Tensions between politico‐institutional factors and accounting regulation in a developing economy: insights from institutional theory

• Published date: 01 October 2015
• Author: Mohammad Nurunnabi
• Date: 01 October 2015
• DOI: http://doi.org/10.1111/beer.12089

Tensions between politico-

institutional factors and

accounting regulation in a

developing economy: insights

from institutional theory

Mohammad Nurunnabi

Department of Accounting, College of Business Administration, Prince Sultan University, Riyadh, Saudi Arabia

The study contributes to building an understanding of the impact of political forces on the information

environment of listed firms in a developing economy. Specifically, it investigates the tensions between

politico-institutional factors and accounting regulation on the prolonged and incomplete implementation of

the International Financial Reporting Standards (IFRS) in Bangladesh from 1998 to 2010. Two phases of

interviews were conducted in 2010–2011 and IFRS-related enforcement documents from 1998 to 2010 were

evaluated. The study contributes that IFRSs are being diffused to developing countries like Bangladesh, but

they invariably interact with local institutions (political institutions in this case), with variable outcomes

(i.e. negative outcomes of IFRS implementation). Coercive, normative and mimetic isomorphisms are low

in Bangladesh. Notably, political forces have been undermining mimetic isomorphism because of the high

level of government intervention and the high level of political lobbying. Political institutional pressures

stand in the way of mimetic isomorphism and constitute negative forces that add further tension to account-

ing regulation (e.g. the implementation of IFRS) in Bangladesh. Regarding the low level of normative

isomorphism, there is evidence of a ‘blame culture’, with state institutions and professional accountancy

institutions in the country blaming each other for the poor progress in IFRS implementation. Although the

study focuses on Bangladesh, its results have implications for international policy makers (the Interna-

tional Accounting Standards Board, the International Monetary Fund and the World Bank), as well

as the governments and regulators of other developing economies facing similar challenges in implementing

IFRS.

Introduction

‘The major emerging and transition economies of

the world – Brazil, China, India, and Russia – are

adopting or considering the adoption of IFRS, not

US GAAP, in an effort to become integrated in the

world’s capital markets and attract the investment

necessary to finance their development. . ..There is

clear momentum towards accepting IFRS as a

common financial reporting language throughout

the world....Investors are able to make compari-

sons of companies operating in different

jurisdictions more easily’ (Sir David Tweedie 2007:

2).1

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Business Ethics: A European Review

Volume 24 Number 4 October 2015

© 2015 John Wiley & Sons Ltd, 9600 Garsington Road,

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doi: 10.1111/beer.12089

398

‘[T]he most likely effect of local politics and local

market realities on IFRS will be much less

visible. . .. I believe the primary effect of local

political and market factors will lie under the

surface, at the level of implementation, which is

bound to be substantially inconsistent across

nations’ (Ball 2006: 16).

The two comments set out above represent con-

trasting attitudes toward the adoption and imple-

mentation of International Financial Reporting

Standards (IFRS).2Although there are said to be

ample benefits in adopting IFRS as a common finan-

cial reporting language (Tweedie 2007), underlying

questions remain regarding implementation because

of political and market factors (Ball 2006). The defi-

nition of ‘IFRS implementation’ in the context of the

present research is: the observed outcomes of intro-

ducing and monitoring accounting standards. These

outcomes will include the actions of the government,

the Bangladesh Securities and Exchange Commis-

sion (BSEC), Ministry of Commerce, Ministry

of Finance, professional bodies, Dhaka Stock

Exchange (DSE, Bangladesh) and the Central Bank

(Bangladesh Bank). ‘Politico-institutional factors’

refer to (a) political factors and (b) cooperation

among state institutions and professional bodies

which affect the implementation of IFRS. From a

comparison with 11 prior studies, which have been

carried out in developing economies, it is apparent

that Bangladesh has the lowest level of compliance

with IFRS (see Table 1).

Two Reports on the Observance of Standards and

Codes (ROSC reports) have been published by the

World Bank regarding accounting and auditing

practices in Bangladesh. In the first report, the

World Bank (2003: 1) stated that: ‘Accounting and

auditing practices in Bangladesh suffer from institu-

tional weaknesses in regulation, compliance, and

enforcement of standards and rules’. In a subsequent

report, the World Bank (2009: 25) included the same

sentiments regarding the poor implementation of

IFRS, observing that ‘Efforts to implement IFRS for

listed companies and other public interest entities

should be accelerated. This will require either more

frequent updating of BAS (Bangladesh Accounting

Standards) or simply adopting IFRS explicitly.

. . . Full implementation will also require that

current donor assistance to ICAB (Institute of

...................................................................................................................................................................

Table 1: Eleven prior studies on disclosure level in developing economies

Author(s) Country of study Disclosure level (%)

Ahmed & Nicholls (1994) Bangladesh 51.33

Abd-Elsalam & Weetman (2003) Egypt 83.0

Al-Shiab (2003) Jordan 56.0

Ali et al. (2004) Bangladesh 78.0

India 79.0

Pakistan 81.0

Akhtaruddin (2005) Bangladesh 43.53

Abdelsalam & Weetman (2007) Egypt 76.0 (1991–1992)

84.0 (1995–1996)

Hasan et al. (2008) Bangladesh Not mentioned

Al-Shammari et al. (2008) Bahrain 65.0

Kuwait 72.0

Oman 65.0

Saudi Arabia 75.0

Qatar 69.0

UAE 75.0

Fekete et al. (2008) Hungary 62.0

Al-Akra et al. (2010) Jordan 54.7 (1996)

79.0 (2004)

Omar & Simon (2011) Jordan 83.12

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Business Ethics: A European Review

Volume 24 Number 4 October 2015

© 2015 John Wiley & Sons Ltd 399