Accounting and Business magazine
As political stability returns to Egypt, greater adoption of international accounting standards is seen as a key factor in galvanising the economy and foreign investment. By Paul Cochrane in Cairo
With the dust settling in post-revolutionary Egypt, economic reforms are on the agenda as the country seeks more foreign investment to get back on its feet. Improving auditing and accounting standards is on the to-do list to bolster capital inflows and the domestic economy.
Egypt has been on a rollercoaster ride since the uprising that ousted long-term president Hosni Mubarak in January 2011. The Muslim Brotherhood came to power in the elections a year later, ushering in a period of uncertainty. In July 2013, Mohamed Morsi, who had been elected president just 12 months before, was put under house arrest following major demonstrations. The leader of the coup, army chief Abdel Fattah Sisi, was elected president in May 2014.
The political turbulence has discouraged foreign direct investment (FDI), which dwindled from US$6.8bn in 2010 to around US$3bn in 2012 and 2013 (according to Central Bank of Egypt figures), and only gradually returned to something like its pre-revolution levels in 2014, when the World Bank valued FDI at US$5.53bn. However, economic growth is still sluggish, way below what is needed to absorb the 700,000 new entrants entering the workforce annually as a result of Egypt’s population growth, according to the government’s Central Agency for Public Mobilisation and Statistics.
Meanwhile, the International Monetary Fund (IMF) says that Egyptian foreign exchange reserves plunged by 50% between January 2011 and late 2014, and the US dollar exchange rate for the Egyptian pound has fallen from 5.70 in 2010 to 7.60 at the time of writing.
Numerous laws and reforms have been delayed because of the political instability. The new government is now planning to reintroduce legislation and some laws previously proposed under the Mubarak regime, such as a new investment law and an amended companies law. Over the past year, the Egyptian Institute of Directors, part of the Egyptian Financial Supervisory Authority, has drafted an updated code of corporate governance, based on Organisation for Economic Cooperation and Development (OECD) guidelines, that should be enacted this year.
There are also hopes that an Egyptian accounting standard for small and medium enterprises (SMEs), based on International Financial Reporting Standards (IFRS) for SMEs, proposed by the Egyptian Society of Accountants and Auditors prior to the revolution, will be implemented.
The supervisory authority has been active since its creation in 1997. In 2008, it established an audit oversight board. But while the financial sector is implementing international best practice, just 213 companies are listed on the Egyptian Exchange, compared with hundreds of thousands of companies not audited to the same standards.
Khaled Dahawy, professor of accounting at the American University in Cairo, says: ‘Unfortunately many SMEs are more interested in tax returns than income statements, so there’s a big mismatch with what we are asking to do. Accountants have become tax consultants.’
Microbusinesses, with fewer than four employees, make up an estimated 91% of Egyptian enterprises, employing 58% of the total workforce, while SMEs account for 8% of enterprises and 25% of the workforce, according to a Carnegie Middle East Center 2014 report, The private sector in postrevolution Egypt.
Mohanad Khaled FCCA, managing partner of BDO Khaled and ACCA voluntary representative for Egypt, says: ‘SMEs are an area we need to work on, as they contribute 80% to 85% of the GDP. That is huge. Imagine how much we need (as accountants) to cater for, as well as the parallel economy we’re not aware of.’
Mohamed Farid, chairman and CEO of Dcode, an economic and financial consulting firm in Cairo, conservatively estimates that if the informal sector were brought into the general economy, there would be a 40% to 50% increase in GDP. But to do that, simplified accounting standards should be applied to ease the cost and resources burden on SMEs, and there would need to be awareness campaigns about accounting processes.
‘The ultimate point is how to expand the role of auditors rather than be only for listed companies and corporations,’ says Farid.
As for the formal business sector, IFRS-based accounting standards were adopted in 2007. ‘They are to a great extent compliant with IFRS – say 95% – but there are four standards we couldn’t have translated due to legal and legislative reasons,’ says Khaled.
The missing four
The four omissions are current cost accounting (except investments), certain employee deductions of profit sharing (by law, not through income statement), general reserves for banks, and financial leasing. Egyptian account leasing legislation contrasts sharply with IFRS. ‘We are still lobbying for legislative change on that as accountants,’ says Khaled.
Implementation of the new standards is patchy outside blue-chip and profitable boutique businesses, however, despite Egypt having a developed accounting sector. Local firms have been expanding internationally and the top 12 global firms all have a presence in the country.
The Egyptian Society of Accountants and Auditors (ESAA), part of the International Federation of Accountants (IFAC), offers courses on the new standards to its 5,000 members, but there has been minimal IFRS outreach to the overall accounting community.
‘That is just 5,000 out of 100,000 accountants [in the country],’ Dahawy points out. ‘Many of our older gentlemen or ladies in accounting have no idea what the standards are. There needs to be mass education courses at low costs and with no exams, just pass or fail, as you can’t implement standards if people don’t know them.’ He would also like to see an accounting law defining the profession and qualifications.
Farid agrees it is not the rules and standards that need improving, but training. ‘There is room for improvement due to the vast number of personnel in this area and the diversity of their backgrounds [with a need for continuous training],’ he says.
As well as the usual tension between academic and technical training, Egypt faces particular issues. Different accounting standards are taught at universities, including IFRS, Certified Public Accountant (CPA) standards and US GAAP, along with the Egyptian standards themselves, published in Arabic.
The primary route to enter the profession is to train for three years at a firm and automatically become a certified accountant after eight years. The second track is through the ESAA, which requires examinations over a three-year period.
Differences in courses, standards and language ability can bring complications. ‘Now, even with CPA, the society asks you to sit two exams, law and tax, which is a disaster, as you may be fluent enough in English for the CPA, but not fluent enough in Arabic for the accounting and auditors exam. It’s a catch-22,’ says Dahawy.
Work was under way before 2011 to establish an Egyptian accounting body to govern the sector but, as with the SME standards, it was put on hold by the revolution. Khaled is hopeful that with more political stability and economic growth such a body will be created and other laws passed to drive development, including legislation on taxation, which is increasingly coming under global regulatory scrutiny.
Khaled says: ‘Accountants have their own ways to deal with tax matters, and that needs to change. It is on its way. It comes down to a number of things, the legal and administrative system. We have a reasonable legal framework; it is the administrative loopholes that, if I may say so, need to be mitigated.
‘One way to enforce taxation is if we make efforts towards introducing the parallel economy into the tax system.’
Dahawy sees an updated code of ethics as key to such change: ‘The previous code dates back to 1933, which is a disgrace. There is, in general, great confusion between what is legal and what is ethically correct, and there needs to be work to understand the difference.’
Such improvements would include greater oversight and enforcement of auditing laws. ‘I don’t recall anyone going to jail recently for an accounting problem, just one in 20 years,’ he says.
In the immediate term, Egypt has been pinning investment hopes on the results of the government-organised Egypt Economic Development Conference, held in March in the Red Sea resort of Sharm El-Sheikh. The aim of the conference was to attract US$10bn to US$20bn in investment, with some US$12bn earmarked for infrastructure projects, showing that Egypt is once again open for business.
While there is optimism, low oil prices may mean less than expected investment from the oil-rich Gulf countries. Ongoing attacks within Egypt on the security forces, conflict in neighbouring Libya, and instability in much of the Middle East may also influence investment commitments. In the medium term, greater adoption of international accounting standards could be critical in attracting FDI beyond infrastructure and high-profile projects.
Dahawy says: ‘To get the FDI that Egypt needs, there should be the stamp of something the investor understands. It’s in everybody’s interest that we move to internationally accepted standards, and more than that, implement them, which we are fighting to do right now.’