basis accounting. IPSAS are important stimuli for harmonizing financial information in the public sector (Benito et al., 2007) and are designed to facilitate the generation of high quality, internationally comparable government financial reports (Khan and Mayes, 2009).

A preliminary step in any reform in this respect is to investigate the current accounting practices of any given country and to compare them with those applied in other countries (Lüder, 1988). When this is done, it is immediately apparent that differences exist internationally. This may be so for various reasons: the accounting language used; the format of the accounting information; the amount of accounting information presented; the accounting procedures used; the policies applied; and the criteria for verification of accounting information. Such differences are present in varying degrees of intensity among the countries under comparison (Caba, 2001).

The IPSAS of the IPSASB were produced independently and adapted from the International Accounting Standards, with the participation of governments from all over the world, professional accounting bodies and international organizations. They are strongly recommended by the World Bank, the United Nations (UN), the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF) and other multilateral organizations, and so it would seem reasonable to expect most countries to favour their introduction (Brusca and Benito, 2004). Nevertheless, although many countries have carried out reforms in this line, others have yet to do so. Thus, the national governments of Belgium and the Netherlands have not adopted IPSAS, while the local governments of countries such as Germany, Japan, Russia and South Korea are still using the cash basis of accounting (http://www.ifac.org). Moreover, countries in receipt of international aid are more likely to apply IPSAS. These circumstances might reflect the fact that although IPSAS are perceived to be a better set of accounting standards, external pressure is an important factor underlying their practical application.

According to Caba and López (2009), IPSAS encourage governments to present additional information to that typically produced on the basis of the budget, in order to improve transparency. Benito et al. (2007) stated that the adoption of IPSAS would significantly improve the quality of general purpose financial reporting by public sector entities, and that the publication of IPSAS-based accounting information would also increase transparency and thus enhance accountability. This additional information should concern the financial position, performance and cash flows of an entity, all of which are useful to a wide range of users in taking and evaluating decisions about the allocation of resources. Among the IPSAS-related questions addressed by the IPSASB are proposals aimed at improving the content of the financial information included in the year-end report, so that it might provide a better reflection of the financial and asset situation of the bodies that comprise the national public sector. The adoption of these standards by governments would improve both the quality and the comparability of the financial information presented by public sector agencies worldwide (Caba and López, 2009).

The nature and development of a governmental accounting information system in a country is influenced by its history, culture, economy, laws and legal system (Lüder, 1992). In this context, an objective study of governmental accounting transparency needs first of all an overview of the most important environmental variables in order to analyse and evaluate the governmental accounting system developed in this environment.

As noted above, in this study we analyse a number of Arab countries in the same geographical area that share socio-cultural characteristics, but present important differences in their level of economic development. Palestine, Jordan and Egypt at present have a low level of economic development and are recipients of international financial aid (Table 1). The GCC countries, on the other hand, have enjoyed strong economic growth in the past five decades, and are currently the richest in the Middle East (Table 2). These countries are highly dependent on oil revenues (Table 2), and a large number of foreign workers are employed in this industry (Hanna, 2006).

Table 1.

Socio-economic indicators for the ODA countries

	EG	JO	PS	Total
Human development index (2011)	0.644	0.698	0.641
Human development index ranking (2011)	113	95	114
GNI per capita in purchasing power parity (2011)	$5,269	$5,300	$2,656
GDP per capita at current prices (2009)	$2,731	$4,027	–
Population (2011)	81,121,077	6,047,000	3,905,364	91,073,441
GDP (2010) ($ millions)	$218,912	$27,454	$6,641	$253,007
ODA received in 2010 ($ millions)	$2,519.43	$955.41	$593.61	$4,068.45

Note: EG, Egypt; JO, Jordan; PS, Palestine.

–: No data.

Source: The authors, based on Development Assistance Committee, World Bank and Human development report 2011, UNDP.

Table 2.

GCC Socio-economic indicators, foreign working power and revenue

	BH	KW	OM	QA	SA	UAE	Total
Human development index (2011)	0.806	0.760	0.705	0.831	0.770	0,846
Human development index ranking (2011)	42	63	89	37	56	30
GNI per capita in purchasing power parity (2011)	$28,169	$47,926	$22,841	$107,721	$23,274	$59,993
GDP per capita at current prices (2009)	$16,394	$31,416	$14,780	$61,106	$13,978	$32,968
Population (2009)
Citizens	558,011	1,025,780	2,017,559	–	18,543,246	933,381	23,077,977
Foreigners	620,404	1,557,240	1,156,358	–	6,830,266	7,266,615	17,430,883
Total	1,178,415	2,583,020	3,173,917	1,638,626	25,373,512	8,199,996	42,147,486
% of foreigners	52.60%	60.30%	36.40%	–	26.90%	88.60%	41.40%
Employees in both public and private sectors (2009)
Citizens	117,682	231,272	294,937	70,873	3,837,968	223,000	4,775,732
Foreigners	351,705	1,217,867	897,161	1,191,390	4,310,024	2,914,000	10,882,147
Total	469,387	1,449,139	1,192,098	1,262,263	8,147,992	3,137,000	15,657,879
% of foreigners	74.90%	84.00%	75.30%	94.40%	52.90%	92.90%	69.50%
Revenue (2009)
Oil and gas revenue ($ millions)	$3,771	$60,359	$11,679	$19,078	$115,845	$47,397	$258,129
Total public revenue ($ millions)	$4,543	$64,359	$17,551	$42,493	$135,948	$64,093	$328,987
% of oil and gas revenue	83.00%	93.80%	66.50%	44.90%	85.20%	74.00%	78.50%
GDP (2009)
Oil and gas contribution ($ millions)	$4,595.20	$49,466	$19,244.50	$45,419	$161,382.30	$78,579.40	$358,686.40
GDP ($ millions)	$19,318.70	$109,481.80	$46,865.30	$98,313.20	$372,633.50	$270,334.40	$916,946.90
% of oil and gas to GDP	23.80%	45.20%	41.10%	46.20%	43.30%	29.00%	39.10%

Notes: BH, Bahrain; KW, Kuwait; OM, Oman; QA, Qatar; SA, Saudi Arabia; UAE, United Arab Emirates.

–:No data.

Source: The authors, based on GCC Statistical Bulletin 2011, Human development report 2011, UNDP.

As observed by Bräutigam et al. (2008), the public accounts structure in these Arab countries is influenced by their dependence on oil revenues, in some cases, or on international financial aid, in others. According to these authors, in the first of these cases, tax payments by the oil industry, and especially by foreign companies, constitute an important proportion of the national income, and this situation tends to be associated with a lack of accountability. Whereas developing countries are pressured to implement aid donors’ conditions, with this aid often substituting for tax revenues (Bräutigam et al., 2008).

In this economic context, most of the countries in the region have implemented reforms in their public financial information systems (Table 3). The GCC countries have developed considerably in diverse aspects over the last three decades; laws have been promulgated to reform their politics, economies and financial systems; some have implemented reforms in their governmental and ministerial systems and adapted governmental entities to changing socioeconomic conditions. The ODA recipients have also developed their governmental accounting systems, and have complied with the requirements of international agencies; as a result, their financial information has gained in transparency, efficiency and effectiveness.

Table 3.

Financial legislation of selected Arab countries

Country	legislation number	Legislation name	Description
BH	16/2002	Supreme audit law	Establishing the Supreme Audit Commission after amended the Ministerial Order 5/1998 that established standards for governmental accounting and control
BH	39/2002	General budget law	Regulated budgeting and final accounts procedures, and was subsequently amended by Law No. 3/2007
EG	53/1973	State budget law	Organization of the State budget; some articles of this law were amended by Laws No. 87/2005 and 109/2008
EG	127/1981	Governmental accounting law	Established the accounting principles and procedures. Some articles were later modified by Law No. 35/2009
JO	39/1962	State budget law	This law addressed State budget procedures.
JO	3/1994	Financial law	Organized accounting principles and practices
JO	28/1952	State audit bureau law	Establishing State audit bureau law, amended by Laws Nos 31/1987, 3/2002 and 18/2007
KW	31/1978	State budget and final accounts law	Established rules for preparing the State budget and final accounts. Some articles were amended by Royal Decrees 18/2000 and 27/2000
KW	30/1964	Supreme audit law	Establishing the Supreme audit law, this law is still valid today
OM	55/2000	State audit law	Establishing the State Audit Institution, superseding Royal Decree 129/1991. This law is interpreted in the 2009 manual
OM	47/1998	Financial law	Determining accounting procedures and practices, the Ministry has issued various manuals, the latest in 2009 under Ministerial Order 118/2008
PS	17/1995	Supreme audit law	Establishing the Supreme audit law Some articles have been amended by 15/2004 on financial and administrative control law
PS	6/1998	State budget and financial affairs law	Regulating public budget and financial affairs

Notes: BH, Bahrain; KW, Kuwait; OM, Oman; EG, Egypt; JO, Jordan; PS, Palestine.

Source: The authors.

Of the reforms undertaken in many countries, we highlight those carried out by Kuwait, Jordan and Palestine, which have had a special impact on their public financial information systems. Kuwait and Jordan have recently initiated projects to modernize their governmental accounting systems. In 2004, the Kuwait Ministry of Finance (MOF) consulted IMF experts on the modernization and development of the governmental accounting information system, and in 2008, implementation began of a project to prepare budget and accounting information in accordance with IPSAS.

The Jordanian MOF recently embarked on an important reform programme to increase efficiency in the planning, preparation and execution of the general budget. This programme includes a rationalization of the budget preparation procedure aimed at achieving a result-oriented budget with clear sectorial priorities, together with greater transparency and enhanced accountability of ministries and spending units.

From 1994 to 1998, the Palestinian National Authority governmental accounting system was regulated by various resolutions, instructions and financial regulations issued by the MOF, and was not subject to specific financial legislation until 1998, when the first law regulating the public budget and financial affairs was issued.

In this study, we set out to verify the level of compliance between the information provided in the annual public financial reports of the countries studied and the requirements set out in IPSAS 1 and 2, with respect to the financial information that should be presented in the year-end financial statements for the public sector.

At present, information and communications technologies, and especially the Internet, are the main tool for information disclosure and communication (Welp, 2008). As observed by Shi (2007), the Internet is fast, flexible and accessible to all users, both within a country and abroad. It is logical, therefore, that the Internet has been widely adopted in public sector reforms in recent years (Lau, 2005). The implementation of new technologies by governments contributes to increasing transparency and accountability in the use of public resources, and makes it easier for citizens to assess governmental performance (Jho, 2005; United Nations, 2003).

Despite the evident differences between information published in paper format and that made available on the Internet, in response to the widespread demand for greater transparency, public accounting information is becoming increasingly accessible online. As mentioned above, in relation to the GCC countries, those which publish public financial information utilize the Internet as the medium of choice, while those which do not disclose such information on the Internet do not do so via other means either. Therefore, to achieve the goals of this study, we examined the financial statements published on the websites of the finance ministries of the countries analysed.

As our fundamental aim was to determine whether the public financial information disclosed by these Arab countries is presented in accordance with IPSAS 1 and 2 recommendations, we used the methodology developed by Caba and López (2009), applying an index focused on the minimum requisites for the information to be provided in the annual financial public report, as recommended by the IPSASB. This index has two levels:

Level 1: distinguishes countries in terms of the financial statements that should be presented by the reporting body, according to IPSAS 1, irrespective of their content. This first level stipulates five items that must be presented: the statement of financial position (a balance sheet or statement of assets and liabilities), the statement of financial performance, the statement of changes in net assets/equity, the cash flow statement and finally, the statement of accounting policies and notes to the financial statements (see Table 4).

Level 2: concentrates on the content that should be published in each of the financial reports presented, with the information to be included being given on separate lines. For the second level, 76 items were selected, distributed as shown in Table 5 and the Appendix.

Table 4.

First level degree of compliance with the IPSAS proposed by IFAC

Notes: BH, Bahrain; KW, Kuwait; OM, Oman; EG, Egypt; JO, Jordan; PS, Palestine.

Source: The authors.

Table 5.

Details of items of level 2

		Items	%
1	BALANCE SHEET ITEMS: 1.1. Non-financial fixed assets; 1.2. Tangible assets; 1.3. Intangible assets; 1.4. Investments; 1.5. Short and long-term financial assets disclosed separately; 1.6. Receivables; 1.7. Short and long-term receivables disclosed separately; 1.8. Cash and cash equivalents; 1.9. Prepayments; 1.10. Payables; 1.11. Short and long-term payables disclosed separately; 1.12. Borrowing; 1.13. Short and long-term borrowings disclosed separately; 1.14. Current portion of borrowing disclosed separately; 1.15. Provisions; 1.16. Net asset/equity; 1.17. Current and non-current assets and current and non-current liabilities as a separate classification or in order of liquidity.	17	22.3
2	OPERATING STATEMENT ITEMS: 2.1. Revenue from operating activities; 2.2. Surplus or deficit from operating activities; 2.3. Finance costs; 2.4. Surplus or deficit from ordinary activities; 2.5. Extraordinary items; 2.6. Net surplus or deficit for the period; 2.7. Expenses are aggregated according to their nature, programme or purpose.	7	9.2
3	CASH FLOW ITEMS: 3.1. Net use of cash payments arising from operating activities disclosed separately; 3.2. Major classes of gross cash receipts and gross from operating activities disclosed separately; 3.3. Use of net cash payments arising from investing activities disclosed separately; 3.4. Major classes of gross cash receipts and gross from investing activities disclosed separately; 3.5. Net use of cash payments arising from financing activities disclosed separately; 3.6. Major classes of gross cash receipts and gross from financing activities disclosed separately; 3.7. Cash flows associated with extraordinary items disclosed separately; 3.8. Cash flows associated with interest received and paid as operating, investing or financing activities disclosed separately; 3.9. Reconciliation of the amounts in the cash flow statement with the equivalent items reported in the statement of financial position disclosed.	9	11.8
4	CHANGES IN NET ASSETS: 4.1. Net surplus or deficit for the period; 4.2. Each item of revenue and expense, recognized directly in net asset/equity, and total of these items; 4.3. Contributions by owners and distribution to owners, in their capacity as owners; 4.4. Cumulative effect of changes in accounting policy and the correction of fundamental errors; 4.5. The balance of accumulated surpluses or deficits at the beginning of the period and at the reporting date, and movements for the period; 4.6. Reconciliation between the earning amount of each component of net asset/equity at the beginning and end of the period.	6	5.2
5	NOTES TO THE FINANCIAL STATEMENTS		48.6
	5.1 Balance sheet backup information.	17
	5.2 Operating account backup information.	2
	5.3 General financial balance sheet backup information.	19
	TOTAL	76	100%

Source: The authors.

The total number of IPSAS requisites for public financial information disclosure in a country’s annual public accounts is obtained by summing the scores for each of the IPSAS recommended items listed in Table 5, a total of 76 items over the five components of basic financial information to be presented. Among the alternatives presented for the scoring of these items, we opted for a dichotomous procedure by which a score of 1 is assigned if the country’s public reporting includes information consistent with IPSAS recommended items and 0 if it does not.

Once all the items had been scored, an index was created to measure the total level of compliance (TC) with the information requisites for annual public accounts, for each country, in accordance with IPSAS recommendations. In this index, an identical valuation was assigned to each of the components of financial statements, that is, 20% for each of the five basic statements. The partial compliance (PC) percentage for each financial statement was obtained by dividing the total item-points obtained (Po) by the maximum number of items possible (m), thus: PCb = Po/m*100 for the Balance sheet, PCp = Po/m*100 for the operating statement, PCc = Po/m*100 for the cash flow statement, PCn = Po/m*100 for the statement of changes in net assets and PCs = Po/m*100 for the notes to the financial statements. Therefore, in order to generate the total level of compliance in Level 2 (TC), we combined all the partial results obtained from each component of the five financial statements and then divided by the total number of financial statements as follows:

TC = PCb + PCp + PCc + PCn + PCs / 5

Partial indexes for each of the following statements were defined for Level 1 compliance: TCb for the balance sheet; TCp for the operating statement; TCc for the cash flow; TCn for the statement of changes in net assets; TCs for the notes to the financial statements.

As remarked above, in all of the countries examined, laws had been modified to improve efficiency, transparency and accountability. Such changes include financial laws and decrees, ministerial orders, new accounting manuals and plans for accounting reforms. In particular, Palestine and Kuwait stated their intention to revise their public financial information systems in line with the IPSAS recommendations.

To analyse what happens in practice, we compared the financial information provided in three consecutive years (2007, 2008 and 2009) in the year-end financial report published by each of the selected countries, examining whether these reports were compiled in accordance with the IPSASB recommendations listed in the previous section.

The first results of our analysis show that the year-end financial reports for the selected countries do not include all the financial statements proposed in IPSAS 1 (see Table 4).

We began our analysis by examining compliance with IPSAS Level 1 recommendations by Bahrain, Oman and Kuwait, regarding the year-end financial report. These countries each complied with just two of the five IPSAS 1 recommendations (see Table 4). The ODA recipient countries all presented the same level of compliance in Level 1. Furthermore, none of the six countries published a balance sheet, statement of changes in net asset/equity or statement of cash flow. In their year-end reports, only a statement of financial performance, accounting practices and notes to the financial statement were provided.

In the light of the Level 1 compliance findings, we analysed the results for Level 2 (Table 6), taking into account that some of the data stipulated in the first level, such as balance sheet, statement of changes in net asset/equity and statement of cash flow did not exist. Thus, for the second level each country lost 32 of the 76 items (17 items referring to the balance sheet, 9 for the cash flow statement and 6 for changes in net assets). Therefore, the proposed index in our methodology for their assessment Level 2 decreases in 42%. It is expected that, when these countries apply IPSAS, involving the development of accrual basis, these countries will elaborate and disclosure financial statements that now are not available, which would imply an increase in the value of the proposed index.

Table 6.

Second level degree of compliance with the IPSAS proposed by IFAC

	BH		EG		JO		KW		OM		PS
	Po	TC	Po	TC	Po	TC	Po	TC	Po	TC	Po	TC
2. Compliance with items to be presented on the face of the statement of financial performance (mp = 7)	4	57%	5	71%	5	71%	3	43%	4	57%	4	57%
5. Compliance with information presented in the main sections or in the notes to the financial statements (ms = 37)	10	27%	5	14%	7	19%	17	46%	8	22%	9	24%
5.A Supporting information for the items included in the balance sheet	1		0		1		7		0		1
5.B Supporting information for the items included in the statement of financial performance	2		2		2		2		2		2
5.C. Supporting information to the financial statement in general	7		3		4		8		6		6
Total second-level compliance (m = 76)	14	18%	10	13%	12	16%	20	26%	12	16%	13	17%

Notes: BH, Bahrain; KW, Kuwait; OM, Oman; EG, Egypt; JO, Jordan; PS, Palestine; Po, points obtained; TC, total compliance; m, maximum number of items that could be obtained in all financial statement.

Source: The authors.

With respect to the items presented in the statement of financial performance, Bahrain, Oman and Kuwait presented broadly the same items for financial performance (see the Appendix). None of these countries considered it necessary to include elements showing in a clearly differentiated way the deficit or surplus produced, whether by operating activities, or as extraordinary items. All three countries report revenue from operating activities, and the net surplus or deficit for the period, with expenses being aggregated according to their nature, programme or purpose. Financial costs are not published by Kuwait, possibly because this country does not have any public deficit. As shown in Table 6, the total Level 2 compliance with respect to the operating statement is 57% for Bahrain and Oman and 43% for Kuwait.

Comparison of these results with those for ODA recipients, as shown in Table 6 and the Appendix, shows that Palestine has the same level of compliance as the GCC countries, while Jordan and Egypt present one more item, namely the surplus or deficit from operating activities. Thus, the total level of compliance for the operating statement for these countries is 71%.

As stated above, the cash flow statement is absent from the year-end reports of the countries studied, and so their compliance with IPSAS 2 for the cash flow statement is 0%. The same is true for changes in net assets; none of these countries presents this information.

Finally, let us mention the information presented in the main section or in the notes to the financial statements, starting with Section 5.A in Table 6 (‘Supporting information for the items included in the balance sheet’). Only Kuwait presents this supporting information; however, it does not present a balance sheet, but only data in the form of notes and separate tables. Nevertheless, Kuwait intends to adapt its system to IPSAS and has recently begun preparations in this respect.

In Section 5.B (‘Supporting information for the items included in the statement of financial performance’), all six countries present notes on the sub-classification of total revenue and analysis of expenses, using a classification based on either the nature of expenses or on their function within the entity. Accordingly, they comply 100% with this section.

Finally, with respect to Section 5.C (‘Supporting information to the financial statement in general’), we found that the three GCC countries present similar numbers of items (Bahrain 7, Oman 6 and Kuwait 8), and so, in every case relatively little information is provided (the maximum possible is 19). Turning to the ODA receivers, we find that Jordan and Egypt present less information than the GCC countries (Jordan 4, Egypt 6 and Palestine 6), while Palestine presents a similar degree of information to that provided by Oman and Bahrain. In every case, thus, the level is low.

Regarding the total for Section 5 (37 items), Kuwait is the most informative, presenting 17, that is, 46% compliance in this section. Bahrain presented 10 items (27%), Palestine 9 (24%), Oman 8 (22%), Jordan 7 (19%) and Egypt 5 (14%).

To end our analysis, Table 6 shows that the overall Level 2 compliance with the IPSAS by the GCC countries is weak; the most informative system, that of Kuwait, only represents 26% compliance with IPSAS, while Bahrain achieves 18%, Oman and Jordan 16%, Palestine 17% and Egypt 13%. In this sense, the progressive implementation of IPSAS would improve disclosure levels of the countries, and therefore compliance with the standards set out in IPSAS 2, gradually increasing the value obtained in the index proposed.

In summary, none of the countries examined presents the financial statements stipulated in IPSAS 1, and in all six countries, only the statement of financial performance and accounting practices and notes to the financial statement are published. The GCC countries present similar information on financial performance, but they do not provide elements showing in a clearly differentiated way the deficit or surplus produced. All three countries provide information on the revenues from operating activities and the deficit or net surplus for the period, aggregating expenses according to their nature or purpose. Among the ODA-receiving countries, Palestine presents the same level of information as the GCC countries, while Jordan and Egypt also present information on the deficit or surplus derived from operating activities.

As for the notes to the financial statements: (1) only Kuwait presents further sub-classifications of line items included in the balance sheet, even though it does not present a real balance sheet (data are presented in the form of notes and separate tables); (2) all six countries present information on the sub-classification of total revenues and analysis of expenses, using a classification based on the nature of expenses or on their function.

The purpose of this study is to measure the level of financial information currently provided by a group of Middle East countries in their year-end public reports and to compare it with the IPSASB recommendations of the IFAC for public sector financial statements (IPSAS 1 and 2).

In this study, we compare the public financial information disclosed by a group of Middle East Arab countries. These all belong to a single geographic area, and have Arabic as their official language and Islam as their religion; therefore, they can be assumed to share certain sociocultural characteristics. Nevertheless, the countries analysed constitute two distinct groups in terms of their economic development: on the one hand, the GCC countries, the richest in the zone (although only three, Oman, Bahrain and Kuwait, which publish public financial information, are analysed); and on the other, the less developed countries, of which we analysed those receiving most international aid – Egypt, Jordan and Palestine.

Taking into account the IPSAS 1 and 2 requirements, we found that, in spite of the important administrative reforms made regarding in financial laws that have been made in recent decades, there is still a low level of development in the financial information presented, for all the countries studied.

While we are aware that the choice of countries for analysis is influenced by the availability of information, we conclude that these countries present similar degrees of transparency and compliance with IPSAS 1 and 2 and no significant differences were observed, in this respect, between the ODA recipients and non recipients. At present, all publish similar levels of information, although the ODA receivers tend to publish more details in the main body of the statement of financial performance, and less information in the accounting policies and notes.

Certain points are apparent from the results obtained. The countries studied present a broadly similar level of public financial reporting, contrary to the findings of previous studies, according to which a higher level of development was associated with a higher level of information presentation. Various explanations for this might be suggested. First, in the case of the GCC countries, their level of economic development is directly linked to oil revenues. Thus there is less need to obtain tax revenues and citizens are less motivated to understand and monitor public finances.

Second, the similarity of information disclosure among the countries making up the two groups could be accounted for, on the one hand, by the fact that the aid-receiving countries are obliged to respond to the demands of donors and international agencies, and therefore have begun to implement the policies stipulated in the international recommendations; and on the other, by the fact that the GCC countries – whose financial needs are met by oil revenues – are less subject to external pressure. This fact, together with the absence of internal pressure, referred to above, would explain why three of the six GCC countries (Qatar, Saudi Arabia and United Arab Emirates) do not disclose such information and a further two (Bahrain and Oman) do so only partially. Only Kuwait seems to be making real efforts to carry out the progressive implementation of the IPSAS; in 2008, it began a four-year plan to adapt its systems to meet the IPSASB recommendations.

Ultimately, in all these countries, there is a need to progress further in the presentation of financial information, as current levels are far below international standards, possibly due to the very different social, cultural and political context. These differences, thus, might be accounted for by the limited existence and background of public institutions that control public finances and inform parliaments, together with the absence of demand in this respect from the population at large.

Khalil Abushamsieh, PhD, is at the University of Grenada. His research interests lie in public sector accounting and governmental accounting system reforms. He has published in Middle Eastern Studies and the Journal of Accounting, Business and Management.

Antonio Manuel López-Hernández, PhD, is Professor of Financial Economics and Accounting at the University of Granada, Spain. His research focuses on the management, information and control systems of organizations. He has published in journals such as Government Information Quarterly, International Review of Administrative Sciences, American Review of Public Administration, International Public Management Journal, Online Information Review, Public Administration and Development, Public Money & Management, Public Management Review and Public Administration.

David Ortiz-Rodríguez, PhD, is Associate Professor in the Department of Accounting and Finance at the University of Granada, Spain. He teaches public sector management and control. His research interests are focused on governmental accounting, public government management and sustainability reporting in public entities. He has published in journals such as Public Management Review, International Public Management Journal, Middle Eastern Studies and Public Administration and Development.

Balance sheet

Statement of financial performance/operative statement

Statement of changes in net assets/equity

Statement of cash flow

Accounting practices and financial statement notes

First-level degree of coincidence

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