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Purpose - The main purpose of this research is to develop a mechanism wherein the enforcement and compliance of the accounting standards can be establish in Pakistan. This research will presents the regulatory framework, enforcement of accounting standards, challenges faced in the process of converging to IFRS, capacity-building issues and lessons learned in the process

Design/methodology/approach - The methodology of this study is based upon a critical approach to accounting research. The study uses a variety of archival data and articals in order to evaluate the due process of accounting standards setting in Pakistan. The Institute of Chartered Accountants of Pakistan (ICAP) is the accounting standards setting body in Pakistan .And it is working closely with the Securities & Exchange Commission of Pakistan (SECP), which is the supervisory body of corporate sector and stock exchanges. The institute of charted accountants of Pakistan (ICAP) is also working closely with the State Bank of Pakistan, the central bank which regulates banks and development finance institutions.

Findings - In recent years, Pakistan has made a considerable progress in adoption and compliance with IFRS for listed companies through joint efforts and close cooperation of the accounting profession and regulatory bodies.

Pakistan's adoption of International Financial Reporting Standards (IFRS) as national standards in the quality of financial reporting has not led to enrichment. The research will conclude that lack of investor protection (e.g., minority rights protection, insider-trading protection), judicial inefficiencies, and weak enforcement mechanisms are more critical than are cultural factors to explaining the state of financial reporting in Pakistan.

Scope/application/originality - The main scope of this research is to draw lessons learned from the understanding of Pakistan in converging with IFRS and to discuss the findings with member States, with a view to facilitating sharing of experience among countries that are either implementing IFRS or that intend to do so in the coming years.



1.1 Background

The recent advances in the field of financial and information technology have generated the ideas of global business strategy and alliances into the center stage. The understanding of outsiders regarding how much a business with-in a particular country can determine the difference between a successful or a failed result - And if the country is an emerging economy like as Pakistan. One fundamental part of this understanding is to determine that in what context a country's business entities evaluate, summarize, and finally report their economic communication to their stakeholders. This leads us to the primary purpose of this research work, which is to observe the origins, growth, development, and the current state of accounting practices in Pakistan.

The involvement of our research work to the literature on process of accounting standards setting in a country lies in Pakistan's unique research setting. Pakistan is an Islamic Republic country and located in a region that has great economic potential for investors. Since 1985 it has been followed International Accounting Standards (IAS) which are now known as International Financial Reporting Standards (IFRS).

A first step toward the institutional development of the profession, the Practicing accountants, which is later on called the Registered Accountants, make a private body that is known as the Pakistan Institute of Accountants (PIA) to look after their own interests and to deals the accounting professional issues with the government. Soon after, a major development in the accounting profession was the formation of the Institute of Chartered Accountants of Pakistan (ICAP) in 1961. This was as the result of both continual pressure from the Pakistan Institute of Accountants and a realization by the government. The other major development in structure of accounting profession that was followed quickly is the establishment of the Institute of Cost and Management Accountants of Pakistan (ICMAP) in 1966 to regulate the profession of cost and management accountants.

The Securities and Exchange Authority, a semi self-governing body established by the government in 1971, developed certain regulations in order to improve the financial reporting practices in the country. Such regulations were available in 1971 and became effective in 1972. Afterward on the establishment of The International Accounting Standard Committee (IASC), Pakistan became its member in 1974. Since Pakistan never had its own national accounting standard, Therefore the Institute of Chartered Accountants of Pakistan (ICAP) encouraged its members to suggest their business clients to prepare their financial statements in compliance with the International Financial Reporting Standards (IFRS). Later on, the Companies Ordinance 1984, Section No. 234 made compulsory for listed companies to adopt all those IFRS in there businesses that have been notified by Corporate Law Authority on the recommendation of ICAP. The unlisted companies were still not required to comply with the requirements of IAS which are now also known as IFRS.

Financial statements of the public or private listed companies were more improved in 1990s with a number of new international accounting standards issued by the IASC (now known as the International Accounting Standards Board IASB). Most of these accounting standards were adopted by the SECP (Securities and Exchange Commission of Pakistan) along with many old standards that were not adopted previously on the recommendation of ICAP. Later on another major development in the financial reporting system was made as a result of issuance of the Code of Corporate Governance (CCG) on March 28, 2002.

In 2005 World Bank published a report on the assessment of Pakistani accounting and auditing practices on the Observance of Standards and Codes (ROSC) and the World Bank notes that "Pakistan has made a consequence progress in closing with the gap between local requirements for financial reporting and international standards by adopting International Financial Reporting Standards (IFRSs). On 18-19 April 2006, the South Asian Federation of Accountants (SAFA) sponsored the First South Asian Accounting Summit in Karachi, Pakistan. At this summit, representatives of the ICAP presented an update on the adoption of IFRSs in Pakistan to speakers of the IASB. According to the ICAP, the International Accounting Standards (IAS) would be applicable in accordance with the three tiers of entities identified as (1) tier one companies comprising public interest entities (PIE) must comply with IFRSs by 2009; (2) Medium-Sized Entities (MSE) are requires to hold fast with the Accounting and Financial Reporting Standard for Medium Size Enterprises developed by the ICAP; and (3) Small-Sized Entities (SSE) must comply with IFRS for Small Size Enterprises.

On November 2007 presentation by Mr. Asad Ali Shah of the Institute of Chartered Accountants of Pakistan (ICAP) indicates that over the last twenty years, in an ongoing effort to converge with IFRSs, Pakistan has been adopting international accounting standards developed by the International Accounting and Standards Board (IASB). And Pakistani financial reporting enforcement authorities have been making continuous efforts for the full adoption of IFRSs.

1.2 Objective of the study

In the seventies, several attempts were made in order to harmonize the international accounting practices throughout the world. Harmonization of the accounting practices is a process by which the differences in accounting practices can be reduce among the different countries of the world. In other words, it is a process which increased the compatibility of the financial reporting practices. The case of harmonization of the accounting principles and practices on the world level is stronger today than the past history. The investor who wants to buy the shares of another country wants harmonized financial reports in order to analyze them in their decision making on issues of investment policies.

There are many multinational companies which are listed in different stock exchanges and required listing requirements of these stock exchanges. There are many international organizations which are trying to reduce the accounting standards differences among the different countries and working to eliminate all the unnecessary accounting variations. The International Accounting Standards Committee (IASC) developed in 1973 with a purpose to provide such a "single set of high quality, understandable and enforceable global accounting standards". After criticization on its early standards, the IASC considerably decreased the number of accounting standards in its Improvements Project from 1987 to 1995 and further sets its standards afterwards in the process of looking for approval of the International Organization of Securities Commissions (IOSCO).

The main purpose for the use of such International Accounting Standards (IAS,s) is that a single set of standards ensures similar transactions are performed the same by the companies in all over the world and are resulting in globally comparable financial statements. In an emerging economy like Pakistan these Accounting standards have an important role in ordered to perform the financial reporting practices in listed companies. Like other developing countries Pakistan is also compliance with these International Financial Reporting Standards (IFRS).

1.3 Research Question:-

The research questions of this thesis are the following,

1. What is the due process of accounting standards setting in Pakistan?


2. What is the mechanism of compliance with International Financial Reporting Standards (IFRS) in Pakistan?

1.4 Research Process:-

The research process is a set of activities in a form of a simple and effective strategy for finding information for a research paper and documenting the sources you find that we have studied in the Business research methods. Depending on the nature my topic and Sources I follow the following research process in my research.

1. Broad problem area and understanding of the topic:-

I state my topic as a question mark. For example, if I want to know that what process of accounting standards setting in Pakistan is, then I might pose the question that is,

2. Preliminary data collection

Then I proceed with my topic to collect the preliminary data related to my area of problem.

3. Problem definition

The third step of research process is problem definition. As concern to the topic of this thesis the statement of problem is that in what context the standards setting bodies of Pakistan are enforces the international accounting standards.

4. Data collection

By using internet search engines and libraries sand research articles to gather information required for my research work.

5. Analysis and interpretation of Data

Then I will analyze the data collected in previous step and then interpret in the good possible manner and come out with the reasonable output.

6. Presentation of the report

At the end I will present my finding in the best possible way in from of a report and present it to the mentor or advisor.

1.5 Limitations of the study

The results presented in this research work are subject to both methodological and data limitations. The comparability key for measuring the accounting harmonization produces has some methodological weaknesses. This research will present only the year wise and decade wise relevant to the listed companies that comply with International Financial Reporting Standards (IFRS) in Pakistan, Is the possible inclusion of short-term timing differences which reverse the following years.

1.6 Research Methodology

This research work used the data collection from the accounting articles related to the subject problem which is "the due process of accounting standards setting in Pakistan". Another source used is direct information from the members of the accounting standards setting bodies in Pakistan like ICAP, ICMA and PIPFA (Pakistan Institute of Public Finance Accountants). The research has used the longitudinal study approach for data collection and qualitative observation mode. In this research the role of accounting standards setting bodies for compliance with international financial reporting standards in Pakistan is discussed in greater detail. Thus an opportunity for a critical study of accounting standards in Pakistan is identified.


2. Literature Review

2.1 Accounting Background

In the earliest times stones were used in the Middle East for the accounting purposes. Soon after in Ancient Sumeria Clay tablets used to create permanent records and document wealth. In 1494 Luca Pacioli writes a paper on double entry bookkeeping records. Then comes the period of Columbus, in this period the accountant's travels with expedition to record the expected discoveries of gold & spices. After that in industries revolutions cost accounting is used to set margins and ensure profits. In 1887 organization of accounts formed the processor of the AICPA. And then, in 1897 standard test for accountancy were created. In 1930's accounting industry establishes Generally Accepted Accounting Principles (GAAP), and seeks to formalize the consistency, transparency and trust for accounting. And the U.S legislature gives the responsibility for auditing public companies to accounting professions.

Soon after, in mid 19th century cooper brothers establish an accounting business in

Britain (now known as United Kingdom). In early 1970's the Federal government

Of USA set up FASB (Financial Accounting Standards Board) to oversee accountants. And in late 1970's Federal Trade Commission (FTC) seeks to lift restrictions on advertising. In 1980's Globalization and deregulation sees companies turning toward more complex and riskier forms of financing away from traditional bank loans. And in late 1980's savings and loan failures comes.

In 1990's consulting divisions start by big five accounting firms and many companies start outsourcing their internal auditing to the big accounting firms - generally the same firm used as auditors. In 2000-2002 Collapse of large corporations (ENRON, WorldCom) involved with complex leverage schemes or accounting irregularities comes in business world.

2.2 What is International Accounting Standard (IAS)/IFRS?

What is IAS/IFRS? The term International Financial Reporting Standards (IFRSs) has two concepts narrow and broad. In narrow sense IFRSs refers to the new numbered series of pronouncements that the IASB issues as distinct from the International Accounting Standards (IASs) series issued by its predecessor. And in more broadly sense IFRSs refers to IASB pronouncements including standards and interpretations approved by the IASB and IASs interpretations approved by the precursor International Accounting Standards Committee. The International Accounting Standard Committee (IASC) founded in 1973 has spent lot of its efforts for developing uniformity in accounting principles and maintain the consistency of accounting practices by business and other organizations around the world. In 2001 IASC was replaced by International Accounting Standards Board (IASB), which is a private sector independent professional accounting body. The IASB establishes and approves International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) and continues its operations and efforts to improve and harmonize the financial reporting practices in all over the world.

Financial statements are prepared and presented by many entities for various purposes to their readers. Despite the similarity of financial statements in different countries around the world the differences in presentation of financial statement is still common. This is due to the differences in social, economic and legal circumstances in these countries and different purposes for the need of different users of financial statements when they set their national requirements. These different circumstances have led to the various uses of the financial statements, for example equity, income, asset, liabilities and expenses. They have also resulted in the use of different procedures for the recognition of different items in the financial statements and in a first choice for various bases of measurement of financial statements.

2.3 Need for International Accounting Standards (IASs)

There is an obvious need to resolve the differences and complexity in accounting and financial accounting practices among various countries around the world. Chief executive officer (CEO) and chief financial officer in multinational enterprises (MNEs) conduct businesses in a global business environment of the world. These executives officer faces daily varying rules governing accounting with in the countries in which their businesses operate. A uniform way of maintaining accounting practices, financial information and reporting requirements would resolve many problems which currently these countries are facing.

Multinational enterprises (MNEs) around the world are trying to expand their capitals and businesses in foreign countries. However, in order to raise capital in foreign countries markets, the MNEs financial statements must be understandable to the foreign countries investors. The one solution of this problem is that, to prepare more than one set of financial statements by using currency, langue and accounting rules of those countries. Yet, the cost of such solution could be prohibitively high. But the more effective solution of such problems is that to create and used commonly acceptable financial reporting standards in all around world. Indeed, the "linkage of worldwide capital markets is one of the driving forces behind the movement toward a single set of accounting rules" (Wyatt & Yospe, 1993).

2.4 The Benefits of International Accounting Standards

In this current global world scenario multinational enterprises (MNEs) and global firms have desire for an international set of accounting standards. A study conducted by Barniv & Fetyko (1997) indicates that there is an increase in demand for harmonization by global business entities, practitioners, and financial statement users. Many large and multinational businesses have already closed their own accounting principles and to follow up the international accounting standards (IAS) even though they are not yet widely acceptable around the world. Bayer AG stated that IAS "provides investors and the financial world with a reliable basis for evaluating our company and its performance" (Pacter, 1998). As the accountability becomes globally more significant, the globalization of accounting standards becomes more common.