Economic Consequences of Accounting Standards

: Implications for the Saudi Organization for Certified Public Accountants (SOCPA)

Abstract

This study aims at collecting empirical evidence on whether or not
financial accounting standards which exist in the Kingdom of Saudi Arabia give
rise to economic consequences. Awareness of the potential economic
consequences of accounting standards emerged first in the United States of
America in the 1970s, but increasingly has attracted a great deal of attention in
many different countries over the last twenty years. The impact of accounting
standards on management behaviour has been cited as one of the consequences. Factors that affect management's attitudes in choosing among
alternative accounting methods are established through the political cost theory
and the contracting and agency theories. Using these theories, this study
hypothesises that company size, the presence of Government debt and/or
donations, the ratio of foreign employees to total employees, the presence of
management compensation plans, and insider ownership provide incentives for
the management of Saudi joint stock companies to adopt income-increasing or -
decreasing accounting policies. The results of the univariate and multivariate tests show that company size, ratios of foreign employees to total employees, and insider ownership are significant determinants of inventory, research and development, and Zakat policies. These findings provide empirical support for the principal hypothesis of this thesis. That is, accounting standards which exist in Saudi Arabia give rise to economic consequences and managers of companies consider these consequences when selecting accounting policies. In summary, this principal conclusion is of critical importance to the Saudi Organization for Certified Public Accountants (SOCPA), given that accounting standard setting processes are still in their early stages of development. It supports the view that SOCPA should acknowledge the possible adverse economic consequences that may result from its accounting standards decisions. In fact, the results of this study justify, in the very least, a wider and more detailed study by SOCPA of the
economic effects of its potential accounting standards. The findings may also
call into question the financial accounting standards which have been recently
promulgated in Saudi Arabia.

Date of Award	1999
Original language	English
Awarding Institution	Aberystwyth University
Supervisor	Mark Tippett (Supervisor)