Although the cardinal rules of accounting may be rather similar in all states, the accounting systems among these states frequently vary. It is by and large accepted that each state has its ain alone societal, economic and political environment which should play a critical function in organizing its accounting system and, therefore, its corporate coverage and revelation patterns. In this respect, Radebaugh and Gray ( 1997 ) statedA that “ accounting is a merchandise of its environment. That is, it is shaped by, reflects, and reinforces peculiar features alone to its national environment ” . Several features have been proposed by writers that might act upon or determine one state ‘s coverage system. These features include the state ‘s political, economical, cultural, and legal environment. ( See Adhikari and Tondkar 1992 ; Cooke and Wallace 1990 ; Doupnik and Salter 2004 ; Meek and Saudagaran, A 1990 ; Nobes, 2000 ; Radebaugh 1975 ) .
Therefore, it is necessary to analyze the environmental features ( societal, economic and political ) of a given state in order to find whether its accounting system is appropriate for its environment. Consequently, this Chapter attempts to analyze the environment in which the current corporate coverage and revelation patterns of the Emirati shareholding companies operate.
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This Chapter is divided into five subdivisions. The subdivision which follows this debut gives a historical background to the UAE State. The 3rd subdivision focuses upon the Emirati economic system in footings of its construction, the characteristics and jobs of its societal and economic development. The 4th subdivision provides an overview of the current model of corporate coverage and revelation patterns in UAE. The concluding subdivision provides a sum-up of the Chapter.
3.2 UAE: Background
The United Arab Emirates ( UAE ) is a developing Arab state situated in the southern corner of the Arabian Peninsula and consists of a federation of seven emirates ( provinces ) , namelyA Abu Dhabi, Dubai, Sharjah, Fujairah, Ras al-Khaimah, Ajman, and Umm al-Quwain. It is a little state of 83,600 square kilometers.A While the emirate of Abu Dhabi is the largest emirate with an country of 67,340A square kilometres, A Ajman is the smallest 1 with an country of merely 259 square kilometers.A The UAE borders the Iranian Gulf to the North, Saudi Arabia to the South and west, Qatar to the Northwest, and Oman and the Gulf of Oman to the east.A
Before the constitution of UAE as independent state tardily in 1971, all the seven emirates that comprise UAE nowadays in add-on to Qatar and Bahrain were known as Trucial States since they were under close British supervising through a armistice or pact relationship between the United KingdomA and these Arab Sheikhs ( emirates ) .
The modern history of UAE began when the seven provinces became independent after the pact with UK had been expired on December 1, 1971 and the backdown of the British forces from these countries. On December 2, 1971, six of these provinces formed a brotherhood called the United Arab Emirates. The 7th one, Ras al-Khaimah, joined the brotherhood in early 1972.
Since independency Shaikh Zayed bin Sultan Al NahyanA became the first President of the UAE and held the station until his decease in 2004. His eldest boy Khalifa bin Zayed Al Nahyan, so, has been elected by the UAE ‘s Supreme Council of Rulers to win his male parent as UAE President.
The United Arab Emirates is a member province in regional and international organisations such as theA Gulf Cooperation Council ( GCC ) , A the Arab League, Organisation of the Islamic Conference, World Trade Organization, OPEC, and the United Nations.
Harmonizing to the most recent nose count that has been taken in 2005, the population of the UAE has reached about 4.1 million. However, the Department of Economic and Social Affairs Population Division estimated the UAE ‘s population at about 8.19 million in 2010, A of which about less than 20 % were local citizens and the staying were aliens. As a effect, the UAE ‘s migratory rate is the highest in the universe ( CIA World Fact Book ) and the state is consideredA to be one of the most diverse states in footings of population in theA Middle East.
The UAE ‘s stableness, high life criterions and employmentA chances have attracted people from Arab, Asian, and even Western states to populate, work and put in UAE.A
The mostA populated emirates are Dubai, Abu Dhabi and Sharjah where about 86 per centum of UAE ‘s people were populating as the most recent nose count in 2005 showed.A While tabular array ( 3.1 ) shows the state ‘s population by Emirate for the old ages 1975, 1985, 1995, and 2005, tabular array ( 3.2 ) presents the per centum distribution of population by Emirate for the same old ages.
3.2.3 Language and Religion
The official linguistic communication of UAE is Arabic. However, other linguistic communications are widely spoken by foreign workers include English, Hindi, Urdu and Persian. Based on the most recent nose count in 2005, the bulk of the population ( 76A per centum ) was Muslim, 9 per centum Christian, and 15 per centum other ( UAE International Religious Freedom Report ) .A
3.2.4 Political System
The current Fundamental law of the UAE was established in December, 1971. The Constitution designates the constellation of the province, the authorization and signifier of authorities, and citizens ‘ rights and responsibilities.
The Constitution stipulates that the province is a familial constitutional monarchy with a presidential system. Administratively, each emirate hasA its ain swayer and local authorities and it controls its mineral resources and revenues.A
The political system of UAE consists of executive, legislative assembly, and judiciary subdivisions.
The executive subdivision is comprised from the President, Prime Minister, Supreme Council of Rulers, and a Council of Ministers. While the President of the state is the swayer of Abu Dhabi Emirate, the premier curate is the swayer of Dubai ( UAE interact ) . The Federal Supreme Council is composed of the swayers of the seven emirates. Its duties include electing the president and the frailty president and naming the authorities ‘s ministries and Judgess of the Federal Supreme Court. The Supreme Council of Rulers besides is responsible for explicating the authorities policy and signing the Torahs and pacts. However, there are important differences among the seven emirates in footings of their political influence and gross.
The legislative assembly subdivision is the Federal National Council ( FNC ) , which comprises of 40 members stand foring the seven emirates. While 20 members of this council are appointed by the emirates ‘ swayers, the other 20 members are indirectly elected. Harmonizing to the Constitution, the FCN has a legislative and supervisory function. ( “ UAE ” . Arabruleoflaw.org. )
A judiciary subdivision includes the Federal Supreme Court. ( UAE interact ) . However, each emirate still has its ain civil and condemnable Torahs every bit good as its ain high tribunal. All emirates have their ain layman and Islamic jurisprudence for civil, condemnable, and high tribunals ( Library of Congress )
It is obvious from the allotment of political places in the state that Abu Dhabi, the major oil manufacturer and exporter, and Dubai, the state ‘s commercial Centre, have the important influence over the political personal businesss and determinations in UAE. There are no political parties in the UAE and the swayer normally additions his power and legitimacy from the dynastic and tribal system.
Prior to the UAE started to export oil in 1962 and converted into oil based economic system ; the country’sA economic system was depending on agribusiness, fishing and pearl production. Natural resources ( particularly crude oil ) have dominated the UAE ‘s economic system since 1973 when the monetary values of the oil have aggressively increased and provided the state with greatly increased income and important investing chances.
Seeking to cut down dependance on fluctuating natural resources grosss, the United Arab Emirates succeeded in traveling off from the dependance chiefly on natural resources and diversifying its economic system to depend besides on international trade, banking, touristry, existent estate and fabrication. Dubai has been considered as an first-class illustration of economic variegation by the World Bank ( World Bank ) and has become a theoretical account for development in other parts of the GCC part.
Assorted recent statistics indicate that the UAE ‘s economic system is one of the fastest turning economic systems in the word. While the UAE ‘s GDP in 2009 stood at $ 200.4 billion ( CIA World Factbook ) , the state ‘s GDP per capita is ranked as the 14th in the universe and the 3rd in the Middle East, after Qatar and Kuwait ( CIA World Factbook ) or as the 17th in the universe ( International Monetary Fund ) .
Tables ( 3.3 ) , ( 3.2 ) and ( 3.3 ) show the composing of GDP, the comparative importance of economic sectors ‘ part to GDP, the size of the Jordanian work force and its distribution harmonizing to economic activities and the structural alterations ( during at least the last two decennaries ) in both GDP and Jordan ‘s work force distribution.
These Tables show clearly that there have been some alterations in the comparative importance of the economic sector in footings of GDP and work force, though such alterations are limited. One can detect that the construction of the Jordanian economic system is still characterised by a comparatively high part of the services sector to both GDP and employment. The services sector histories for about 65 per centum of GDP and has done so for the past two decennaries. Further, this sector has absorbed 60 to 70 per centum of the entire Jordanian work force for more than two decennaries. Several factors might lend to such a laterality, including:
To pull international investing, the UAE established free trade zones where the transnational corporations can work under few ordinances in fabrication and distribution of assorted types of goods and services while basking a full responsibility and revenue enhancement freedom. Nowadays, more than 6000 foreign companies operate at one of these free zones called Jebel Ali composite in Dubai.
Each emirate retains considerable liberty over economic and fiscal personal businesss and has adopted different development scheme contingent upon their resources. So the economic development theoretical account of the UAE is non unified. There are significant differences among the single emirates in footings of size, population, economic resources and grade of development. The procedure of economic development gathered impulse in the larger emirates of Abu Dhabi and Dubai with the start of oil exports. However, the little emirates like Ajman and the East Coast emirate of Fujairah were extremely developing in footings of infrastructure.A
3.4 CURRENT FRAMEWORK OF CORPORATE REPORTING PRACTICES IN UAE
This subdivision attempts to supply an overview of the current model of corporate coverage and revelation patterns in UAE. This reappraisal constitutes a preliminary measure towards foregrounding the possible restrictions and defects of this model and, therefore, proposing the appropriate attack in the visible radiation of the state ‘s economic, societal and political environment..
There are two interconnected elements to the conventional footing of legitimation for current accounting patterns: the function of the jurisprudence and the construct of GAAP. In analyzing the footing of legitimation for corporate coverage and revelation patterns in UAE, it can be seen that it is derived, foremost, from the governmental ordinances govern the fiscal accounting patterns, and, secondly, from the criterions promulgated by the International Financial Reporting Standards ( IFRSs ) that have non been officially adopted yet.
In the UAE, there are three sets of governmental ordinances govern the fiscal accounting patterns in the state. These ordinances are Companies Law, UAE cardinal bank ordinances, and Emirates Securities and Commodities Market Authority ( ESCMA ) enrollment conditions. Although it has been argued that a first measure in accounting development for a underdeveloped state would be the finding of a set of fiscal accounting criterions appropriate to the state ‘s demands, whether at the micro or macro degree ( Amenkhienan, 1986 ) , the UAE does non hold an accounting jurisprudence every bit good as does non lawfully mandate accounting criterions ( International Monetary Fund ‘s ( IMF ) 2007 Financial System Stability Assessment )
One option which appears to hold been accepted by a figure of developing states is the acceptance of the International Financial Reporting Standards ( IFRSs ) issued by the International Accounting Standards Board ( IASB ) . Adopting these criterions may ensue in many benefits to the following companies and to the stakeholders. I add-on to the enhancing of the transparence and revelation quality of following companies and increasing the comparison of fiscal statements among companies and states, this acceptance besides reduces the cost of capital these companies may pay to its fund suppliers ( IASB, 2002 ) since utilizing the same coverage patterns by different companies and among assorted states should do it less hard and cheaper for fund suppliers to compare the chances and hazards of investings in these companies and markets.
Although it is still non compulsory for listed companies in UAE to use the International Financial Reporting Standards ( IFRSs ) in fixing its one-year studies, the economic enlargement in the UAE, through international trade and finance, in the last few old ages brings a force per unit area on the UAE to follow westernized signifiers of answerability and fiscal coverage, peculiarly those of its “ influential trading spouse ( s ) ” ( Haswell and McKinnon, 2003 ) . Reacting to this force per unit area, the UAE presently requires the application of IFRSs for its Bankss and for domestic companies listed for trading on the UAE ‘s new stock exchange, Dubai International Financial Centre ( DIFC ) ( DIFC, 2006a ; DIFC, 2006e ; DIFC, 2006f ; IAS Plus, 2006a ) .
Therefore, the acceptance of IFRS became a critical factor in the UAE ‘s attempts to pull capital ( Irvine et. al. , 2006 ) . Furthermore, Irvine et Al ( 2006 ) argued that the westernized civilization of UAE, and its committedness to globalisation, has no uncertainty contributed to the comparative easiness with which the determination to follow IFRS has been made, but there will be important troubles in its on-going execution, given the alone civilization and substructure of UAE.
However, the procedure of IFRS execution for non-western states seems to be the “ most debatable facet ” of following IFRS instead than the determination to follow ( Mir and Rahaman, 2005, p. 833 ) .
The UAE, as an emerging economic system, faces important challenges associating to its civilization, political and regulative systems, as it implements IFRS since international criterions have non been developed with its alone demands, civilization and regulative substructure in head. One of the most of import challenges is that the UAE has non had a civilization of public answerability and transparence since there is no general right to vote in the state ( The World Fact book, 2006 ) . Furthermore, the civilization of secretiveness, common in states that have non antecedently been required to describe fiscal information to a regulative organic structure, is likely to be a challenge in the UAE.
In add-on to the function of the governmental ordinances that influence the corporate coverage patterns in UAE, other parties may hold influence on these patterns include the accounting and auditing houses ( particularly the Big Four international accounting houses ) , the Accountants and Auditors Association ( AAA ) , and the Corporate Administration
In 1995, the Institute of Internal Auditor ( IIA ) was established in UAE. The functions of all these organic structures and parties in explicating the current revelation patterns by listed companies in UAE are to be discussed in the undermentioned subdivisions.
3.4.1 The Role of Government
Government has been one of the most persuasive forces in the development of fiscal coverage aims, criterions, and patterns in assorted states ( Radebaugh 1975 ; Cooke 1989 ) . The active engagement of authorities in fiscal coverage ordinance has been important in states with a comparatively weak and unworldly accounting profession.
In the UAE, there are three sets of governmental ordinances coercively govern the fiscal accounting patterns. First, the Companies Law that governs the readying of fiscal studies for listed corporations except Bankss and fiscal establishments. Second, the UAE cardinal bank set ordinances that govern the readyings of fiscal studies for fiscal establishments and Bankss. Finally, Emirates Securities and Commodities Market Authority set enrollment conditions.
188.8.131.52 The Company Law
Before 1984, the constitution of and runing the companies in UAE were regulated harmonizing to the local Torahs and regulations of the local governments such as municipalities in each emirate. Harmonizing to theses Torahs, any single or entity wish to get down a concern in the UAE had to register in an organisation called “ Commercial Register ” normally organized by the Municipalities in these emirates.
Since 1984, stairss have been taken to present a more advanced company jurisprudence applicable throughout the UAE and, so, the Commercial Company Law ( Federal Law No. 8 of 1984 ) was passed in April, 1984. The jurisprudence, which used the Gallic legal system, was based on the experience of other Arab states in the part.
TheA Company Law determines the legal footing for set uping and runing companies. Formation inside informations such as enrollment processs, figure of spouses or managers, and the minimal capital required are described in inside informations in the jurisprudence ‘s articles. Under the Company Law, all companies founded within the UAE must hold at least 51 % equity engagement by UAE subjects. It defines seven classs of concern administration which can be established in the UAE. The classs of concern administration defined by the jurisprudence are: Partnership, Limited Partnership, ConsortiumA Company, Public Shareholding Company, Private Shareholding Company, Limited liability Company, and Share Partnership Company.
Harmonizing to this Law, A the board of managers must fix fiscal statements, which include a balance sheet, net income and loss history, and a study on the company ‘s activities and fiscal place during that twelvemonth. Furthermore, within four months of year-end, public and private shareholding companies, limited liability companies, subdivisions of foreign companies and free zone establishmentsA have to register their fiscal statements with the Ministry of Economy and with the local licensing authorityA ( i.e. the Economic Department or the municipality ) . In add-on, certain concern activities may be required to register their fiscal statements with other authorities bureaus such as Bankss and fiscal establishments are required to subject their fiscal statements to the Central Bank.
However, the commissariats of Article ( 2 ) of Federal Law No. ( 8 ) of 1984 ( Company Law ) were amended by new 1s in Federal Law No. ( 15 ) of 1998. The companies incorporated in UAE Free Zones were excluded from the commissariats of the Company Law and started to be regulated by the concerned free zone ‘s regulations and ordinances except when these companies are national 1s. Furthermore, the new Article ( 2 ) exempts companies runing in the oil, gas, electricity, and H2O purification Fieldss from the application of the commissariats of the Company.
It seems from the legal demands refering accounting and coverage and revelation patterns provided by the Company Law that there is a rule of stewardship present since the managers are to state stockholders what they have done with their resources
Therefore, from the legal demands refering accounting and coverage and revelation patterns provided by the Company Law, it ‘s clear that the intent of accounting and coverage and revelation patterns in UAE is to enable stockholders to measure the stewardship since the managers are to state stockholders what they have done with their resources. Furthermore, accounting and coverage and revelation patterns, harmonizing to the legal footing, can be seen as restricted to stockholders about strictly fiscal facets.
On the other manus, the legal footing mostly fails to give inside informations and specifications of the fiscal accounting and coverage and revelation required. AlthoughA the Company Law states that accounting rules and patterns should be in line with the by and large accepted accounting rules, it does non specify theses criterions ( International Monetary Fund ‘s ( IMF ) 2007 Financial System Stability Assessment ) nor supply a list of specific accounting criterions which could be regarded as acceptable. Hence, the pick of accounting criterions and techniques is wholly left to the discretion of the company ‘s board of managers and hearers. Therefore, it can be argued that the legal footing to legitimating of the UAE accounting and coverage and revelation patterns can non afford a meaningful pattern due to the deficiency of fullness, specification or completeness.
Central bank Regulations
The UAE Currency Board was established in 1973 to publish a national currency for the state. The Board, in add-on to publishing the currency, it issued the regulations and Torahs necessary to modulate the organisation of and runing the banking sector in the state. With the issue of Federal Law No. ( 10 ) of 1980, The UAE Central Bank has been the regulative authorization since 1980. , the Currency Board was replaced by the Central Bank of the UAE. Under this jurisprudence, the Central Bank is granted a general power to make regulations regulating all affairs falling within its competency. The Central Bank has, in this context, promulgated a figure of elaborate ordinances regulating the operation of banking and securities businesses.A
The first effort from UAE Central Bank to enforce the application of International Accounting Standards ( IAS ) on the local Bankss was taken topographic point in 1994 when it urged all local Bankss to follow these criterions. However, the response to this recommendation was still really slow when the Central Bank Circular No 20/99A was published in 1999 by the UAE Central Bank necessitating the Bankss, finance companies, and investing companies runing in the state to fix their fiscal statements in conformity with IASs since January 1, 1999.
The acceptance was due to the broad usage of the International Accounting Standards in respect to histories of Bankss and other fiscal establishments in many states across the universe, andA soA the accounting revelation under these criterions have become apprehensible and more acceptable world-wide, which its executions would heighten the place of Bankss runing in the UAE.A
Emirates Securities and Commodities Market Authority ( ESCA ) Regulations
The 3rd sets of ordinances govern the fiscal accounting patterns in the UAE isA
2000 Federal Law No. 4 refering the Emirates Securities and Commodities Authority “ ESCA Law ” .A
It has been argued that capital markets contribute to the national economic system ‘s well-being through increasing the sum of financess available to finance industry and encouraging nest eggs towards investing ( see Pike and Neale, 1993 ) . Given this function of capital markets, together with the developments in the UAE economic system, in peculiar the addition in the volume of public and private investings, created the demand to set up an instrument capable of mobilising these investings, supported the call for set uping the stock markets in UAE.
ESCA ‘s primary nonsubjective isA to advance nest eggs through encouraging investing in securities and, to direct these nest eggs towards the development of the national economic system.
There are three stock markets in UAE runing under the authorization of the ESCA. Theses stock markets include the Dubai Financial Market ( DFM ) , Abu Dhabi Securities Exchange ( ADX ) , andA the Dubai Gold and Commodities ExchangeA ( DGCX ) . The DFM and the ADX were established in 2000, pursuant to the ESCA Law, whereas the DGCX began merchandising in 2005.A
One of import influence of the stock market on accounting patterns is through the coverage and revelation required from listed companies. The listing conditions in the Emirates Securities and Commodities Authority ( ESCA ) encourages corporations to to the full unwrap with appropriate degree of transparence certain risk-related information. Although all companies listed on the Abu Dhabi Securities ExchangeA ( ADX ) , are required to use International Financial Reporting Standards ( IFRSs ) since 2003, there is no specific counsel every bit far as their application is concerned. The regulations of the Dubai Financial Market ( DFM ) do non stipulate any accounting criterions.
A first stock exchange, NASDAQ Dubai ( once known as the Dubai International Financial Exchange or DIFX ) , opened in Dubai International Financial Center ( DIFC ) in September 2005 as portion of UAE authorities ‘s vision of making an environment for growing, advancement, and economic development in the UAE and the wider part. NASDAQ Dubai was established as a fiscal free zone, A concentrating on capital markets, plus direction, banking services, and insurance and reinsurance. Harmonizing to the 2006 PricewaterhouseCoopers ( PwC ) “ Making Business Guide, ” within the legal power of the DFIC, histories of limited liability companies ( LLCs ) and limited liability partnerships ( LLPs ) shouldA be prepared in conformity with accounting rules or criterions approved by the RegistrarA of Companies ( RoC ) runing under the Companies Law, which typically comply with IFRSs. If an LLC is a member of an international corporate group which prepares fiscal statements under a different accounting model, the company may fix its fiscal statements under the other model, provided that anterior consent was given by the RoC. With regard to general partnerships, nevertheless, A the jurisprudence does non qualify any statutory fiscal, accounting or audit requirements.A
Harmonizing to the IMF ‘s 2007 FSSA, the constitution of the DIFC has fostered competition in the UAE fiscal markets.A
The constitution of the Dubai International Financial CentreA required the acceptance of IFRS in order to project an image of unity, efficiency and transparence ( Al Mulla, 2005 ) .A
3.4.3 International Accounting FirmsA
International accounting houses have demonstrated themselves to be? international organisations which invest in systems of planetary coordination and control? , and have both driven the acceptance of IFRS, and benefited from their debut ( Greenwood et al, 1998 ) .A The Big Four international accounting houses, viz. KPMG, PricewaterhouseCoopers, , Ernst & A ; Young, and DeloitteA Touche, in add-on to the largest Arab group of accounting and auditing houses ( Talal Abu-Ghazaleh Organization ) are all set-up offices in the UAE, which helped drive the state ‘s acceptance of the International Financial Reporting Standards. While the large four accounting houses in the UAE, in add-on to Talal Abu-Ghazaleh Organization, A require their clients to fix their fiscal statements under IFRS, A the other accounting houses have offered strong encouragement to their clients to make the same.A
Harmonizing to Irvine et. al. , ( 2006 ) , each of these ( large four ) firmsA has pitched itself as adding value to Arab States, for illustration PricewaterhouseCoopers ( PWC ) with its Arab Business Intelligence Report ( PricewaterhouseCoopers, 2006 ) , KPMG ( 2004 ) with its Gulf Cooperation Council Fraud Survey, and Ernst & A ; Young ( 2006 ) with its Global Fraud Survey. Ernst & A ; Young was besides the independent hearer for UAE Central Bank ‘s Annual Report.
In 2005, the UAE hosted the first World Accounting Summit, affecting transnational leaders such as Coca-Cola, with industry talkers and comptrollers from over 190 states, and representatives of the Big 4 accounting houses. The acme highlighted both the new chances for professional comptrollers, every bit good as the troubles involved in? consistent application? of international accounting criterions. Dubai Financial Services Authority ( DFSA ) Chairman, Dr Habib Al Mulla, stressed the importance of implementing IFRS in the UAE:
“ It may be hard ab initio to follow themA [ IFRS ] , A but eventually everybody will be pleased to hold strong ordinances in topographic point ” [ AME Info. ( 2005c ) ] .
3.4.4 Accountants and Auditors Association ( AAA ) A
The enrollment of comptrollers and hearers in the UAE is governed by Federal Law No.9 of 1975, which modulating the accounting and scrutinizing professions. The Accountants and Auditors Association ( AAA ) A was established to get by with overall economic development in the UAE. TheA chief aim of the AAAA isA to develop and consolidate the regulations and criterions for the pattern of the profession of accounting and auditing in the state.
In 1975, the Federal Law No.9 was published to modulate the accounting and scrutinizing professions.
Although the UAE Accountants and Auditors Association ( AAA ) is an official organic structure that has an of import consequence on the fiscal accounting patterns in the UAE, the profession is non a member of IFAC ( Al- Qahtani, 2005 ) . The AAA recommends the usage of IFRS in order to heighten the quality of fiscal statements and promote foreign investing ( Aljifri & A ; Khasharmeh, 2006 ) . Similar to other less developing states, the profession is immature one ( Samules & A ; Oliga, 1982 ; Chamisa, 2000 ) .
Consequently, the practicing of accounting profession in the UAE is dominated by the large international auditing houses, viz. Ernst and Young, Arthur Andersen, Price Waterhouse Coopers, Touche Ross and Co and KPMG Peat Marwick.A