Table of Contents

Contents
Page
1. Background..............................................................................................................................1
1.1. Pre 1974............................................................................................................................1
1.2. 1974 – 1991.......................................................................................................................4
1.3. Post 1991...........................................................................................................................5
1.4. The Application of IFRS in Ethiopia................................................................................8
2. Empirical Analysis.................................................................................................................10
2.1. An Overview OIB and BIB.............................................................................................10
2.1.1. An Overview of OIB S.C.................................................................................10
2.1.2. An Overview of BIB S.C.................................................................................11
2.2. Financial Reporting Practice...........................................................................................11
2.2.1. Balance sheet Statement...................................................................................11
2.2.2. Income (Profit/Loss) Statement........................................................................12
2.2.3. Cash Flow Statement........................................................................................12
2.2.4. Statement of Change in Shareholders’ Equity.................................................13
2.2.5. Important Notes to the account (Disclosure)....................................................13
2.3. Similarities......................................................................................................................15
2.3.1. Similarities- Financial Reporting Format.........................................................15
2.3.2. Similarities- Accounting Policies.....................................................................16
2.4. Differences......................................................................................................................16
2.4.1. Differences- Financial Reporting Format.........................................................16
2.4.2. Differences- Accounting Policies.....................................................................17
3. Conclusion and Recommendation..........................................................................................18
3.1. Conclusion......................................................................................................................18
3.2. Recommendation............................................................................................................18
4. References..............................................................................................................................19
5. Appendixes.............................................................................................................................21
5.1. Financial Statements of OIB...........................................................................................21
5.2. Financial statements of BIB............................................................................................21

Page | 0
1. Background

The accounting practice in Ethiopia appears to exhibit distinct patterns during the three epochs
where the nation has had alternating political orders: from a developing market economy (pre
1974) to a communist economy (1974 through to 1991), and then back to a market oriented
economy (1991 onwards). Before 1974, Ethiopia was a developing market economy. In 1974,
with the coming into power of a military government, the country shifted to a command
economy. This led to nationalization of private companies and establishment of state-owned
companies. In 1991, the present government came into power, proclaimed a free market
economic system, and privatized a number of state-owned companies. The next three subsections
discuss this process in the three chronological periods, i.e., pre-1974, 1974 to 1991, and post-
1991 respectively.

1.1. Pre 1974

Accounting and its key concepts do not appear to have had a recent history in Ethiopia. Prior to
1974, Ethiopia was a feudal society under transformation to capitalism (Tesema 2003). From
1968 to 1973, the country’s private sector accounted for 59 per cent of manufacturing output
with the remaining 41 per cent being produced by state-owned enterprises. The private sector’s
share of output was 79 per cent for the construction sub-sector during the same period. Foreign
investors were major participants in the private sector as the national culture did not consider
entrepreneurship as a dignified concept. Kinfu(1990) argues that the keeping of records in
various forms might have existed in ancient Ethiopia as early as the 3rd century A.D. during the
Axumite Kingdom of ancient Ethiopia. According to Kinfu, the keeping of formal records of
government activities started in the 1900s when Emperor Menelik established Finance and
Gauda (meaning treasury) Ministry which was to keep records of the king’s treasury.

Modern financial accounting in the private sector started in Ethiopia in 1905 with establishment
of the Bank of Abyssinia. The bank was established as a branch of the Bank of Egypt, which was
in turn administered under the British financial system. As a result, British accounting
terminology and financial reporting requirements were used, and personnel training further
strengthened this trend (Kinfu 1990). This observation lends support to Frank’s (1979)

Page | 1
classification of Ethiopian financial reporting practices mainly under the British Commonwealth
model, despite the authors’ indication that Ethiopian accounting is also not too far removed from
the Latin American model. Kinfu (1990) explains that advice of foreign consultants to the kings
of Ethiopia from the 1890s to the 1970s led to the issuance of several proclamations. Some of the
proclamations and regulations continue to define or at least strongly influence the legal basis of
accounting and audit practice in Ethiopia to this date. Examples include:

 The 1960 Commercial Code of Ethiopia,

 The Audit Commission Proclamation of 1944 and,
 The Audit Service Corporation Proclamation of 1977.

Kinfu highlights the contributions of consultants during the construction of the Ethio-Djibouti
railway in the 1890s and of the legal, military, and foreign affairs advisers in the 1930s. He then
relates the subsequent developments of accounting from 1934 to the early-1970s to the Anglo-
American legal and financial advisors to Emperor Haile Silassie I (1928-1974). In the Ethiopian
public sector, a commission of trade inspectors was established by government regulation in
1917 to monitor trade and customs. Some of the proclamations, for example:

 Ministry of Finance directives in 1942,

 Commercial Code of Ethiopia 1960 ,
 The Audit Commission Proclamation of 1944 and,
 The Audit Service Corporation (ASC) Proclamation of 1977 continues to influence the
legal basis of accounting practice in Ethiopia (Mihret, James, and Mula 2009).

The first substantial development during this period was the issuance of Ministry of Finance
directives in 1942 (Argaw, 2000; Kinfu, 1990; Kinfu, Negash and Merissa, 1981). This was
followed by the formation of the Audit Commission by Proclamation No. 69/1944 to undertake
external audit of accounts of the Ministry of Finance (Government of Ethiopia, 1944), which was
subsequently mandated to conduct the external audit of other budgetary institutions as well. This
marks the start of today’s Office of the Auditor General of Ethiopia (OFAG), which, amongst
other duties, monitors and regulates the accounting and auditing profession in the country.

The establishment of Ethiopian Highway Authority and Ethiopian Airlines and reorganization of
Ethiopian Telecommunications and Ethiopian Electric Light and Power Authority as state-owned

Page | 2
enterprises led to involvement of foreign companies as partners, financiers or consultants to the
Ethiopian state-owned enterprises. This in turn helped strengthen internal control systems of the
enterprises (Kinfu 1990). Another development in the 1940s was the start of public accounting in
Ethiopia. Price Waterhouse and Peat & Co. were the first British public accounting firms to open
public practice in Ethiopia and their influence over the accounting practice in the country
through auditing and financial advisory services to their clients remain British-oriented to the
present day (Kinfu 1990).

British influence penetrated the accounting practices of many client organizations as auditing and
financial advisory services were provided by their foreign and indigenous counterparts and were
to remain British-oriented even up to today. As a consequence of the growth of the demand for
trained manpower in accounting and auditing up to the early-1940s, the Addis Ababa College of
Commerce was established in 1943. The College of Business was then opened at Addis Ababa
University in 1963 and at Asmara University in 1969. These institutions have played essential
role in the development of the accounting profession in Ethiopia (Argaw, 2000; Kinfu, 1990).

Other significant developments in the history of accounting in Ethiopia took place in the 1960s.
Firstly, the Commercial Code of Ethiopia was proclaimed in 1960 (Government of Ethiopia
1960). This Code contains accounting and external auditing provisions, which still serve as the
legal basis for financial reporting and external audit of companies (Argaw, 2000; Kinfu, 1970;
Kinfu, Negash and Merissa, 1981; World Bank, 2007). The code provides some requirements for
financial accounting, reporting, and external auditing of companies that operate in Ethiopia. The
limitations that possibly constrained the code’s contribution to the development of accounting
and auditing in the nation include that it does not:

 Specify the accounting standards to be followed in financial reporting;

 Define the qualifications of an auditor;
 Require compliance with professional standards on auditing; or
 Impose an audit requirement upon private limited companies with less than 20 members
(World Bank, 2007).

The second development was the formation of the Office of the Auditor General (OAG) was
then established in 1961 by proclamation number 199/1961 (Government of Ethiopia 1961),

Page | 3
which accorded the OAG greater authority than the Audit Commission that was established in
1944 (Argaw 2000; Kinfu 1990).

1.2. 1974 – 1991

In 1974 a revolution occurred in Ethiopia due to the discontent of the masses about the ruling
classes’ control of land. A communist military government controlled state power following the
revolution and ruled Ethiopia until 1991. This government proclaimed a centrally planned
economic policy, which was followed by a nationalization of virtually all private enterprises and
replaced them by state-owned enterprises instead. According to the communist ideology of this
period, private enterprise was not encouraged; rather, abolishing feudal, bourgeoisie and petty
bourgeoisie classes was the dominant focus.

Following this event, international public accounting firms that have been operating in Ethiopia,
i.e. Price Waterhouse Peat and Co and Mann Judd & Co., were closed (Kinfu, 2005;
Weldegiorgis, 1992). Most people agree that the period up to 1991 was a time when the
development of accounting appears to have been held back (Argaw, 2000; Blake, 1997; Kinfu,
2005). Nonetheless, an important landmark in the history of accounting and auditing in this
period was the formation of the Audit Service Corporation (ASC) by Proclamation 126/1977
(Government of Ethiopia, 1977). The ASC currently undertakes external audit of public
enterprises. Internal audit as a separate function also appeared in this period (in 1987) when the
Auditor General was given the mandate to monitor and regulate internal auditing in government
offices and public enterprises (Argaw, 2000). This proclamation also gave the auditor general the
authority to issue minimum requirements for recruitment of internal auditors, provide training to
internal auditors, and require reports on internal audit of government organizations.

As this period is generally considered as a time when the development of accounting was
directly or indirectly constrained (Blake, 1997; Kinfu, 2005), limited achievements were made in
terms of the development of professional associations as perceived from the perspective of the
Western model. The EPAAA was not active throughout this period. The use of accounting as a
useful tool in organizations was undermined. During this period, private companies were
nationalized. There were many public enterprises. Professionals could not succeed in their

Page | 4
careers unless they were associated with the Workers Party of Ethiopia. Hence, professional
standards were weakened during this period.

Despite the existence of a military government during this episode of the development of
accounting in Ethiopia, this situation was not exploited by the accounting profession possibly for
two reasons. First, the professions do not seem to have actively lobbied those in power to utilize
the situation. Second, the Ethiopia military government of this period had a communist ideology
which arguably does not appreciate the role of Western-styled accounting in a society.

In a communist economy, accounting serves as a central planning tool as contrasted with its
accountability and value-adding roles in Western corporate governance mechanisms (Hao,
1999). The greater emphasis of the Ethiopian government on internal audit compared to external
audit could be in line with this notion of accounting’s role in a planned economy. Arguably,
Ethiopia’s strengths today in internal audit built upon the foundations lay down in the communist
years. In accounting terms, the communist period in Ethiopia cannot be regarded as a total
negative. Every historical period must be examined dialectically in terms of its thesis and anti-
thesis. Following the fall of the former USSR in late 1980s, the military government of Ethiopia
was weakened and a group of armed fronts who had been confronting the military regime
through armed insurrection throughout the communist years overthrew the military regime.
Thus, the current government took power by overthrowing the communist party in 1991.

1.3. Post 1991

Post 1991 was a period when the country shifted back to a free-market economic order after
being structured as a command economy for seventeen years. The state privatized a number of
state-owned enterprises and granted enhanced management autonomy to the remaining state-
owned enterprises by Proclamation No. 25/1992 (Government of Ethiopia 1992). Nevertheless,
similar to the earlier two episodes covered in this study; state-owned enterprises continue to be
dominant in the economy (World Bank 2007) and thus a major employer of professionals.
Change of government and the type of government are important influences on the development
of the accounting profession. The role of government in the development of accounting in other
sub-Saharan African countries, i.e. Nigeria (Uche, 2002) and Kenya (Sian 2006) are examples of
such influence. Ethiopia has recorded fast economic growth in recent years. In 2007, it was the

Page | 5
seventh largest Sub-Sahara African economy (with a Gross National Income of USD 160 per
capita) following the Republic of South Africa, Nigeria, the Sudan, Angola, Kenya, & Tanzania
(World Bank 2007) and improved to be the fifth largest Sub-Sahara African economy in 2009.

There has arguably been some government interest in enhancing accounting and auditing in the
country during this period. The free-market system has been taken as one of the signals of the
hope for a better future for the accounting profession (Argaw, 2000). The Ethiopian government
has been undertaking financial reforms in the financial reporting and internal audit areas in the
public sector (Peterson, 2001). As part of its economic policy reforms, the government has been
working to improve the financial infrastructure of the country and to encourage private
investment via enhanced platform for risk assessment and reduced corporate failure. Under this
framework, a World Bank and IMF joint initiative study —Reports on Observance of Standards
and Codes (ROSC) — was undertaken in 2007 focusing on financial reporting and external audit
in Ethiopia (World Bank, 2007).

A review on accounting standards in Ethiopia conducted by World Bank and IMF in 2007,
“Reports on Observance of Standards and Codes (ROSC)”, indicated various issues in
accounting standards in Ethiopia. Some of the major issues include:-

 There is no requirement in the commercial Code to comply with accounting standards

 There [were] an estimated 200 professional accountants [as of 2007] in the country. In
comparison, Kenya, whose economy is roughly 1.5 times that of Ethiopia, had 3,000
professional accountants in 2001
 On its part, OFAG, [the regulatory and licensing body], institutionally, is facing
effectiveness challenges partly caused by the broad nature of its statutory obligations.
 The Ethiopian Professional Association of Accountants and Auditors (EPAAA), has no
legal backing and is not a member of International Federation of Accountants (IFAC).
 Ethiopia does not have a quality assurance program for auditors
 No legal requirement exists for auditors to have professional indemnity insurance
 The big-four international audit firm networks are not present in the country
 The country has not yet experienced litigation on financial reporting
 Locally, there is neither professional accountancy qualifications nor training available
for professional accountancy

Page | 6
  There is no body with a specific mandate for setting accounting and auditing standards
 Every auditor determines accounting standards for their clients

The Ethiopian government has also been providing enhanced support to the development of
internal audit since 1994 (Teklegiorgis, 2000). In 1994, the Prime Minister set up a task force
that forwarded recommendations to improve internal audit in government offices. Consequently,
the Ministry of Finance and Economic Development (MoFED) has been mandated to develop a
manual for internal audit in government organizations.

During this period, the EPAAA has been re-activated and three other professional associations: -

 The Ethiopian Accounting Finance Association (EAFA),

 The Ethiopian chapter of the Institute of Internal Auditors (IIA), and
 The Accounting Society in Ethiopia (ASE) has been established.

Post-1991, EPAAA has gained a more active status than in prior periods. At present, the
association has three categories of members: two classes of practicing and non-practicing. The
practicing member category contains authorized auditors and authorized accountants. Authorized
auditors are those having certificates as a chartered or certified accountant and memberships with
recognized international accounting bodies. Currently auditors are mostly members of the UK
based Association of Chartered Certified Accountants (ACCA) (World Bank, 2007) and some
are members of the AICPA.

The second is authorized accountants, who provide accounting services as independent firm;
whereas membership as a practicing auditor also requires auditing experience. Membership as an
authorized accountant requires university/college accounting education plus practical experience
in the field. These requirements should be met to obtain practicing licenses from the Office of
the Federal Auditor General. With the opening of the ACCA-Ethiopia branch in Addis Ababa,
the ACCA made arrangements with the EPAAA such that members of the former obtain
automatic membership to the latter. It had a plan to launch a joint examination scheme with the
ACCA such that the ACCA would include Ethiopian variants of its taxation and commercial law
papers when relevant materials are developed on Ethiopia for these papers. Under that scheme
the EPPAAA was supposed to actively participate in the process. It could be noted that the post-
1991 period brought about some favorable conditions for the development of accounting and

Page | 7
auditing in the country that could be exploited by aspiring professional associations. The
EPAAA has not developed to a level where it can offer certification examinations.

According to World Bank on the Report on the Observance of Standards and Codes, there is no
specific set of accounting regulations in Ethiopia (ROSC, 2007, p. 12) and therefore accounting
practices vary across institutions (ROSC, 2007, p. 13). In a sample of 35 financial statements, 17
indicated they were applying IFRS (ROSC, 2007, p. 13). According to The Reporter, the
National Bank of Ethiopia has required the banks to prepare their financial statements in
accordance to IFRS (The Reporter, 2009). Even though IFRS is required for a certain type of
institution, Ethiopia lacks resources to implement IFRS properly (The Reporter, 2009). Ethiopia
currently does not have an authoritative body for accounting which can guide and dictate the
implementation of IFRS (The Reporter, 2009). Nevertheless, Ethiopia has expressed an initiative
to integrate Ethiopia’s financial statements with international standards and therefore Ethiopia is
in Stage II of the IFRS adoption.

1.4. The Application of IFRS in Ethiopia

According to ROSC (2007), so far there is no particular accounting standard in Ethiopia.

Financial reporting system varies among institutions. Even though some of the laws indicate to
use Generally Accepted Accounting Principles for example the income tax proclamation of
Ethiopia article 58(1), neither of the international standards are officially adopted. According to
the same report, the most commonly used financial reporting standard is IFRS and GAAP. There
are also institutions which don not indicate any principles or standards.

But very recently, the government issued a draft proclamation called “Financial Report
Proclamation of Ethiopia” which obliges “public interest entities” to follow IFRS in their
financial reporting. Even though Financial Report Proclamation of Ethiopia is being criticized
for not setting a firm deadline for the IFRS transition, it sets the financial reporting standards that
reporting entities in Ethiopia should use when preparing their financial statements. These are
(Draft Financial Report Proclamation of Ethiopia article 5):

a) IFRS issued by IASB or its successor;

b) IFRS for SMEs issued by IASB or its successor and;

Page | 8
 c) International Public Sector Accounting Standard (IPSAS) issued by the International
Public Sector Accounting Standards Board or its successor.

According to the draft Financial Reporting Proclamation of Ethiopia, the country is in the
progress of adopting IFRS and it is already required for a certain type of institutions. The main
problem associated with this was the lack of an authoritative body for accounting which can
guide and dictate the implementation of IFRS. When draft proclamation approved and
publicized, it can no longer be a problem; as the National Accounting and Auditing Board of
Ethiopia (NAABE) is hereby established as autonomous public body having judicial personality.

According to the draft proclamation article 13, the objectives of the Board shall be to:

a) Promote high quality reporting of financial and non-financial information by public

interest entities;
b) Promote the highest professional standards among auditors and accountants;
c) Enhance the creditability of financial reporting;
d) Improve the quality of accounting and auditing services;

With these objectives, after approval and publication of the draft report, problems associated
with standardization and regulatory organ will be solved. All reporting entries within the country
will also adhere to the reporting standards stated by the proclamation.

The possible benefits and advantages Ethiopia will gain from the adoption and implementation
of IFRS include:
 High/rapid economic growth and this in turn means that the existence of increment in
business transaction which need to be recognized, measured, disclosed/presented by both
private and public sectors based on standardized financial reporting procedures. Thus,
following those procedures will lead the businesses and government to disclose the
relevant and reliable financial information in helping the investors to make a sound
decision with less risk.

Page | 9
  The availability of perfect information due to standardized accounting/financial
information which enhances the fair market competition among different firms in the
industry.
 Due the existence of standard accounting procedure the government and businesses
becomes accountable, responsible and transparent
 Standardized financial report provides important financial information which reduces risk
involved in making an investment decision. Thus, any investors can easily evaluate the
available investment opportunities could make an investment decision i.e. standardized
reporting procedures attract the foreign direct investment (FDI).
 The availability of reliable corporate financial information reduce the risk of financial
crisis, corporate failure and other possible factors that could affect the operation of the
businesses.
2. Empirical Analysis

In order reveal the empirical accounting practice of Ethiopia, we have selected two institutions
from banking industries namely Oromia International Bank S.C. and Buna International Bank
S.C. and tried to look their financial reporting practice, similarities and differences persisted.
Auditors of Oromiya International Bank S.C. used International Standards on Auditing for
financial reporting. To the contrary, audit of Buna International Bank S.C. conducted in
accordance with Generally Accepted Auditing Standard (GAAP). This helps us to compare and
contrast both standards. Both reports are also for the year ended June 30, 2012.

Before going to our discussion part, let as look short overview of the selected organizations.
Next, we will try to discuss the financial reporting practice and their similarities and differences
persisted between both OIB and BIB financial reporting system.

2.1. An Overview OIB and BIB

2.1.1. An Overview of OIB S.C

Oromia International Bank S.C. (OIB) was established in accordance with the pertinent laws,
regulations and the 1960 Commercial Code of Ethiopia, by the Monetary and Banking
Proclamation No. 592/2008. Accordingly, on September 18, 2008, OIB obtained a banking
business license. At the time of its establishment, OIB’s authorized capital was Birr 1.5 billion,

Page | 10
whereas its subscribed capital was Birr 279.2 million, and its paid-up capital Birr 91.2 million.
OIB began operation on October 25, 2008 by opening its first branch at Dembel City Centre. Its
Branch was named Bole Branch.

OIB is one of the most recent popular private financial institutions. Currently, the bank has 61
branches all over the country until December 2013. Its paid-up capital is rose up to Birr 50
million as at June 30, 2013, respectively. OIB is delivering services like credit facilities, deposit
accounts, local transfer, international banking and other related banking services. It has also
become the first private bank to implement interest free banking in the country since the National
Bank of Ethiopia issued a directive to banks allowing them to provide the service using separate
window along with other banking services.

2.1.2. An Overview of BIB S.C

Buna International Bank S.C. uniquely established as the largest number of shareholders’ bank in
the country. It has more than 11,000 shareholders that put the bank on a strong base. The bank
was officially inaugurated on October 10, 2009 with subscribed capital was Birr 308 million, and
its paid-up capital Birr 156 Million.

Currently, the bank has 46 branches that are found both in Addis Ababa and other towns of the
country. Its subscribed and paid-up capital is also rose up Birr 375 and Birr 308 as at June 30,
2013, respectively. Like other private banks of the country, the bank is delivering services like
credit facilities, deposit accounts, local transfer, international banking & other banking services.

2.2. Financial Reporting Practice

As stated above, financial reporting of OIB conducted in accordance with ISA and whereas BIB
conducted according to GAAP. For ease comparison, we have grouped financial reporting into
four parts: the Balance sheet (Statement of Financial Position), Income (Profit/Loss) Statement,
Cash Flow Statement, Statement of Change in Shareholders’ Equity and Notes to the account or
disclosure part of the report.

2.2.1. Balance sheet Statement

The heading part of the statement is name of the company followed by name of the statement
and reporting date, consequently. Also, for ease presentation, the balance sheet statement part of

Page | 11
the report used asset part at the top and followed by liability and equity parts of the company,
concurrently. The report is also prepared as a comparative financial statement; it is easier to see
changes in the financial data. Appropriate notes references are also included side by side.

Further, the asset part of the report is bisected into two parts which shows current asset, cash and
bank balances, and other financial assets like loans and advances, plants and equipments assets,
deferred expenditure and investments of the company. The liability and equity parts of the report
also clearly show the debt obligations of the company and shareholders’ claim over the
company. Liabilities of the company’s are grouped into various parts to show respective owns.
The equity part divided into three categories: share capital, legal reserve and retained earnings.
Finally, both the asset and liability and equity sides of the report have the total sum.

2.2.2. Income (Profit/Loss) Statement

The same with Balance sheet statement, the Income (Profit/Loss) statement of both companies
are prepared with the heading of respective company’s name followed by name of the statement
and reporting date at the last of the heading. However, OIB used single-step income statement
reporting format. They presented their financial statements in a condensed format. This means,
all costs and expenses are deducted from total revenue in a single step. There is no subtotal for
gross profit or operating income. However, BIB used a multiple income statement reporting
format and the report has various sub-totals and sections.

In addition to difference in reporting format, financial report BIB incorporated the declared
dividend for the year. However, OIB’s audit report incorporated neither in income statement part
nor in notes of the report. Also, BIB audit report has complete note references for every item of
income statement. However, audit report OIB lacked this. Notes for provision for profit tax,
transfer to legal reserve and dividend declared are not incorporated.

2.2.3. Cash Flow Statement

Cash Flow Statement of both companies are prepared with the heading of respective company’s
name followed by name of the statement and reporting date at the last of the heading. For both
companies, cash flow statement has three parts: cash flow from operation activity, cash flow
from investment activities and cash flow from financial activities. Based on this division, the
three have their own sub-totals and finally added together to bring balance of the year.

Page | 12
Beside their similarities, the cash flow statement part of the reports has also some variations.
The audit report of OIB bisects the increments alone and transfers the balance for the year.
Whereas, audit report of BIB puts all together under one column and come down to the balance.
In addition to this, audit report of BIB puts under what circumstances the cash balance for the
year persisted. However, audit report of OIB merely put the final balance.

2.2.4. Statement of Change in Shareholders’ Equity

Auditors of BIB included statement of change in shareholders’ equity in the financial report they
have prepared. To the contrary, audit report of OIB has not. This indicate that since there is no
reporting standard in the country how financial reports are prepared and what should be included
or not are determined by those auditors who conduct the auditing activities. Thus why auditors
who undertake auditing activities of BIB included statement of change in shareholders’ equity in
their financial report and that of OIB did not.

2.2.5. Important Notes to the account (Disclosure)

As we have discussed in our fraud case on disclosure principle, notes are very crucial in financial
reporting. The purpose of accounting disclosure is to inform both current and potential investors
accounting strategies and methods used when developing periodic financial reports. It is an
effective tool for improving investor protection. Without good disclosure, it is easy to mislead
decision that will be made by the user of the report. As a result, any event that would have an
impact on the financial statements should be disclosed.

However, even though it is crucial for financial report understanding, disclosure principle is
based on personal judgment. Some accountants or auditors disclose every reporting unit as many
as possible. Some others limited to only very important points. Nevertheless, an entity shall
disclose in the summary of significant accounting policies the measurement basis (or bases) used
in preparing the financial statements and the other accounting policies used that are relevant to
an understanding of the financial statements.

Based on these facts, while we look at the financial reports of the company we have selected,
even though lots of similarities persisted, we have found that there are some variations regarding
disclosing important financial reporting items. We have picked out each of them and depict on
the below table.

Page | 13
 COMPANY
SR. NAME
DESCRIPTION
NO.
OIB BIB
1 GENERAL INFORMATION  
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
3 DEPOSITS WITH NATIONAL BANK OF ETHIOPIA  
4 DEPOSITS WITH LOCAL COMMERCIAL BANKS  
5 PREPAYMENTS 
6 OTHER ASSETS  
7 LOAN AND ADVANCES TO CUSTOMERS  
8 DEFERRED EXPENDITURES  
9 INVESTMENTS  
10 PROPERTY AND EQUIPMENT  
11 PROFIT TAX COMPUTATION 
12 DEPOSIT FROM CUSTOMERS  
13 OTHER LIABILITIES  
14 PROVISION FOR PROFIT TAX 
15 PAID UP CAPITAL (Par value Birr 100)  
16 LEGAL RESERVE  
17 INTEREST INCOME  
18 INTEREST EXPENSES  
19 SERVICE CHARGE 
20 COMMISSION EARNED  
21 OTHER INCOMES 
22 SALARIES AND BENEFITS  
23 GENERAL AND ADMINISTRATIVE EXPENSES  
24 BOARD OF DIRECTORS’ MONTHLY ALLOWANCE REMUNERATION 
25 RELATED PARTY TRANSACTIONS 
26 EARNINGS PER SHARE 
27 CONTINGENT LIABILITIES AND COMMITMENTS  
28 MEMORANDUM ACCOUNTS  
29 EMPLOYEES’ BENEFITS 
30 COMPARATIVE FIGURES 
2.3. Similarities

Even if reporting standard is different, there are a lots of similarities persisted between financial
reporting of OIB and BIB. While analyzing, we tried look their similarities in two perspectives:
financial reporting format and accounting policies they have employed. These are discussed as
follows.

Page | 14
2.3.1. Similarities- Financial Reporting Format

Heading of all statements that both companies prepared are similar: - The name of the company
at the top followed by name of the statement and reporting date, consequently.

In Balance sheet, both companies report used asset part at the top and followed by liability and
equity parts of the company, concurrently. The report is also prepared as a comparative financial
statement; it is easier to see changes in the financial data. Appropriate notes references are also
included side by side.

The asset part of the report is further bisected into two parts which shows current asset, cash and
bank balances, and other financial assets like loans and advances, plants and equipments assets,
deferred expenditure and investments of the company. The liability and equity parts of the report
also clearly show the debt obligations of the company and shareholders’ claim over the
company. Liabilities of the company’s are grouped into various parts to show respective owns.
The equity part divided into three categories: share capital, legal reserve and retained earnings.
Finally, both the asset and liability and equity sides of the report have the total sum which
equates total assets with total liability plus total equity.

Also, for both companies cash flow statement has three parts: cash flow from operation activity,
cash flow from investment activities and cash flow from financial activities. Based on this
division, the three have their own sub-totals and finally added together to bring balance of the
year.

Regarding important notes to the account, the most important notes are incorporated within both
financial reports. Both are disclosed accounting standard, significant accounting policies and
other important financial reporting items they have been following and employing in order to
accomplish their auditing tasks.

2.3.2. Similarities- Accounting Policies

Both companies employed the followings similarly: -

 Fixed assets are reported in the balance sheet at acquisition cost less accumulated
depreciation. Depreciation is computed on straight line basis and both companies used
similar rates for respective assets.

Page | 15
 Deferred charges (expenditure incurred before the commencement of operations) is treated as
pre-operational costs and amortized on the straight-line method for expected useful life of 5
years.

 Interest on loans and advances are recorded when earned. However, interest income on non-
performing loans (NPL) is accounted for on cash basis of accounting.

 Foreign currencies denominated transactions are converted into Birr at the prevailing rates of
exchange and realized foreign exchange gains or losses are reflected in the profit and loss
account.

2.4. Differences

We have also tried to identify the differences between financial reporting systems of the two
companies with regard to financial reporting formats and accounting policies they have
employed while undertaking auditing task.

2.4.1. Differences- Financial Reporting Format

OIB used single-step income statement reporting format. They presented their financial
statements in a condensed format. This means, all costs and expenses are deducted from total
revenue in a single step. There is no subtotal for gross profit or operating income. However, BIB
used a multiple income statement reporting format and the report has various sub-totals.

The cash flow statement part of the reports has also some variations. The audit report of OIB
bisects the increments alone and transfers the balance for the year. Whereas, audit report of BIB
puts all together under one column and come down to the balance. In addition to this, audit
report of BIB puts under what circumstances the cash balance for the year persisted. However,
audit report of OIB merely put the final balance.

In addition to the above, BIB incorporated the declared dividend for the year. However, OIB’s
audit report incorporated neither in income statement part nor in notes of the report. Also, BIB
audit report has note references for every item of income statement. However, audit report OIB
lacked this. For example, Notes for provision for profit tax, transfer to legal reserve and dividend
declared are not incorporated.

Page | 16
Furthermore, BIB included statement of change in shareholders’ equity in their financial report
and that of OIB did not.

2.4.2. Differences- Accounting Policies

 From the very beginning, BIB’s financial statements are prepared in accordance with the
Generally Accepted Accounting Principle (GAAP). Whereas, OIB’s conducted in
accordance with International Standards on Auditing (ISA), predecessor of IFRS.

 For OIB, foreign currencies on hand and correspondent banks balances at the balance
sheet date are translated at the average rates of buying and selling rates for notes and
transactions respectively. Whereas, for BIB, Year–end balances of foreign currencies on
hand and with correspondent banks are converted into Birr at mid exchange rates ruling
at the balance sheet date.

 Stocks are valued using FIFO costing base for OIB.

3. Conclusion and Recommendation

3.1. Conclusion

Page | 17
  As we tried to depicted above, Ethiopia has long years of accounting history. However,
accounting practice were not developed even though the country has long period of
civilization.
 As the economy of the country passes different epochs the development of accounting
practice also experienced differently during different regimes.
 The country has no specific guidelines that enforces the entities to practice the IFRS and
this resulted in the different practices of accounting in different entities
 The NBE also does not have specific guide lines that enforce the banking industries to
practice the IFRS accordingly.
 The country has adopting IFRS and draft financial reporting proclamation is underway.
When approved and publicized, problems related with variation in reporting standards
will hopefully eliminated.
 The two banks, within the same country and governed by the same rules and regulations
employed two different reporting standards which yield different outputs. This is resulted
from absence of single standards which govern them.

3.2. Recommendation

 The government of Ethiopia should provide enough budgets for development

infrastructure accounting practice ,
 The NBE should develop guide lines for banking industries towards practicing
International Financial Reporting Standards,
 The Boards should approve the draft proclamation as soon as possible,
 Professional auditors should be encouraged and trained,
 Entities in the country and banking industry should practice accounting standard rather
than simply put the guide lines on the shelf,
 Exchanging good practice with outside countries which have good accounting practice.
 Undertaking financial reporting reforms.

4. References

Page | 18
Aberra, K., 2005, the State of Accounting Profession in Ethiopia and the Way Forward for
Sustainable Development, Accounting Focus 1, 16-24.

Argaw, L., 2000, The State of Internal Auditing in Ethiopia-The way Forward to
Professionalism, Inaugural Ceremony of the Institute of Internal Auditors-Ethiopian Chapter
Addis Ababa) 21-37.

Blake, J., 1997, Accounting in the Developing Countries, The Ethiopian Journal of Accounting
& Finance vol. 1, no. 1, p. 1997.

Buna International Bank S.C. (2011), Annual Report of 2011, Addis Ababa, Ethiopia

Hao, Z.P., 1999, Regulation and organization of accountants in China, Accounting, Auditing &
Accountability Journal, vol. 12, no. 286-302.

Kinfu, J., 1970, The Accounting provisions of the Commercial Code of Ethiopia, DBA thesis,
Michigan State University.

Kinfu, J., T. Negash, and A. Merissa, 1981, The Accounting Profession and Practice: The
Ethiopian Experience, paper presented to Regional Conference on Localization of Professional
Training, qualification and examination in African States, UNECA hall, Addis Ababa, 27-30
June 1981.

Mihret, D. G., K. James, and J. M. Mula, 2009, Accounting and auditing professionalization
processes amidst alternating politico-economic order of Ethiopia, Paper presented at the
Accounting and Finance Association of Australia and New Zealand, AFAANZ conference,
Adelaide, Australia.

Ministry of Finance and Economic Development (MoFED) (2011), Financial Reporting

Proclamation of Ethiopia, Draft, proclamation no. .

National Steering Committee, 2010, Organizational structure and scope of activities of the
National Accounting and Auditing Board of Ethiopia Addis Ababa, Ethiopia).

Page | 19
Negatu, Z., 2009, investing in Ethiopia: The Global Business Advisors' Perspective Washington
D. C.

Oromia International Bank S.C. (2011), Annual Report of 2011, Addis Ababa, Ethiopia

Peterson, S.B., 2001, Financial Reform in a devolved African Country: Lessons from Ethiopia,
Public Administration and Development, vol. 21, no. 2, pp. 131-48.

ROSC, 2007, Report on the observance of standards and codes (ROSC)

Sian, S. 2006, Inclusion, exclusion and control: The case of the Kenyan accounting
professionalization project, Accounting, Organizations and Society, vol. 31, no. 3., pp. 295-322.

Teklegiorgis, H., 2000, Kynote Speech, Inaugural Ceremony of the Institute of Internal
Auditors--Ethiopia Chapter Addis Ababa, 16 December 2000.

Uche, C.U., 2002, Professional accounting development in Nigeria: threats from the inside and
outside, Accounting, Organizations and Society, vol. 27, no. 4-5, pp. 471-96.

World Bank, 2007, Report on the observance of standards and codes (ROSC) Ethiopia, The
World Bank, viewed 13 April 2008, <http://www.worldbank.org/ifa/rosc_aa_ethiopia.pdf>.

———, 1960, Commercial Code of Ethiopia Negarit Gazette, Addis Ababa).

———, 1961, Government of Ethiopia, Office of Auditor General Proclamation No. 199/1961
Addis Ababa).

Page | 20
5. Appendixes

5.1. Financial Statements of OIB

5.2. Financial statements of BIB

Page | 21