Accounting Practices by SrinivasInguva

1. Accounting and Auditing Practices in UAE Srinivas Inguva PhD Department of Accounting, Faculty of Business Administration, Ajman University of Science and Technology Network, P.O Box 346, Ajman, United Arab Emirates drsrinivas_i@yahoo.com & drsrinivas_i@hotmail.com ABSTRACT: The UAE has an open economy with a high per capita income and a sizable annual trade surplus. Public enterprises in the UAE are of recent origin and their establishment was encouraged after national independence in 1971 not only to provide more efficient and effective services but also to promote economic growth and help in generating state revenue. Public enterprises in the UAE are maintaining their accounts in accordance with the accounting standards contained in their respective laws and regulations and prepare their financial statements on historical cost basis in accordance with Internationally Accepted Accounting Standards. In many countries, accounting regulation is based on a system of detailed rules prescribed in standards and law. In UAE the State Audit Institution has been set up as an independent authority attached to the federal national council by Federal Law of 1971.The State Audit Institution carries out concurrent audit and post audit of all financial operations relating to jointly own public enterprises. The main objective of the present study is to evaluate and analyze the present accounting and auditing practices in the United Arab Emirates in general in the light of Auditing Standards and from the view of State Audit Institution. Keywords: Accounting and Auditing Undertakings, Rules and Regulations, Auditing Standards, State Audit Institution and UAE Introduction: Since the discovery of oil in the UAE more than 30 years ago, the UAE has undergone a profound transformation from an impoverished region of small desert principalities to a modern state with a high standard of living1. The government has increased spending on job creation and infrastructure expansion and is opening up its utilities to greater private sector involvement. According to the 2002 estimates the composition of GDP from the Industries sector (58.5%) is more when compared to services sector (37.5%) and the agriculture sector (4%)in the UAE economy. But, in the total labor force 2.36 million, labor engaged in the services sector (78%) is more followed by industry (15%) and agriculture (7%) sectors. The UAE has no restrictions or regulations on foreign exchange. Capital, profits, interest, and royalty payments may be repatriated freely. The current domestic financial market is best described as "over- banked." It consists of forty-eight local and foreign commercial banks, two restricted license (specialized) banks, and thirteen foreign bank representative offices. Many of the large, international accounting firms are maintaining their offices in the UAE.According to the new Federal law Concerning the Organization of the Auditing Profession No. 22 of 1995 and the supplementing Ministerial Resolutions No. 49 of 1996 and No. 7 of 1997, foreign accounting firms can now only be listed in the register of active accountants if they have operated in the UAE prior to the effective date of the 1995 law. Further, the new law requires that all foreign firms will have to take on UAE nationals as partners2. Public enterprises in the United Arab Emirates (UAE) are of recent origin. Their establishment was encouraged after national independence in 1971 to provide more efficient and effective services, promote economic growth and help in generating state revenue. Public enterprises maintain their accounts in accordance with the accounting standards contained in their respective laws and regulations. All public enterprises in the UAE are preparing their financial statements on historical cost basis and strictly in accordance with Internationally Accepted Accounting Principles. In the year 1971, The State Audit Institution has been set up as an independent authority attached to the Federal National Council (Parliament) by the constitution as one of the Federal authorities. The SAI does not audit public enterprises in any Emirate except upon a written request from its ruler. The SAI carries out concurrent audit and post audit of all financial operations relating to jointly own public companies3. The general objective of the SAI in conducting the audit of public enterprises is to assist these enterprises in achieving their objectives in the most efficient, economic and effective ways4. The main objective of the present study is to evaluate and analyze the present accounting and auditing practices in the United Arab Emirates in general in the light of Auditing Standards and from the view of State Audit Institution. Information drawn from different primary and secondary sources has been analyzed and interpreted to express the main theme of the paper. The study may be useful to appraise the present accounting and auditing practices in the UAE, to strengthen such practices. The study is limited to the accounting and auditing practices, rules and regulations and State Audit Institution in the UAE. Literature Review Several studiers have been conducted on the accounting and auditing practices in this region. Due to time and space constraint only two and highly relevant studies are mentioned below Financial reporting practices in selected Arab countries: an empirical study of Egypt, Saudi Arabia, and the United Arab Emirates by Jeffrey Kantor , Clare B. Roberts , Stephen B. Salter stated that “the Financial reporting, Accounting and auditing practices arise from the need to inform the participants in the society in which they are developed. It is therefore not unreasonable to expect that accounting and reporting practices will generally reflect the environmental factors that influence business practice in that society. The practices, Public Sector

2. Arab countries have a great deal in common, although they may perceive themselves from time to time as having different political and economic aims. Despite great wealth in some of them, they are all developing countries attempting to build a modern business infrastructure within the constraints of limitations in available social and physical resources. They share the common bond of an Islamic religious and cultural heritage, which specifies certain rules about life and economic activity. In many cases they share a heritage of economic or political colonialism but maintain a tradition of independence5. An another relevant study to quote in this regard is “Accounting standards and practices of financial institutions in GCC countries” by Mostaque Hussain et.al. According to the study, “there has been a growing tendency to establish closer ties among GCC (Gulf Cooperative Council) countries in economies and financial institutions. As a result, there is an increasing need for the harmonization of accounting regulations in order to improve cooperation and enhance the efficiency of financial institutions among GCC countries6. The study is an investigation of the accounting standards followed by the financial institutions in five GCC countries with some policy prescriptions for the harmonization of accounting regulations in GCC countries. This paper deals with accounting policies and practices including loans and provisions, assets, investments and taxation, liabilities and foreign exchange, revenue recognition and consolidation of GCC countries banking and other financial institutions. The study was an in depth analysis of the similarities and differences in accounting standards and practices in GCC countries except Kuwait. There are no specific studies explaining how the accounting and auditing is conducted in the public sector undertakings in the UAE. The present study is an attempt to explain accounting and revenue audit procedures in the public sector undertakings in the UAE. Data and Methodology The present study is based on both secondary and primary sources of information collected from the officially published secondary sources like web sites, publication and annual reports of the public sectors undertakings and the primary sources include the summary of personal interviews conducted to the concerned accounting and auditing authorities of the public enterprises related. Information drawn from different sources has been processed and presented to strengthen the subject matter of the study. Since the main focus of the study is on the accounting and auditing practices in UAE, major part of the information is collected from the officially published records and reports. The Study: Accounting regulation and auditing practices are based on a system of detailed rules prescribed in standards and the law7. Accommodation of the rapid expansion of the several free zones established in the UAE and the administration of various types of industries located in this region needs a systematic application of required accounting and auditing practices in this region. As a result of the introduction of obligatory standards on the practitioners of all business entities and professionals, the importance of auditing and accounting profession has been increased tremendously in this region. There are around 3036 manufacturing industrial establishments are functioning with a capital investment of 62978 million AED in UAE during 2004 year. According to UAE directory, as on today there are 35 oil & petroleum gas and allied industrial establishments are engaged in various oil business and other services. Within its function the Ministry of finance and industry is accountable for supervising the organization of the industry affairs; further more, to urge the revenues with in the rules and principles of the provisions of federal Law number 1 of 1979. Financial professionals who work with state and local governments must stay current with emerging governmental standards or face some unfortunate consequences. This one- of-a-kind tool discusses all the promulgated accounting principles applicable to financial reporting by state and local governments. No natural person or corporate entity may practice the auditing profession in the State, unless his/its name is registered in the Schedule of practicing Auditors, kept by the Ministry8. As on today, according to the index UAE.com there are 17 accounting and auditing firms are engaged in the development and consolidating the rules and standards for the practice of the profession of accounting and auditing in UAE. “Federal law number (22) of 1995 regarding organization of auditing profession” and “Federal law number (9) of 1975 regarding organizing accounting and auditing” are the two basic statutory laws relating to accounting and auditing profession in the UAE. Until 1992, there was no legislation prescribing accounting policies to be followed nor was there a prescribed minimum level of disclosure. Management and the auditor had considerable discretion in determining accounting policies that were to be followed9. As a result auditors’ reports are at variance making reference to proper books of account, international accounting guidelines, generally accepted auditing standards and generally accepted accounting principles. Company law requires the directors to prepare financial statements for each financial year, which give a true and fair view of the company’s state of affairs at the end of the year and of its profit, or loss for the period10. International association of oil and gas producers’ statement of directors’ responsibilities stated that the directors are required to select proper accounting policies, and their consistent application. They are also needed to prepare the financial statements on the going concern process. The directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at anytime the financial position of the company and enable them to ensure that the financial statements comply with the company’s act of 1985. All the public sector and private sector industrial organizations are adapting Standards while preparing their financial statements and majority of them are audited by popular foreign auditing firms. With Government Financial Activities continuously expanding, the importance of public Revenues has increased not only as means for financing government activities but also for building General Reserves for government to meet any unforeseen expenses as well as means for checking inflation etc11. In U.A.E. government revenues are derived mainly from non-tax receipts because there are no taxes levied on income or on profits, the only taxes levied being those levied on some of the imports and some fees on Public Services as health, Communications etc. The proceeds from these taxes i.e. excise duties represent only 5% of International Accounting

3. government revenues while the fees represent about 19%. The main item of government revenue is derived from contributions from the member Emirates of the Union. Public Corporations, Companies or any bodies in which the state or any public artificial person has a share of no less than 25 percent or for which the state guarantees minimum limit of profit or offers financial subsidy. In addition to these audits, the SAI also approves draft government contracts above 500.000 dirhams, The SAI also exercises concomitant audit and inspection during contract and some operations implementation as well as having a full post audit. The president of SAI has to forward an annual report about each final account of the bodies subject to the SAI's audit but he can also forward other reports during the fiscal year about cases which he may see of major importance obliging perusal of the concerned authorities, as well as the annual general report which exposes all the activities which are conducted by SAI, explaining all the major findings, conclusions and recommendations. So this AGR in considered as a very important document, which plays an important role in the financial and administrative reform in the State14. According to article No. 136 of U.A.E Constitution, Federal law No. 7 for 1976 was issued, establishing the state audit institution (S.A.I) as one of the federal authorities attached to the Federal National Council in its capacity as the legislature in the U.A.E. The State Audit Institution has a right to exercise the audit in regard to time, in regard to nature and in regard to scope of audit. In regard to time they are exercising pre audit, concomitant and post audits. In regard to nature of audit they exercise regularity audit and performance audit. To ensure that the administrative authorities have collected the revenues accrued to the State and added them to the related accounts. For this purpose the S.A.I shall scrutinize the documents, sheets and accounts to ensure the sound calculations of such dues, that the collected amounts are the legally accrued and that the financial operations relating to the collection of these accrued amounts and to their entry, have been accomplished regularly and according to the financial and accounting laws, regulations, and rules. The conduct of an effective Audit requires the objectives, standards and criteria to be set out clearly. This can be attained through applying planning techniques in managing the audit work. The preliminary stage, according to the present audit work plan, includes the examination of the auditee's general policies, internal control system and the critical points etc. All the information gathered is analyzed and evaluated. The conclusions reached are taken into consideration in the next audit stage. SAI improve its methodologies and practices, reviews, evaluates and refines its methodologies and accordingly issues internal circulars for the use of staff. According to Article 13 of S.A.I's law the S.A.I shall practice its powers as provided in this law by both methods of auditing and inspection. S.A.I can perform inspection on the bodies subject to its audit spontaneously or at the request of the authority concerned. .The audit practiced by the S.A.I shall be complete or selective and according to the rules determined by the work plan drawn up by the S.A.I and which shall not be available to the bodies subject to audit. Also article 14 of S.A.I law states: "the S.A.I is entitled to scrutinize any document, record or papers which the S.A.I deems necessary for its proper performance of audit".In accordance with S.A.I law No. 7 for 1976, the president of the S.A.I issued decision No. 1 for 1978 as a regulation for organizing the process of audit works and issued decision No. 192 for 1988 as standards for S.A.I audit. The major issues covered in the public sector undertakings in the UAE are the Assessment Audit, Collection's Audit and Accounting Audit The assessment phase is the most important phase in the Revenue process as it initiates the accruing of revenue. Thus the auditor has to take due care when auditing assessments. The main points checked in this connection are: Checking files/documents to ensure that the information presented by revenue payers is complete, accurate and relevant and checking the accuracy of the calculations to ensure that the assessed amounts are legally accrued. Collection audit ensures that the assessed revenues have been realized in time as delay in realization of revenue encourages indiscipline, probably defalcation and financial contraventions and also increases the cost of administration. Accounting Audit ensures that the administration keeps up-to-date and accurate accounting entries-records i.e. ensure that these records provide complete information about assessed amounts, position of realization etc., as this reflects largely the efficiency of Revenue administration and its internal control system. The majority of audit findings are: the related assessment Guide Lines on revenue audit include Scrutiny of the laws, rules and regulation organizing the revenue process, Scrutiny of the financial & accounting systems in the revenue administrations and this includes the study of internal financial controls and internal check systems, and finally Checking the three phases of the revenue process i.e. assessment phase, collecting phase and deposit of revenues phase12. The SAI in U.A.E is aware of the importance of performance audit as means of improving public sector management of resources, and as means of enhancing accountability of the executive branch of the government by providing adequate information to the legislature. The SAI's law entitles the SAI to conduct performance auditing and accordingly instructions and directives were issued to be followed by SAI's staff for effective conduct of performance audit13. • Under and over-collections which are mainly due to insufficient legislative provisions and lack of executive sanctions. Violation of laws and regulations. Lack of proper attention towards records management and system improvement. Errors in calculations and in recording accurate accounts. • • The State Audit Institution conducts financial audits of public funds. It also ensures the legality and safety of the management of these funds and of the implementation of development projects. Itdoes this by conductingfinancial audits of Ministries, Federal Government Departments, •

4. Reporting is the last stage in the audit process. The results of this process cannot be effective nor have useful impact, unless the findings are presented in a clear and accurate manner in the audit reports and according to the SAIs audit standards. The SAI should make sure that reports contain relevant, accurate and reliable information and fair assessment on the execution of the State's General Budget in respect of the Revenue process (assessment, collection and accounting) indicating any weaknesses in the process. According to SAIs mandate, the SAI has to submit the initial reports to the executive and the General Report to the legislature and notified to the supreme authorities of the state. The SAI is very keen to make sure that its reports reflect its activities, realize their required objectives and be of maximum benefit and effectiveness. References Sources 1.UAE Economy overview, CIA world Facts Book, 10th January 2006 2.www.IndexUAE.com 3.www.saiuae.gov.ae 4.Ibid 5. Jeffrey Kantor , Clare B. Roberts , Stephen B. Salter.,(1995) “The Accounting and auditing practices in the Arab countries”, International studies of Management and Organization, volume 25. 6.Mostaque Hussain et.al., (2002), “Accounting standards and practices of financial institutions in GCC countries”, Managerial Auditing Journal,302- 362. 7.www. UAE lawupdate.com 8.www.indexuae.com 9.www.tamimi.com 10.www.gulf-law.com/uae 11.www.saiuae.gov.ae 12.Ibid 13.www.asosai.org 14.www. saiuae.gov.ae Other Reference Sources 1.www.mideasti.org 2.www.uaeinteract.com 3.www.law.emory.edu 4.www.usc.edu 5.www.loc.gov 6.www.unu.org 7.www.pogar.org 8.www.adcci.gov.ae 9.www.imf.org 10.www.hlbi.com Financial Reporting, The Summary: In many countries accounting regulation is based on a system of detailed rules prescribed in standards and law. In the UAE the State Audit Institution has been set up as an independent authority attached to the federal national council by federal law and it carries out audit of all financial operations relating to jointly own public enterprises. Public sector enterprises, which are of recent origin, prepare their financial statements on historical cost basis and strictly in accordance with Internationally Accepted Accounting Standards. The study has reviewed accounting and auditing practices and the law relating to these practices in the UAE while quoting the two recent studies on this subject matter. The recent study by Jeffrey et .al stated that financial reporting, accounting and auditing practices arise from the need to inform the participants in the society in which they are developed and Arab countries should share a common bond of Islamic religious and cultural heritage which specifies certain heritage which species certain rules about life and economic activity. Another study in this regard while stating that there has been a growing tendency to establish closer ties among GCC countries in economies and financial institutions among GCC countries analyzed the difference and similarities in accounting standards and practices. In the UAE all the public sector and private sector industrial organizations are accounting standards while preparing their financial statements and popular foreign auditing firms audit majority of them. The 1971 constitution of the UAE has established the state audit institution as one of the federal authority to audit the public sector undertakings. According to the law the state audit institute has been provided with methods of auditing and inspection. The state audit institution is aware of the importance of the performance of audit and enhancing the accountability of the executive branch of the government by providing the required information. The major issued covered in the revenue auditing of the public sector undertakings are assessment audit, collection audit and the accounting audit. The state audit institution has the responsibility to submit the initial reports to the executive and the general report to the legislatures and notified to the supreme authorities of the state. The State audit institution set up has been strengthened and standardized the accounting and auditing practices in the public sector undertakings in the UAE. Although it is very recent in origin, the Accountants and Auditors Association of UAE performing very well and trying to standardize the accounting and auditing profession in the UAE to suit the local requirements. adapting international