Investigating ISA adaptation in a developing country context: the selective influence of Big Four affiliates

1 Investigating ISA adaptation in a developing country context: The selective influence of Big Four affiliates Peter Ghattas a University of Guelph Teerooven Soobaroyen University of Essex Oliver Marnet University of Southampton a Corresponding author Abstract This paper examines how the national process of adapting the International Standards on Auditing (ISAs) unfolds in developing countries, focusing on the case of Egypt. The study relies on data gathered from 33 semi-structured interviews with government officials and senior auditors alongside documentary evidence. Our findings show how legacy state institutions that were involved in the national standard-setting committee have largely fallen short of their aspirations to align local auditing standards with the expectations set out in the ISAs. The lack of a coherent approach to developing state policy objectives, resources, and public consultation, together with technical demands and translation difficulties, hampered the process. Such weaknesses provided an opportunity for the local Big Four affiliates to become deeply involved. The firms’ strategic manoeuvres were driven not only by a material desire to protect their market position/status but also by a commitment to a perceived national duty to support government attempts at national standard-setting. Importantly, our findings reveal the selectivity of such interventions and the differential impact of ISA adaptation on the diverse constituency of audit firms. Theoretically, we propose the institutional void perspective to conceptualise the intervention of private actors as well as to articulate the elements of a void in an audit regulatory process. While Big Four firms typically seek to position themselves in such processes, we argue that international reforms and policies 2 should focus on fostering a more inclusive, accountable, and deliberative system that promotes the presence of diverse, independent and representative local audit actors. Keywords: International Standards on Auditing (ISA); adaptation; Egypt; audit regulation; institutional void 1. Introduction This paper focuses on what has been observed to be the arduous path(s) of implementing International Standards on Auditing (ISAs) in developing countries (Boolaky & Soobaroyen, 2017; Elmghaamez & Elmagrhi, 2022; Haapamäki & Sihvonen, 2019). While ISAs are issued at the global level by the International Federation of Accountants (IFAC) and nominally disseminated to each member country, improving the reliability of financial information through greater compliance with the ISAs remains highly dependent on the timely adaptations of these standards to local regulation/laws, audit market dynamics, language and terminologies/practices, and on their actual implementation at the local audit firm level (Boolaky & Soobaroyen, 2017; Ramirez, 2012; Samsonova‐Taddei, 2013). The IFAC’s goal of synchronising globally issued ISAs and local auditing standards in its member countries requires significant technical expertise and financial capacity that national standard-setters (NSSs) in developing countries often lack or struggle to develop in the short to medium term (Boolaky & Soobaroyen, 2017). In many cases, financial and technical support, typically included in private-sector development programs, is provided by transnational agencies (Group of Seven (G7), World Bank (WB), European Union (EU), International Monetary (IMF)) 1 to facilitate the adoption of such standards on the grounds of improving governance and maintaining “global financial stability” (Camfferman & Zeff, 2007; 1 A full list of abbreviations is provided in Appendix 1. 3 Hopper et al., 2017). However, there is little evidence on how the embedding of ISAs is proceeding in developing countries or transition economies (e.g. Haapamäki & Sihvonen, 2019; SamsonovaTaddei, 2013; Yapa et al. 2017). Specifically, we seek to explore the process of ISA adaptation, whereby countries translate and tailor these standards to conform to national laws/regulations and to accommodate their specific audit practices/market context, even though this is contrary to the IFAC’s stated objective of jurisdictions adopting the ISAs without modifications. An adaptation process would typically involve a network of local state institutions, firms, structures (e.g. practitioner associations, interest groups), actors/competencies and resources. Compared to developed countries, where there are often many well-resourced and relatively active actors and organisations vying for influence (Malsch & Gendron, 2011) – such as regulatory agencies, ministries, professional accountancy bodies, accounting firms and stock market institutions – the associated power dynamics and lobbying opportunities in developing countries may be less present or one-sided (Boolaky & Soobaroyen, 2017). Expertise and resources within regulatory circles are also generally limited, while pressures at the local level driven by the public interest can be sparse. In the case of auditor oversight and regulation, which involves the dissemination of transnational models to national contexts, there have already been indications of conflicting rationales and outcomes across a socalled multi-scalar environment (Hazgui & Malsch, 2020), ineffective implementation of AngloAmerican frameworks (Caramanis et al., 2015) and an emphasis on projecting an image of oversight (Ghattas et al., 2024). We contend that an understanding of the ISA adaptation process, which in effect largely lays the groundwork for the above-mentioned oversight mechanisms, can complement the emerging body of evidence about the spatial complexity of audit regulation, which is seen to occur at the intersection of national and transnational regulatory spaces (Hazgui & 4 Malsch, 2020). Given the limited evidence at the field level, we bring the Egyptian case to the fore as it provides an opportunity to examine these issues given the government’s commitment to co-opting the ISAs as the basis for its national standards (the Egyptian Standards on Auditing, ESAs). Stateled efforts to reform accounting and auditing practices, which started with the enactment of the Capital Markets Law in 1992, appear to have had little impact on audit outcomes and on the capacity of the local profession (Ghattas et al., 2021). This law introduced a dependency on international standards, necessitating the translation and adaptation of ISAs into national law. Given the Egyptian government’s legal authority to issue auditing regulations and the fact that its historically centrally planned, bureaucratic institutions – notably the Central Accounting Organization (CAO), the Ministry of Finance and the Syndicate for Commercial Professions (SCP) – are somewhat detached from competencies associated with private-sector auditing and accounting practices (Ghattas et al., 2021), we examine the implications of the ISA adaptation process. Specifically, we ask: How did the ISA adaptation process unfold in Egypt? To answer our research question, we relied on primary data drawn from 33 semi-structured interviews conducted between December 2014 and June 2016, supplemented by three follow-up interviews between December 2020 and September 2022. Participants, some of whom were directly involved in the ISA adaptation process, included senior auditors, officials and academics holding/having held positions within the Egyptian Financial Regulatory Authority (FRA), the Egyptian Society of Accountants and Auditors (ESAA) and the key partners/managers of Big Four affiliates in their main Cairo offices. Secondary data included legal and internal documents related to the formulation and operation of the standards-setting process. Our findings expose the very limited capacity of the Egyptian NSS to operationalise ISA 5 adaptation as a technical process and in terms of its outcomes (i.e. ESAs). There were challenges related to the translation of standards and in determining which entity is subject to the regulation (audit firm vs. individually registered auditor) and significant delays in updating some standards relative to international developments. We highlight how local affiliates of the Big Four firms then became deeply involved in the regulatory process of ISA adaptation under the guise of their membership within national professional bodies. In spite of the resource-intensive nature of this task, including translating and adapting international standards at their own expense, we find that the strategic manoeuvres of the Big Four firms were driven not only by a “purely” commercial logic (Hazgui & Malsch, 2020) but also by a commitment to a perceived national duty and social responsibility to support the nominally government-led standard-setting process. Furthermore, in contrast to the enthusiastic embrace of the International Financial Reporting Standards (IFRSs) by Egyptian Accounting Standards (EASs), there was a relatively lukewarm commitment to the ESAs and the ISAs. Such issues led to questions about the reasons underlying the process and outcome of ISA adaptation. Our study proposes a theoretical explanation that links the organisational (audit firm) actions/interventions and the relative absence or limited involvement of other parties to the existence of an institutional void in the Egyptian context (Doh et al., 2017; Khanna & Palepu, 1997; Mair & Marti, 2009). We show how such a void arises from the absence of (i) coherent and indigenous state policy objectives with respect to audit regulation, (ii) sufficient technical and financial resources for the NSS to develop and issue appropriate standards that can effectively regulate audit practice, and (iii) a deliberative space that substantively engages stakeholders and professionals. Consequently, these conditions give way to private interests with sufficient technical and reputational resources to intervene and fill this institutional void. This paper seeks to contribute to the literature on audit standards-setting by uncovering the 6 dynamics of an ISA adaptation process in developing countries. Essentially, we reveal the fieldlevel realities of this process, with an emphasis on the technical complexities of state-led ISA adaptation and how Big Four firms strategically and selectively intervene in these institutional voids. This aligns with some of the previous research that has considered the contributions that Big Four (and/or other internationally affiliated) firms might make in such an environment (Humphrey & Loft, 2009a, 2009b; Kleinman et al., 2014). Our findings are consistent with the literature that recognises the strong presence, if not outright dominance, of the Big Four and their affiliates in accounting and audit standards-setting processes (Ramirez, 2012; Yapa et al., 2017). We distinguish our work by delving deeper into their actual influence on the specific process of ISA adaptation in developing countries, instead of solely concentrating on market or commercial consequences after adoption (as emphasised by Yapa et al., 2017), and shed further light on the profound role these entities play in shaping regulatory landscapes in developing countries. By providing empirical insights into the implementation of ISA adaptation and proposing a fresh theoretical lens, we seek to contribute to a deeper understanding of audit and accounting regulatory processes in developing countries (Moses & Hopper, 2022). The remainder of the paper is organised as follows. First, a review of the literature on ISA implementation in general and in the context of developing countries is presented. Second, the methods section outlines the approach used to collect and analyse the data. The paper then outlines the findings, uncovering the background of audit and accounting regulation in Egypt, a chronology of how ISAs were adapted locally, and the involvement of the Big Four firms throughout the process. This is followed by a discussion informed by the proposed lens of institutional void, highlighting the key insights of the study. Finally, we present our conclusions and implications. 7 2. Literature review on ISA implementation Early research on the spread of the ISAs worldwide focused on the rise of the IFAC and an increasing recognition of the pronouncements by the International Auditing and Assurance Standards Board (IAASB), particularly when endorsed by influential global organisations such as the International Organization of Securities Commissions (IOSCO 2 ), the European Commission (EC) and the World Trade Organization (WTO) (Camfferman & Zeff, 2007; EC, 1996; Loft et al., 2006; WTO, 1996). However, a series of global audit failures cast doubt on the effectiveness of the ISAs, and the EC, for instance, highlighted concerns that the IFAC’s governance structure and standards-setting process were dominated by the audit profession (Humphrey & Loft, 2008). In response, the IFAC established a Public Interest Oversight Board (PIOB), 3 enhanced its standardssetting due process (Humphrey & Loft, 2008; Loft et al., 2006) and acknowledged the need to consider the voice of developing countries through its Developing Nations Permanent Task Force (DNPTF). 4 As a result, there has been a broader endorsement of the so-called Clarified ISAs by the EC and IOSCO (Humphrey & Loft, 2013). In parallel, the IMF and the WB formulated recommendations for developing countries to strengthen their regulatory and local professional bodies by promoting the ISAs as “best 2 The IOSCO endorsed the replacement of the previous ISAs with the restructured and improved Clarified ISAs, issued in 2009. 3 PIOB members included organisations such as the Financial Stability Board (FSB), the IOSCO, the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors (IAIS), the EC and the WB (Humphrey & Loft, 2009a). 4 It is noteworthy that some argued that the resources allocated to the DNPTF did not indicate a genuine interest to encompass concerns from a broader constituency of countries (Loft et al., 2006; Wade, 2007). 8 international practices” (IMF, 2001; Siddiqui et al., 2011; World Bank, 2004). Financial support for developing countries, typically encompassed within private-sector development programs, has often been conditioned on the adoption of such standards (Camfferman & Zeff, 2007; Hopper et al., 2017) with the aim of improving governance and maintaining “global financial stability”. What is less clear is what happens once the ISAs need to be embedded within local practice and regulatory circles. The regulation of audit practice involves a relatively small number of technical and political actors (typically state-led standard-setters, audit firms, professional accountancy organisations and stock market regulators), compared to accounting standards, which typically involve a wider circle of interested parties outside of the audit profession (Boolaky & Soobaroyen, 2017; Ramirez, 2012). Thus, the ability to codify technical audit procedures into globally applicable pronouncements requires audit practitioners with international experience. This inherently leads to an interdependent relationship between international standardisation “work” and the Big Four networks, where the latter can rely on their extended network of national outposts as a “testing ground” for principle-based standards (Botzem, 2014; Ramirez, 2012). On the one hand, the use of ISAs by the Big Four firms enables them to secure a leading position internationally (Cooper & Robson, 2006; Robson et al., 2007; Samsonova‐Taddei, 2013). This positioning helps the Big Four through their networks and affiliates to better serve the needs of their multinational clients, and to support their claim of carrying out efficient and uniform audit engagements, regardless of location (Needles Jr et al., 2002). On the other hand, the Big Four firms appear to have become indispensable players for the IFAC, through direct representation, provision of knowledge experts, and involvement with proxy organisations (Cooper & Robson, 2006; Loft et al., 2006). Evidence shows that IAASB board members are often current or former employees of the 9 Big Four (Cooper & Robson, 2006; Humphrey & Loft, 2009b). Furthermore, the Big Four firms’ technical departments often seek to provide a universal interpretation of ISAs, which positions them as an “obligatory passage point” (Ramirez, 2012, p. 41) between standards and practice. While research on the development of auditing standards and their regulation in developed countries has generally addressed the power dynamics and struggles between multiple, relatively well-established and resourced institutions, shedding light on how the Big Four firms influence the standard-setting processes by being highly involved at the “source” and what reforms are being undertaken to mitigate this influence (Canning & O’Dwyer, 2013; Hazgui & Gendron, 2015; Jeppesen, 2010; Richardson, 2009; Simunic, 2003), far less is known about what occurs in a developing country context. Developing countries have varying political, legal, educational and institutional structures compared to developed countries, influencing how local audit professionalisation and regulation projects have proceeded in these countries (Hopper et al., 2017; Wade, 2007). On the one hand, there has been significant international pressure for the full adoption of the ISAs, as revealed by Yapa et al. (2017), who saw ISA adoption in Sri Lanka primarily as a by-product of globalisation and the transition to a market economy, which allowed multinational audit firms to dominate the ISA adoption process through the local association of accountants. This situation created tensions between the Big Four firms and local auditors in a context where the state is not directly involved in audit/auditor regulation. In contrast, where the state is involved, factors such as legislation, regulatory scope and political oversight often mediate a full and/or timely commitment to adopting the ISAs on a wholesale basis. Although the ISAs are billed as a uniform set of standards, previous research has highlighted different barriers to (wholesale) ISA adoption across countries, albeit with little attention to the adaptation process (Boolaky & Omoteso, 2016; Needles Jr et al., 2002; 16 The Capital Markets Law soon followed, with Article 58 mandating the use of international accounting and auditing standards for listed companies (Law No. 95, 1992; World Bank, 2002). However, there were no Egyptian auditing standards, and a major concern was the lack of a legitimate translation of the ISAs for the country. It also became apparent that there was no local institutional structure or strategy to manage the adaptation of the ISAs. Interviewee 1, a Big Four firm partner and an ESAA executive member, was directly involved in the drafting of the law and commented: After we drafted the executive regulations for the Capital Markets Law, we faced lawsuits from some [local] auditors arguing that the law is unconstitutional. The argument was based on the fact that the law is referring to a text that is not available in Arabic [the country’s official language]. The argument that the process of ISA adaptation was necessary is strengthened not only because Egypt’s constitution requires a legal text to be written in Arabic but also because of the provisions of the Accounting and Auditing Practice Law (Law No. 133, 1951), which grants the right to practise to individual auditors and not to firms (Ghattas et al., 2021). Therefore, any auditing standards that referred to the responsibilities and expectations of an audit firm had to be adjusted to comply with the law and to ensure the legitimacy and acceptance of the ISAs in the local profession. As suggested by Yapa et al. (2017), the concern was that local firms would struggle to engage with the ISAs, thus allowing international firms to further dominate the market. In 1997, the minister of economy and foreign trade established and chaired the Permanent Committee for Standards of Accounting and Auditing (PCSAA), which would issue the first Egyptian accounting standards (Ministerial Decree, 1997a; World Bank, 2002). A key difference and obstacle to the adoption of international standards in Egypt is the bureaucracy, as the ESAs and EASs had to be initially issued by a committee headed by the minister. Interviewee 1 explained 17 the process: In the past, the standards-setting committee was headed by the Minister, which made us go through a prolonged bureaucratic process to set a meeting with him to review the standards. After the revolution [in 2011], this committee is now headed by the president of FRA … The committee issues the standards, and the minister legislates them without interfering. At the time, these issues revealed a lack of political purpose on the part of the state and resulted in a delayed process of deliberation. Despite the change of leadership, the rigid structure composed of the institutions within the PCSAA led to limited active participation in the standard-setting process. This lack of substantive involvement implies that, while the PCSAA sought to enhance efficiency, the crucial elements - operating as an expert organisation, having political/regulatory clout and legitimacy of the process - remained relatively unaddressed. 4.3 The limited role of state institutions and the influence of Big Four firms The path of adaptation was fraught with further challenges, notably a dearth of local expertise and resources. For instance, the socialist-era local accounting body (CAO) was not considered to have the necessary expertise. Interviewee 15, an academic and a managing partner at a local audit firm, explained that the “CAO cannot help with standards for private companies. They [CAO] are used to governmental audits. They probably never even seen the accounts of a small supermarket, let alone audit it.” Interviewee 6 also commented on the actual involvement of actors representing the remaining institutions within the PCSAA, and observed that: They don’t have the necessary calibre. Bottom line, when it comes to standards and interpretations, it is very hard to find someone outside of the international firms. The ESAA practically has a monopoly on the standards-setting process in Egypt through the Big Four. PCSAA might have only 1 or 2 members from the Big Four, but they control the rest. 18 This view was shared by Interviewee 3, and Interviewee 10 when asked about the most influential actors in the PCSAA. He stated that: It used to be the CAO, but now [KPMG] is the only one at the front row. When you confront them with this fact [KPMG dominance over PCSAA], their answer is: we are not KPMG we are ESAA. Nevertheless, we all know that the Big Four occupy ESAA and rationalize it with their contribution to most of the ESAA’s funding. They will not fund if it does not bring some kind of benefit to them. The WB’s Reports on the Observance of Standards and Codes (ROSC) concurred with this assessment of the ESAA’s local role and revealed the interconnections between the ESAA and representatives of the Big Four firms in the process of adapting standards (particularly KPMG), with the PCSAA being merely a vehicle for ascribing state legitimacy to the standards being developed. In terms of outcome, six EASs were issued in three years, addressing only issues related to auditors’ reports (Ministerial Decree, 2000a). In view of the slow pace of adaptation, the Capital Markets Law was amended to require the use of the newly issued EASs (Ministerial Decree, 1997b), while mandating the use of the ISAs in the absence of a comparable ESA (Ministerial Decree, 2000b). Indeed, the continued prominence of socialist-led institutions, which were only accustomed to the UAS, coupled with pressure from international agencies to reform regulation in favour of the Egyptian capital market, effectively created a policy gap. Market-oriented practices, such as risk-based audit and auditor independence, were foreign to the state Egyptian institutions. Eventually, ESAA, backed by the technical and financial resources of the Big Four firms, emerged as a key player. In 2004, there was a renewed pressure to adapt the Egyptian financial reporting standards based on ISAs, which reassured international actors. The Egyptian state again relied on the ESAA 19 to address the lack of regulatory-level knowledge. In 2008, the current version of the ESAs 6 was issued, consisting of 38 ESAs and a general audit conceptual framework (Ministerial Decree 166, 2008). As reported in Ghattas et al., (2021), a partner in an international firm and a former ESAA board member, narrated that the interdependence between ESAA and the Egyptian state was due to a good relationship with the minister at the time. Enforcement and regulation were formalised to convey to the international stakeholders that there was as a “proper profession” in place (Ghattas et al., 2021, p. 14). In 2014, a new and arguably less bureaucratic PCSAA was established. It was chaired by the president of the FRA rather than the minister. The new committee 7 retained most of the wider composition of the PCSAA with the notable replacement of the member representing the Department of Companies with a member representing the SCP and the inclusion of an ESAA member, who was also a KPMG partner (Egyptian Cabinet, 2011; FRA, 2014), thus consolidating the Big Four’s position within the PCSAA. This reliance was even more evident in the most recent PCSAA formation, when in July 2023 the Egyptian government further updated the committee’s structure by maintaining the previous composition and adding another KPMG partner, thereby reinforcing the Big Four’s dominant position within the PCSAA (FRA, 2023). The PCSAA’s struggle to adapt to the international standards is reflective of the broader challenge of transplanting 6 ESAs issued in 2008 were based on the IFAC’s 2005 ISA. 7 The new/current PCSAA includes seven members: (i) the president of the FRA (serving as the committee chairman); (ii) the president of the Egyptian Authority for Investment and Free Trade (EAIFT) or his representative; (iii) a representative of the Central Auditing Organization (CAO); (iv) the president of the Egyptian Institute for Accountants and Auditors (EIAA); (v) the president of the Egyptian Society of Accountants and Auditors (ESAA); (vi) the head of the accounting & auditing sector at the SCP; and (vii) an accounting expert chosen by the committee chairman. 20 Anglo-American models into a socio-political context that may not align with such models (Caramanis et al., 2015), leading to the increased involvement of international firms. Figure 1 depicts the Egyptian ISA adaptation process. The process began with the review of the ISAs by the ESAA Standards Committee. The committee, dominated by Big Four partners, translated the ISAs into Arabic and made the necessary changes to align the ESA drafts with Law 133. The ESA draft was then submitted to the PCSAA for endorsement and publication. Insert Figure 1 about here. When approached for interview, ESAA board members viewed their role and intervention relating to the ISAs as a form of service to the country. “They [the state] have a big problem concerning funding; we ended up translating and working on the standards at our offices,” added Interviewee 3. Interviewee 1 further detailed ESAA members’ efforts: Bear in mind that the people at the ESAA are volunteers, they do not get paid for this job. They are partners at their firms; PCSAA is not their full-time job. For example, in 2014 while we were working on the new standards, a new updated one came out which we had to factor in. Interviewee 7, a Big Four partner, reiterated: Most countries have dedicated qualified professionals for these tasks. However, in Egypt, although we as professionals are willing to help, we do not have enough time. We do help after our normal work schedule, and we are not paid. This is not a sustainable system. However, I do not agree with the standards setting process in Egypt. I think it has many flaws and is largely affected by politics and economic interests. KPMG takes the credit for issuing the standards. As highlighted above, there is a voluntary contribution of time and resources by the Big Four firms to the ESAA’s work and mandate. This a contribution that may indicate a twin motive of a genuine commitment to help the country by enhancing the profession and a strategic, 21 commercial-led manoeuvre to influence the process. The process of ISA adaptation to the Egyptian context certainly required technical and financial support backed by a mindset that was sorely lacking in Egyptian governmental and regulatory institutions. From our vantage point, it is difficult to draw a definitive conclusion about their ultimate motive for engaging in the ISA adaptation process, thus chiming with Hazgui and Malsch’s (2020) views about the need to challenge notions of commercial and professional logic in the audit setting. Nevertheless, as in the case considered by Yapa et al. (2017), the Big Four intervened to ensure the issuance of adapted ISAs. However, in the next section, we provide some insights into the (limited) due process related to ISA adaptation and the reasons for the delay in synchronising the ESAs with the ISAs, to shed further light on the consequences of the Big Four firms’ selective intervention strategy. 4.4 The Big Four firms’ selective intervention In 2009, the IFAC issued its Clarified ISA, which included significant improvements to the structure of the ISAs, clarifying the objective of each ISA and the auditor’s obligations, and reducing the overall complexity. The ESAA was required to submit its SMO as part of the IFAC’s Member Compliance Program. The SMO includes details on the status of ISA adoption and reports on actions taken to fulfil the “members’ obligations to support the adoption and implementation of ISA” (IFAC, 2012, p. 4). Members should provide a satisfactory explanation if they fail to meet the target set out in their SMO or risk the suspension or termination of their membership (Siddiqui et al., 2011). In their 2016 SMO, the ESAA stated that it was not responsible for the adoption of auditing standards but that its role was only to monitor the IAASB pronouncements and proposed changes to the local standard-setter to ensure the convergence of the ESAs with the ISAs. The ESAA stated that it had been promoting the need to bring ESAs in line with ISAs, but the standards had not been updated despite several meetings with the Ministry of Investment in 2014 and 2015 22 (IFAC, 2016). In its 2020 SMO, the ESAA noted that “[t]he updates of standards have not been yet issued by the competent authority” (IFAC, 2020, p. 18). Legally, the PCSAA, not the ESAA, is the institution responsible for the ISAs in Egypt. The above information extracted from the ESAA’s SMO submission is at odds with the WB ROSC report (World Bank, 2002) and the views of most of our interviewees. For example, Interviewee 4, a former board member of the ESAA, described the adaptation process as follows: It starts with the standard-setting committee at the ESAA, and then it goes to the Permanent Standards Setting Committee [PCSAA], before final approval by the Minister of Investment. Interviewee 9, a partner at a local audit firm and an ESAA member, added that: ESAA initiates the process. However, there is no trace as to what happens internally … ESAA does not send exposure draft. They just send us the newsletters. Interviewee 6 also criticised the lack of transparency of the ESAA’s due process: Although something like the standards’ exposure draft should be circulated to all registered auditors, not only the ESAA members, in practice, they circulate internally between only members of the ESAA’s standards-setting committee and the board ratifies it. The regular ESAA members do not receive it. In response, Interviewee 4 disputed these claims, but his answers show the limited extent to which the ESAA interacts with local stakeholders, stating that: “[w]e publish it on the ESAA’s website. If anyone is interested, they can look at it and send comments. We send it out after it is issued.” This is reflective of the absence of an active consultation process. Since 2009, there has been constant pressure on IFAC members to adopt the ISAs in their entirety or to adapt them to national standards. However, for the past 14 years, the ESAs have been based on outdated versions, while the EASs have gone through several versions and were updated in 2016, 2019, 2020 and as 23 recently as 2022. Figure 2 summarises the timeline of EAS and ESA issuances, with no further ESA standards issued to date. Insert Figure 2 about here Moreover, the ESAA shrouds its standards-setting “due process” with ambiguity. The ESAA claimed that it disseminated exposure drafts to the ESAA members and encouraged them to provide comments, but some interviewees disagreed that such consultations took place. During our initial interview phase (December 2014–June 2016), we inquired into the time lag between the ESAs and the ISAs and the responses were largely related to prioritising accounting standards rather than auditing ones. After two major EAS updates, we asked the same question in follow-up phone interviewees in August 2021. Interviewee 3 explained that “[w]e just finished issuing the new EASs. The priority is EASs, and differences between the ESAs and ISA are not that critical.” When we highlighted the significant changes pertaining to the Clarified ISAs, Interviewee 3 replied: We don’t want to play around the [ISA] 700’s standards [auditor’s report]. It will have a lot of implications and added costs and the Egyptian audit market cannot bear additional costs to just change the format of the report. The audit work in Egypt is already unrewarding. Despite the public interest implications of these standards for the audit report, the above response reflected a prioritisation of cost–benefit (for the audit market) over ISA development and adaptation, since that would affect how local auditors performed their engagements. It seems that the additional costs of updating the ESAs outweighed the benefits, which does not serve the Big Four firms’ strategic objective, i.e., a heavy focus on non-audit fees (Interviewee 5). Overall, the evidence suggests that the Big Four affiliates appear to be selectively addressing ISA deficiencies, and that there is a clear gap between national-level claims of ISA adaptation and the reality on the 24 ground. Hence, actual adaptation seemed to be driven by economic considerations pertaining to the key audit firms. 4.5 Consequences of ISA adaptation: use of different standards Our interviewees included different levels of auditors (e.g. partners, managers, seniors and juniors) from three types of audit firm operating in Egypt: the Big Four firms in Egypt (KPMG, Deloitte, E&Y and PWC), other local affiliates of international firms (e.g. Grant Thornton, BDO) and Egyptian audit firms of different sizes. In response to our questions, interviewees at various hierarchical levels concurred that their knowledge of the ISAs was through their firm’s audit software. Interviewee 23, a manager in a Big Four affiliate, stated that “[t]hey give us regular training on international accounting and auditing standards. Also, we get training on the [firm’s] software.” In terms of implementing the ISAs or the ESAs in their audits, Interviewee 20, a senior at an affiliate of an international firm, explained: As an auditor, you have the accounting standards and the auditing standards. You inquire about the IFRS updates because you are required sometimes by multi-national companies to do packages using IFRS, and those cases exist in Egypt, but why would I need to know ISA? My scope is the ESAs. Professionally, it is good to be updated with the new ISA. But, in reality, I wouldn’t use the ISAs. In response to a follow-up question, namely whether their firm had been asked to use ISAs in an audit of a multinational company, their manager, Interviewee 13, added: My affiliate sends me a [audit software name] file … this file is made according to ISA. I don’t issue an ISA report to the public. But to help him [their affiliate] as a group auditor, to issue an audit report on the consolidated financial statement, I don’t issue it to the public, as a local office I send out to my affiliation to help him audit the consolidation for the group. 25 Internationally affiliated firms thus seem to be able to navigate easily between the ISAs and the ESAs depending on their client’s needs. They leverage their global network as a testing ground for the ISAs, reinforcing their global efficiency (Ramirez, 2012), while marginalising the local firms (Samsonova-Taddei, 2013; Yapa et al., 2017). Such marginalisation is evidenced by comments from Interviewees 9 and 6 regarding the ESAA’s practices of not circulating exposure drafts beyond its standards-setting committee, coupled with the continued lack of representation of local small firms, a pattern observed in the composition of the committee (FRA, 2023). As for local audit firms, Interviewee 6 explained how his firm overcame the lag between the ESAs and the ISAs: We apply ISA as a benchmark. My firm does not wait for the Egyptian standards to be updated, because by the time it gets translated, it is already outdated, and a new version is issued. We have some staff members who cannot read the original text in English. In this case, we use the official translation by IASCA who hold a translation license for IFRSs and ISA pronouncements. This was not the case for the rest of our interviewees from local firms, who concurred that they were only familiar with the ESAs. Interviewee 22 explained, for instance: I am not familiar with the international ISA, at least the new one. The 2007 [2008] Egyptian standards were supposed to be a literal translation of the international standards. But the translation wasn’t very good. With regards to the usefulness of the ESAs for local firms, Interviewee 16 elaborated: The current auditing standards are a literal and ambiguous translation. The Arabic version is not simple, and its structure is complicated. When talking about documenting audit procedures, it doesn’t mention practical steps. The issue is that the standards are too theoretical instead of practical. They need to be more practical and actual steps [to follow]. 32 2010). Motivated by the lack of field-level evidence on the ISA adaptation process and its consequences in such contexts (Haapamäki & Sihvonen, 2019), we have explored Egypt’s ISA adaptation process to uncover its historical and contemporary dynamics. Historically, the Egyptian case demonstrated how legacy institutions such as the CAO, SCP and related state agencies within the PCSAA were not aligned with the aspirations to develop local auditing standards according to best international practices, thereby hindering the purported commitment to adapt the ISAs (Ghattas et al., 2021; Hopper et al., 2017). At the same time, there was no clear policy objective tying these ISA developments to existing audit profession reform, coupled with a lack of financial resources, technical expertise and meaningful consultation to conduct an independent process of adaptation. This provided the opportunity for the internationally affiliated segment of the local profession to address these institutional weaknesses. While interventions by such firms in the global audit regulatory processes have been previously documented (Humphrey & Loft, 2009b), the selectivity of this intervention and its differential impact on various audit firms is more pronounced. This evidence adds to empirical insights into the “micro” industry consequences of ISA implementation in developing countries (Yapa et al., 2017) and the dominance of the Big Four in influencing the adaptation process. While such intervention may help countries to respond to international pressures, the benefits do not appear to flow to the wider (and local) constituency of audit providers. Analytically, we propose the institutional void perspective to conceptualise the intervention of private actors in the regulatory process (Doh et al., 2017; Hajer, 2003) and to articulate the facets/elements of what constitutes a void. By choosing to align their local standards to the ISA (as opposed to adopting them wholesale), developing countries may be motivated by a simplistic approach of maintaining control over their audit regulations, while placating concerns from 33 international agencies and donors. However, in the absence of (i) coherent and indigenous state policy objectives, (ii) sufficient independent technical and financial resources to develop and issue adapted standards and (iii) a deliberative space that substantively engages all stakeholders, it is likely that very little control will be exercised in the national and public interest. This point contributes to the extant literature on which institutional factors are important for the adoption of the ISAs by reflecting beyond mainstream conceptions of national-level coercive, mimetic and normative pressures (Boolaky & Soobaroyen, 2017). Furthermore, the shortcomings of newly established institutions (e.g. NSSs) are not only due to material and institutional constraints. They also result from weak political clout and lack of policy coherence, which render regulatory institutions relatively powerless “at birth”, even if there is enabling legislation that confers the authority to act on them. Furthermore, a deliberative local mindset – i.e. regular stakeholder engagement, public consultations and timely responses to requests from market players – is not always automatically present. Instead, most strategies and policies remain subservient to political, historical and private interest considerations. Finally, in contrast to prior studies in developed countries, there is little by way of a formal “regulatory space” in which multiple institutions compete for regulatory power while the state seeks to intervene in the public interest (Canning & O’Dwyer, 2013; Hazgui & Gendron, 2015; Jeppesen, 2010; Malsch & Gendron, 2011; Richardson, 2009; Simunic, 2003). Therefore, the notion of institutional void offers a different perspective on how NSS institutions in developing countries navigate such regulatory processes and what the consequences of doing so are. Our findings and analysis lead to some key implications. If it is somewhat inevitable that Big Four firms seek to position themselves in the driver’s seat, IFAC guidance and donor-led reforms in auditing should focus on fostering a more inclusive, accountable and deliberative system 34 that promotes the presence of diverse, independent and representative local audit actors. This is a necessary safeguard against the perceived exclusion of the large constituency of local firms. Supranational institutions and national governments also need to consider how to promote higher levels of competition in the audit market by encouraging the entry of more international networks, incentivising the practice of joint audits and the pooling of regional regulatory capacity. We also raise an important implication in that, to assess “progress”, the IFAC and other interested stakeholders largely rely on SMOs, which are self-assessments. 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ESAA Standards-Setting Committee Big Four EAIFT CAO PCSAA Big Four SCP EIA A ESAA 49 Figure 2: The timeline of EASs and ESAs issuance and updates. 1992 – Capital Markets Law issued mandating ISA application 1997 – PCSAA established; first ESA issued 2000 – First six ESAs issued 2002 – PCSAA updates ESAs 2008 – PCSAA issues a full set of ESAs 2008-2024 ESAs updates pending 2006 – PCSAA updates ESAs