Special Issues, December 2014 THE INSTITUTIONAL

Special Issues, December 2014

THE INSTITUTIONAL ENVIRONMENT OFACCOUNTING PROFESSION IN ASIA

Prem W.S. Yapa

ISSN 2087-4499

Asia Pacific Journal of Accounting and Finance Special Issues: “The Accounting Profession towards ASEAN Economic Community“

THE INSTITUTIONAL ENVIRONMENT OF ACCOUNTING PROFESSION IN ASIA

Prem W.S. Yapa

Associate ProfessorSchool of Accounting

RMIT University

Email: [email protected]

Abstract

This paper examines the accounting profession and its impacts of the convergence of International Financial Reporting Standards (IFRS) with local accounting standards on companies in selected Association of South East Asian Nations (ASEAN). After several decades of ASEAN Federation of Accountants (AFA)’s existence and largely unproductive debate on regional harmonisation, there is a growing recognition of the urgency of enforcing internationally recognized accounting regulation to ensure that the financial information upon which investors base their decisions is transparent and internationally comparable. This paper attempts to review the development of the accounting environment in ASEAN over last few decades using an institutional theory perspective as the basis for analysis of field work and uses this to evaluate the research questions to help to guide future accounting research in ASEAN. Using a sample of respondents from a selected ASEAN accounting professional bodies, we argue that AFA has seemingly failed in convincing ASEAN policy makers to focus on regional harmonisation. This has been partly attributed to the inadequacy of local financial infrastructures and supervisory procedures. Eventually, on one hand, regional accounting bodies or institutional actors attempted to model themselves on the practices of other global organisations (such as IAS / IFRS) when local/regional accounting regulations are poorly understood; goals are ambiguous and when the environment created symbolic uncertainty. On the other hand, the resting of formal education and of legitimation in the cognitive base produced by university and other training institutions are important centres for a development of organisational norms among professional accountants and their subordinates. These deep seated institutional influences bring into play by national associations could not be ignored in AFA’s pursuit of regional harmony.

Keywords: institutional theory, ASEAN, ASEAN federation of accountants, Asian financial crisis.

Asia Pacific Journal of Accounting and Finance Special Issues, December 2014, 73-9674

1. INTRODUCTION

This article concerns a study of the accounting profession and its impacts of the convergence of International Financial Reporting Standards (IFRS) with local accounting standards on companies in selected Association of South East Asian Nations (ASEAN). ASEAN1 have achieved a remarkable economic progress as a region and has attracted a growing number of investors from many countries.

The ASEAN countries are being assisted by major development financing institutions, such as the World Bank and the Asian Development Bank, mainly due to the development of global capital markets, growth of multi-national enterprises and the Asian financial crisis in the mid-1990s. As investors and creditors require up-to-date financial statements and reports, the professional accounting practices of ASEAN countries are being scrutinised by many parties. ASEAN countries are thus under pressure for a uniform set of accounting standards. Convergence of local accounting standards with IFRS is now one of the rising concerns among stakeholders with interests in ASEAN countries. In this regard the ASEAN Federation of Accountants (AFA) plays an important role. The AFA was set up in 1977 as the sole promoter of accounting harmonisation in ASEAN.

The federation originally intended to provide technical services to its member bodies in the formulation and adoption of accounting and auditing standards and practices with the end view of establishing an ASEAN philosophy for the accounting profession (AFA 1977). However, with the on-going globalization of services and the aftermath of East Asian financial crisis, the AFA council decided to encourage its members to go for convergence of standards and practices based on issuance’s of the International Accounting Standards Committee (ISAC) and the International Federation of Accountants (IFAC). A growing body of literature has examined various aspects of the accounting systems and their implications for ASEAN (Briston 1990, Craig and Diga 1996, Cruz 1993, Yasuda 1993, Saudagaran and Diga 2000, 2003, Yapa 2003). However, one aspect that has not received adequate attention is the ASEAN national accounting associations / bodies2 and their institutional influence over AFA for internationally recognized standards. Against such a background, this paper attempts to review the development of the professional accounting environment in AFA using an institutional theory perspective.

This paper, therefore, has three main contributions. Firstly, we outline the development of accounting environment in ASEAN countries, culminating in converging local accounting standards with IFRS. To our knowledge, this is one of the few papers that has looked at the accountancy development in ASEAN after its major crisis including financial crisis. Secondly, in connection with the European domination, we show how the development of the accounting profession moved towards the global standards with the influence of big four operations during the period covered in this paper. Thirdly, in relation to the historical development of accountancy in ASEAN, we consider whether accountancy changes is more likely to be a consequence of external, rather than internal, pressures. Indeed, the eventual evolution of the accountancy development was, in fact, determined by external rather than internal factors.

We have adopted an eight-section structure to achieve our aims. The next section explains a profile of the ASEAN Federation of Accountants (AFA) and then the literature review

Yapa, The Institutional Environment of Accounting Profession.... 75

is presented in Section 3. Section 4 explains the methodology and data collection. Section 5 is built upon theoretical insights from the study of social, economic and political phenomena using institutional theory which presents a paradox. Section 6 provides a discussion. The last section concludes the paper with a summary of the limitations of the study and further areas for research.

2. A PROFILE OF THE ASEAN FEDERATION OF ACCOUNTANTS (AFA)

Over the last decade, a growing number of studies addressed the accounting profession and financial reporting in ASEAN countries (Craig and Diga 1996, Saudagan and Diga 2000, 2003, Yapa 1999, 2003, 2014). With the establishment of ASEAN its declaration stated the aims and purposes of the association as - “The association represents the collective will of the nations of Southeast Asia to bind themselves together in friendship and cooperation and, through joint efforts and sacrifices, secure for their peoples and for posterity the blessings of peace, freedom, and prosperity (The ASEAN Declaration, Bangkok, 8 August 1967 - Fact Sheet on ASEAN3).

The ASEAN region has a population of about 600 million, a total area of 4.5 million square kilometers, a combined gross domestic product of US $ 935 billion, and a total trade of US $920 Billion (Fact sheet on ASEAN 20054). The Secretary General of the United Nations stated the importance of ASEAN to the rest of the world as: “Today, ASEAN is not only a well functioning, indispensable reality in the region, it is a real force to be reckoned with far beyond the region. It is also a trusted partner of the United Nations in the field of development” (16 Feb 2000).

The ASEAN Federation of Accountants (AFA) was organized in March, 1977. It was established to serve as the umbrella organization for the national associations of accounting professionals of the member countries of the Association of South East Asian Nations (ASEAN). AFA originally had only five member bodies. These were the national accountancy bodies of Indonesia, Malaysia, Philippines, Singapore and Thailand5. In 1989, The Brunei Institute of CPAs (BICPA) was admitted into the Federation. In the recent past AFA admitted the national accountancy bodies of Vietnam and Myanmar6.

There are two kinds of AFA members. Primary members are the national organization of accounting professionals representing ASEAN member countries. Associate members are internationally recognized accounting organizations of countries outside South East Asia, which are friendly to ASEAN. In 1999, the first associate member was admitted into the Federation-the Australian Society of CPAs (ASCPA)7 followed by Association of Certified Chartered Accountants (ACCA) of U.K. The Mongolian Institute of Certified Public Accountants was admitted to AFA as an associate member in 2000. Primary membership in the Federation is by country – i.e. one member per country except for Malaysia. AFA primary members must have been created under a specific statute or regulation. However, among ASEAN members Malaysia is represented by both Malaysian Institute of Accountants (MIA- a government body) and the Malaysian Association of Certified Public Accountants (MACPA- a private sector body).

Regional accounting harmonization is an important objective for setting up of AFA (Kondo 1992). The chairman of the International Federation of Accountants (IFA) at the time


of setting up of AFA stated that: “The formation of an ASEAN accountants’ organization…. will make it easier to harmonize the accounting principles and practices in the region. We will thus be complementing the efforts of the ASEAN private and government sectors in the economic development of the region (SyCip 1977)”.

Regional harmonization of accounting standards within ASEAN was encouraged through various committees of AFA ever since its inception. For example, one of the prominent committees set up by AFA in 1978 was the Committee on Accounting Principles and Standards (CAPS). The role of this committee was to undertake programs to develop accounting principles and auditing standards suitable for the conditions in ASEAN. As a result of CAPS, a survey of accounting principles and practices in the ASEAN was conducted and, as an outcome of this survey, an exposure draft called ASEAN Accounting Standards (AAS) No.1- Fundamental Accounting Principles - was issued (ASEAN Federation of Accountants, 1978(a),(b)) This exposure draft and AAS No.1 provided a suitable yardstick against which to compare accounting standards and practices in ASEAN. As evidenced, there have been no substantial differences existed between local accounting standards of ASEAN national institutions and AAS No.1. Although, CAPS would have issued more ASEAN accounting standards focusing on regional harmonization, they did not pursue it mainly due to various influences and pressures by national accounting bodies of ASEAN. Therefore, AFA’s impact on regional accounting harmonization had been demoralized and slowed down (Donleavy 1991).

In 1984, on a comprehensive survey of accounting and auditing practices in ASEAN, revealed a wide range of accounting standards and practices existing in ASEAN (SGV 1984). According to the report of SGV survey two groups of accounting practices appeared in ASEAN region. One group of ASEAN members such as the Philippines, Thailand and Indonesia apparently supported U.S accounting practices and the other group mainly Malaysia, Singapore and Brunei adopted practice in the U.K. The apparent reason for this practice in ASEAN countries is that they have adopted legal and micro-economic approach with regard to financial reporting practices and regulations, not only because of their colonial link, but also because it was perceived to be more convenient with the regulatory system of their governments. In this context many researchers have argued that most developing countries including ASEAN have adopted legislation of the colonial powers without due regard to their local conditions even after their political and economic independence (Briston 1978). This inclination of colonial influence gave rise to national accounting professional associations of most ASEAN countries partiality towards the colonial master. This partiality towards colonial powers gave a significant influence over AFA’s non-implementation of ASEAN accounting standards (AASs).

The East Asian financial crisis in mid 1990s also raised questions about the quality of accounting and auditing in the affected countries. It seems that, as a result of the lack of proper disclosure in the accounting reports of Asian enterprises, the users of accounting information did not receive the early warning signals about deteriorating financial conditions and were therefore not able to make adjustments accordingly. James D. Wolfensohn, President of the World Bank, while analyzing the causes of the Asian financial crisis, summarized disclosure problems as - “The culture in the region has not been one of disclosure; if you go back further


it was a culture of a smallish number of wealthy people. It was an agrarian society with a lot of people in the country and some significant factors of power. It is reflected in the chaebols. It is reflected in groups that come together. There were centers of power. There was little disclosure, and there was a familial structure in the industrial and in the financial sector just as there was in the ordinary sector: (Wolfensohn 1998,p.3).

Following from this view and the critics of the accounting and auditing profession, cited incomplete financial information, lack of transparency, inappropriate accounting standards and inconsistent application of those standards as factors contributing to the seriousness of the crisis or to the delay in identifying and responding to it. Consequently, there seems to be a growing recognition of the urgency of enforcing a core set of internationally recognised standards to ensure that the information upon which investors and other stakeholders base their decisions is transparent, comprehensive, reliable, consistent and internationally comparable. This paper aims to explain that AFA has failed in convincing ASEAN policy makers to focus on regional harmonisation in accounting and member countries attracted by IFRS. The deep seated institutional influences bring into play by national associations cannot be ignored in AFA’s pursuit of regional harmony. This is the motivation of this study.

A review of the literature on the relevance of IFRS / IASs to developing countries in general terms is explored in the next section before attempting to analyze the institutional influence and pressure for AFA over the last few decades.

3. LITERATURE REVIEW

The International Accounting Standards Board (IASB) has played a leading role in the development of International Accounting Standards (IAS). The IASB has played the primary leadership role in the push for harmonization of global accounting rules. Most of the research in IFRSs comprises of quantitative studies relating to the impacts and implications of IFRS, such as the economic consequences of requiring IFRSs for financial reporting, issues related to the convergence or conversion (Wright and Hobbs 2010, Hail et al. 2010a, 2010b), policy factors specific to accounting concepts like earnings quality (Sun et al. 2011), attempts to understand the impacts on either reported performances (Cordazzo 2008) or on key financial ratios (Lantto and Sahlström 2009, Bao et al. 2010) due to shift from national GAAPs to IFRSs. Many studies have been conducted in the U.S. concerning the relevance and implementation of IFRSs (Hail et al. 2010a and 2010b, Sun et al. 2011). A few studies cover the impacts of IFRSs on accounting practices in country specific contexts (Ballas et al. 2010, Callao et al. 2009) and the relevance of IFRSs to different emerging markets, for example China (Chen et al. 1999), European Union (Callao et al. 2009), Germany (Haller 2009), Greece (Ballas et al. 2010), Romania (Albu et al. 2011), South Asia (Ali 2005, 2006). Perera and Baydoun (2007) commented on IFRS convergence issues in Indonesia.

The review of the existing literature on IFRS adoption shows that much of the IFRS research has been based on: the review and analysis of what might happen to company financial statements as an implication of the adoption of IFRS (Kasanen et al. 1992), consultancy reports by Big four accounting firms advising companies on preparation for the change (PriceWaterhouseCoopers 2012), empirical surveys of the practices or experiences of early


adopters in other European countries and the empirical findings of studies prior and post to the adoption of IFRS that predict the possible changes that might take place (Fearnley et al. 2007). These studies differ in their analysis period, jurisdictional setting, and research design, and they report varying findings. Ahmed et al. (2013) provide a Meta analysis of the extant literature that considers IFRS adoption from both a quantitative and qualitative point of view. They argued that factors that can influence the financial reporting quality consequences of IFRS adoption include a country’s macroeconomic and financial system, the motivation for adopting IFRS including preparer incentives, the role of the accounting profession, ownership concentration, and the strength of corporate governance.

More recently, another important and emerging area of research in this direction relates to the benefits of IFRS from the point of view of various stakeholders such as organizations implementing IFRS, small and medium enterprises (Wyk and Rossouw 2009) and academic and practitioner reviews of the quality and implementation effectiveness of IFRSs (Joshi and Ramadhan 2002, Jones and Wolnizer 2003, Leng et al. 2007, Bradbury 2008, Joshi et al. 2008, Nobes 2008, FRC 2009, Rezaee et al. 2010, Jun and Koga 2012). Jermakowicz (2004) conducted her study on IFRS adoption in Belgium and argued that the change in accounting regime through adoption of IFRSs will have a positive impact on the competitiveness and the growth of European companies and the realization of an integrated financial services market. Jermakowicz (2004) also listed some key challenges in the process of adopting IFRSs including the complicated nature of some standards of IFRSs, the lack of guidance of first time IFRSs reporting, the underdevelopment of capital market and the weak enforcement of law and regulations. She also pointed that a training program or program for the corporate staff is one of the most important issues of the IFRSs adoption and is also an ongoing exercise as IFRSs will remain in the development phase for a long period of time. It also requires a huge investment of money, people, and institutional leadership to support the transition to IFRSs, and will require a significant change in the training of accounting students and accounting professionals in the near future. It is, however, the right objective and one that must be pursued strongly, as it offers incredible opportunities for all involved, but especially for users and preparers of financial statements. Similarly, Joshi et al. (2008) examined the perceptions of accounting and auditing professionals with respect to issues concerning development and implementation of IFRSs in a developing nation - Bahrain. The respondents supported the move to adopt IFRSs and agreed that it can be gradually accomplished with appropriate training programs. Respondents agreed that IFRSs global adoption would bring benefits at the international level and the perceived benefits should outweigh the cost of implementation and other challenges.

Joshi and Ramadhan (2002), in their study on IFRSs adoption by small and closely held companies found that external auditors exerted the greatest influence on getting firms to adopt IFRSs followed by the banks and management. The respondent firms did not find IFRSs adoption was costly and did not face many problems in applying IFRSs except some interpretation issues. On the contrary, Jun and Koga (2009), in their study on mandatory application of IFRSs in Japan revealed Japanese managers’ negative attitude towards IFRSs adoption possibly because they thought IFRS application would be difficult. The main reasons for this negative opinion by the respondents include IFRSs is that it is not mandatory to adopt, inconsistencies of IFRSs with Japanese GAAP and lack of adequate training systems in place.


In addition, the respondents believe that they can get the trust and confidence of investors even without adopting the IFRSs. The acceptance of IFRSs adoption in Japan can be evidenced from the level of voluntary adoption of IFRS, because there has been a little progress in Japan on the IFRSs adoption as at the end of May 2013, only 20 companies are using IFRS or publicly announced their decision to use IFRSs voluntarily, out of approximately 3,600 companies listed on the stock exchanges in Japan (ifrs.org 2013)

The study of prior literature suggests that there has been little or no research in the developing countries context on the adoption of the IFRSs issues, specifically in the ASEAN countries and Joshi et al (2008) observed that only a few studies investigate the perceptions of professional accountants with regard to the interpretation and implementation of IFRSs. This research extends the extant literature by adding literature on the attraction to IFRSs adoption from the perceptions of two key stakeholder groups, first, professional accountants working in South East Asian Region and second, executives of the professional accounting bodies working on these adoption processes in the region. For the countries selected as a sample for this study, a minimum of three years has passed since they committed to the adoption/convergence to IFRSs. Singapore committed to full adoption in 2005 starting in 2003; Malaysia adopted the transition to IFRSs in 2006, and the Indonesian Institute of Accountants (IAI) committed to remove differences in the Indonesian GAAP and IFRSs by the year 2008. The researchers believe that a three year period is enough to cover the initial troubles and settling down though there are still some issues regarding complete adoption of IFRSs in the region. This is the appropriate time to understand the implications and impacts of IFRSs in these countries. Accounting professional in Malaysia face a significant challenge in meeting the deadline for preparing and reporting financial statement compliance with the IFRSs (Leng et al. 2007) and Indonesian accounting profession is still in the early stage of IFRSs adoption. A study of the differences in perceptions of accountants in various countries has important implications because many studies in different countries document that some of the IFRSs may not appropriate to all countries due to different cultures, financial and legal systems (Schipper 2005).

IFRS/ Harmonization in ASEANIndonesian accounting standards draw heavily upon US sources as the first set of

accounting standards, Indonesian Accounting Principles (Prinsip Akuntansi Indonesia) formulated by the IAI in 1973 was directly adopted from Accounting Research Study entitled ‘‘Inventory of Generally Accepted Accounting Principles for Business Enterprises’’ published by the AICPA in 1965 (Perera and Baydoun 2007). The Indonesian Institute of Accountants, on 23 December 2008, announced that the convergence of local standard to the international accounting standard (IFRS) should be completed by 2012. Indonesia’s approach to IFRS adoption is to maintain its national GAAP (Indonesian Financial Accounting Standards IFAS) and converge it gradually with IFRSs as much as possible. However, there is currently no plan and consequently no timetable for a full adoption of IFRSs (IFRS 2013). Indonesia aims to provide a sufficient transitional period of three to four years for new standards while minimizing any gaps between the effective dates of new IFRSs and new Indonesian standards.

The colonial history of Singapore dictates that its accounting standards and professional training of the accountants also were under strong influence of the British accounting practices.


Before 1987, there was no formal standard setting in Singapore and accounting standards were mainly adopted from UK standards. The Singapore Institute of Certified Public Accountants (ICPAS) was established in 1987, and it turned to the IASC as its main guidance for standard setting. All IAS standards are examined for propriety of adoption in the Singapore context, and most had been adopted by the end of 1995. Some IAS standards have been amended to be more relevant in the Singapore context, but the amendments generally are not significant and the essence of each IAS statement has been retained. Singapore has adopted most, but not all, IFRSs and has made several modifications to the IFRSs that it has adopted. The standards are known as Singapore Financial Reporting Standards (SFRSs). Incorporated companies in Singapore are allowed to use IFRSs as issued by the IASB (rather than Singapore Financial Reporting Standards) if approval for the use of IFRSs is granted to such companies by the Accounting and Corporate Regulatory Authority of Singapore. In addition, a Singapore incorporated company that is listed on both a securities exchange in Singapore and a securities exchange outside Singapore is permitted to use IFRSs as issued by the IASB if the securities exchange outside Singapore on which the company is listed requires the use of IFRSs (IFRS 2013)

Before its independence in 1957, Malaysia was under British rule for over 80 years, thus it’s accounting standards and reporting practices had UK influence. After the emergence of International Accounting Standards in the 1970s, Malaysian formal accounting standards have been aligned with these international standards. The professional accounting bodies, the Malaysian Association of Certified Public Accountants (MACPA) and the Malaysian Institute of Accountants (MIA), endorsed IAS as early as 1977 and they review accounting standards when issued by the IASC and adapt them to local needs. By 1996, most IAS standards either had been adopted or were under consideration in Malaysia, with only a few exceptions. Malaysia adopted the Financial Reporting Standards (FRS) regime in 2006. Starting from 1 January 2006, Malaysian companies were required to implement all the Financial Reporting Standards (FRSs ) issued by the Malaysian Accounting Standards Board (MASB) in the preparation and presentation of financial statements. While in certain respects the transition to IFRS based reporting was not an enormous change, there are areas of reporting where there are few issues that need to be sorted out. The application of IAS without any modifications as a national standard in the ASEAN countries has been criticized in some of the empirical investigations (Wallace 1993, Briston 1990). In the ASEAN region, Diga (1996) studied, in his doctoral project, the extent of accounting harmonization among five ASEAN countries: Indonesia, Malaysia, the Philippines, Singapore and Thailand. The results of this study showed that ASEAN countries have achieved a relatively high degree of measurement harmonization in the area of consolidated financial statements, business combinations, inventory, marketable securities, long-term investments, foreign currency translation methods and research and development expenditures. In contrast, the study found relatively law harmonization in accounting for good will, income tax and leases, property, plant and equipment. The study points out the reasons for the low level of harmonization as the use of flexible and discretionary accounting treatments for similar accounting transactions. This study also highlights the absence of appropriate accounting standards in some areas and the nondisclosure of accounting policies. Among the countries that Diga (1996) observed in his study, Singapore, Malaysia


and Thailand have significantly adopted IAS disclosure requirements into their local rules. However, Indonesia and the Philippines showed significantly low adoption of IAS. The study pointed out that due to small sample size, it was difficult to generalize the results.

Another study by Saudagaran and Diga (1997) examined the similarities and differences in the regulatory environment of the same five ASEAN countries studied in Diga’s work in 1996. While this study found some substantial similarities, there were some differences as well. Among these countries Indonesia needed to improve quality of its standards and regulations. The authors pointed out those similarities in accounting regulations in most of the countries in the region had led to the dominance of a global paradigm of harmonization. Saudagaran and Diga’s (1997) study however, failed to elaborate on the legislation for financial reporting practices among ASEAN countries, that is, company law, securities and exchange law for companies and law regulating auditors (Ali 2005). Accordingly, contemporary accounting standards in the ASEAN draw heavily from foreign sources, mainly U.K, U.S and IASB standards8. As far as the author is aware, no study has ever been conducted to examine the institutional influence and pressure in relation to professional accounting in AFA. This is the task of the sections which follow. Despite the setting up of AFA in 1977, regional harmonization of accounting standards has not occurred apparently due to various influences and pressures by the national accounting bodies of ASEAN.

4. METHODOLOGY AND DATA COLLECTION

The study is based on data provided by the national accounting professional associations of seven ASEAN members. The national representatives of the accounting professional association were asked to respond to a questionnaire covering relevant accounting standards and practices. Table 1 provides accounting associations that participated in the collection of data in each ASEAN member country. All these associations are covered under the umbrella of AFA. The questionnaire used an open question format to allow respondents to give more flexibility. The objective behind the open questions was to give an opportunity for respondents to briefly describe the back ground information to their responses. Moreover, many more questions were explicitly asked to substantiate on the current accounting standards in the country of the respondents. Basic research questions included in the questionnaire were, nature of current practice of accounting standards, opinions about the AAS standards against U.K, U.S standards or IAS standards, history of the formation of accounting standards, accounting training and education.

After scrutinizing the responses, some of the country specific issues required further clarifications. Hence interviews were conducted in three ASEAN member countries-namely Singapore, Malaysia (both MIA and MACPA) and in Brunei Darussalam. During these interviews the researcher was able to gain a more in-depth understanding of their independent views, opinions and suggestions on various aspects of the items covered in the questionnaire. No formal interview schedule (a structured questions guide) was used for the interviews. Instead, the discussion at each interview was initiated and conducted in a very informal way, allowing the interviewee to express his\her ideas and observations more freely and independently. However, the discussions at these interviews basically centered on those items which were


covered in the original questionnaire. The researcher transposed himself as an observer with the interviewees and this approach seemed to provide them with encouragement which apparently helped to make the discussion more independent and unbiased. The interviews varied in length from about one to two hours.

The study adopts institutional theory as the basis for analysis since it offers an approach that aim to explain the behavior of national accounting bodies in the context of the institutional frameworks within which they operate. This is particularly relevant for AFA context because it offers benefits for all the members of ASEAN, whose institutional factors vary widely.

As shown in Table 1, this study covers seven member countries and nine professional institutions of ASEAN as of early 2000s. Myanmar and Laos were admitted into ASEAN later. As they are very new to AFA they are not included in this study. In Brunei Darussalam, the BICPA is the private sector body and the Ministry of Finance is monitoring the current accounting standards. Hence some key officials of the Ministry of Finance also were interviewed. The theoretical framework is outlined in the next section. There then follows a discussion which attempts to address the research question. The concluding section highlights the derailment of regional harmonization effort of AFA.

5. THEORETICAL FRAMEWORK: INSTITUTIONAL ISOMORPHISM

This paper takes an institutional perspective, which is built upon theoretical insights from the study of social, economic and political phenomena. Institutional theory presents a paradox. Institutional analysis is as old as Emile Durkheim’s exhortation to study “social facts as things,” yet sufficiently novel to be preceded by new in much of the contemporary literature (Dimaggio and Powell 1991, p.1). Institutional theory addresses the role of institutions in explaining the behavior of organizations and other social actors (North 1989) and provides a perspective which would help to assess the formal and informal rules that shape behavior (North 1990). In the early 1980’s some researchers held the view point that older, larger organizations reach a point where they can dominate their environment rather than adjust to them (Freeman 1982, p.14). An article written in 1983 by DiMaggio and Powell entitled the ‘The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields’ traces the epistemic grouping of self-styled New Institutions. This theory postulates that populations of organizations will come to resemble each other over time and that this conformism will make it difficult for new entrants to operate successfully without imitating or matching (isomorphically) the dominant mode of operation within the boundaries of the field, thus enabling a socially constructed ‘iron cage’ (Dimaggio and Powell 1991).

Accordingly, institutional theory (institutional isomorphism) recognizes the influence on organizations and pressures that requires organizations to behave in certain defined manner (DiMaggio and Powell 1983). DiMaggio and Powell argue that organizations compete not just for resources and customers, but also for political power and institutional legitimacy, for social as well as economic fitness. They argue that this typology is an analytic one and the types are not always empirically distinct. They argue also that the concept of institutional isomorphism is a useful tool for understanding the politics and ceremony that pervade much


modern organizational life. DiMaggio and Powell identified three mechanisms through which institutional isomorphic change occurs, each with its own antecedents: 1) coercive isomorphism that stems from the need to gain legitimacy and creditworthiness; 2) mimetic isomorphism resulting from the tendency of uncertain new entrants to adopt or to imitate organizational forms and collectively established rules; and 3) normative isomorphism occurring when rules are mentally internalized and take on a moral value for the participant or in other words associated with socialization of professionals (DiMaggio and Powell 1983, p.150).

Particularly coercive isomorphism results from both formal and informal pressures exerted on organizations by other organizations upon which they are dependent on by cultural expectations in the society within which organizations function. They argue that institutions tend to model their activities after similar institutions in their field that they perceive to be more legitimate or successful.

Mimetic process stems from standard responses to uncertainty. When institutional technologies are poorly understood (March and Olsen 1976), when goals are ambiguous or when environment creates symbolic uncertainty, institutions may model themselves on other organizations. When an organization faces problem with ambiguous causes or unclear solutions, problematic search may yield a viable solution with little expense (Cyert and March 1963).

Normative pressures stems primarily from professionalization through which different stake holders in an organization can encourage change, such as towards the adoption of IAS in their professional bodies. According to Larson (1977) and Collins (1979) professionalization can be interpreted as a collective struggle of members of an occupation to define the conditions and methods of their work, to control “the production of produces” (Larson 1977: 49 –52) and to establish a cognitive base and legitimation for their occupational autonomy. Accordingly professions are subject to the same coercive and mimetic pressures as are organizations. Moreover, while various kinds of professionals within an organization may differ from one another, they exhibit much similarity to their professional counterparts in other organizations. Accordingly, two aspects of professionalization are important sources of isomorphism. One is the resting of formal education and legitimation in a cognitive base produced by university specialists; the second is the growth and elaboration of professional networks that span organizations and across which new models diffuse rapidly. Universities and professional training institutions are important centers for the development of organizational norms among professional managers and their staff. Professional and trade associations are another vehicle for the definition and promulgation of normative rules about organizational and professional behavior. Such mechanisms create a pool of almost interchangeable individuals who occupy similar positions across a range of organizations and possess a similarity of orientation and disposition that may override variations in tradition and control that might otherwise shape organizational behavior (Parrow 1974).

Most recent studies examined the organizational pressures on accounting disclosure issues. For example Burns (2000), Fogarthy (1996), Carruthers (1995), Scapens (1994), Mauritsen (1994), Covaleski et al. (1993), Covaleski and Dirsmith (1988a, 1988b) investigated


similar phenomenon. The next section discusses the institutional isomorphism and the national accounting institutions and their influence on IAS to focus direction in AFA

6. DISCUSSION

Brunei Darussalam, Malaysia and Singapore (all former British colonies) have each adopted a Companies Act modeled on the U.K Companies Act 1948 and the Australian uniform Companies Act, 1961. However, the Companies Act of Singapore has undergone considerable changes since first enacted in 1967. Indonesian commercial code 1848 was patterned on the early Dutch Commercial Code with some minor amendments. It is therefore obvious that company laws in ASEAN have been affected strongly by each member country’s former colonial links despite the appropriateness of such legislation to its environment. British group (Brunei, Malaysia, Singapore) was mainly influenced by Britain and U.S group (The Philippines, Thailand, Indonesia) was influenced by U.S. reflecting its important trading links with these major economic powers during the late 1800’s and early 1900s. With this backdrop it is obvious that accounting standards and practice in ASEAN has been structured based on the corporate legal environment created by the colonial powers during their administration. Therefore, as suggested in the institutional theory - coercive isomorphism results from both formal and informal pressures exerted an organizations by other organizations. They are dependent on cultural expectations in the society within which organizations function. The coercive pressures explain that institutions tend to model their activities after similar institutions in their field that they perceive to be more legitimate or successful. This seems to be a valid argument for most ASEAN members in the group. As revealed by the respondents (most ASEAN members), there was a consensus amongst themselves that they prefer U.K, U.S or IAS standards as it is convenient for them to work with the rest of the world. Hence local accounting associations have a reluctance about the implementation of a regional harmonization project introduced by the AFA. As revealed by the respondents, the professionalization of accounting tends to proceed in tandem with the structuration of AFA. The exchange of information among accounting professionals in different ASEAN members using a common set of standards i.e IFRS/IAS help contribute to a commonly recognized hierarchy of status and recognition, of center and periphery, that becomes a matrix for information flows and personnel movement across ASEAN. This may happen both formal and informal basis.

The institutional set up in AFA involves the national accounting associations/bodies of ASEAN countries. The process initiated by AFA in 1978 was to harmonize the accounting standards and practice within ASEAN region. Committee on Accounting Principles and Standards (CAPS) was set up to undertake this challenge. On the regional harmonization process, most of the respondents consistently argued that professional accounting standards vary widely among member nations hence there is a problem of harmonizing the accounting standards preventing the cross-flow of professional expertise in the region. This view was supported by 70 the AFA Council Meeting (AFA council meeting January 2001). Some respondents stated that:


“More advanced countries like Singapore, Malaysia and Thailand are encouraged to help less developed countries in ASEAN like Myanmar and Vietnam, in accountancy”

It is evident that Singapore, Malaysia and Thailand have already based on IAS. For example, 17 out of 23 Thai accounting standards are based on IAS. Surely these accounting professional bodies (i.e. Singapore, Malaysia and Thailand) apparently have had an interest in the IAS exercise. Moreover, Singapore and Malaysia already had the British pattern in accounting standards. As suggested in the institutional theory it recognises the influence on organizations and pressures which requires organizations to behave in certain defined ways. As evidenced, Singapore and Malaysian professional bodies are trying to convince AFA that IFRS/ IASs are much more suitable for ASEAN region. In order to gain this legitimacy, they are now trying to create an influence through perpetuation of symbolic and ceremonial activities – i.e. adoption of IAS in their accounting practice.

Malaysia, Brunei Darussalam and Singapore have inherited their accounting education through British universities and higher educational institutions. Historically Singapore, Malaysia and Brunei were British colonies for a long period. Therefore their general education from primary to university level was inherited from the British education system. The British system of accounting education and practice was imposed on these countries during the colonial period in a number of ways such as export of British accounting professionals; export of British accounting qualifications and the establishment of British professional bodies’ examination centres. Therefore, early years of these countries - most of the accounting professionals obtained their accounting education and training from the U.K. At the setting up of most accounting associations in ASEAN countries, the originators had British education and exposure in the setting up process. Hence they followed a carbon copy of British accounting system. In the interviews, it was revealed that still Malaysian, Singapore and Brunei accounting academics proceed to UK, Australia and New Zealand for their higher education such as masters and such as doctoral programs9. Moreover some respondents in this study indicated following:

“We received accounting education and training through the university. University exposed us to practice our knowledge based on Western accounting practices. Most normative rules and regulation on accounting profession that we learnt are applicable to ASEAN countries without a difficulty. Therefore the adoption of IAS is not a great difficulty”.

These countries have student exchange programs and staff exchange programs with some of the British universities. For example Brunei’s only university revised its undergraduate program in business by introducing, inter alia, a major in accounting and finance in early 2000s and established a link program leading to an accounting degree with Manchester University in the UK. Moreover, external examiners for accounting degree programs in the University of Brunei are annually visiting from the UK. In addition, as revealed by the Brunei accounting professionals, particularly Brunei’s accounting professional power is as much assigned by the state as it is created by the activities of the government. The saga of the missing billions (US$ 14.8b) from the Brunei Investment Agency (BIA) in 1997 by the State Finance


Minister, and the aftermath of Asian financial crisis the State has announced that Brunei is now moving towards adopting the International Accounting Standards (IASs) as a common and universal set of standard for accounting practices in the country (Yapa 2014). This was made mandatory with effect from 2002. Adopting the IASs is crucial for Brunei in its efforts to make investment climate more conducive to international investors. Accelerated pace of economic reforms including therein initiatives taken towards globalisation and liberalisation, in different countries in ASEAN and the Asian financial crisis have changed the imperatives for public accountability. Moreover, it raises serious doubts about the disclosure and the role of accounting and reporting of reliable and relevant financial information. In this paper it is argued that an adoption of IASs in Brunei composes a transitory measure given the ossified political landscape and speculates as to whether such a measure may not necessarily be in the continuing attention of potential private sector investors including the planned international financial centre and the diversified downstream oil and gas industry.

According to institutional theory two aspects of professionalization are important sources of isomorphism. Accordingly cognitive base imparted by universities is an important implication. It is obvious from the experience of most ASEAN countries that university accounting degree programs have legitimised and created the normative pressure on AFA to go for U.K or U.S accounting practice. For example, Singapore and Malaysian respondents revealed that their training and education in accounting were based on either British or US models, hence the organisational norms and practices among most accountants were biased towards Western models such as IFRS/IAS.

Another important aspect is that British and U.S professional bodies have been very much instrumental in setting up and organisation of local accounting associations in ASEAN. For example in Malaysia, ACCA has currently set up a joint program with MIA to produce accounting personnel. ACCA has adopted local requirements in their accounting training - eg. local commercial law and taxation subjects. Another example is Brunei – where Brunei Shell Company has liaised with the local BICPA to train accounting personnel with a few British professional bodies. Singapore and Indonesian questionnaire respondents indicated the following:

“AFA should promote cooperation with more developed countries. In particular more support from Australia and the United Kingdom to coordinate with the AFA in training accountants and auditors. Presently ACCA is doing a valuable contribution in our country to develop the accounting qualifications”.

Another interesting observation by some respondents was that the European Union’s decision on their regional harmonization effort. Particularly Singaporean and Malaysian respondents indicated the following observation:

‘As we know the European Union has given up its effort in regional harmonization of accounting standards in their region. So why AFA is pursuing a regional harmonization drive? It is time to concentrate national and international efforts to develop and implement international accounting


and reporting standards. Because we have to join hands with the global business to foster business growth’

As institutional isomorphism indicated normative pressures have given a negative impact and a pressure on AFA’s project on regional harmonisation. The growth and elaboration of professional networks that span organizations and across new models diffuse rapidly. Accordingly, professional training institutions are important centers for the development of organizational norms among professional managers and their staff. This seems to be applicable in the context of ASEAN members and AFA. Most professional associations of ASEAN have been patterned on Western model. Hence personnel who received their professional training from such institutional set up prefer to apply their competencies in ASEAN business activities with a similar orientation and disposition.

With the departure of the Dutch system in Indonesia the gradual adoption of U.S accounting system was started in 1970’s. With the assistance of the Ford Foundation, the University of California (Berkeley, USA) provided the teaching staff, on a five year contract to the University of Indonesia, at the same time providing opportunities for Indonesians to study in the U.S. The Ford Foundation also assisted Gadjah Mada University, which was affiliated with the University of Wisconsin. From this time, the American influence began to gain momentum in Indonesia. According to donor agencies preference, the aid receiving country tends to follow donor agency guidelines for financial reporting. This has already taken place in Indonesia. As revealed by DiMaggio and Powel (1983), one important mechanism for encouraging normative isomorphism is the filtering of personnel (ibed,p152). Within many organizational fields filtering occurs through the hiring of individuals from firms within the same industry; through the recruitment of fast-track staff from a narrow range of training institutions; through common promotion practices etc. As revealed by the respondents, this phenomenon seems to be proven in the case of Indonesia. Accounting profession career track is so closely guarded, both at the entry level and throughout the career progression that individuals who make it to the top are very much supporting the adaptation of IFRS /IAS in Indonesia.

Indonesia has officially announced IFRS adoption in 2012. It was found that Indonesia’s standard setter Financial Accounting Standards Board (Dewan Standar Akuntansi Keuangan - DSAK) seems to be divided by the sensitive issue of whether IFRS and Shari’a principles can be reconciled. The application of fair value is also seen as a complex issue. Similarly to Malaysia, questions are being raised about inadequate IFRS training; and problems of low numbers of business professionals to service industry.

Currently both public and private companies must comply with accounting standards set by DSAK. With the introduction of IFRS, only listed companies, ‘will face dramatic reporting changes in 2012.’ As mentioned by an interviewee, ‘IFRS convergence in Indonesia will be done gradually in order to minimise the psychological impact. The first stage was conducted during 2008- 2012.’ Indonesia is an Islamic country and recognises Shari’a law, which has impacted the harmonisation with IFRS. Standards such as IAS 39 Financial Instruments: Recognition and Measurement currently have difficulties with regards to interest. IAS 17 Leases, which involves land and buildings, is problematic for the banking sector, as there are differences in timing of gain recognition in sale-lease back transactions. As one of the interviewees revealed,


the harmonisation poses, ‘a mismatch between the local GAAP and IFRS’. Another interviewee noted, ‘non-compatible legal and regulatory environment, economic environment, and issues in application of certain requirements of IFRS, are real challenges to Indonesian accounting practitioners.’ These changes will directly affect tax policy, financial planning, performance based compensation schemes and systems requirements.

7. SUMMARY AND CONCLUSION

Based on this study it is argued that AFA is under severe pressure from national accounting associations of member ASEAN countries to focus its direction towards IFRS/IAS and practice. This pressure has been mounted mainly from most influential emerging economies in ASEAN. As discussed in the previous section, colonial influence inculcated among national accounting associations through university accounting education and training has created a significant institutional pressure and impact on the adoption of IAS or similar global set of accounting standards in the region. AFA’s effort in regional harmonization has been demoralized due to various pressures from member countries. There are strong reasons for such a situation. One important reason is that with the European Union’s decision in 1995 to give up their regional harmonization effort and their decision to adopt IASs.

One negative perception is ambivalence as to whether IFRS will fix the current lack of transparency in Malaysian financial reporting. One interviewee stated that investors rely on analyst reports rather than comparing financial reports at source (which is similar a Singapore interviewee’s observation). Generally academic interviewees were concerned about IFRS impact; they emphasized the need for a clear implementation plan and more stakeholder participation. Overall, there are pressures emerging in Malaysia from external parties, who are questioning the complexity and usefulness of IFRS; it could suggest coercive isomorphism exists in the adoption of IFRS in Malaysia.

Interviewees in Indonesia and Brunei commented on tax regulation in association with Islamic principles. It is expected that withholding tax and corporate taxes may create some complications, hence a clear set of rules and regulations are needed. Finally, some interviewees predict that adoption of IFRS will impact the cost of reporting and compliance, as many listed companies do not have web sites with financial information. Indonesia’s SME companies (around one million) might face high costs of reporting issues in the future if IFRS is adopted.5

Overall, the problems generated by IAS 39 Financial Instruments for interest, taxation requirements in Indonesia and compliance costs, could be difficult to resolves. Institutional theory explains that in these types of situations the myth of compliance with a formal structure (in this case IFRS) becomes decoupled from work practices (the prohibition of interest in Shari’a finance transactions).

Interviewees in Singapore and Vietnam were consistently critical of the continuously changing nature of IFRS standards. They were also critical of the lead time for financial disclosure, which results in untimely financial statements for potential investors. Investors

5 Indonesian Statistics Centre Agency (BPS), 99% of businesses in Indonesia are SMEs


are therefore relying on other information sources, such as financial analysts’ reports. Some major questions were raised by interviewees about the actual usefulness of IFRS standards to potential investors. Reduction of the cost of capital was supposed to be one of the bonuses behind the adoption of IFRS, but interviewees had reservations about whether there is a lower cost of capital for business in Singapore and Vietnam. Despite all these perceived tensions about the adoption of international standards, Singapore continues on its IFRS convergence. Institutional theory explains that in times of uncertainty or major change (such as IFRS) actors copy or mimic the legitimatized practices from other actors in the field. Singapore’s persistence with the convergence of IFRS convergence suggests that there is a significant degree of mimetic behavior.

Incomplete financial information, lack of transparency, inappropriate accounting standards and inconsistent application of those standards have been some of the criticisms levelled against the current practice in ASEAN. Based on these circumstances AFA’s effort in regional harmonisation over the last few decades have gained no results instead member institutions are favouring for much more sophisticated financial reporting environment based on IASs. Further research on individual countries are needed to investigate various issues such as self-regulation on IAS in the region.

.


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APPENDIX

Table 1: ASEAN professional accounting associations participated in the data collection

Brunei Darussalam (1). The Brunei Institute of Certified Public Accountants (BICPA)(2). The Ministry of Finance – Brunei Darussalam

Indonesia Ikatan Akuntan Indonesia (IAI)- Indonesian Institute of Accountants

Malaysia (1). The Malaysian Institute of Accountants (MIA) (Government sector accounting body)(2). The Malaysian Association of Certified Public Accountants(MACPA) ( Private sector body)

The Philippines The Philippine Institute of Certified Public Accountants (PICPA)

Singapore The Institute of Certified Public Accountants of Singapore (ICPAS)

Thailand The Institute of Certified Accountants and Auditors of Thailand (ICAAT)-Federation of Accounting Profession (FAP)

Vietnam The Vietnamese Accounting Association (VAA)

i ASEAN was formed in 8, August 1967 in Bangkok by the five original member countries, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Laos and Myanmar on 23 July 1997 and Cambodia on 30 April 1999.

ii See Figure 1 for the list of national accounting bodies/ associations in AFA.iii http://www.aseansec.org/history/overview.htmiv http://www.aseansec.org/history/overview.htmv Primary member accounting bodies are: Brunei Darussalam Institute of Certified Public Accountants (BICPA),

Ikatan Akuntan Indonesia (IAI), Laos Institute of Certified Public Accountants (LICPA), Malaysian Institute of Accountants (MIA), Malaysian Association of Certified Public Accountants (MACPA), The Philippine Institute of Certified Public Accountants (PICPA), Institute of Certified Public Accountants of Singapore (ICPAS),Institute of Certified Accountants and Auditors of Thailand (ICAAT).

vi Myanmar Accountancy Council (MAC), Vietnam Accounting Association (VAA).vii Now CPAAviii In 2002, 17 out of 23 Thai accounting standards are based on the IAS. In Singapore, adopted IAS are referred

to as SAS. In Malaysia, most IAS are adopted as Approved Accounting Standards. ix Malaysian and Brunei governments are offering scholarships for accounting academics to pursue their

postgraduate qualifications in the U.K, Australia and New Zealand.

ASIAPACIFICJOURNAL OFACCOUNTINGAND FINANCE

ASIA PACIFIC JOURNAL OFASIA PACIFIC JOURNAL OFACCOUNTING AND FINANCEACCOUNTING AND FINANCEASIA PACIFIC JOURNAL OFACCOUNTING AND FINANCEDepartment of Accounting, Faculty of Economics,Universitas Indonesia Depok, IndonesiaPhone : +62-21-7272425, Fax: +62-21-7863558Email : [email protected]

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