Economic Consequences of Accounting Standards: Implications for the Saudi Organization for Certified Public Accountants (SOCPA)

This study aims at collecting empirical evidence on whether or notfinancial accounting standards which exist in the Kingdom of Saudi Arabia giverise to economic consequences. Awareness of the potential economicconsequences of accounting standards emerged first in the United States ofAmerica in the 1970s, but increasingly has attracted a great deal of attention inmany different countries over the last twenty years. The impact of accountingstandards on management behaviour has been cited as one of the consequences. Factors that affect management's attitudes in choosing amongalternative accounting methods are established through the political cost theoryand the contracting and agency theories. Using these theories, this studyhypothesises that company size, the presence of Government debt and/ordonations, the ratio of foreign employees to total employees, the presence ofmanagement compensation plans, and insider ownership provide incentives forthe management of Saudi joint stock companies to adopt income-increasing or -decreasing accounting policies. The results of the univariate and multivariate tests show that companysize, ratios of foreign employees to total employees, and insider ownership aresignificant determinants of inventory, research and development, and Zakatpolicies. These findings provide empirical support for the principal hypothesisof this thesis. That is, accounting standards which exist in Saudi Arabia giverise to economic consequences and managers of companies consider theseconsequences when selecting accounting policies. In summary, this principalconclusion is of critical importance to the Saudi Organization for CertifiedPublic Accountants (SOCPA), given that accounting standard setting processesare still in their early stages of development. It supports the view that SOCPAshould acknowledge the possible adverse economic consequences that mayresult from its accounting standards decisions. In fact, the results of this studyjustify, in the very least, a wider and more detailed study by SOCPA of theeconomic effects of its potential accounting standards. The findings may alsocall into question the financial accounting standards which have been recentlypromulgated in Saudi Arabia.