Accountants  and  auditors  in  the  Arab  Machreq   From  colonial  to  global  models   Draft paper

Abstract   The comparative approach highlights the differences in national trajectories of the accounting profession in different countries. It also reveals the importance of legacies as well as policies, professional strategies, and specific socio economic constraints. In Machreq countries, the history of the modern accounting profession has been shaped firstly by the respective influence of France and Great Britain as colonial powers, then by the economic policies of new political regimes in the 1960s and finally, by the constraints of open markets and globalization, since the beginning of the 1980s. A comparison between Egypt, Syria, Lebanon and Jordan, interestingly reveals cross influences and developments, followed by convergences, and similar tensions and conflicts on professional models.

Key  words   Accounting profession, historical legacies, globalization, Lebanon, Jordan, Syria, Egypt, comparative sociology

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At the crossroads of several ancient civilizations based on long distance trade, peoples of Eastern Mediterranean and Asia Minor have developed since ancient times a practice of accounting for the use of merchants and trade (Goody 1996). Besides, “there is evidence that the art of record keeping and accounting was practiced in ancient Egypt (Farag 2009). More recently, the Ottoman XVI to XIX centuries were a particularly flourishing period for trade, with increasing relations between Europe and the East. As research on the history of “Islamic accounting” is still scarce, recent research have focused on Ottoman accounting (mainly published in Turkish). Debate is going on about the origin of the method of double entry (Napier 2009), as some authors think that “double-entry bookkeeping which is credited to Paciolo's text of 1494 seem to have been preceded by a comprehensive accounting text which used a form of double entry by Abdallah El Mazindari in 1363, and therefore it may have been adopted around the same time it was found in the Italian cities” (Farag 2009 ; Zaid 2009). Following the introduction of Western interests in the nineteenth century, a new practice of accounting appeared with the arrival of foreign firms. Meanwhile, the Tanzimat reforms included the promulgation of a code of commerce, inspired by the French code, in 1850, and a law on joint stock companies in 1882, requiring the designation of an auditor (Young, 1906). The first English-speaking audit firms followed British firms in Egypt and in Palestine at the end of the 19th century. Alexandria’s stock market was created in 1888, followed by the Cairo stock market in 1903. The first modern local professionals were trained either in the Christian vocational schools1, or in companies and foreign audit firms. The history of the modern accounting profession is indeed deeply marked firstly by the respective influence of France and Great Britain, according to the country, then by the economic policies of new political regimes in the 1960s and finally, for two decades by the constraints of open markets since the beginning of the 1980s. A comparison between Egypt, Syria, Lebanon and Jordan, interestingly reveals cross influences and developments, followed by convergences, and professional conflicts whose form is marked by specific legacies. We contend here that a comparative approach highlights the differences in national trajectories of the accounting profession in different countries, and the importance of legacies as well as policies, professional strategies, and specific socio economic constraints (Ramirez 2005, Longuenesse 2010, 2014, Khlif Omari 2014). Although Kantor (quoted by Dahawy 2011) classifies Arab countries in the so-called Continental group (following the Continental “macroeconomic legalistic based” model of the profession, as opposed to the Anglo-American liberal micro-economic based model), Dahawy notes the importance of the influence of the United States in the recent period. I argue that the Anglo-American influence is more important in several aspects of the definition and development of the profession. This is true not only in countries previously occupied by the British, but even in a country such as Lebanon, where the French mandate clearly had a deep influence on professional matters. American universities in Beirut as well as in Cairo indeed played a role in introducing Anglo-American professional culture. Liberalization policies, the increasing embeddedness of regional economies in global markets, the penetration of multinational firms and the domination of the Big on the audit market, are today common features all over the world. Ramirez suggested that the penetration of the Big on the professional market was easier in Great Britain than in France, because of 1

The role of the Frères des Ecoles Chrétiennes (in Alexandria first, and later on in Palestine and Lebanon in the second half of the nineteenth century), seems to have been important in the development of vocational education, where accounting plays an important role (Riffier 2000).

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specific professional traditions: in the UK, the accounting profession had long been organized in professional firms, whereas in France it still considered the independent professional as the best model of practice. Ramirez theorized the concept of ‘model’ as based on the mode of practice and organization of work, and distinguishes between two historical ‘models of practice’, the firm and the independent professional (the ‘notable’). The Big represent a third model of the “mega global firm”. With this definition as a starting point, he suggests that comparative sociology should become sociology of confrontation of models. The approach advocated by Ramirez is stimulating for the study of the accounting profession in Middle Eastern countries. Yet, the scholar must consider the specificity of each country’s history, and its colonial legacy, as well as the impact of socio economic policies during the Nasserite or Baathist periods. Rather than ethnocentrism (Gallhofer, Kamla 2011), decontextualisation is the danger to be avoided (Longuenesse 2007, 2011).

From  state  model  to  open  door  policies:  Egypt  and  Syria   The modern accounting profession developed earlier in Egypt, and was radically transformed by state policies in the 1950s (Longuenesse 2009, Farag 2009). Despite the French colonial legacy, the Syrian profession was influenced by the Egyptian experience (Longuenesse 2007, Abdulraouf 2006). a) In Egypt, the first professional association of accounting, the Egyptian Association of Accountants and Auditors (ESAA), was created in 1946. Its board was composed of seven Englishmen and nine Egyptians, all of them members of the Institute of Chartered Accountants of England and Wales (ICAEW). The British dominated the profession and the market for accounting services until 1956: at that date, out of 89 members of ESAA, 32 were English or French. Foreign professionals were forced to leave Egypt in 1956, after the Suez crisis. The first law regulating the profession of "accountant and auditor" in Egypt was enacted in 1951. It created a certifying commission in charge of keeping a register of chartered accountants and auditors, under the auspices of the Ministry of Trade and Industry. A 1953 law required investors to target their accounting records and tax returns by a registered accountant in the Ministry of Finance. In 1955, three years after the overthrow of the monarchy and a year after the arrival of Nasser to power, a Union (or "syndicate") of Accountants and Auditors (niqâbat al-muhâsibîn al-wa-l -murâji'în) was created, membership became mandatory for practice, and the new syndicate supplanted the ESAA. In 1956, the profession was definitively nationalized with the expulsion of foreigners. The ‘socialist laws’ of July 1961 and nationalization of industrial and commercial companies, which succeeded until 1964, soon transformed the state into the main economic actor. A ‘Central Accountancy Court’ was assigned the responsibility of public sector finance control and audit of public enterprises and government administration. In 1966 was published a ‘unified accounting system.’ The activity of private offices declined rapidly (Farag 2009, Longuenesse 2009, Dahawy 2011). While the ESAA was dormant since the creation of the union in 1955, the latter had itself a reduced activity. Although it included a register for "non-practicing" members which could include some accountants who had abandoned private practice and become employed in various government agencies, its membership remained low. In 1972, it was absorbed into a large "professional syndicate", which eventually signed the control of the state over the profession (Farag 2009).

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Yet with the infitah policy the issue of the necessary independence of accountants in charge of auditing commercial and industrial companies’ accounts came back to the fore. In the 1980s, more and more private corporations were created. Following the first structural adjustment agreement with the IMF in 1991, a series of reforms were implemented. In 1992 a law on financial markets was promulgated. The transformation of the ‘public sector’ into ‘public business sector’ underlined a return to market logic. But it was not until 2002 that a branch for independent accountants was recreated within the union, which took into account the transformations of the professional market. By the 1990s, however, the ESAA had resumed service. Chaired by the son of one of the founders of the association, it represented mainly the interests of big and international firms. In the early 2000s, a project for reforming the profession, which gave a prominent role to ESAA, elicited a strong reaction on the part of representatives of the national midsize firms (Longuenesse 2011). The challenge was twofold: it referred both to the passage of an economic and social model in which the State was the main actor to a neoliberal model where nothing should hinder the freedom of movement of capital, and to the opposition between the model of a national profession and that of global audit firms. The challenge crystallized in the call to generalize the use of IFRS. b) In Syria, the Association of Accountants established in 1958 (Abdulraouf 2006, Gallhofer Haslam Kamla 2011)2 consisted mainly of independent accountants and was intended to turn into professional, or at least to play an increasing role in the structuring and control of the accounting service market. After the seizure of power by the Baath Party in 1963, the 1965 nationalizations completely transformed the nature of the Syrian economy. Soon, as had happened in Egypt earlier, accounting employees, particularly those of the ministry of finance, of tax administration and of the national audit court, represented the vast majority of members of the association. Many independent firms closed. The profession survived on a small scale, and its mission was reduced almost to the certification of accounts of small and very small industrial and commercial establishments for the Ministry of Finance. A few midsize firms could still be found mainly in Aleppo, the second city of Syria and former regional trade center in the Ottoman period, due to the persistence of an economic fabric of dynamic private companies, representing the private sector within a professional association dominated by senior officials of the Court of Audit and university professors (Longuenesse 2007). In the 1980s, with the first laws of liberalization, a slight change was felt. In 1988, Andersen opened an office in Damascus at the request of Elf Aquitaine (a French oil company granted permission to prospect new oil fields). Officially, a foreign firm still had no right to audit the accounts of a company working in Syria. Andersen's auditors could only audit foreign partners of the firm, and had to delegate to a Syrian firm the task of certifying for the state the accounts of a firm working in Syria. By 2004, Syrian professionals represented three of the big 5 (Abdulraouf 2006, Gallhofer Kamla), as a prelude to the full opening of the Syrian market, rendered inevitable by the succession of free-trade agreements signed by the Syrian government with its Arab neighbors, and the negotiation of an association agreement with the European Community. They soon dominated the local market for audit services. A tough battle occurred within the association, and state employees were forced to hand over the presidency to the representatives of private offices, whose position had been strengthened in this context of opening markets. As in Egypt, a new divide appeared between nationals and branches of foreign companies' offices, the latter being considered a threat to the national 2

Adulraouf mentions a first association founded in 1946, without giving his source. But this first association was not mentioned in the documents I consulted, or the interviews I did.

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profession. The issue of international standards did not seem however to be a matter of debate - although some did worry privately about their unsuitability to the Syrian reality.

Colonial  heritage  and  competition  of  models:  Lebanon  and  Jordan   Lebanon and Jordan never went through a socialist episode. The former had long been a hub for the penetration of European capital in the Middle East, and was able to capitalize on this legacy after independence, whereas the second developed a rentier economy, heavily dependent on foreign aid (British, then American). However, the family character of the Lebanese capitalism, combined with French influence, was not conducive to the institutionalization of a liberal accounting profession. Conversely, the British influence was felt in Jordan, although sometime afterwards, due to the late development of the market economy. The recent convergence of some developments in the accounting profession is all the more interesting to observe (Longuenesse 2010). a) In Lebanon, professionals trained in the Anglo-American mold remarkably created the first independent accounting firms. The best known, Fouad Saba, a Palestinian from Haifa, who was granted Lebanese citizenship after 1948, founded the first regional firm, with branches in Damascus, Aleppo, Amman and Kuwait (Longuenesse 2002, 2006). Until 1964, there was little regulation of the profession. Only experts from the courts had a small association. On 17 November 1963, according to a Ministry of Social Affairs Decree a Sundicate of Accounting Offices (Syndicat des cabinets comptables) was created, and three months later, on March 12, 1964, a British style professional association followed, the Middle East Association of Auditors and accountants (MESAA), chaired by Fouad Saba. The MESAA membership was composed of a small elite of mainly Anglo-Saxon trained accountants, with a few professionals holding other internationally recognized qualifications, whilst the Syndicate did not impose any condition other than practice for membership. As a trade union, whose aim was to defend the material interests of a professional group, the Syndicate was the only interlocutor recognized by the State, and included also members of the MESAA. But when the IFAC (International Federation of Accountants) was founded, the MESAA easily obtained its recognition, whilst the Syndicate did not until it evolved towards a more 'professional' logic. After the rejection of its first application to join IFAC in 1978, justified by the lack of control of the qualification of its members, it indeed modified its charter, introduced an exam, and changed its name to Syndicate of accountants (Syndicat des experts-comptables). An Accounting System (‘Plan comptable’) was enacted a few years later, in 1983, during the civil war, and a Higher Council for Accountancy, established the following year. In 1995 the creation of a new professional association, under the name “Ordre des Experts-comptables du Liban” (OECL), or Lebanese Association of Certified Public Accountants (LACPA), imposed a professional examination and a qualifying period of at least three years to obtain the license to practice, and full membership. Yet, the admission of a large number of "non-practitioners", i.e. graduate accountants (or certified public accountants) employed in the public or private sector, was interpreted as a form of control of the Ministry of finance, who was their main employer. Banks or financial institutions actually were the biggest employers, and although their presence probably had a clientelist dimension, this also reflected an Anglo-American influenced representation of the profession that placed more emphasis on the title rather than on independent practice, and on expertise rather than on occupational status.

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b) In Jordan, the first law defining the rules of accounting practice was passed in 1952. In 1961, a Council of the Profession of Chartered Accountant was established under the aegis of the Court of Audit in charge of issuing the license to practice. Accountants were then trained mainly in Damascus, Cairo or Alexandria, a small minority completing its education in Britain. The development of the profession was slow, because of the relative backwardness of the Jordanian economy. In the 1960s and 1970s, several attempts to create a professional association failed. In 1985, a new law reorganized the profession, redefined the conditions of access and the supervisory bodies, and delegated some missions to a professional association, the Jordanian Association of Certified Public Accountants (JACPA). The role of Council of the Profession was strengthened with the establishment of an examination under its supervision (Longuenesse 2001). The introduction of the exam, a higher level of requirement, and a more restrictive definition of the profession, primarily structured around the audit missions, according to British tradition, probably account for the small number of members (four times fewer than in Lebanon in the early 2000s). Indeed, some professionals expressed concern about open membership to a wider range of accounting graduates. A reform of the law on the profession, in 2003, introduced mandatory membership of the association for internal auditors and financial managers of industrial and commercial companies. The Association protested that training a sufficient number of professionals would require several years and that in any event, it was difficult to impose anything on private company. Others emphasized the importance of private practice. But their protest was vain.

Global  constraints  and  national  convergences     All four countries are today confronted with globalization, which imposes the generalization of standards defined by international bodies (mainly IFAC and IASB) dominated by the Big. This supposes a representation of the profession influenced by the dominant practice of the Big, characterized by a high level of qualification, extreme specialization, team work, professional mobility, with professionals circulating between audit firms, multinational companies and financial institutions. Everywhere, the reform of the profession is on the agenda of economic and professional actors, and the “non compliance” with international standards (Abd Elsalam) seen as a failure reveals the adoption of the values imposed by the financial markets without discussion. In the four countries, the professional identity is still based on the model of the independent professional, which can extend the model of the professional firm, but remains far from the model of the multinational firm, and even more so, of the professional employed in industrial or commercial companies. Because of the structure of local markets, dominated by SMEs, the profession is divided between a large segment of independent small professionals, who defend the idea of a national profession against the intrusion of foreign professionals, and a small but powerful segment of professionals working for internationalized audit firms, whose professional legitimacy is not contested, but who are often seen as representing foreign interests that are a potential danger and a risk of domination of foreign interest on the national economy (Longuenesse 2014). The professional associations, however, are the zealous promoters of international standardization and IFRS – while questioning the conditions of their application for small and very small businesses. No one questions the model of the market economy, as the basis for a liberal professional model. Fears of globalization seem only to concern the protection of a national profession. In a more subtle way, the issue of salaried work appears to be a source of conflict and tension. Remarkably, when Gallhofer and Kamla question the representation of the

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profession and the influence of globalization, they include in their investigation not only salaried accountants, but even accountants working in state institutions. And they do so at the very moment when independent accountants had resumed power in the Syrian Association of Accountants. In Jordan, the tension between salaried and independent accountants has taken a different form. Despite the historical influence of the British model, independent practice was seen as the noblest form of practice. Contrary to Jordan and Lebanon, in Syria and Egypt, the nationalization of the economy in the sixties and seventies had transformed the profession in a salaried profession, and the recent changeover induced by liberalization policies has resulted in a fierce battle between state civil servants, independent practitioners, and audit firms of different size. Globalization has other massive consequences, which may raise controversial issues with international standards, developed by international boards dominated by the Big, the language in use is English, because of the absence of a universally accepted Arabic translation. When such a translation exists, it is more often an adaptation to national needs, and imposes an elaboration on the shift between the structure of local markets and the logic of global financial markets (Abdulraouf 2006, Abd-Elsalam 2003). The level and form of acceptation or resistance to globalization from one country to another differs, the nature of the confrontation (to adopt Ramirez conceptualization) depends on each national legacy: from violent class conflict in Egypt, to a much ‘softer’ confrontation in Lebanon and Jordan. In the case of Syria, the situation might have been somehow intermediate, but the present crisis makes it more difficult to decipher.

Lyon-Versailles 31 August 2015

 

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