Towards Better Disclosure and Transparency in Saudi firms: Overview

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Towards Better Disclosure and Transparency in
Saudi firms Overview
Dr. OBAID ALMOTAIRY Department OF Accounting
College of Business Economics QASSEEM
UNIVERSITY Saudi Arabia O_motairy_at_hotmail.com
Second Middle East and North African Forum on
Corporate Governance Improving Transparency and
Disclosure Beirut, June 3-5 - 2004
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Outline

1. Introduction
2. Capital Market Overview
3. The Legal Framework for Disclosure
4. Monitoring and Enforcement of Reporting and
   Disclosure Standards
5. Disclosure Practices
6. Enforcing Transparency and Disclosure
7. Challenges in Enforcing Disclosure and
   Transparency

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1. Introduction

• During the 1990s, Saudi Arabia realized the
  importance of reconstructuring the economy and
  underwent liberalization and privatization
  programes.
• The countrys modern infrastructure and on-going
  structural reforms are paving the way for a
  greater private sector role in the economy and a
  better future for the country.
• The rationale behind creation of the Supreme
  Economic Council, followed by the Saudi Arabian
  General Investment Authority and many other
  institutions, the last of which was the issuance
  of the Capital Market Law (mid 2003).

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2. The Saudi capital market is the largest in the
Middle East in terms of market capitalization,
which is over 127 bio. 

No. of Companies Sectors
9 Banking
24 Industrial
8 Cement
17 Service
1 Electricity
9 Agricultural
1 Telecomunication
69 Total
In Saudi Arabia, the capital market is undergoing
changes
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3. The Legal Framework for Disclosure
The main regulations governing corporate
governance in SA

• The Companies Law (1965) was the primary
  authoritative reference for the accounting
  auditing profession in SA (which requested public
  companies to appoint auditors
• During the early of the 1980s, SA had been
  engaged to developing its own accounting and
  auditing standards.
• The Ministry of Commerce (MoC) as the major role
  player in SA that exercise control over
  corporations on behalf of the government issued
  the first two national accounting standards in SA
  in 1986 and became effective in 1990. These
  standards are
• (1) Objectives and Concepts of Financial
  Accounting and
• (2) General Presentation and Disclosure
  Standard.

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The Legal Framework for DisclosureContinued..

• Two years later in 1992, the Saudi Organisation
  for Certified Public Accountants(SOCPA) was
  established.
• During the last 10 years SOCPA worked heavily on
  providing CPA examinations, developing accounting
  and auditing standards, overseeing professional
  ethics, establishing CPA quality review programs,
  and organising training courses to provide
  continuous professional education for CPAs.
• The development and reviewing of all accounting
  standards in SA is the responsibiliy of the
  Accounting Standards Committee (ASC), which is
  part of SOCPA.
• By the end of 2003 there were 20 Statements of
  Financial Accounting Standards in effect and they
  covered most business transactions and events
  relevant to public companies in Saudi Arabia.
• Generally, Saudi Accounting Standards deal with
  topics covered by the USA, the UK and
  international accounting standards plus topics of
  local importance.

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The Legal Framework for DisclosureContinued..

• All listed companies must announce the annually
  and quarterly reporting of financial results.
  They are required to submit quarterly financial
  statements within 3 weeks of the quarter end.
  Annual financial statements reviewed by the
  auditors are to be submitted within 3 months of
  the end of the year.
• Since 1994 publicly listed companies in SA are
  required to set up an audit committee.
• Banks are meeting accounting and disclosure
  standards prescribed by SAMA, which are in line
  with International Accounting Standards

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4. Monitoring and Enforcement of Reporting
Disclosure Standards

• In Saudi Arabia, it is difficult to name exactly
  the body involved in monitoring and enforcement
  of reporting and disclosure standards because of
  the absence of the securities regulator (e.g the
  Saudi securities commission).
• These functions are currently undertaken by
  various bodies, in varying degrees, such as
• the MOC (through its Companies General
  Management (CGM)),
• SOCPA, and
• Saudi Arabian Monetary Agency (SAMA) (through its
  Stock Control Department).

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Monitoring and Enforcement of Reporting and
Disclosure Standards Continued

• The CGM of the MOC is currently the body involved
  in the review of all annual reports, financial
  statements and offering documents issued by
  listed companies. The CGM, with its legislative
  power, can take enforcement actions against
  listed companies, in cases of serious
  non-compliance, and impose sanctions, which serve
  to deter improper financial reporting.
• SOCPA regulates the reporting and disclosure
  standards. However, the scope is restricted to
  the practising members of SOCPA in their capacity
  as auditors of listed companies. As SOCPA has no
  authority over listed companies, it is unable to
  monitor and enforce compliance with reporting and
  disclosure requirements by the companies.
• The Stock Control Department of SAMA oversees the
  implementation of regulations for share trading
  and daily transactions.

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5. Disclosure Practices

• Studies by academics have found that
• High compliance with the mandatory requirements
  in most industries
• The level of voluntary disclosure is low
• The implementation of accounting and auditing
  standards need investigation.
• Lack of adequate enforcement.

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6. Enforcing Transparency and Disclosure

• At the beginning of 2003 the MoC issued
  Ministerial Resolution No. 2217, which requires
  all listed companies to include a report by the
  directors, CEO and CFM, requiring them to confirm
  the information contained in the financial
  statements and disclose compliance with the
  Companies Law.
• It is expected that these confirmations would add
  value to the information in the financial
  statements.
• However, this Resolution has not been adopted for
  several reasons
• The directors fight against
• The close emergence of the Saudi securities
  exchange.
• Accordingly, the MoC saw that the requirement
  for such confirmations could be delayed or
  removed.

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7. Challenges in enforcing disclosure and
transparency

• In the IFAD Report "GAAP Convergence 2002",
  Saudi-Arabia has been listed as one of countries,
  together with Iceland and Japan, which do not
  intend to converge its own accounting standards
  with IFRS.
• The emergence of the Saudi Securities and
  Exchange Commission, with its focused mandate,
  would seek to facilitate listings and improve
  transparency through disclosure requirements.
• How, why and what should corporate governance
  look like in Saudi Arabia is the most challenges.

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Thank you for your attention