Ali rather than investors injecting fund through equity.

Ali and Hwang (2000) suggested that countries with under developed capital market (low demand for information from published financial reports) tend to employ accounting practices that produce low quality accounting data and information. Similarly, the capital market in Bhutan is underdeveloped. The Royal Securities Exchange of Bhutan Ltd (RSEBL) established in 1993 is the only stock exchange in Bhutan and it is one of the world’s smallest stock exchanges with only 21 companies registered locally as shown in Table. 2. Their total market capitalization as of 31st December 2015 stands at BTN.23.99 billion with trading worth BTN 923.75 million during the same period (RSEBL, 2016).   The number of listed companies in the local stock exchange composes of less than 1% of total business organization. Thus, the capital market in Bhutan is underdeveloped. Give the fact that the capital market in Bhutan is underdeveloped; the requirement of extensive disclosure of financial statement seems irrelevant as desired by IFRS. As one interviewee mentioned that most business organization use different source of finance like bank credit with high collateral, individual or family funding and government finance rather than investors injecting fund through equity.

5.3       Professional Environment

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The professional environment encompasses the education, training, registration, discipline, professional ethics and culture of accountants and auditors. (Gernon & Wallace, 1995, p. 68). The modern form of accounting and auditing was introduced after 1960, with the commencement of the First Five-Year plan. The Royal Government of Bhutan (RGOB) issued the first edition of the Financial Manual (FM) in 1963 to promote accountability of resources, effective evaluation and reporting for appropriate decision-making (Sharma, 2014). The Royal Audit Department was established in 1970 and it was restructured into an autonomous body called Royal Audit Authority (RAA) in 1985 (Pradhan, 1999).  Accounting and auditing in Bhutan then, was based on the Financial Manual issued by the Royal Government and the RAA is responsible for auditing Government Departments, the Judiciary, Defense and Security service, SOEs and any other institutions that receives state funding.

In addition, RAA is mandated by the Company Act of Bhutan 2016 to appoint or empanel external auditors for companies in Bhutan (Sec. 252 Co. Act, 2016).  As there are no professional accounting bodies or organization like Japan Institute of Certified Public Accountant (JICPA) and Institute of Chartered Accountant of England ad Wales (ICAEW); the RAA is authorized to issue practicing certificates like a professional body of CA and CPA (Sharma, 2014).  All companies registered?under the Companies Act are?mandated to be audited by external or statutory auditor (Sec. 265 &265, Co Act, 2016).  In the process, RAA control the quality of audit by participating in the exit meeting to ensure that the auditors comply with the code of ethics and the standing instructions (Sharma, 2014).

The accounting profession in Bhutan is relatively small and underdeveloped as compared to Anglo-American countries where IFRS was developed. There are only 36 CPAs/ CAs in Bhutan as of September 2017, who are members of different professional bodies around the world (interviewee. 4). These limited number of CA/CPA are not practicing auditors, but are engaged by corporate and government agencies with different roles and responsibility (Sharma, 2014). If Bhutan’s population is assumed to be one million, the number of CAs or CPAs per one million people would have been 46 CAs or CPAs (36 CAs or CPAs against Bhutan’s population of 785,000 (NSB, 2017). Where as the number of CPAs per one million people in Japan and the USA in 2011 was 235 and 1,087 respectively (Tsunogaya et al. 2015). So, Japan and USA has five times and 23 times more CPAs than Bhutan. Thus, the accounting professional is Bhutan is small and underdeveloped.

There are no local audit firms, which are certified to conduct external audit in Bhutan.  According to one interviewee, this is the result of two distinct reasons. Firstly, the Accounting professional in Bhutan is small and underdeveloped. Second, the small number of CAs/ CPAs is not ready to open audit firms as they occupy high positions in the government or corporate sectors and does not want to leave their comfort zone (interviewee. 1). Lack of local auditing firms in Bhutan have actually resulted in outsourcing professional service like external audit to firms outside Bhutan especially India (AASBB, 2015) and the RAA has an important role in appointing or empaneling auditors as discussed in detail earlier. The outsourcing of auditing services to firms outside Bhutan has three negative implications.

First, the outsourcing of professional service to firms outside Bhutan has actually resulted in non-development of accounting and auditing profession in Bhutan (AASBB, 2015) because of easy access to abundant supply of audit in India. Second, all external or statutory auditor in Bhutan are Indian firms who are member of Institute of Chartered Accountant, India (ICAI) and are required to adhere to the professional code of conduct and ethical rules prescribed by ICAI.  The RAA however does not have any legal jurisdiction over these Indian firms as the mechanism and law under which these firms operate does not extend beyond Indian Territory (AASBB, 2012). So, the audit firm has never been subject to legal action by regulating bodies in Bhutan that resulted in fines or reprimands (Interviewee 5). Third, since BAS is fairly a new concept in Bhutan, most of the auditors are not competent enough to audit and certify the IFRS compliant financial statements as pointed by one interviewee. This is because India is in the process of implementing IFRS in phased manner, the external auditors (Indian firms) have problem understanding the BAS and certifying the financial statements (interviewee 6). Thus, the underdeveloped accounting profession in general has been one impediment in the consistent application and interpretation of IFRS in Bhutan.

Chand, Patel and Day, (2008) suggested the importance and need to provide training to professional accountants, particularly in developing countries, for consistent interpretation and application of IFRS across all countries. But, in absence of independent professional accounting bodies or organization lick JICPA or ICAEW, Bhutan has no facility to professional accounting education, (AASBB, 2015). Apart from preparing, issuing and reviewing accounting standards in Bhutan, AASBB has been providing training related to accounting standards in Bhutan. But there is no regular system or mechanism to provide accountants with continuing professional development and training in Bhutan (AASBB, 2012).

With increasing demand for qualified accountant both within the private as well as the public sectors, the gap between the demand and supply of qualified professional accountants has been widening (AASBB, 2015). Similarly, there is demand for local audit firms to carry out external audit of various companies in Bhutan (Sharma, 2014). So, it is time for Bhutan to have