Towards Better Disclosure and Transparency in Saudi firms: Overview

1. 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@hotmail.com Second Middle East and North African Forum on Corporate Governance “Improving Transparency and Disclosure” Beirut, June 3-5 - 2004

2. Outline • Introduction • Capital Market Overview • The Legal Framework for Disclosure • Monitoring and Enforcement of Reporting and Disclosure Standards • Disclosure Practices • Enforcing Transparency and Disclosure • Challenges in Enforcing Disclosure and Transparency

3. 1. Introduction • During the 1990s, Saudi Arabia realized the importance of reconstructuring the economy and underwent liberalization and privatization programes. • The country’s 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).

4. 2. The Saudi capital market is the largest in the Middle East in terms of market capitalization, which is over $ 127 bio.  69 Total In Saudi Arabia, the capital market is undergoing changes

5. 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.

6. 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.

7. 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

8. 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).

9. 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.

10. 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.

11. 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.

12. 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.

13. Thank you for your attention