22 - 28 August 2002
Issue No. 600
|Published in Cairo by AL-AHRAM established in 1875||Recommend this page|
Book-fixing, here and thereAccurate financial statements are crucial for investors. Wael Gamal looks at accounting standards in Egypt in the light of the US's recent spate of corporate scandal
These days, the word 'fraud' is fraught with infamy. High profile fraud cases now stand as a symbol of the end of the US's decade-long economic boom. These fraud cases, and their wider impact on the global economy, have triggered a deep institutional crisis, and may even contribute to a 'double-dip' recession in the US. They have also led to the largest corporate collapses in US history, brutally exposing the rot within the system. Dubious accounting used to artificially inflate profits and boost share prices was, hitherto, common practice in the world's most developed financial market. Today, these practices have been exposed to the public, with devastating financial consequences.
Even though questionable accounting also exists in Egypt, "it is on a much smaller scale," says Hesham Hassabo, a commerce professor at Ain Shams University. "The size of the market, business culture, the number of investors and the historical development of accounting practices, are all factors which make the possibilities and consequences of accounting fraud quite different in Egypt," Hassabo adds.
Egypt's relatively late transformation into a market economy makes comparison with the US difficult. In Egypt, the dominance of the public sector can be seen in accounting and auditing regulations which are not market oriented. The unified accounting system (UAS), designed in the '60s, mainly for the public sector, was not radically altered until the late '90s. The UAS defers to the Central Auditing Agency (CAA) which guarantees proper conduct in public sector companies and joint ventures with public holdings greater than 25 per cent. The CAA's close monitoring made fraud a rare event.
Egypt's privatisation programme also illustrated the relative absence of fraud. "With a total of 190 companies sold and 60 of them in the stock- market, not a single fraud case was discovered," says Mohamed Hassouna, head of the valuation and financial analysis unit at the Public Enterprise Office. "The only problem was in harmonising the UAS with International Accounting Standards (IAS). For that reason, the ministry has cooperated with international financial institutions to modify the financial statements of companies to be privatised on a case by case basis," adds Hassouna.
Nevertheless, "The absence of any uniformity between the UAS and IAS created a discrepancy in the evaluation of privatised companies. In some cases, the CAA's financial estimates were twice those of the international institutions," says Mostapha Abdel-Latif, a Price Waterhouse Coopers analyst.
In the past, the UAS focused on public sector companies because privately owned ones were of little significance for the national economy. However, the increasing importance of private companies, as a result of privatisation and the encouragement of private sector investment, has meant that a lot still needs to be done. The annually published accounts of limited and public companies are crucially important for financial analysts and investors. They also act as a signal for the economy as a whole.
Increased foreign investment has also led to a revival of the auditing profession in Egypt. However, regulation still lags. "There is still no monitoring of accounting and auditing practices," says Abdel-Latif. There is also no regulation in place requiring the independence of auditors. Additionally, "there is no time limit on contracts between companies and auditors, a regulation adopted in the US to prevent any stable relationship developing between them. All that exists is a general framework, forbidding the auditing company's employers from investing in the audited company," says Hossam Omar, a lawyer.
This means that while fraud in financial statements is not as important in Egypt as in the US, it is still not easy to discover early. The relatively small market, the limited numbers of investors in the stock-market and the lack of a business culture, gives disproportionate influence to elements other than financial statements in directing the movements of the market. As a result, the importance and effect of financial accounting is not the same as in the US. Indeed, while American companies tend to inflate profits to push up share prices, Egyptian companies often prefer to deflate profits to avoid taxes and paying high dividends.
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