The start of Iran's accounting practices began around 500 B.C. when income and costs were recorded. Various plaques were discovered in the ruins of Persepolis, which exposed the economic and financial system. This system recorded payments, received goods, and detailed trade reports. In addition, the plaques also revealed a tax system. Although vague, the plaques illustrated that a person delegated tax collectors, supervised the process, and documented the collected taxes. During the Abbasid and Qajar eras, the "Computation Bureau" was created, to calculate the country's budget. Furthermore, journals were created from trade reports which documented traders' payables and receivables. In the Qajar era, Iran's main sources of revenues were direct tax, property income tax, customs, and lease revenues (1- whole paragraph).
In 1900, the first contemporary accounting methods were introduced. Auditing was established from the 1949 Income Tax Law, and The Certified Public Accountants Association began in 1963, while The Center of Iranian Official Accountants began in 1966. In 1983, the national parliament combined the Nationalized Industries and Plan Organization Audit Firm, the Mostazafan Foundation Audit Firm, and the Shahed Audit Firm, to create the Audit Organization. Parliament approved the Audit Organization's laws in 1987 and thus became a legal, independent, entity (1 - whole paragraph).
Factors Influencing Accounting Practices in Iran
Various factors influenced the accounting practices in Iran. The five factors are financial markets, privatization, tax laws, joining the World Trade Organization (WTO), and legal systems. The financial market, the Tehran Stock Exchange (TSE), was established in 1968, when only government bonds and certificates were traded. Stock market activity increased during the 1970s because there was a greater demand for capital, which spurred the demand for stocks. However, after the Islamic revolution, the government controlled the economy. Therefore, the need for private capital and interest-bearing bonds were eliminated. These events led to a stagnant period for the TSE; however, this period ended in 1989 when the private sector was restored. Since privatization, the TSE has continued to grow.
In response to pressures regarding privatization from the World Bank and the International Monetary Fund, Iranian's have placed greater emphasis on financial reporting. Since privatization, the need for public financial information has increased because private companies need public and foreign funding. In order for the public and foreign investors to provide capital to private companies, private companies need to provide sufficient disclosure in financial reports (1). Despite efforts to become fully privatized, Iran's "absence of privatization laws, lack of social and economic aims of privatization, and lack of suitable system for pricing and sectors" (1), has hindered the implementation of full privatization.
Next, current tax laws influence Iran's accounting system. Iran has yet to enforce an efficient and effective taxation system which encompasses all aspects of business. Therefore, this has made it difficult for Iranian standard setting authorities to propose new laws or change old laws (1).
Although Iran is only an observer of the WTO, its accounting practices are affected by the organization. Many believe that Iran should adopt international standards in order to bridge the gap among nations. Furthermore, if Iran became a member of the WTO, Iranian financial markets and accounting standards would become further developed (1).
Moreover, foreign investment shapes the accounting system in Iran. The utilization of international accounting standards would make Iranian's reporting more useful to foreign investors. However, the Iranian accounting system needs immense improvement in order to be able to convert to international standards. Overall, Iran needs to adopt international standards in order to help generate foreign investment and possible WTO membership (1).
The legal system in Iran also impacts Iran's financial reporting and accounting system. According to the International Journal of Accounting 43, Iran is a code-law country because of its weak equity market and the reliance on debt as a source of financing. The term code-law means the government and certain banks are the key sources of financing. Also, code-law countries financial accounting is geared toward creditor protection and financial reporting is distinguished by inadequate disclosures. Furthermore, financial accounting is aligned with the tax laws and the government exercises strong influence on setting accounting standards (1).
Finally, corporate governance affects financial reporting and the accounting system in Iran. Mashayekhi and Mashayekh state that Iran's corporate governance mimics an internal governance structure, which is a structure where all listed companies are controlled by a small number of major shareholders (1). The major shareholders are broken down in to various groups, which include the foundation group, the creditor banks, and other companies or the government. Major shareholders' supervision depends on the role of institutional investors and various activities such as buying a certain amount of stock. Minor shareholders do not participate in decision-making. Although companies listed on the TSE must be audited, Iran does not have a distinctive system for internal controls. However, in 2004 the TSE published a Code of Corporate Governance. Since then a second edition of the code has been published. The code contains 5 chapters 37 clauses, and each section provides definitions as well as management, board, and shareholder responsibilities, and information on financial disclosures, accountability, and auditing theories (1).
Setting Standards
Iranian National Accounting Standards (INAS or NAS) are primarily interpretations and variations of international standards. However, unlike most countries, a government agency, the Audit Organization of Iran (AOI), issues accounting standards. The AOI is accountable for setting accounting and auditing standards for non-governmental sector, which includes state-owned enterprises (2). Also, the AOI is responsible for legal examination and auditing all of the non-financial and financial state-owned companies, National Development Plans, and nongovernment public institutions (8). Although the AOI is in the process of implementing the international standards, no IFRS principles have been adopted and only six IAS principles have been implemented.
Iran follows a multistep process to set and adopt accounting standards. First, the Accounting Standard Setting Committee decides which topics to consider (3). Next, the Advisors of Standard Setting Department performs research and studies on International Accounting Standards, which are then compared to Iran's accounting practices. Following the research, the department issues a report which is presented to the Standard Setting Committee, and based on the report the committee decides if developing a standard is necessary. A primary draft is prepared if the committee decides that it is necessary to develop a standard (3). Subsequent to the review of the primary draft, a standard draft is developed, which is then presented to authorizes, published, and open for public feedback and comments (3). After public comments have been reviewed, and revisions have been made by the Accounting Standard Setting Committee, the standard draft is sent to the Technical Committee and Board of Executives of the AOI for approval. If the standard draft is approved, the standard is published and becomes part of the law (3).
Accounting and Auditing Standards
According to the Audit Organization, the accounting standards are based on theoretical concepts of financial reporting. The purpose of accounting standards is to provide users with useful information about the "financial position, financial performance, and financial flexibility" of an entity (4). Furthermore these standards are used for all for profit organizations, whether they are private or public.
In addition, the Audit Organization states that the auditing and accounting standards are in accordance with Islamic criteria and country needs (4). Currently, thirty-seven accounting standards have been developed. Many of the standards are in compliance with the international standards. However, revisions have been made to the standards to fit the country's needs. The Audit Organization's website contains information regarding the various standards, such as how to account for tangible, fixed assets.
The AOI also provides information on auditing standards. Quality control systems within auditing should include policies and procedures in regards to the following: "the quality of management's responsibilities within the institution, ethical requirements, human resources, implementation work, and control" (4). The quality control system should also be documented and presented to the institution's staff. Furthermore, the policies should promote the culture of the institution and management must accept full responsibility for the quality control system within the institute. In addition, there are fundamental principles of professional ethics that professionals in the business system must attain. These are: "righteousness, neutrality, competent, professional care, secrecy, professional behaviors, and principles and professional standards" (4).
Much like auditors in the US, Iranian auditors need to follow certain steps when performing the audit. First, the auditors must "work according to requirements of professional standards, legal and regulatory information" (4). The auditors must also recognize important issues that will require additional attention, do proper "consultations and documentation, and apply the results" (4). Moreover, the auditors must assess the nature, timing, and performance of the work completed and prove that the nature of the work and the documentation were appropriate for the situation. Auditors must include all adequate, appropriate, evidence that gathered during the audit and implement the "work methods to achieve goals" (4). When issuing the report, the auditors must include various aspects of their findings. The report must include an independent evaluation of the institution, the main risks identified during the audit, and whether "proper consultation on controversial cases was needed" (4). Also, the report must include any violations of the standards and how to resolve them, as well as issues that the Executive Director of the Board should be informed about. The AOI also provides information on protecting the integrity of the audit papers. For instance, the AOI states that passwords should be used to restrict access to electronic documents, backup of electronic documents should occur throughout the auditing process. Additionally, the AOI states that the audit "workgroup" should use restrictive access for the distribution of hard copies (4).
Overall, the accounting standards in Iran need to be further revised in order to align with international standards. Although the auditing standards need slight revision, the standards are detailed and easy to follow.
Taxation System
According to Hatamizadeh and Gheibi, prior to 1975, indirect taxes were a significant portion of tax revenues. However, improvement in the economic system and an increased dependence on oil reserves, led to an emphasis on income generating sources in the computation of tax revenues. The taxation system in Iran is broken down into five categories, which include taxes on companies, occupation taxes, taxes on salaries, consumption and sales taxes, and taxes on imports (6). Iran's tax revenues account for a very low percentage of gross domestic product. In prior years, the ratio of tax revenue and GDP has reached only six percent. In other countries, such as the Netherlands, tax revenues account for roughly forty-three percent of GDP (6). Thus illustrating Iran has extremely low tax revenues. Following the Direct Taxation Law in 1987, direct taxes accounted for forty percent of tax revenue, while indirect taxes accounted for sixty percent of tax revenue (6).
Company taxes are applicable to governmental and nongovernmental "legal persons' incomes and profits" (6). Governmental entities, where at least fifty percent of belongs to the government, are taxed after a ten percent deduction for company tax. On the other hand, the deduction rate for private companies varies depending on whether the company is a join stock, mixed, or cooperative company (6).
Occupation tax is part of direct tax, which is based on "income of commercial, restaurant, hotel keeping, financial, fiscal, public services and other activities" (6). According to the Direct Taxation Law, income earned by a person through occupation is taxable after deductions (6). Occupational tax payers are split into two categories. The first category of taxpayers are required to keep a "legal book" while the second group is not required to keep a "legal book" (6). Consequently, occupation taxes can only be calculated through investigation of the "legal books" (6).
According to the Direct Taxation Law, income earned by a person for his labor is subject to income tax. Salary tax includes a person's "salary, fringe benefits related to the job, as well as income in kind, such as housing, cares, etc." based on a specific rate (6). Salary tax, compared to other tax items, is the least vulnerable to evasion and is inexpensive to collect (6).
Also, the quantity of goods and services are the basis of the computation for consumption and sales tax (6). Hatamizadeh and Gheibi, noted that consumption and sales tax accounted for forty percent of indirect taxes.
Taxes on imports are related to quality and quantity of imported goods (6). Import taxes increase the price of imported goods. In Iran, there is a significant gap between estimated and actual import taxes (6). Furthermore, import taxes accounted for approximately eighty-two percent of indirect taxes. Exemptions in Iran's taxation system do not have any economic justifications and are directed towards achieving economic objects of certain groups within society (6).
Financial Reporting
A legal model of financial reporting states that financial reports must be periodically presented to shareholders of stock companies (8). The presented reports include primarily audited financial statements that are prepared according to the NASs identified by the AOI (8). Furthermore, shareholders rely heavily on these reports because they do not have direct access to the companies' information systems (8). Not only are financial statements valuable information to external uses, they are also important to internal users.
In order to prepare financial statements, management must select accounting procedures that are consistent with accounting standards. If no specific standard is published, management should establish procedures to guarantee the financial statements provide information that shows the financial position and performance (4). Financial statements in Iran include information on "assets, debt, capital ownership, income, costs and cash flows" (4). Moreover, this information is used to prepare a balance sheet, a statement of profits and losses, cash flow statements and explanatory notes (4).
