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Factors influencing the extent of mandatory compliance with international financial reporting standards: the case of Kuwaiti listed companies.
Abstract:
The purpose of this study is to examine empirically the extent of disclosure compliance with international financial reporting standards (IFRSs) by 168 companies listed in the Kuwait Stock Exchange for the financial year ending in 2008 and to outline the underlying company characteristics affecting the compliance of companies with IFRSs. The results report that the extent of compliance with the disclosure requirements of IFRSs, measured by a self-constructed index, is 82%. Using multivariate regression analysis, this study provides evidence that the level of compliance is associated positively with company size, age, internationality and auditor and negatively with liquidity. There is also evidence that there are differences between industries. Noncompliance is also attributed to ineffectiveness in the functions of external auditors and enforcement bodies.

Keywords: Compliance, international financial reporting standards, company characteristics, external auditors, enforcement bodies, Kuwait

Subject:
Financial disclosure (Analysis)
Financial disclosure (Standards)
Private sector (Standards)
Private sector (Accounting and auditing)
Author:
Al-Shammari, Bader
Pub Date:
12/01/2011
Publication:
Name: Journal of International Business and Economics Publisher: International Academy of Business and Economics Audience: Academic Format: Magazine/Journal Subject: Business, international; Computers Copyright: COPYRIGHT 2011 International Academy of Business and Economics ISSN: 1544-8037
Issue:
Date: Dec, 2011 Source Volume: 11 Source Issue: 4
Topic:
Event Code: 350 Product standards, safety, & recalls; 800 Capital funds & cash flow
Product:
Product Code: 9108628 Financial Regulation & Reporting; 9915410 Reporting & Disclosure NAICS Code: 92615 Regulation, Licensing, and Inspection of Miscellaneous Commercial Sectors
Geographic:
Geographic Scope: Kuwait Geographic Code: 7KUWA Kuwait
Accession Number:
272739721
Full Text:
1. INTRODUCTION

Rapid globalization of business investments and financial markets has led to the demand for more internationally comparable financial reporting. This in turn has led companies around the world to seek conforming their financial reporting to most accepted global accounting standards. International Financial Reporting Standards (IFRSs) was created by the International Accounting Standards Board (IASB) with the main objective to produce international accounting standards for use by private sector entities worldwide. IFRSs were defined as a core set of accounting standards that increase the consistency, transparency and comparability of financial statements (Gelard, 2004). IFRSs have been accepted by numerous developed and developing countries around the world and have gained real momentum by the European Union's (EU) decision requiring all EU listed companies to comply with IFRSs beginning in 2005. Consequently, there is increased interest in the comparability of financial reporting being achieved as well as the role of auditors and enforcement bodies in promoting compliance (Schipper, 2005).

This study examines the extent of disclosure compliance with IFRSs by companies listed on the Kuwait Stock Exchange (KSE) for the financial year ending in 2008 and outlines the underlying company characteristics affecting the compliance of companies. Kuwait, a small, rich country that gained its independence in 1961, has a relatively open economy with crude oil reserves equal to about 10 percent of world reserves (Central Bank of Kuwait, 2009). Oil production accounts for nearly half of the GDP, 90 percent of export revenues, and 80 percent of government income (Central Bank of Kuwait, 2009). In recent years, Kuwait's economy has grown rapidly due to increased oil production and high export oil prices that boosted the gross domestic product GDP per capita from US $18,100 in 2004 to US $55,800 in 2009 (Central Bank of Kuwait, 2009).

During the past decade, the Kuwaiti government has undertaken economic reforms including an 'open' economic policy. Reforms at the KSE have been undertaken to encourage domestic savings and attract foreign capital investment. These measures include privatization of state enterprises through the stock exchange and lifting investment restrictions on foreign ownership since 2000, tax free. These have attracted foreign investment. In response, the KSE has experienced rapid growth, the trading at the KSE increased exponentially, and it is now a major capital market in the region. Trading volume, for example, increased from US $51,820 million in 2004 to US $103,772 million in 2009, making the KSE the largest market in the Arab world after Saudi Arabia in total market capitalization: US $93,824 million as of 31 December 2009 (Arab Monetary Fund, 2009).

The rapid growth and opening up of capital markets in Kuwait has made the government adoption of IFRSs mandatory in 1990 for all types of companies, in the expectation that adoption would meet demands by local and international investors for more detailed and comparable financial reporting (Shuaib, 1999; Hussain, Islam, Gunasekaran, and Maskooki, 2002). This setting allows us to explore the use of mandatory IFRSs in a small emerging economy. In addition, it allows us to explore the role of external auditors and enforcement bodies in promoting compliance. Specifically, this study attempts to seek answers to the following three research questions:

1--To what extent do companies listed in the Kuwait Stock Exchange comply with the disclosure requirements of IFRSs for the financial year ending in 2008?

2--What company characteristics are associated with the level of compliance with IFRSs?

3--Do the functions of external auditors and enforcement bodies promote compliance with IFRSs?

Using a self-constructed disclosure compliance checklist, the extent of 168 listed companies' compliance with 21 relevant IFRSs at the end of 2008 is measured. Data was collected manually from annual reports of companies. The results reported that the mean level of disclosure compliance with IFRSs was 82%. The level of compliance was lower than that observed in developed countries such as Australia (0.94; Tower, Hancock and Taplin, 1999), Germany (0.81; Glaum and Street, 2003) and Switzerland (0.74; Street and Gray, 2001). This suggests that incentives for compliance are less in Kuwait than in developed countries.

Using regression analysis, disclosure compliance varies by industry and is higher for larger companies and older companies and shows greater international activity but has a higher liquidity ratio. Type of auditor also associated with disclosure compliance with IFRSs. The result differs from that found in developed countries where compliance is more likely to be associated with having a Big 5 auditor and a foreign stock exchange listing (Street and Bryant, 2000; Glaum and Street, 2003).

The results also suggest that although a set of enforcement mechanisms to promote compliance is in place, activities of enforcement bodies have been insufficient to ensure compliance. Possible reasons are a lack of professional training and payment of salaries to attract sufficiently qualified staff. The results report that noncompliance exists, although responsibilities of external auditors were defined by company law and external auditor law. External auditors in Kuwait report that client companies fully complied with all IFRSs even where that was clearly not the case. To date, no action has been taken against an audit firm, member of board of directors, or a manager for violating an accounting regulation.

The motivation of this study is to advance understanding of the compliance with IFRSs and why there is noncompliance. This study extends international accounting compliance studies. It considers a small emerging economy which has considerable wealth from oil production and reserves and has sought to develop its stock market and attract international investors through adoption of IFRSs. Observing financial reporting compliance and associated audit and enforcement activities is one indicator of the extent of support in practice for international harmonization. Prior studies, such as Abdelrahim, Hewaidy and Mostafa (1997) and Abdelrahim and Mostafa (2000) have not examined compliance in Kuwait in depth. Al-Shammari, Brown and Tarca (2008) have examined Gulf Co-Operation Council member states (GCC) (Kuwait, Bahrain, Qatar, Oman, Saudi Arabia and United Arab Emirates (UAE)) together for a period between 1996 and 2002. This study extends this research by examining disclosure compliance with IFRSs in Kuwait in depth for the financial year ending in 2008. Therefore, it is of interest to academics and practitioners following the development of more comparable financial reporting on a global scale. International Accounting Standards Board (IASB) will benefit from understanding the degree of compliance with IFRSs to make better decisions in terms of the choices of standards that fit developing countries.

Most previous IAS compliance studies have been in developed countries and in settings where use of IAS is voluntary or not subject to national enforcement (Nobes, 1990; Street, Gray, and Bryant, 1999; Tower, Hancock, and Taplin, 1999; Street and Bryant, 2000; Street and Gray, 2002; Glaum and Street, 2003; Hodgdon, Tondkar, Adhikari, and Harless, 2009). This study provides insights into the relationship of mandatory use IASs, levels of compliance and the effectiveness of external auditors and enforcement bodies.

The remainder of the paper is organized as follows. The Second section presents the corporate financial reporting environment in Kuwait. The Third section reviews relevant literature. The hypotheses are then developed in Section Four. The Fifth section describes sample selection, data collection and statistical method. Results are reported in the Sixth section. Conclusions, limitations and suggestions for further research complete the paper.

2. CORPORATE FINANCIAL REPORTING ENVIRONMENT IN KUWAIT

In Kuwait, the government establishes and oversees financial reporting to protect investors and other users of financial reports. The Ministry of Commerce and the Kuwait Stock Exchange issue most rules while the most important regulations for listed companies are Company Law No. 15 (1960) and its amendments, the Stock Exchange Law (1983) and its amendments, and Ministerial Resolution No. 18 (1990), which was issued to improve information disclosure by requiring all companies operating in Kuwait to comply with International Financial Reporting Standards (IFRSs) starting from 1991.

Company Law No. 15 requires companies to maintain records of their operations. Each board of directors must prepare a balance sheet and a profit and loss statement for the year, giving a "true and fair" view of the company's financial position. The report is due within three months after the end of the fiscal year and the statements must be audited by at least two registered auditors and submitted to the Ministry of Commerce. Companies must distribute their statements to shareholders. The law, however, does not specify what accounting standards companies must use in preparing their financial statements. The Ministerial Resolution No. 18 (1990) was issued to fill this gap by adopting IFRSs.

Enforcement bodies exist and the law provides monitoring mechanisms. However, the extent to which they checked compliance with IFRSs had some degree of proactive surveillance programs which investigated company compliance. According to company law, regulators in Kuwait do not rely primarily on the audit report. The Surveillance Department of the Ministry of Commerce checks whether companies comply with company law requirements including the lodgment of audited annual financial statements. With respect to compliance with IFRSs, although the law gives the Department the right to check compliance with accounting regulation, it relies primarily on the external auditors' report for indicating compliance with IFRSs.

The Stock Exchange Law of 1983 and its amendments require companies to meet a number of accounting requirements in order to be listed on the KSE. They must have published audited annual accounts that demonstrate satisfactory operating profits and financial structure for the preceding two years. The KSE board of directors has the right to impose any additional requirements deemed necessary for approval of the listing. Listed companies submit audited annual accounts of their balance sheet and profit and loss statement to the stock exchange within three months after the end of the fiscal year as well as interim and quarterly accounts within two months after the end of the fiscal period. All listed companies must comply with the accounting regulations of the Ministry of Commerce or be ceased or delisted. But the law does not specify accounting standards companies must follow in preparing their financial statements.

Unlike the Ministry's limited monitoring mechanism, the KSE, through its Surveillance Department, has been responsible for monitoring in greater detail some listed companies' compliance with company law requirements. These include the lodgment of audited annual financial statements with the KSE and the provisions of the securities law. The Department checks compliance with IFRSs through a checklist for every standard. The checklist is prepared by qualified staff and checked against a company's annual report. However, the Department checks only for listed companies that have complaints from shareholders that the companies violated standards. If a Departmental review detects a possible case of non-compliance with an IFRS requirement and the external auditor did not report the violation, the Department communicates with the company's manager and the external auditor to investigate the matter further. If it is evident that the company has violated a requirement of an IFRS, the Department can report the case to the Minister of Commerce for assessment and decision, through the Market Director. The Minister may take any necessary steps to convene a meeting of shareholders, who have the right to take further action. If the general meeting were to decide to pursue a legal remedy then the Minister would refer the case to a Commercial Court. The Minister would refer any case against an external auditor to a Disciplinary Committee of the Ministry of Commerce for hearing and possible action. The market Director also has authority to refer cases to the KSE's Disciplinary Committee. The Disciplinary Committee may impose penalties for the violation such as a warning, a suspension of dealing in the company's securities or even delisting.

The Central Bank of Kuwait, which is responsible for supervising banks and finance and investment companies, relies on the audit report for monitoring compliance with IFRSs and other regulations.

According to the External Auditing Law no. 5 (1981), examinations for admission as auditors are required. In addition, Kuwait had pursued actions against firms for breach of reporting requirements. The law also specifies penalties if an external auditor violates the regulations. These penalties range from a caution to suspension of the external auditor's license for a period of time, or even removal from the register of external auditors.

The Kuwait Accounting and Auditing Association (KAAA), the only professional association of its kind in Kuwait, was established in 1973. It has no power to regulate the profession or enforce compliance but it has recently provided advice when requested by the government. For the most part, the association's work is limited to conducting courses in accounting standards and financial statements analysis.

3. LITERATURE REVIEW

Several studies have investigated the relationship between company characteristics and voluntary adoption of IFRSs (Al-Basteki, 1995; Dumontier and Raffournier, 1998; El-Gazzar, Finn, and Jacob, 1999; Murphy, 1999; Morris, Moy, and Tarca, 2004; Tarca, 2004). However, these studies did not measure compliance with IASs by an index. Rather, they relied on the auditor's report and statement by companies that they had adopted IASs. Compliance studies relevant to this study can be divided into two groups. The first group (Nobes, 1990; Street et al., 1999) calculated the fraction of companies that complied with a given item. The second group (Tower et al., 1999; Street and Bryant, 2000; Street and Gray, 2002; Glaum and Street, 2003; Dahawy and Conover, 2007) comprises research using a compliance index to measure the extent of compliance. Both groups are discussed below briefly.

Nobes (1990) examines disclosure compliance with IASs by US listed companies in relation to minority interests, depreciation and the pooling of interest method in business combinations, where US GAAP was silent. From the percentage of companies that complied with an item, Nobes found that based on 200 companies the level of disclosure compliance was between 0.33 for minority interests and 0.50 for the pooling of interest method. Following Nobes (1990), Street, Gray and Bryant (1999) examine compliance with IASs for a sample of 49 multinational companies, operating in several countries that claimed to have adopted IASs for the financial year 1996. They report that several areas of noncompliance exist in each standard. They also conclude that the level of compliance by companies claiming to have adopted IASs is mixed and selective. However, they do not attempt to explain the variation across companies in the level of compliance.

Tower, Hancock and Taplin (1999) investigate the extent of compliance with IASs in six Asia-Pacific countries comprised of a developed country (Australia) and developing countries (Hong Kong, Malaysia, Philippines, Singapore and Thailand) and evaluated the influence of company size, leverage, profitability and industry. A sample of ten listed companies' 1997 annual reports in each of the six countries is examined. They use a compliance index to measure the level of compliance with IASs. They find that the level of compliance is 0.91. They report that all company characteristics are not significant.

Street and Bryant (2000) examined the extent to which companies, from 17 countries, who claimed to have adopted IASs complied with or exceeded IAS disclosure requirements. They seek to identify whether there are differences between companies with US listings, US filings, and those with no US listings or filings with regard to compliance with IAS disclosure requirements. They also attempt to identify whether company size, listing status, profitability, or type of industry have an impact on the level of compliance with IASs. Annual reports of a sample of 82 companies were examined for 1998. They report that the level of compliance differs by the three groups. The level of compliance is less than or equal to 0.75 for several IASs. They indicate that the degree of compliance is not associated with all characteristics.

Street and Gray (2002) examine the extent of compliance with IASs by a sample of 279 companies from 32 countries in 1998 who claim to use IASs and assess whether a number of company characteristics are associated with the level of compliance. Street and Gray extended the work of Street and Bryant (2000) by examining a larger sample of companies from more countries, thereby allowing for further segregation of companies without US listings or filings. They add two new company characteristics to the study (type of auditor and internationality). They find that the level of disclosure compliance was 0.72. They also report that the level of disclosure compliance is associated with listing status but not with company size, profitability and industry.

Glaum and Street (2003) investigate the extent to which 100 companies listed on the German new market complied with IASs for the financial year 2000. They also relate the level of mandatory disclosure compliance to a number of company characteristics; namely company size, type of auditor, listing status, industry, profitability, internationality, ownership diffusion and company age. A checklist is developed for IASs disclosure requirements. They find that the average mandatory compliance level for companies that applied IASs is 0.81. Using regression analysis, they report that the level of compliance with IASs is positively associated with companies being audited by Big Five audit firms and to cross-listing on a US exchange. Other characteristics are not significant.

Dahawy and Conover (2007) investigate the level of compliance with IFRSs by a sample of actively traded companies listed on the Egyptian Stock Exchange. They indicate that the level of disclosure compliance is 0.61. They refer noncompliance with IFRSs to culture reasons.

Hodgdon et al. (2009) investigate the extent of disclosure compliance by companies from developed countries with non US listings that claim to have complied with IASs in 1999 and 2000. They also evaluate the impact of a number of company characteristics on the extent of compliance. They find that the level of compliance from a sample of 101 companies is 0.58 and 0.64 in 1999 and 2000. They also indicate that the extent of disclosure compliance with IASs is associated positively with company size, auditor type and negatively with profitability.

Compliance with IASs has also been the subject of two prior studies in Kuwait. However, no study of companies in Kuwait has used an index to measure the level of compliance with IASs and has then related the level of compliance to specific company characteristics. Abdelrahim, Hewaidy and Mostafa (1997) investigate the extent to which 22 listed companies in the KSE complied with IASs for the financial year 1995. Three standards relating to fixed assets are examined. These standards are IAS 16 accounting for property, plant and equipment, IAS 20 accounting for government grants and disclosure of government assistance and IAS 23 borrowing costs. Forty-four items are developed to investigate whether the companies complied with these standards. They survey the CFO of the sample companies. The survey consisted of 44 questions. Each is related to one item of these standards. They find that the extent of compliance varied among the items. For some items there is complete compliance, whereas for the other items the index value is less than 0.20. No company complied with all requirements of the three standards.

Abdelrahim and Mostafa (2000) replicate Abdelrahim et al.'s (1997) study, but with different accounting standards. The standards are IAS 25 accounting for investments, IAS 26 consolidated financial statements and accounting for investments in subsidiaries and IAS 28 accounting for investment in associates. A sample of 26 companies listed on KSE is investigated for 1997 and 24 items are used to investigate the level of compliance. The findings reveal that the extent of compliance with these standards varied among the items.

Al-Shammari, Brown and Tarca (2008) investigate the level of compliance with IASs in the GCC member states over the period from 1996 to 2002. Kuwait is examined as one of the GCC member states. They investigate the level of compliance in 14 standards relevant to the GCC. They report that the degree of compliance with IASs increases from 0.60 in 1996 to 0.80 in 2002. However, no company in any year within the study period fully complied with all relevant IASs. They report that the level of compliance is associated with company size, internationality, leverage and age.

The contribution of this study is to extend IASs compliance studies by examining a Kuwait which has not been the focus of previous research. Prior studies Abdelrahim, Hewaidy and Mostafa (1997) and Abdelrahim and Mostafa (2000) have examined a relatively small sample (22-26 companies) and a limited number of IASs (three standards). This study includes all listed companies for which data are available. It uses a comprehensive compliance index, based on all IASs applicable in Kuwait at the time.

4. DEVELOPMENT HYPOTHESES

The agency theory framework of Jensen and Meckling (1976) proposes that reducing information asymmetry between company insiders (managers) and providers of capital (outsiders) lowers agency costs (monitoring, bonding and residual loss). The aim of reducing agency costs provides an incentive for adopting IFRSs, since adoption leads to greater disclosure and more transparency compared to the situation under national GAAP (Ashbaugh and Pincus, 2001; Barth, Landsman, and Lang, 2008). However, to maximize benefits from adopting higher quality standards, companies must also demonstrate compliance with the standards. The motivation to seek benefits from compliance may vary systematically between companies, based on their individual attributes. A number of company characteristics that could be related to level of compliance will be explored.

Company size

Company size is identified as a significant explanatory variable in explaining variation in the level of disclosure compliance with IFRSs in prior studies. A number of theoretical explanations for expecting a positive relationship between company size and level of disclosure compliance are provided in the literature. Larger companies are more visible and therefore may be more likely to comply with IFRSs since IFRSs lead to greater disclosure. Watts and Zimmerman (1978) and Holthausen and Leftwich (1983) argue that larger companies act to protect their reputation and avoid government intervention. While the authors based their ideas on developed markets, they also applied in Kuwait, where large companies are politically visible and economically important. Recent privatizations of large state-owned companies mean that they are a focus of government and investor attention. In addition, larger companies have more resources to spend on compliance and are less likely to be affected by disclosure of proprietary information than smaller companies. Therefore, it is hypothesized that:

H1: The level of disclosure compliance with IFRSs is positively associated with company size.

Empirical evidence on the association between company size and the level of compliance with IFRSs is mixed. Tower et al. (1999), Street and Bryant (2000), Street and Gray (2002) and Glaum and Street (2003) find no association between company size and the level of voluntary compliance with IFRSs. Al-Shammari, Brown, and Tarca (2008) report a positive relationship in GCC member states.

Leverage

Leverage has been suggested as relevant in explaining variation in the extent of disclosure compliance. Companies with higher leverage can be expected to comply with IFRSs to reduce agency costs, to reassure debtholders that their interests are protected since compliance with IFRSs lead to greater disclosure of information. In Kuwait, banks play a dominant financial role in the economy (Al-Shimmiri, 2003) and have substantial and enduring financial relationships with companies. While banks may not need to rely on public information to the same extent as in, say, the USA, it can still be argued that companies with a higher level of leverage may be more likely to comply with IFRSs, in order to reduce agency costs and information asymmetry with shareholders, than companies with a lower level of leverage.

Companies with higher leverage have, by definition, relatively less equity and probably, in turn, fewer shareholders. Consequently, they are more likely to be subject to higher equity risk than companies with a lower level of leverage and, therefore, be subjected to greater shareholder demand for information to assess both the probability their company will meet its debt obligations and the riskiness of future cash flows arising from their investments. Therefore, one can expect that companies with a higher level of leverage are more likely to comply with IFRSs. Accordingly, it is hypothesized that:

H2: The level of disclosure compliance with IFRSs is positively associated with the level of leverage.

Empirical evidence provides conflicting results in prior studies. Tower et al. (1999) report no evidence of an association between leverage and compliance with IFRSs whereas Al-Shammari et al. (2008) report a positive relationship in GCC member states.

Liquidity

Liquidity is identified to be a relevant factor for explaining variations in the level of disclosure compliance with IFRSs in prior studies. In Kuwait, the Ministry of Commerce (the regulators) refers to companies' liquidity ratios to assess their ability to meet short-term commitments. Companies that seek external financing through lending agreements with banks (debtholders) are also subject to restrictive covenants related to liquidity. Although major debtholders usually can have access to private information from companies, demand for public information from regulators and shareholders is also expected, in order to assess the ability of a company to meet its short-term commitments.

Wallace and Naser (1995) argue that regulatory bodies, debtholders and shareholders are particularly concerned with the going-concern status of companies. In view of this, the ability of a company to meet its short-term commitments without having to liquidate its fixed assets is potentially an important factor in the evaluation of the company by regulatory bodies, debtholders and shareholders. The inability of a company to meet its short-term commitments may result in delays in paying debts and could, in an extreme case, give rise to bankruptcy.

Demand for company information by the Ministry of Commerce and shareholders is expected to increase when liquidity is lower. As a result, a company with a lower liquidity ratio is more likely to disclose additional information in order to reduce agency costs and assure shareholders and the Ministry of Commerce that its financial position is sufficient to meet short-term commitments. Since compliance with IASs may be considered a form of expanded disclosure (Dumontier and Raffournier, 1998; Naser, 1998; Leuz, 2003), it can be anticipated that companies with lower liquidity ratios are more likely to comply with IASs. Accordingly, it is hypothesized that:

H3: The level of disclosure compliance with IFRSs is negatively associated with liquidity.

Liquidity was not examined before. This study will provide the literature for the impact of liquidity ratios on the level of compliance with IFRSs. However, Wallace, Naser, and Mora (1994) find a negative association between liquidity and compliance with mandatory national standards in Spain whereas Owusu-Ansah and Yeoh (2005) report no relationship between liquidity and compliance with mandatory disclosure standards in New Zealand. Similarly, Wallace and Naser (Wallace and Naser, 1995) find no such association in Hong Kong.

Profitability

Prior research suggests that the extent of compliance with IFRSs is positively associated with profitability. One can expect companies with larger profits to comply more with IFRSs since compliance leads to more disclosure because, as predicted by signaling theory, managers of companies making larger profits are more likely to wish to signal their success and strength to potential foreign investors and market participants. In addition, those managers may also wish to comply more with IFRSs to reassure shareholders and strengthen their management position and, in turn, justify management's compensation (Dumontier and Raffournier, 1998).

Since compliance with IFRSs could provide more information (Ashbaugh, 2001; Leuz, 2003), it can be predicted that companies with larger profits are more likely to comply with IFRSs. Hence, it is hypothesized that:

H4: The level of disclosure compliance with IFRSs is positively associated with profitability.

Prior studies reported no association between profitability and the extent of compliance with IFRSs. Tower et al. (1999), Street and Bryant (2000) and Street and Gray (2001) find no association between profitability and the level of voluntary compliance with IFRSs. Similarly, Glaum and Street (2003) reported no relationship between profitability and the extent of mandatory compliance with IAS disclosure requirements. With respect to the association between the extent of compliance with mandatory national disclosure requirements and profitability, prior studies show inconsistent findings. Patton and Zelenka (1997) report positive association in Czech Republic while Ali, Ahmed, and Henry (2004) find no relationship in India, Pakistan and Bangladesh.

Ownership structure

Ownership structure has been examined extensively in prior studies. In Kuwait, three shareholder groups typically have substantial equity ownership in companies listed on the KSE. These groups are the government and its agencies, dominant families and institutional investors, all of whom may influence the level and quality of disclosure and the level of compliance with IFRSs. In Kuwait, these groups are considered insiders because they usually have representatives on the companies' boards of directors; thereby, they have better access to internal information. Outsiders are the individuals who do not have access to internal information. Therefore, they are more likely to demand more public information and hence require more compliance with IFRSs. Therefore, it can be expected that companies with more outsiders (that is, more widely held ownership) have higher motivation to comply with IFRSs than companies with less outsiders (closely held share ownership). Therefore, it is hypothesized that:

H5: The level of disclosure compliance with IFRSs is positively associated with ownership structure.

Empirical studies report no association between the level of compliance with IFRSs and ownership structure. Glaum and Street (2003) find no such relationship in Germany. Similarly, Al-Shammari et al. (2008) report the same results in GCC member states countries. With respect to the association between the extent of compliance with voluntary disclosure and ownership structure, prior studies show inconsistent findings. Hossain, Tan and Adams (1994) report positive association in Malaysia. Similarly, Chau and Gray (2002) report a positive relationship in Hong Kong and Singapore. However, Owusu-Ansah and Yeoh (2005) find no relationship in New Zealand.

Company age

The extent of a company's compliance with IFRSs may be associated with its age. In the case Kuwaiti companies, it is predicted that older companies are more likely to disclose more information leading to more compliance with IFRSs than are younger companies. Two factors support this proposition. First, older companies are more likely to have established, well-organised professional staff to deal with the technical aspects of their financial statements. Their better established accounting systems are more likely to be capable of producing more detailed information at less cost, compared to younger companies. Since IFRSs require more detailed information, older companies with more established accounting systems are more likely to be able to meet the IFRS requirements than those with less established and less comprehensive accounting systems.

Second, a younger company may suffer a greater competitive disadvantage if it discloses certain items such as information on capital expenditure and new products. The competitive disadvantage would arise when the information disclosed by the younger company is used to its detriment by others. Older companies may be more motivated to disclose such information, as its disclosure is less likely to hurt their competitive position (Owusu-Ansah, 1998). Accordingly, since compliance with IFRSs can be expected to increase disclosure, it is predicted that older companies are more likely to have a higher level of compliance with IFRSs. Hence, it is hypothesized that:

H6: The level of disclosure compliance with IFRSs is positively associated with company age.

Prior studies report inconsistent results regarding the association between company age and compliance with IFRSs. Glaum and Street (2003) find no evidence of an association between a company's age and the extent of mandatory compliance with IAS disclosure requirements. Owusu-Ansah and Yeoh (2005) find no such relationship in New Zealand. However, Al-Shammari et al. (2008) report a positive association in the GCC member states. Similarly, Owusu-Ansah (1998) finds a positive association between a company's age and its level of compliance with mandatory disclosure in Zimbabwe.

Type of Auditor

Type of auditor has been suggested as a relevant variable to explain variation in the level of compliance with IFRSs. Watts and Zimmerman (1983) and Craswell and Taylor (1992) put forward the view that choice of external auditor is a mechanism that helps alleviate conflicts of interest between managers and shareholders. Jensen and Meckling (1976) and Watts and Zimmerman (1983) also argue that large audit firms act as a mechanism to reduce agency costs and exert more of a monitoring role by limiting opportunistic behaviour by managers. Jensen and Meckling (1976) and Watts and Zimmerman (1983) argue that larger audit firms are less likely to be associated with clients that disclose lower levels of information in their annual reports. Conventionally, larger audit firms are identified as being one of these Big Four (or Big Five formerly) international audit firms, and smaller audit firms are the rest (DeAngelo, 1981; Hossain et al., 1994; Owusu-Ansah, 1998; Haniffa and Cooke, 2002; Naser, Al-Khatib, and Karbhari, 2002; Glaum and Street, 2003).

The signalling literature suggests that there are dual benefits for auditing firms and their clients. The choice of an external auditor can serve as one signal of a company's (or client's) value. For example, Titman and Trueman (1986) and Craswell and Taylor (1992) showed that listed companies are more likely to choose a Big Six audit firm. Such a choice signals to investors that the contents of the annual reports are audited with high quality. Auditing firms may also use the information disclosed by their clients as a way of signalling their own quality (DeAngelo, 1981).

In Kuwait, company law requires every joint stock company to appoint at least two external auditors registered with the Ministry of Commerce to audit the company's accounts. The external auditing laws of Kuwait do not permit foreign auditing firms to operate unless they are affiliated with a local firm. As a result, audit firms in Kuwait can be classified into local firms with international affiliations (Big Four) and local firms without such an international affiliation (non-Big Four). According to the external auditing law, an external auditor is responsible for the accuracy of the statements included in their report and is liable for losses arising out of fraudulent or misleading certified annual reports. The laws also specify penalties if an external auditor violates the regulations. These penalties range from a caution to suspension of the external auditor's license for a period of time, or even removal from the register of external auditors.

It can be expected that companies audited by one of the local audit firms with an international affiliation (Big Four) are more likely to have a higher level of compliance with IFRSs than companies audited by local audit firms without an international affiliation (non-Big Four). The Big Four internationally affiliated local audit firms are more likely to be larger and more likely to be backed by greater technical capabilities, expertise and experience. This may help them both to avoid legal liability (from reporting misstatements or errors) and to ensure compliance with IFRSs by their clients with statutory and regulatory reporting rules. Local audit firms with an international affiliation (Big Four) have a stronger incentive to protect their reputation and to signal to the market their higher audit quality. Therefore, it is predicted that companies audited by local audit firms affiliated with one of the Big Four are more likely to comply with IFRSs than client companies audited by local audit firms without that affiliation. Hence, it is hypothesized that:

H7: The level of disclosure compliance with IFRSs is positively associated with auditor type.

Empirical evidence relating the relationship between auditor type and the level of compliance with IFRSs finds a positive relationship. Street and Gray (2001) report that the level of compliance with IAS disclosure requirements is positively associated with companies in developed countries being audited by Big Five auditing firms. Glaum and Street (2003) also find a positive association between the level of mandatory compliance with IAS disclosure requirements and being audited by Big Five auditing firms in Germany. This study examines such a relationship in a developed country to explore whether the influence of auditor type is the same as developed countries.

Internationality

Companies with international activities have been proposed to explain variation in the extent of compliance with IFRSs in prior studies. International activities have been defined in terms of listing on a foreign stock market (Glaum and Street, 2003), foreign sales (Meek, Roberts, and Gray, 1995; Street and Gray, 2001), foreign subsidiaries (Craig and Diga, 1998; Ali et al., 2004), foreign debt (Bradbury, 1992) or foreign shareholders (Craig and Diga, 1998; Naser et al., 2002; Morris et al., 2004).

It can be argued that companies with international activities are more likely to be subject to a broader range of regulatory authorities and to have foreign operations and diverse financiers, labour, suppliers and customers. As a consequence, they are more likely to disclose more detailed information and to do so in a more widely understood form (Malone, Fries, and Jones, 1993). It is important for these companies that they provide reliable information about the nature of their operations, in order to obtain such resources at the most economical cost. Moreover, foreign customers and suppliers, for example, are interested in the financial soundness of the company with which they transact, especially when it involves credit or warranties (Zarzeski, 1996). Companies may attempt to meet this demand by providing more detailed and higher quality information. It may be that providing IFRS financial statements enables a company to do this (Murphy, 1999; Street and Gray, 2001). If so, then companies that have more international activities and want to produce more internationally comparable information have a greater incentive to comply with IFRSs than less internationally oriented companies. Accordingly, in Kuwait it is predicted that companies more heavily engaged in international activities are more likely to comply with IFRSs than companies with more local operations. Hence, it is hypothesized that:

H8: The level of disclosure compliance with IFRSs is positively associated with international activities.

Empirical studies find mixed results with respect to the relationship between internationality and compliance with IFRSs. Glaum and Street (2003) find that the level of mandatory compliance with IAS disclosure requirements is positively associated with companies being cross-listed on US stock markets. Similarly, Al-Shammari et al. (2008) report a positive association in GCC member states. On the other hand, Street and Gray (2001) find no association between the level of voluntary compliance with IAS disclosure requirements and foreign sales.

Industry membership

A final factor which may be relevant is industry membership. It may capture sensitivity to political costs not captured by other proxies that differ by industry (Ball and Foster, 1982; Bazley, Brown, and Izan, 1985). In this connection, Ball and Foster (1982) argue that industry membership can be a more appropriate proxy for political cost sensitivity than size. Accounting and disclosure practices are often observed to reflect industry commonalities. Malone, Fries and Jones (1993) and Wallace, Naser and Mora (1994), for example, propose that the adoption of industry-related practices may lead to differential levels of disclosure on similar items in financial reports published by companies in different industries. Accordingly, it is hypothesized that:

H9: The level of disclosure compliance with IFRSs differs by industry.

Empirical evidence from prior studies is mixed. Street and Bryant (2000) report no association between industry membership and the level of voluntary compliance with IFRSs while Street and Gray (2002) find a positive relationship between being in the commerce and transportation industry and the extent of voluntary disclosure compliance.

5. RESEARCH DESIGN AND METHODOLOGY

Sample selection and data sources

The sample for the study was drawn from companies listed in the KSE because they are the largest companies. Companies Guide for 2008 published by the KSE revealed that, on 31 December 2008, 198 companies were listed on the stock exchange. Since the number of listed companies is relatively small, the study aimed to include all companies. There are 88 companies that published their annual reports in English on their websites. The companies guide was consulted to obtain the names and addresses of the remaining 110 companies' general managers or chief executive officers. A letter requesting the English version of the 2008 annual reports was addressed to the general manager or chief executive officer of each of these companies. After a follow up letter was sent, 91 companies responded to the request for their annual reports. The number of companies with available annual reports was 179. There are 11 companies excluded because of different financial year ends. The final sample was 168 companies representing 85% of the companies listed in the KSE. The 2008 annual reports were selected because they represented the recent year when conducting this study. Table 1 summarizes the final sample.

The dependent variable

The level of compliance with IFRSs was measured by a self-constructed compliance index consistent with prior compliance studies (Glaum and Street, 2003; Al-Shammari et al., 2008). The checklist was based on 21 standards. Table 2 summarizes the included standards in the compliance index.

The 21 selected IFRSs were the ones most applicable to Kuwaiti companies and have been found to be among the most important and controversial standards in prior studies (Street and Bryant, 2000; Street and Gray, 2002). IFRSs not included were those not applicable to Kuwaiti companies (IAS 11, 12, 17, 19, 20, 26, 29, 31, 34; IFRS 2, 3, 4, 6) or those where there was little or no disclosure (IAS 8 and 38).

The checklist was developed based on the requirements shown in IFRSs published by the IASB. The checklist (available from the author) was validated by comparison with checklists used by Ernst & Young and KMPG in Kuwait. In addition, its validity and comprehensiveness was confirmed by an external auditor from Kuwait. The disclosure compliance index includes 256 information items.

Data for the index were extracted from the annual reports. The full annual report was read and data hand collected by the author to ensure consistency in coding. Each disclosure item on the checklist was assigned a value of one if it was disclosed and zero if the item obviously applied but was not disclosed. Items obviously not applicable to the report were coded as "NA". Items in the checklist were not weighted because this process can introduce subjectivity and bias (Cooke, 1989; 1991; Wallace and Naser, 1995).

The level of disclosure compliance with IFRSs was measured using an index. The compliance index was expressed as a ratio ranging from zero to one. It was labeled COM and calculated as the total number of required disclosures provided by the company in its annual report (for the 21 standards) divided by the maximum applicable score.

The independent variables

Nine company characteristics were examined for their association with the level of disclosure compliance to discover if the level of compliance with IFRSs was influenced by company characteristics. Data for Eight of them (company size, leverage, liquidity, profitability, age, internationality, auditor and industry) were obtained from companies' annual reports. Data for ownership structure were obtained from the companies guides published by the stock exchanges. Table 3 summarizes the independent variables and their proxies.

Statistical methods:

Multivariate analysis was used to explore the relationships between the level of disclosure compliance with IFRSs and company characteristics. The following regression equation was used to examine such relationships:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

Where: COM = the compliance index scores for sampled companies; j = number of companies (1,....168).

6. RESULTS AND DISCUSSION

Descriptive statistics

Descriptive statistics for the dependent and independent variables are reported in Table 4. The mean of the level of disclosure compliance with IFRSs of the sample companies was 82 percent with a minimum of 70 percent and a maximum of 98 percent indicating variations in the level of disclosure compliance with IFRSs in Kuwait. It is lower than the level of voluntary disclosure compliance in Australia (94 percent) (Tower et al., 1999), but higher than Germany (81 percent) (Glaum and Street, 2003), Switzerland (74 percent) (Street and Gray, 2002) and developed countries (64 percent) (Hodgdon et al., 2009). The table shows that the maximum level of compliance was 98 percent, indicating that no company in Kuwait complied with all requirements of the IFRSs.

Table 4 reports a wide range of variation within the sample in the independent variables as indicated by the minimum and maximum values. The mean of company size was 475 KD millions with a minimum of 3 KD millions and a maximum of 11,973 KD millions. This size distribution was, as usual, skewed. Skewness was mitigated by utilizing the natural logarithm of size in the regression analysis, consistent with prior studies (Cooke, 1991; Wallace et al., 1994).

The average leverage for the sample companies was 47 percent with a minimum of zero and a maximum of 99 percent. The figure of one percent implied that some companies had almost no debt, whereas a ratio of 99 percent indicated that the company had high debt. Liquidity ratio ranges from one percent to 60, with a mean of 2.88. Profitability ranges from -9.45 to 3.71 with a mean of -0.06, indicating variation in profitability ratios among sample companies. The value of -9.45 implied that nine times the amount of the entire equity of the company (Gulf Bank) was eroded due to investing in derivatives. Since it is one of the largest banks in Kuwait, the government assisted it by increasing the capital and investing in it in order to protect it from bankruptcy and hence protect the reputation of the financial system in Kuwait.

The average ownership structure was 44 percent with a minimum of 4 percent and a maximum of 0.86, implying that only less than 50 percent of investors were outsiders (individuals). The figure of 4 percent indicated that individuals own only 4 percent of the company's shares while the other remaining shares are owned by a few investors that are institutional and/or family. Company age ranges from 2 to 56 with a mean of 22.40.

For the categorical independent variables, there were 97 companies with foreign subsidiary (internationality activities) and 71 companies with no foreign subsidiary, indicating that most Kuwaiti companies have international activities. For type of auditor, there were 100 companies that were audited by a local audit firm affiliated with one of the Big Four and 68 were clients of local audit firm not affiliated with one of the Big Four. This result implied that listed companies' audits were dominated by local firms with international affiliation.

It is important to assess whether multicollinearity exists before estimating the model as it could cause estimation problems. The correlations among the continuous independent variables were measured and are reported in Table 5. The table showed that the highest correlation was between company size and leverage (0.653). Other variables were also correlated, but probably no correlation was sufficient to impair the regression results since the pair-wise correlation coefficients are less than 0.80 (Gujarati, 2003).

However, another method that is widely used to detect multicollinearity is the Variance Inflation Factor (VIF). This was reported in Table 6. Since VIF did not exceed 10 for any variable in any model, it was concluded that collinearity was not a serious problem (Neter, Wasserman, and Kunter, 1983).

Regression analysis

This study is concerned with investigating the association between the extent of compliance with IFRSs and nine company characteristics by annual reports of sample companies listed on the KSE in 2008. Table 6 reports the regression results.

The [R.sup.2] (adj.) suggests that approximately 40 percent of the compliance level variation is explained by the independent variables. The explanatory power of this model is higher than (Glaum and Street, 2003) 29 percent and (Hodgdon et al., 2009) 21 percent, but lower than (Al-Shammari et al., 2008) 43 percent. The results also show that the model was significant (F = 9.175, p < 0.001).

The results showed that the extent of disclosure compliance with IFRSs was associated with company size, liquidity, age, internationality, auditor and industry. The remaining independent variables (profitability and ownership structure) were not significant while leverage was significant but in the opposite prediction.

The results provide evidence that the level of disclosure compliance with IFRSs was associated positively with company size. This result led support to hypothesis 1. This finding is consistent with Al-Shammari et al. (2008) in GCC member states and Hodgdon et al. (2009) for companies from developed countries that claim to comply with IFRSs. A possible explanation for this finding is that larger companies in Kuwait are more visible and economically important and are a focus of government intervention and investor attention. Therefore, they may comply more with IFRSs, thereby disclosing more detailed information in order to reduce government intervention, satisfying investor needs of information and enhancing corporate image.

This study provides evidence that there is a negative association between the level of disclosure compliance with IFRSs and liquidity ratios. Therefore, hypothesis 3 was supported. In Kuwait, the Ministry of Commerce (the regulators) and shareholders use companies' liquidity ratios to assess their financial positions and their ability to meet short-term commitments. Therefore, demand for information by the Ministry of Commerce and shareholders increases when liquidity is lower. Companies with lower liquidity ratio, in turn, comply more with IFRSs to satisfy the Ministry of Commerce and shareholders since compliance with IFRSs may be considered a form of expanded information.

The results showed that the extent of disclosure compliance with IFRSs was positively associated with company age. This supports hypothesis 6. This result is consistent with Al-Shammari et al. (2008) in the GCC member states. An explanation for this finding is that older companies disclose more information leading to more compliance with IFRSs because they have established accounting systems and well-organised professional staff capable of producing more detailed information at less cost, compared to younger companies.

Internationality is also associated positively with the level of disclosure compliance with IFRSs and therefore hypothesis 8 is supported. This finding is consistent with Glaum and Street (2003), who found such an association in Germany. A possible interpretation for this result is that companies with foreign subsidiaries have more international activities and wish to produce more internationally comparable information to satisfy various investors, suppliers, regulators, and shareholders. Since compliance with IFRSs provides comparable information, these companies have a greater incentive to comply with IFRSs than less internationally oriented companies.

The level of disclosure compliance with IFRSs is associated positively with the type of auditor. Thus, hypothesis 7 is supported. This result is consistent with Street and Gray (2002), Glaum and Street (2003) and Hodgdon et al. (2009). The results provide evidence that companies that were clients of local firms affiliated with the Big Four audit firms have a higher level of compliance with IFRSs than companies that were clients of local firms without affiliation. An explanation for this finding is that local audit firms with an international affiliation (Big Four) have a stronger incentive to protect their reputation and to signal to the market their higher audit quality. Therefore, they encourage their clients to have a higher level of disclosure compliance with IFRSs.

The results also show that the level of disclosure compliance with IFRSs differs with industry memberships. Therefore, hypothesis 9 is also supported. It is consistent with Street and Gray (2002) and Al-Shammari et al. (2008). The level of disclosure compliance with IFRSs for banks, investment, real estate, manufacturing and services differs from the food industry (represented by the constant). These differences could be related to sensitivity to political costs and industry commonalities.

The finding also reported that the level of leverage is negatively associated with the extent of disclosure compliance with IFRSs. It is opposite to the prediction. Therefore, hypothesis 2 is not supported. An explanation for this finding is that Kuwaiti companies with lower levels of leverage may face more demand for information from shareholders because these companies may be subject to higher public equity risk. These companies may comply more with IFRSs in order to satisfy the needs of shareholders for information.

An alternative ranking model was estimated but not reported in Table 6. A rank regression assigns "equal weight to all points in a data set whether it is influential or not" (Iman and Conover, 1979, p. 502). This model was estimated with rank transformation of the disclosure compliance index of the sample companies and independent continuous variables. The results of the ranked regression model were similar to main model reported in Table 6 (the unranked regression model). This indicates that the original results are robust to outliers and influential data.

This study provides evidence of the extent of disclosure compliance associated with a number of company characteristics. It also provides evidence that noncompliance exists by listed companies in Kuwait, although external auditors report a client company fully complied with all IFRSs. The study also finds that although a set of enforcement mechanisms to promote compliance is in place, activities of enforcement bodies have been insufficient to ensure compliance.

7. SUMMARY AND CONCLUSIONS

This study examines the extent of disclosure compliance with international financial reporting standards (IFRSs) by 168 companies listed on the Kuwait Stock Exchange in 2008 and outlines the underlying company characteristics affecting the disclosure compliance of companies with IFRSs. The extent of disclosure compliance with IFRSs is measured cross sectionally using a self-disclosure compliance index. A multivariate regression analysis was employed to test the relationship between the level of disclosure compliance with IFRSs and nine company characteristics. In addition, this study sought to explore the role of external auditors and enforcement bodies in promoting compliance.

The results showed that the level of compliance with IFRSs is 0.82. It is slightly higher than Glaum and Street (2003) in Germany (0.81), Street and Gray (2002) in Switzerland (0.74), Hodgdon et al. (2009) by companies from developed countries with non-US listing (.64), but lower than Street and Bryant (2000) by companies from developed countries with US listing (0.84), Tower et al. (1999) in Thailand (0.93), in Singapore (0.90), Malaysia (0.90), Hong Kong (0.89), and the Philippines (0.88). This suggests that incentives for compliance are less in Kuwait than in developed countries and that there is scope for further improvement in national monitoring and enforcement mechanisms in Kuwait.

The results of multivariate analysis showed that compliance also varies by industry and auditor type. It is higher for larger companies, older companies and those with a greater international presence, but lower with higher liquidity ratio. The result differs from that found in developed countries where disclosure compliance is more likely to be associated with having a Big 5 auditor and a foreign stock exchange listing (Street and Bryant, 2000; Glaum and Street, 2003).

The results also suggest that although a set of enforcement mechanisms to promote compliance is in place, activities of enforcement bodies have been insufficient to ensure compliance. Possible reasons are a lack of professional training and payment of salaries to attract sufficiently qualified staff. The results report that noncompliance exists although responsibilities of external auditors were defined by company law and external auditing law. External auditors in Kuwait report a client company fully complied with all IFRSs even where that was clearly not the case. To date, no action has been taken against an audit firm, member of board of directors, or a manager for violating an accounting regulation.

This study made two important contributions, and this study extends international accounting compliance studies in two significant ways. It considers a small emerging economy which has considerable wealth from oil production and reserves. Kuwait has sought to develop its stock market and attract international investors through adoption of IFRSs. Observing financial reporting compliance and associated audit and enforcement activities is one indicator of the extent of support in practice for international harmonization. Prior studies, such as Abdelrahim, Hewaidy and Mostafa (1997) and Abdelrahim and Mostafa (2000) have not examined compliance in depth and have not related noncompliance to company characteristics. Al-Shammari, Brown and Tarca (2008) have examined GCC countries together for a period between 1996 and 2002. This study examined compliance with IFRSs in Kuwait in depth and outlines company characteristics affecting compliance.

This study also contributes to the literature on investigating the relationship of the national regulatory frameworks and mandatory compliance over time. Most previous IFRS compliance studies have been in developed countries and in settings where use of IAS is voluntary or not subject to national enforcement (Nobes, 1990; Street et al., 1999; Tower et al., 1999; Street and Bryant, 2000; Street and Gray, 2002; Hodgdon et al., 2009). This study provides insights into the relationship of mandatory use of IFRSs, levels of compliance and the effectiveness of external auditors and enforcement bodies. It also contributes to the literature on the relationship of company characteristics and compliance with IFRSs in developed countries, by testing its application to a developing country like Kuwait.

Several limitations should be noted. First, the model has explained 40% of the compliance variation. Although the model has explained a significant part of the variation in compliance, there is still a material part unexplained which represents the "noise" of the model. Data availability limited the ability to study some factors that have been found to be important theoretically or empirically in other compliance studies (e.g., share ownership by managers). As additional information becomes available about Kuwaiti businesses, the effects of such factors should be investigated. Second, this study has assumed that compliance items have the same weight and that companies that are disclosing the most information would have selected the most important information.

In the field of compliance with IFRSs in the Middle East, research could extend this study over a longer period of time or alternatively involve comparative studies with other Arab countries such as Gulf Co-Operation Council (GCC) member states. Such studies will investigate the changes in compliance with IFRSs across time and compare for role of external auditors and enforcement bodies in promoting compliance. This will also help validate the conclusions of this study and overcome the possibility that a small, single-period set may bias results. The relationship between corporate governance characteristics and the extent of compliance with IFRSs have not been considered in Kuwait, although the board of directors is formally responsible for compliance with IFRSs in annual reports. Three specific corporate governance variables relevant to Kuwait are the existence of audit committee and whether the company's chairman of the board of directors or other board members are from the royal family. The presence of a royal family member in a board of directors could influence compliance with IFRSs.

This study is of interest to academics and practitioners following the development of more comparable financial reporting on a global scale. International Accounting Standards Board (IASB) will benefit from understanding the degree of compliance with IFRSs to make better decisions in terms of the choices of standards that fit developing countries. This study is also of interest to regulators in Kuwait in their efforts to reinforce full compliance with IFRSs. This study highlights the role of external auditors and enforcement mechanisms to encourage compliance.

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Bader Al-Shammari, Public Authority for Applied Education and Training, KUWAIT

Dr. Bader Al-Shammari earned his Ph.D at the University of Western Australia, Perth in 2005. Currently he is an associate professor of College of Business Studies, the Public Authority for Applied Education and Training, Kuwait. He has research interest in enforcement and compliance with International Financial reporting Standards by the Middle Eastern countries, voluntary disclosure, corporate governance and cost of quality reporting. He has published in several referred journals such as International Journal of Accounting, Journal of International Business and Economics, Review of Business Research, Journal of Corporate Ownership and Control, International Journal of Disclosure and Governance and the Middle East Business and Economic Review.
TABLE 1: SELECTION OF THE SAMPLE COMPANIES

Description                                               No. of
                                                          listed
                                                         companies

Companies included in the list of the market as of 31       198
December 2008
Companies that published their annual reports on their      88
websites
Mailed letter requesting copy of 2008 annual reports        110
Companies responding to my request for their 2008           91
annual reports
Companies ending year that is not calendar year            (11)
Companies not responding to my request for their 2008      (19)
annual reports

Final sample                                                168

TABLE 2: INTERNATIONAL FINANCIAL REPORTING STANDARDS
AND THEIR EFFECTIVE DATE AND WHETHER THEY ARE INCLUDED
IN THE COMPLIANCE INDEX

Standard   Title                          Effective date   Included
                                                           in
                                                           compliance
                                                           index

IFRS 1     First-time Adoption of         1 January 2004   Yes
           International Financial
           Reporting Standards

IFRS 2     Share-based Payment            1 January 2005   No

IFRS 3     Business Combinations          31 March 2004    No

IFRS 4     Insurance Contracts            1 January 2005   No

IFRS 5     Non-current Assets Held for    1 January 2005   Yes
           Sale and Discontinued
           Operations

IFRS 6     Exploration for and            1 January 2006   No
           Evaluation of Mineral
           Resources

IFRS 7     Financial Instruments:         1 January 2007   Yes
           Disclosures

IAS 1      Presentation of Financial      1 January 2005   Yes
           Statements

IAS 2      Inventories                    1 January 2005   Yes

IAS 7      Statement of Cash Flows        1 January 1994   Yes

IAS 8      Accounting Policies, Changes   1 January 2005   Yes
           in Accounting Estimates and
           Errors

IAS 10     Events after the Reporting     1 January 2005   Yes
           Period

IAS 11     Construction Contracts         1 January 1995   No

IAS 12     Income Taxes                   1 January 1998   No

IAS 14     Segment Reporting              1 July 1998      Yes

IAS 16     Property, Plant and            1 January 2005   Yes
           Equipment

IAS 17     Leases                         1 January 2005   No

IAS 18     Revenue                        1 January 1995   Yes

IAS 19     Employee Benefits              1 January 1999   No

IAS 20     Accounting for Government      1 January 1984   No
           Grants and Disclosure of
           Government Assistance

IAS 21     The Effects of Changes in      1 January 2005   Yes
           Foreign Exchange Rates

IAS 23     Borrowing Costs                1 January 1995   Yes

IAS 24     Related Party Disclosures      1 January 2005   Yes

IAS 26     Accounting and Reporting by    1 January 1988   No
           Retirement Benefit Plans

IAS 27     Consolidated and Separate      1 January 2005   Yes
           Financial Statements

IAS 28     Investments in Associates      1 January 2005   Yes

IAS 29     Financial Reporting in         1 January 1990   No
           Hyperinflationary Economies

IAS 31     Interests in Joint Ventures    1 January 2005   No

IAS 32     Financial Instruments:         1 January 2005   Yes
           Presentation

IAS 33     Earnings Per Share             1 January 2005   Yes

IAS 34     Interim Financial Reporting    1 January 2009   No

IAS 36     Impairment of Assets           31 March 2004    Yes

IAS 37     Provisions, Contingent         1 July 1999      Yes
           Liabilities and Contingent
           Assets

IAS 38     Intangible Assets              31 March 2004    No

IAS 39     Financial Instruments:         1 January 2005   No
           Recognition and Measurement

IAS 40     Investment Property            1 January 2005   Yes

IAS 41     Agriculture                    1 January 2003   No

TABLE 3: SUMMARY OF THE INDEPENDENT VARIABLES

Variable              Proxy

Company size          Natural log of total assets

Leverage              Total debt/total assets

Liquidity             Current assets/ current liabilities

Profitability         Return on equity = net profit/total
                      shareholders' equity

Ownership structure   Number of shares owned by outsiders/number of
                      outstanding shares at year-end

Company age           Number of years since foundation

Internationality      Dummy variable coded 1 = a company has at
                      least one foreign subsidiary, 0 = a company has
                      no foreign subsidiary

Auditor               Dummy variable coded 1 = a company audited by
                      local auditor with international affiliation
                      (Big Four), 0 = a company audited by local
                      auditor without international affiliation
                      (non-Big Four)

Industry

Industry 1            Bank. Dummy variable coded 1 = Bank company, 0
                      = otherwise

Industry 2            Investment. Dummy variable coded 1 =
                      investment company, 0 = otherwise

Industry 3            Insurance. Dummy variable coded 1 = insurance
                      company, 0 = otherwise

Industry 4            Real estate. Dummy variable coded 1 = real
                      estate company, 0 = otherwise

Industry 5            Manufacturing. Dummy variable coded 1 =
                      manufacturing company, 0 = otherwise

Industry 6            Services. Dummy variable coded 1 = service
                      company, 0 = otherwise

Industry 7            Food. Dummy variable coded 1 = food company, 0
                      = otherwise

TABLE 4: DESCRIPTIVE STATISTICS FOR THE DEPENDENT
AND INDEPENDENT CONTINUOUS VARIABLES

                              Mean     Std. Dev.   Min     Max
Dependent variables
Compliance level              0.82     0.06        0.70    0.98
Independent variables
Company size(KD million) *    475.59   1472.67     3.11    11973.32
Leverage                      0.47     0.25        0.01    0.99
Liquidity                     2.88     6.42        0.01    60.75
Profitability                 -0.06    0.89        -9.45   3.71
Ownership structure           0.44     0.20        0.04    0.86
Age                           22.40    13.24       2       56

* One $US = 0.305 KW Dinar.

TABLE 5: PEARSON CORRELATION COEFFICIENTS
MATRIX FOR THE CONTINUOUS INDEPENDENT VARIABLES

                Company     Leverage    Liquidity
                size

Leverage        0.653 **
Liquidity       -0.282 **   -0.376 **
Profitability   -0.106      -0.112      0.029
Ownership       0.305 **    0.188 *     -0.197 *
structure
Age             0.325 **    0.229 **    -0.152 *

                Profitability   Ownership
                                structure

Leverage
Liquidity
Profitability
Ownership       -0.111
structure
Age             -0.108          0.188 *

** Significant at the 0.01 level (two-tailed).
* Significant at the 0.05 level (two-tailed).

TABLE 6: REGRESSION RESULTS

Independent variables         Model
(expected sign)               Coefficients   VIF

Company size (+)               0.047 +++     3.024
Leverage (+)                  -0.070 (a)     2.013
Liquidity (-)                 -0.001 ++      1.261
Profitability (+)              0.001         1.095
Ownership structure (+)        0.025         1.180
Company age (+)                0.001 +       1.302
Internationality (+)           0.022 +++     1.258
Auditor (+)                    0.014 +       1.176
Industry 1 (banks)            -0.059 *       3.281
Industry 2 (investments)      -0.098 ***     6.822
Industry 3 (Insurance)        -0.009         2.109
Industry 4 (Real estate)      -0.081 ***     5.030
Industry 5 (Manufacturing)    -0.053 **      4.756
Industry 6 (Services)         -0.050 **      6.559
Constant                       0.503 ***
Adjusted [R.sup.2]             0.407
F                              9.175
Prob. (F)                    < 0.001
No. of companies               168

+++ t test (one-tailed) significant p < 0.01; ++ t
test (one-tailed) significant p < 0.05; + t test
(one-tailed) significant p < 0.10; *** t test
(two-tailed) significant p < 0.01; ** t test (two-
tailed) significant p < 0.05; * t test (two-
tailed) significant p < 0.10.
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