Dr. Ahmed PHD Thesis

An Examination of Shares Prices’ Reaction to Publication
of Annual Financial Statements Released by Companies
Listed on Saudi Stock Market
BY
Ahmed Abdelrahman Ahmed Ibrahim
A Thesis Submitted to Atlantic International University, USA
in Partial Fulfillment of the Requirements for the Degree of
Doctor of Philosophy in Business Administration.
October, 2008

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Abstract
______________________________________________________________
An Examination of shares prices’ Reaction to the Publication of Annual Financial
Statements Released by Companies Listed on the Saudi Stock Market.
______________________________________________________________
The main objective of this thesis is to examine the reaction of shares prices to
the publication of annual financial statements released by the companies listed
on the Saudi Stock Market for the period (2003-2007). To achieve this objective,
data of thirty eight companies listed on the Saudi Stock Market is used to
examine shares prices’ reactions around release dates of annual financial
statements. The joint stock companies whose shares are traded on the Saudi
Stock Market (SSM) have been required to publish their annual financial
statements since 1985. Since that time, no attempts have been made as far as
Iam aware by either the academics or professionals to examine reaction of
shares prices to publication of annual financial statements. This study is based
on the previous structure of Saudi Stock Market, where the market was divided
into seven main sectors (banking, industry, cement, services, electricity,
agriculture, and telecommunication).
This thesis has been divided into nine chapters. The first six chapters provide a
theoretical background and review of the mainly US, UK literature of annual
financial reporting as well as supplying a description of the Saudi Arabian
economic development. Chapter three focuses in particular on the development
of the Saudi Stock Market (SSM) and highlights the main features of the market,
the electronic securities information system (ESIS), and the role of Capital
Market Authority (CMA) in supervising the Saudi Stock Market (SSM). Chapter
seven outlines the research methodology and design adopted in this study.
Chapter eight presents the results of the market model. A summary of the main
conclusions of the study, as well as the recommendations, are reported in the
final chapter (Chapter nine).
In relation to the reaction of shares prices regarding the announcement of
good news and bad news released by the companies, the study revealed that
the shares prices reacted faster and stronger to the bad news than the good
news. However, significant early reaction by shares prices was observed
preceding the announcement of good news.
Regarding the reaction of shares prices to the release of annual financial
statements of large and small companies, the study revealed that the reaction
of large companies followed the release of annual financial statements, while
the reaction of small companies preceded the release annual financial
statements.
In relation to early and late announcing companies, the reaction of shares
prices preceded and immediately followed the release of early announcing

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companies, while the significant reaction of late announcing companies
occurred a few days after the release of annual financial statements.
Regarding the sectoral analysis of the listed companies, the study revealed
different shares prices reactions according to the sector in which the
companies operate. It was noticed that there were no shares prices reactions
upon the release of banks annual financial statements, while there were
significant reactions on the release dates and the following days for
companies operating in industry and telecommunication sectors. The shares
prices reactions were significant before and after the released date of annual
financial statements of cement, services, electricity, and agriculture sectors.
In relation to the influence of government ownership, the shares prices
reacted immediately after the release date of the annual financial statements
of companies where the government owned a small percentage of the shares.
On the other hand, there were no shares prices reactions to the release of
annual financial statements of companies where the government owned a
large percentage of shares.

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Declaration
I hereby declare that Iam the author of this thesis, that the work of this thesis was
done by me, and it hasn’t previously been accepted for a higher degree.
Name: Ahmed Abdelrahman Ahmed Ibrahim
Signature:
Date: 15/10/2008
Certificate
I certify that Ahmed Abdelrahman Ahmed Ibrahim has worked the equivalent
term on this research, and that the conditions of the relevant ordinance and
regulations have been fulfilled.
Name: Erick Aguilar
Signature:
Date: 15/10/2008

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Acknowledgements
I would like to express my deepest thanks to a number of very special individuals
and organizations who have made a valuable contribution to this thesis.
First, Iam forever indebted to my supervisor, Erick Aguilar for his guidance,
support, suggestions and advice; his generous assistance and help as well
friendly encouragement during my study at Atlantic International University, made
this dissertation possible.
Second, I wish to extend my sincere thanks and gratitude to all those who helped
me in gathering the needed data for this study in Saudi Arabia. Iam grateful to
thank the staff of King Fahad Library, the staff of Saudi Arabian Monetary
Agency, the staff of Capital Market Authority, the staff of the library of General
Administration Institute, and the officials of companies listed on the Saudi Stock
Market who helped me in collecting the required data.
Third, a very special thanks and gratitude goes to my small family lives with me
in Saudi Arabia, to my wife Safaa for her sacrifices and working hard to provide
the right environment for the success of my research. My special appreciation
also goes to my child, Shirin who gave me enormous joy and pleasure.
Fourth, a very special thanks go to my father and mother for their support from
the very beginning of my study and their continued prayer for the success of this
thesis.

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Table of Contents
Contents Pages
Abstract 2
Declaration 4
Acknowledgements 5
Table of Contents 6
List of Tables 11
List of Abbreviations 12
Chapter One
Introduction
1.1 Background 14
1.2 Research problem 16
1.3 Objectives of the Study 17
1.4 Research Methodology 18
1.5 Limitations of the Study 18
1.6 Outline of the Remaining Chapters 19
Chapter Two
The Economy and the Development
of Accounting Practice in Saudi Arabia
2.1 Introduction 21
2.2 Brief Background 21
2.3 The Economic Environment 22
2.3.1 The First Economic Stage 22
2.3.2 The Second Economic Stage 22
2.3.2.1 The First Development Plan (1970-1975) 23
2.3.2.2 The Second Development Plan (1975-1980) 25
2.3.2.3 The Third Development Plan (1980-1985) 25
2.3.2.4 The Fourth Development Plan (1985-1990) 26
2.3.2.5 The Fifth Development Plan (1990-1995) 27
2.3.2.6 The Sixth Development Plan (1995-2000) 27
2.3.2.7 The Seventh Development Plan (2000-2004) 28
2.3.2.8 The Eighth Development Plan (2004-2009) 30
2.3.3 The Role of the Private Sector 33
2.4 The Financial System 35
2.4.1 The Saudi Arabian Monetary Agency 35
2.4.2 Specialized Credit Funds 36
2.4.2.1 The Saudi Agricultural Bank 36
2.4.2.2 The Saudi Credit Bank 37
2.4.2.3 The Public Investment Fund 37
2.4.2.4 The Real Estate Development Fund 37
2.4.2.5 The Saudi Industrial Development Fund 38
2.4.3 Commercial Banks 38

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Contents Pages
2.5 The Development of Accounting in Saudi Arabia 41
2.5.1 Brief Background 41
2.5.2 The Influence of the Government 42
2.5.3 The Company Act 42
2.5.4 Certified Public Accountants Regulation 43
2.5.5 Accounting Standardization Development 43
2.5.5.1 Objectives of Financial Accounting 45
2.5.5.2 The Concepts of Financial Accounting 45
2.5.5.3 The General Presentation and Disclosure Standard 46
2.5.5.3.1 General Presentation 46
2.5.5.3.2 General Disclosure 46
2.5.6 Saudi Organization for Certified Public Accountants 47
2.6 Summary of the Chapter 47
CHAPTER THREE
The Saudi Stock Market
3.1 Introduction 49
3.2 Importance of Saudi Stock Market to Economic Development 50
3.3 Development of the Saudi Stock Market 50
3.3.1 General Background 50
3.3.2 Saudi Monetary Regulatory Authorities 51
3.3.3 The Primary Market 52
3.3.4 The Secondary Market 55
3.3.4.1 The Share Negotiation System 55
3.3.4.2Electronic Securities Information System 56
3.3.4.3New Tadawul Systems 57
3.3.5 Saudi Stock Market Participants 57
3.3.6 Listed Companies and the Growth of the SSM 58
3.3.7 Indices of the SSM Published by SAMA 60
3.3.8 Capital Market Authority 61
3.3.9 Saudi Stock Exchange Company 61
3.3.10 Committees for the Resolution of Securities Disputes 62
3.3.11 Securities Depository Center 62
CHAPTER FOUR
Efficient Market Hypothesis
4.1 Origins and Definition of Efficient Market Hypothesis 64
4.2 Empirical Testing Weak Form Efficient Market Hypothesis 66
4.2.1 Auto Correlation and Runs Tests of developed Markets 66
4.2.2 Auto Correlation and Runs Tests of developing Markets 67
4.2.3 Filter Test 70
4.2.4 Co integration Test 70

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Contents Pages
4.3 Semi Strong and Strong Forms of Efficient Market Hypothesis 73
4.4 Implications of Efficient Market Hypothesis 74
CHAPTER FIVE
The Usefulness of Financial Reports:
Literature Review
5.1 Introduction 75
5.2 Objectives of Financial Reporting 75
5.2.1 Accountability and Stewardship 80
5.2.2 Decision Usefulness 81
5.2.2.1 Individual Survey 82
5.2.2.2 Capital Market Research 82
5.3 Qualitative Characteristics of Financial Statement Information 83
5.3.1 Relevance 83
5.3.2 Reliability 84
5.3.3 Understandability 84
5.3.4 Comparability and consistency 85
5.4 The Users of Financial Statement Information 86
5.5 Previous Studies on the usefulness of Financial information 87
5.5.1 Previous Studies in Other Countries 88
5.5.2 Previous Studies Focused On Saudi Arabia 92
CHAPTER SIX
Literature Review on Empirical Studies on
Information Content of Financial Reporting
6.1 Introduction 95
6.2 Definition of Information Content 95
6.2.1 Measuring the Information Content of Accounting Data 96
6.2.2 Efficient Market Hypothesis 97
6.2.3 Event Studies 97
6.2.4 Measures of Stock Market Reaction 98
6.2.4.1 Share Price Performance Measures 99
6.2.4.2 Trading Volume Measures 99
6.3 Review of Previous Empirical Studies 100
6.3.1 The Information Content of Earning Announcements 100
6.3.1.1 The Mean Abnormal Return Studies 101
6.3.1.2 The Variance of Abnormal Return Studies 104
6.3.2 The Effect of Information Content of Earning Announcements
on Share Performance of Non Announcing Companies
108
6.3.3 The Information Content of Non Earning Announcements 110
6.3.3.1 Dividend announcements 110
6.3.3.2 Stock Splits announcement 110
6.3.3.3 Management Earnings Forecasts 111

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Contents Pages
6.3.4 Factors Affecting the information Content of Accounting Data
Announcements
112
6.3.4.1 The Effect of Company Performance 112
6.3.4.2 The Effect of Company Size 113
6.3.4.3 Timeliness of Financial Statement Announcements 115
6.3.4.4 The Effect of Industry Sector 117
6.3.4.5 The Effect of Government Ownership 118
CHAPTER SEVEN
Research Methodology and Design
7.1 Introduction 119
7.2 The Objective of the Empirical Study 119
7.2.1 Research Hypothesis 119
7.2.1.1 Information Content of Annual Financial Statements 119
7.2.1.2 Results of Annual Financial Statements 121
7.2.1.3 The Effect of Company Size 121
7.2.1.4 The Effect of Industry Sector 123
7.2.1.5 The Effect of Time Lag 123
7.2.1.6 The Effect of Sizeable Government Ownership 124
7.3 Research Design 125
7.3.1 Data Description 125
7.3.2 The Release Date 128
7.3.3 Share Prices 128
7.3.4 The Index 128
7.3.5 The Study Period 129
7.4 Methodology 129
7.4.1 The Event Study Method 129
7.4.1.1 The Market Model 130
7.4.1.2 The Market Adjusted Return Model 131
7.4.2 The Market Reaction Test (Test of Significance) 132
7.5 Assumptions 132
CHAPTER Eight
The Share Price Reaction to Annual
Financial Statements Announcements
8.2 Results of the Market Model 134
8.2.1 Information Content of Annual Financial Statements 135
8.2.2 Results of Annual Financial Statements 137
8.2.3 The Effect of Company Size 139
8.2.4 The Effect of Time Lag 141
8.2.5 The Effect of the Industry Sector 143

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Contents Pages
8.2.6 The Effect of the Size of Government Ownership 151
CHAPTER NINE
Summary and Conclusions
9.2 Summary 155
9.3 Conclusions 157
9.4 Recommendations 158
9.5 Future Researches 159
APPENDICES & REFERENCES
Appendix One 160
Appendix Two 167
References 183

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List of Tables
Table
No.
Title Page
2-1 Government expenditure during the development plans on the major sectors. 23
2-2 Average targets and actual rates for oil and non oil sectors during the
development plans (1970-2009).
24
2-3 Companies operating in Saudi Arabia at the end of 2006. 34
2-4 Credit disburses by specialized credit institutions. 38
2-5 Commercial banks operating in Saudi Arabia as of the end of 2007. 40
2-6 Development of banks’ branches operating in in Saudi Arabia regions. 40
2-7 Private sector imports financed through commercial banks. 41
3-1 No. & value of shares traded in the Saudi Stock Market (1995-2007). 54
3-2 Market value of all shares in the Saudi Stock Market (1995-2007). 59
3-3 Number of shares traded in the different sectors (1995-2007) 60
3-4 NCFEI Domestic shares index. 61
7-1 Sectors of companies included in the study sample. 126
7-2 List of companies included in the sample. 127
8-1 Summary of statistical results for the abnormal return (2003-2007). 135
8-2 Statistics of all the studied company. 136
8-3 Companies announced good news. 138
8-4 Companies announced bad news. 139
8-5 Large companies. 140
8-6 Small companies. 141
8-7 Early announcing companies. 142
8-8 Late announcing companies. 143
8-9 Banking sector. 145
8-10 Industry sector. 146
8-11 Cement sector. 147
8-12 Services sector. 148
8-13 Electricity sector. 149
8-14 Agriculture sector. 150
8-15 Telecommunication sector. 151
8-16 Small government ownership. 152
8-17 Large government ownership. 153

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List of Abbreviations
Abbreviation Statement
AAA American Accounting Association
AAC Arabian Automobile Company
AICPA American Institute of Certified Public Accountants
APB Accounting Principle Board
API Abnormal Performance Index
ASB Accounting Standard Board
ASE American Stock Exchange
ASSC Accounting Standards Steering Committee
ATM Automated Teller Machine
BNU Branch Negotiation Unit
CICA Canadian Institute of Chartered Accountants
CMA Capital Market Authority
CPA Certified Public Accountant
CRSD Committee for the Resolution of Securities
CRSP Centre of Research in Security Prices
CUN Central Negotiation Unit
EMH Efficient Market Hypothesis
ESIS Electronic Securities Information System
FASB Financial Accounting Standard Board
GCC Gulf Co operation Council
GDP Gross Domestic Product
GPDS General Presentation and Disclosure Stanard
ICAEW Institute of Chartered Accounts in England and Wales
KSU King Saud University
LSE London Stock Exchange
MM Market Model
NAA National Association of Accounting
NCEFI National Centre for Financial and Economic Information
NYSE New York Stock Exchange
OTC Over the Counter
PIF Public Investment Fund
POS Point of Sale
REDF Real Estate Development Fund
SAB Saudi Agricultural Bank
SABIC Saudi Arabian Industries Corporation
SAMA Saudi Arabian Monetary Agency
SARIE Saudi Arabian Riyal Inter-band Express
SCB Saudi Credit Bank
SCD Share Control Department
SCI Specialized Credit Institution
SDC Securities Depository Center
SFAC Statement of Financial Concept
SIDF Saudi Industrial Development Fund
SNS Share Negotiation System
SOCPA Saudi Organization for Certified Public Accountants
SPAN Saudi Payment Network

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Abbreviation Statement
SR Saudi Riyal
SSM Saudi Stock Market
SSRC Saudi Share Registration Company
Tadawul Saudi Stock Exchange
UK United Kingdom
USA United States of America
VDU Visual Data Unit
WSJ Wall Street Journal

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CHAPTER ONE
Introduction
1.1 Background
There is a broad body of opinion that the primary objective of financial
statements is to provide information that is useful in making investment
decisions. Several authoritative bodies have stressed this provision.
According to the financial accounting standard board, financial reporting
should provide:
“Information that is useful to present and potential investors, creditors, and
other users in making rational investment, credit, an similar decisions.” (FASB,
1978, Para.34, P.8)
In this context, the Institute of Chartered Accountants stated that the
fundamental objective of financial reporting in the corporate report is:
“To communicate economic measurements of information about the resources
and performance of the reporting entity useful to those having reasonable
rights to such information.” (ASSC, 1975, P.28)
In the same frame work, the AICPA (1973) stated that:
“The basic objective of financial statements is the provision of information
useful for economic decisions”. (True blood report P.13)
The Canadian Institute of Chartered Accountants (1980) pointed out that the
central objective of financial reporting is:
“To provide adequate information about the real economic position and
performance of an enterprise to all potential users who need such information
to make decisions”. (CICA, 1980, P.32)
The Accounting Standard Board (1991) stressed that the objective of financial
statement is:
“To provide information about the financial position, performance and financial
adaptability of an enterprise that is useful to a wide range of users in making
economic decisions”. (Para. 12)
These authoritative bodies have emphasized that useful information for
investment decision making is a primary function behind the publication of
financial reports.
Although several users will benefit from financial reports, investors groups in
particular, are a constituent of the primary users. The Financial Standard
Board (1978) emphasizes that investors and creditors are the main groups to
benefit from information useful in making rational investment decisions. Day
(1986) stated that:
“It is generally agreed that investors form the largest and the most important
group of potential users”. (P.295)

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In Saudi Arabia, the objectives of financial accounting circulated by the
Ministry of Commerce in 1986 stated that:
“The primary external users of general purpose of financial statements are
current and prospective equity investors” Para, 53 P.12)
It is clear from the above discussion that investors, whether current or
potential, are considered as either a primary or a major group utilizing
financial reporting information.
Saudi Arabia has the largest oil reserve in the world, and it is considered as
one of the biggest oil exporters in the world. As a developing country with the
mentioned important natural resources, the government plays an important
role in developing the economy. However, government planners realized the
importance of reducing the total dependence on oil reserve as a main source
of national income, and efforts have been exerted to diversify the economy.
During the mid 1980s, oil production and prices declined dramatically,
affirming the need for diversifying the economy. The government, to attract an
increased volume of medium and long term savings (accumulated during the
oil booming years from mid 1970s to the early 1980s, then from 2003 to 2007)
into the financial system, offered the private sector a variety of investment
opportunities and improved the allocation of financial resources. Royal
decree, issued in April 1983, approved the formation of a joint ministerial
committee to study and review the Saudi Stock Market.
In late 1984, the government regulated the stock market and all shares were
traded through commercial banks under the supervision of Saudi Arabian
Monetary Agency (SAMA). SAMA developed the mechanism to run the stock
market by implementing the share negotiation system (SNS) in 1985 and the
Electronic Securities Information System (ESIS) in 1990.
In 2003 the Capital Market Authority (CMA) was established according to
Capital Market Law to supervise the Saudis Stock Market, and to issue the
rules and regulations that protect the investors and ensure the fairness and
efficiency of the market. Furthermore, the Saudi Stock Exchange Company
(Tadawul) was established in 2007 as a joint stock company responsible for
operating the Saudi Stock Market.
The stock market efficiency however depends on the availability and
transparency of financial information available to all investors. Financial
information about companies’ performance should be conveyed to the stock
market participants in order to make rational investment decisions. Lev and
Ohlson (1982) argued that financial information has a dual role in the capital
market in that:
 It aids in establishing a set of equilibrium share prices that affect the
allocation of resources and the production decisions implemented by
companies.

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 It enables individuals to exchange claims to present and future
consumption across different states, hence attaining both preferred
patterns of consumption and the sharing of social risks.
Participants in the stock market can be divided into two board groups:
institutional investors, who are more likely to be sophisticated, and individual
investors who are more likely to be unsophisticated.
Individual investors, by virtue of being rather unsophisticated, have little
understanding of the complexities of accounting. Hence, they may seek
advice from financial analysts who have the education and experience to
analyze and evaluate companies’ financial information in order to sell, buy or
hold shares in the stock market. On the other hand, institutional investors are
more likely to be knowledgeable readers of financial information and may
seek more information from other sources in order to make investment
decisions.
There is a large amount of researches in the developed countries attempted to
evaluate the information content of annual financial reports by examining
share price reaction on the days surrounding the release of the news. The
main findings of this primary US and UK based literature indicates that annual
financial reports contain price sensitive information. US studies by Jones and
Litzenberger (1970), May (1970), Brown and Kennelly (1972), Kiger (1972),
Hagermen (1973), Foster(1977), Watts (1978), and Morse (1981) all find
significant abnormal returns during the period in which the annual financial
statement is publicated.
Relatively little work, however, has been undertaken into the stock market
reaction to earnings announcements by companies in the developing countries
whose shares are traded on emerging stock markets. A lack of price data, the
absence of regulations requiring companies to report earnings information at
regular intervals and the relative paucity of quoted companies in these
countries have all contributed to the dearth of research in this area. The recent
interest in emerging markets by international fund managers in developed
countries together with a greater recognition of the importance of equity
markets to the development of emerging economies makes this investigation
timely both from a Saudi Arabian point of view and from a wider international
perspective.
1.2 Research Problem
Although the companies listed on the Saudi Stock Market have been required
to prepare and release their annual financial statements since 1985, the
reaction of shares prices to the released annual financial statements have
been largely ignored by both the professionals and the academics in Saudi
Arabia. In the existing literature on Saudi Arabia, no attempts have been
made to examine the relationship between releasing the annual financial

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statements and the reaction of shares prices of the companies listed on the
Saudi Stock Market. Moreover, no specific guidelines have been issued by the
Ministry of Commerce to determine the appropriate level of disclosure. The
Department of General Administration for Companies in the Ministry of
Commerce issued a circular in April 1985 to all joined stock companies, in
which an example of the financial statement to be disclosed was explained,
including the main headings of items to be contained in the financial
statements. The Ministry aimed, through the circular to provide guidance for
companies when they are preparing such statements. However, it was clear
from the circular that companies had the right to disclose any amount of
information that they wanted. They Ministry did not specify the minimum level
of information to be disclosed in these statements nor the principles to be
used in the construction of disclosure. Moreover, even though the Ministry
required these statements to be published in two national newspapers and a
copy of these newspapers to be sent to the Department of General
Administration in the Ministry of Commerce, it did not require a copy of these
statements to be posted to shareholders. Today, the publication of annual
financial statements raised many questions regarding its affect on the shares
prices reaction. These points will be addressed in this study.
1.3 Objectives of the Study
The main objective of this research is to examine the reaction of shares prices
of the companies listed on the Saudi Stock Market (SSM), to the publication of
annual financial statements released by the studied companies. It is hoped
that the results of this study will add to the existing literature on share price
reaction in the developing countries and provide insights to both the
researchers and the governmental officials in the kingdom who are dealing
with this topic. To achieve this objective the study will investigate the shares
prices’ reaction to the release of annual financial statements. In particular the
study will attempt to answer the following questions:
1. Do the shares prices of the companies listed on the Saudi Stock Market
respond to the release of annual financial statements?
2. Do the shares prices react differently to the release of annual financial
statements, according to the annual performance of the listed companies
(good news, bad news) or not?
3. Does the size of a company affect the share price’s reaction to the release
of annual financial statements or not?
4. Does the sector in which a company operates affect the share price’s
reaction to the release of annual financial statements or not?
5. Does the time lag between the end of financial year and the day of the
release affect the share price’s reaction to the release of annual financial
statements or not?

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6. Does a sizeable government ownership of a company’s shares affect the
share price’s reaction to the release of annual financial statements or not?
1.4 Research Methodology
To achieve the above mentioned objectives, the following steps have been
undertaken:
1. The international literature on annual financial reporting, particularly in the
developed countries (e.g., the United States, Canada, the United
Kingdom), is reviewed. The empirical studies regarding the share price
reaction upon the release of annual financial statements is also reviewed.
This literature review is applied, where relevant, to the financial system in
Saudi Arabia, as a support and as a guidance to the study evaluation of
share price reaction in Saudi Arabia.
2. A survey of releasing the annual financial statements practices in Saudi
Arabia is carried out. The annual financial statements of thirty eight
companies listed on the Saudi Stock Market are examined over the period
(2003-2007). The purpose of the survey is to study and evaluate the
annual financial statements and the announcement practices by the listed
companies over the period of the study, and to identify any trends towards
shares prices’ reactions.
3. The data concerning the shares prices of thirty eight companies listed on
the Saudi Stock Market over the period of five years (2003-2007), the
release dates of annual financial statements, and the Saudi Stock Market
index are collected. The data are used to examine the share prices’
reaction to the release of annual financial statements.
4. Conclusions as to the status of announcing annual financial statements
and the reaction of the share prices are drawn from these studies, and
recommendations are to be given for future development and expansion of
such studies in Saudi Arabia.
1.5 Limitations of the Study
This study is concerned primarily with the reactions of shares prices to the
publication of annual financial statements released by the companies listed on
the Saudi Stock Market. It is mainly focus on the companies listed on the
Saudi Stock Market since 2003, and their annual financial statements were
published by Saudi Stock Exchange (Tadawul) website, or the Saudi national
newspapers for five successive years (2003-2007). The research does not
purport to deal with proprietorships, partnerships, and non-profit
organizations, nor with closely-held and owner-managed corporations. The
research does not deal with political or religious matters related to accounting
and financial reporting in Saudi Arabia. This research will not analyze the

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preliminary announcements which are made by companies before publishing
the final statements for the year and which may be seen as a further form of
annual reporting. The preliminary announcements are limited in the amount of
the information contained, and produced shortly after the end of the period of
account and before the publication of the formal financial statements.
Nevertheless, despite these limitations, this thesis represents a valuable
contribution to our knowledge regarding the reaction of shares prices to the
publication of annual financial statements. It is the first comprehensive attempt
to look at this area in Saudi Arabia.
1.6 Outline of Remaining Chapters
The present chapter has provided the background of the study, a statement of
the problem, the main objectives of the study, an outline of research
methodology, the limitations of the study, and highlights the contributions of
the study to the existing literature.
The remaining chapters will be presented as follows:
Chapter two provides a background on Saudi Arabia’s economy and the
development of accounting practice in the country. This chapter discusses the
development of the Saudi economy, highlights the main features of the
successive five-year development plans, and the role of the private sector in
the economy. Furthermore, the chapter discusses the major elements of the
financial system, including the Saudi Arabian Monetary Agency, specialized
credit institutions, and commercial banks. Finally, the chapter discusses the
development of accounting practices in the kingdom, by highlighting the role
of the government, laws and regulations related to accounting, and the
development of accounting standardization. The Saudi Organization for
Certified Public Accountants is also reviewed.
Chapter three is devoted to the Saudi Stock Market, its evolution and the role
of the market authorities, the primary market, the secondary market, technical
systems implemented in the market, the market indices, participants and
information sources.
Chapter four is a literature review chapter and focuses on efficient market
hypothesis. It deals with origins and definition of efficient market hypothesis,
the empirical testing of weak form efficient market hypothesis, filter test, co
integration test, semi strong and strong forms of efficient market hypothesis,
and implications of efficient market hypothesis.
Chapter five is a second literature review chapter. It focuses on literature
related to the usefulness of financial reports. The chapter investigates the
objectives, qualitative characteristics and users of financial reports. The
chapter also reviews previous studies related to the usefulness of annual
reports.

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Chapter six is the third literature review chapter. It focuses on empirical
studies on the information content of financial reporting. The chapter deals
with definition and measures of information content, efficient market
hypothesis, and event studies. It also provides a review of previous empirical
studies related to the information content of financial reporting.
The research methodology is presented in chapter seven. The chapter
mainly focuses on the data collected. The topics presented in this chapter
including the detailed research methodology and test structure. The chapter
also focuses on the methodology used to examine the market reaction. This
involves the research hypotheses, research design, the method and model
used.
Chapter eight presents the results of the examination of the share price
reaction to the announcement of annual financial statements.
Chapter nine presents a brief summary of the overall study, and highlights its
findings. Furthermore, it presents the recommendations and suggestions for
future research.

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CHAPTER TWO
The Economy and the Development of
Accounting Practices in Saudi Arabia
2.1 Introduction:
The economic environment is essential in understanding the development of
accounting practices, as Arapan Redebaugh (1985) stated:
“of all the environmental factors that influence accounting system
development, a strong case can be made that economic characteristics are
the most influential. Economic development affects many sociocultural
attitudes and brings about change in legal, political and educational objectives
and sophistication, each of which in turn can affect accounting practice.”
The main objectives of this chapter are: Firstly, to give an overall review of the
economic development of Saudi Arabia, including an outline of the major
elements of the financial system. Secondly, to present the development of the
accounting system as well as the profession’s rules and regulations. To
achieve these objectives, the chapter is organized to proceed as follows: The
next section presents a brief overview of the historical background. Section
2.3 discusses the economic environment in Saudi Arabia, with an emphasis
on the development plans, and the role of the private sector in developing
economy. Section 2.4 presents the major component of the Saudi financial
structure. Section 2.5 reviews the development of the framework of the
accounting system and the accounting profession. The last section provides a
summary of the chapter.
2.2 Brief Background:
Saudi Arabia was founded in September 22, 1932 by king Abdul Aziz Al-Saud.
It is an Arab Islamic monarchy with a political system lodged in Islamic
traditions. Saudi Arabia’s rules and regulations are governed by the holy
Koran and the sunnah (teachings, sayings, and actions of the profit
Mohammed peace be upon him), which call for peace, justice, equality, and
respect for the individual’s rights. Saudi Arabia is located in the south-west of
Asia (representing approximately 80 percent of the total area of Arabian
Peninsula) with an area of 2,186,000 square kilometres and a population of
22.7 millions.

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2.3 The Economic Environment:
The economic development of Saudi Arabia can be divided into two stages:
The first stage precedes the discovery of oil and leading up to the years
between the discovery of oil and 1970, when the government of Saudi Arabia
started implementing the first five year development plan. The second stage
began in 1970 and continues till the present time.
Subsections discuss the two stages:
2.3.1 The First Economic Stage:
Before the discovery of oil, Saudi Arabia had a very poor economy with scant
resources, mostly the revenue received from pilgrims to the holy cities of
Makkah and Medina. The country was poor and underdeveloped, while most
of its population lived in small villages, worked in agriculture, fishing, pearling,
and commerce.
In 1938, the Standard Oil Company of California discovered oil in commercial
quantities at AL-Dammam (eastern province of Saudi Arabia). Production
totaled 3.1 million barrels in that year, but was interrupted by World War Two
shortly thereafter. A new era of economic development began when oil
production rose nearly three fold, from 7.8 to 21.3 million barrels in 1945, and
reached almost 90 million barrels by 1947. The next increase in output took
place in 1948, when crude oil output rose by nearly 50 percent over the
previous year, inspiring the first official national budget in the country’s history.
Oil revenues fluctuated during the 1950s, largely due to the world oil market,
but then resumed its increase during the 1960s, representing eight percent of
world production by 1970.
The rapid expansion of oil production has provided Saudi Arabia with
revenues to finance the country’s development. However, prior to 1970, there
was no coherent framework for this development. The rapid growth of oil
revenues, coupled with assistance from the World Bank, led the Saudi
government to introduce the first comprehensive five year development plan
in 1970. By this year, the second stage of economic development had started.
2.3.2 The Second Economic Stage.
One of the most important features of this stage was the establishment of
board strategic goals for Saudi Arabian long term development. These
strategic goals were designed to provide an appropriate conceptual, practical
and organizational frame work for the development process, taking into
account the relevant economic, social and institutional dimensions.
This stage commenced when the Saudi government implemented the first
comprehensive plan of a series of five year development plans in 1970. Seven

٢٣
five year development plans have thus far been implemented, and the eighth
is still being implemented. The successive five year development plans have
sustained the strategic long term goals, reflecting both the essential continuity
and the nature of the Saudi development process. The long term strategic
goals, as defined by Ministry of Planning, are:
1. Maintaining economic growth and social stability.
2. Diversifying the economic base and reducing dependence on crude oil.
3. Developing human resources.
4. Developing and preserving the physical infrastructure.
5. Raising the standard of living and improving the quality of live.
6. Expanding the role of the private sector.
With these long term goals in mind, each five year plan had its own specific
focus, targets, and priorities, reflecting both the stages of development and
available resources.
2.3.2.1 The First Development Plan (1970-1975):
The initial plan, implemented in 1970, was the first comprehensive attempt to
transform the country into a modern industrializing nation. The plan
emphasized the following objectives:
1. A gross domestic product (GDP) of 9.8 percent annually.
2. The development of the human resources, so that Saudi citizens would be
able to participate in the development process.
3. Diversification of sources of national income and the reduction of
dependency on crude oil by increasing the contribution of other producing
sectors, such as agriculture, industry, and petrochemicals.
Table (2-1) shows the actual amounts spent in developing major sectors
during the various development plans.
Table 2-1
Government expenditure during the development plans on the major sectors (1970-2004) in SR billions
sectors
Plans
Economic resources Human resources Health and social Infrastructure Total
amount % amount % amount % amount % amount %
First Plan 9.5 27.8 7.0 20.5 3.5 10.2 14.1 41.5 34.1 100
Second Plan 97.2 28.1 51.0 14.7 26.6 7.7 171.3 49.5 346.1 100
Third Plan 120.4 21.4 124.3 22.1 69.6 12.4 248.0 44.1 562.3 100
Fourth Plan 71.4 20.9 114.2 33.4 59.3 17.4 96.6 28.3 341.5 100
Fifth Plan 34.7 10.6 155.0 47.3 63.3 19.3 74.8 22.8 327.8 100
Six Plan 48.2 11.5 216.6 51.5 87.5 20.8 68.1 16.2 420.4 100
Seven Plan 54.4 11.2 276.9 57.1 92.6 19.1 61.4 12.7 485.3 100
Total 435.8 945 402.4 734.3 2517.5
Source: Saudi Arabian Monetary Agency, Annual Report,(October 1998),P24. Ministry of planning, Sixth Development Plan,(1995),P.46.
Eighth Development Plan,(2005),P.105.

٢٤
A chart shows the government expenditure during the development plans (1970-2004) on the major economic sectors
Government expenditure during the development plans (1970-2004) on the major sectors
0
500
1000
1500
2000
2500
3000
TotalInfrastructureHealth and socialHuman resourcesEconomic resources
1‫ﻣﺗﺳﻠﺳﻠﺔ‬
Table 2-٢
Average targets and actual growth rates for oil and non-oil sectors during the development plans (1970-2009)
Sectors
Plans
Oil sector Non-oil sector Total GDP
Target Actual Target Actual Target Actual
First Plan 9.1 14.8 10.5 11.7 9.8 13.4
Second Plan 9.7 4.9 13.3 15 10.2 9.3
Third Plan 1.4 -14.6 6.2 5.1 3.2 -5.8
Fourth Plan 5.6 1 2.9 -0.8 4 0.1
Fifth Plan 2.2 9 3.7 2.1 2.2 9
Six Plan 3.8 1.6 3.9 1 3.8 1.2
Seven Plan 1.2 2.6 5 3.9 3.2 3.4
Eighth Plan 2.7 - 5.2 - 4.6 -
Annual Average 4.5 2.8 6.3 5.4 5.1 4.4
Sources: Saudi Arabian Monetary Agency, Thirty Fourth Annual Report, (October 1998),P.19 . And Eighth development plan (2005), P.87.
A chart shows the actual average annual growth rates for oil and non oil sectors during the development plans (1970-2004)
Average annual growth rates for oil and non oil sectors during the development plans (1970-2004)
0
1
2
3
4
5
6
Total GDPNon-oil sectorOil sector
Overall, the plan was a great success; actual achievements exceeded the
targets. The first objective was fulfilled when the GDP rose about 13.4 percent
annually. The second objective was considered an important milestone. The
third objective successfully accomplished when the non-oil sector contribution
to the GDP rose about 11.7 percent annually, exceeding the target level of

٢٥
10.5 percent. Table 2-2 presents annual average targets and actual growth
rates for oil and non-oil sectors during the various development plans.
The plan, however, was not successful in fulfilling certain aspects of an
increase of development. For example, the agriculture industry was targeted
for an increase of 4.6 percent annually, but real growth in that sector reached
only 3.6 percent annually. After all, the greatest achievement attained in the
course of the plan was, as stated in the Wall Street Journal on October 6th
1975, the planning experience that the government and planning agencies
accumulated during the first five year development plan.
2.3.2.2 The Second Development Plan (1975-1980):
The plan covered the period 1975-1980, when the Saudi Arabian’s financial
position was some what different from the first plan. By that time, the country’s
financial standing had drastically improved, while oil prices reached $28.67 per
a barrel at the end of the plan period. The plan, in line with the long term goals
of the country, emphasized the following objectives:
1.Maintaining a high rate of economic growth.
2.Emphasising the need for diversifying the economy and reducing
dependency on crude oil.
3.Encouraging the private sector to take part in this plan by increasing
investment in the physical structure.
Tabe2-1 shows government expenditure on major sectors during this plan. To
assist in achieving the objectives of development and to diversify the
economy, the government created several major institutions, such as
specialized credit funds, the Saudi Arabian Basic Industry Corporation, the
Ministry of Industry and Electricity. The government also set up the Royal
Commission for Jubail and Yanbu, with the mission was to develop two large
new industrial cities (Ministry of Planning, 1995, Sixth Development Plan).
The actual growth rate achieved in the non oil sector at the end of this plan
was 15 percent per annum, compared with the target of 13.3 percent.
However, the growth rate in the oil sector, at 4.9 annum, full short of the target
of 9.7 percent. The overall GDP growth rate was, therefore, slightly lower at
9.3 percent, compared to the target of 10.2 percent.
2.3.2.3 The Third Development Plan (1980-1985):
This plan covered the period 1980-1985. An economic shock occurred during
the last two years of the plan, when oil production declined, reaching the
lowest level of 3.2 million barrel per day in 1985. The volatility of oil revenues
re-affirmed the need for the private sector to expand and for the economy to
become less dependent on government activity and the oil sector. Hence, the
plan’s objectives shifted from infrastructure development to the development of

٢٦
the manufacturing and agriculture sectors. Three main goals were stated in
this plan:
1.To promote structural change in the economy through emphasis on resource
development and growth in the production sectors.
2.To increase economic and administrative efficiency.
3.To increase participation in the development process, thereby raising the
welfare level of the society.
At the end of the plan period, the oil sector contribution to the GDP fell by 14.6
percent, offsetting the positive growth of 5.1 percent in the non- oil sector.
Hence, the overall growth rate also turned negative by 5.8 percent per annum
during the plan period. However, it’s worth mentioning that some sectors of the
economy experienced positive growth rates, such as the agriculture sector,
which grew at a rate of 8.7 percent annually, the utilities sector, which grew at
24 percent annually, and the mining sector, which grew by 5.7 per annum.
2.3.2.4 The Fourth Development Plan (1985-1990):
The fourth plan came at a period when the country’s financial circumstances
had changed, largely due to changes in the crude oil market during the first
three years of the plan. The country’s revenue was substantially less than the
revenue accrued during the third plan. Hence, the fourth plan reinforced the
diversification theme outlined in the third plan, placing even greater emphasis
on restructuring the economy and encouraging the private sector to play a
leading role. The objectives of the fourth plan continued to reaffirm the strategy
of the third plan, while focusing on:
1. Continuing to implement structural changes in the economy in order to
diversify the economic base and reduce dependence on crude oil.
2. Encouraging the rapid development of the private sector as the principal
mechanism for achieving economic diversification and improving the
economic efficiency of the government sector.
3. Completing the remaining infrastructure projects necessary to achieve a
long term economic and social development.
4. The development of Saudi human resources.
During the plan period, the annual average growth rate of the oil sector as well
as of the overall GDP grew positive, as oil production resumed its prior rising
trend and doubled from 3.2 million barrel per a day in 1985 to 6.4 million
barrels per a day in 1990. The oil sector grew by one percent and the overall
GDP by 0.1 percent annually. However, the fall in oil prices during this period
caused a decline in government revenue and expenditure, resulting in a sharp
turnaround in the growth rate of the non oil sector from a positive 5.1 percent
during the third plan to (-0.8) percent annually during the fourth plan period.

٢٧
2.3.2.5 The Fifth Development Plan (1990-1995):
The fifth plan may be regarded as the beginning of a second stage of planning
in Saudi Arabia. The completion of four development plans had established a
strong physical and institutional foundation of a modern economy. The basis
for a diversified, productive economy had been set up in the industry,
agriculture and mining sectors, and financial services. Hence, the plan was
designed to continue with the previous strategic goals while incorporating a
substantially different set of development policies to suit the special needs that
had evolved in the preceding years. The plan’s major objectives were:
1. To develop the country’s human resources by updating its quality and
improving its efficiency to meet the requirements of the national economy.
2. To reduce dependency on crude oil revenue as the main source of national
economy.
3. To encourage private sector participation in the socio-economic
development of the country, as well as to achieve a balanced growth
throughout all regions.
4. To continue to diversify the economic base of the country by further
developing the industrial and agricultural sectors.
The fifth plan was more successful than its two predecessors. The oil sector
grew at an average rate of 9 percent annually, as compared with the target of
2.2 percent. The growth rate of the non oil sector was 2.1 percent annually,
which was lower than the target of 3.7 percent, although a substantial
improvement over the fourth plan. The overall GDP grew at 4.1 percent,
exceeding the plan’s target of 3.4 percent per annum. It is worth noting,
however, that the implementation of a new comprehensive automated system
in the Saudi Stock Market with the aim of expanding investment channels for
Saudi investors occurred during the fifth plan period.
2.3.2.6 The Sixth Development Plan (1995-2000):
The plan became effective in 1995, continuing to enhance and broaden the
main objectives of the previous plans. The plan gave priority to maximizing the
private sector’s contribution to the provision of jobs, diversifying the economy
to lessen dependency on oil revenues, building new physical infrastructure to
meet the needs of a growing population, improving social services, and
maintaining a balanced budget over the plan period. These priorities were to
be secured by the following means:
1. The government budget was to be shifted from consumption to investment
expenditure.
2. Gradual and selective investment opportunities were to be provided to the
private sector.

٢٨
3. Broadening the domestic capital market by mobilizing the private sector’s
financial assets.
4. Reducing the number of low skilled workers and increasing the capability of
the Saudi labour force in order realize productivity growth.
The sixth plan targeted an annual average growth rate of 3.8 percent. The oil
sector envisaged an annual average growth rate of 3.8 percent and the non oil
sector of 3.9 percent. Data available for the first three years of the plan period
reveals that the GDP grew at a rate of 1.2 percent in real terms annually. The
oil and non oil sectors grew by 1.6 percent and one percent respectively
(SAMA, annual report 1998).
2.3.2.7 The Seventh Development Plan (2000-2004):
The general objectives and strategic bases of the seventh development plan
(2000-2004) have been formulated to reflect and affirm the development
approach adopted in the previous plans, based on free market principles and
in accordance with Islamic teachings and values. Thus, the general objectives
and strategic bases of the seventh plan emphasize the safeguarding of Islamic
values and confirming Allah’s Sharia (God’s Divine Law), upholding national
security and social stability, continuing with the development and utilization of
Saudi human resources, providing basic services to citizens including
education, health and social care services, diversifying the national economic
base, encouraging the private sector, completing infrastructure development in
conformity with the growing demand for such facilities and realizing
comprehensive and balanced growth throughout the Kingdom’s regions.
The objectives of the seventh development plan’s fiscal policy are:
1. To contribute to improving the performance of the national economy and to
prepare it to adjust in a more efficient and flexible manner to domestic,
regional and international developments.
2. To contribute towards attainment of a high level of employment, and
expedite Saudization programs in both the public and private sectors.
3. To increase non-oil government revenues and to reduce the budget deficit
to the lowest possible level.
4. To maintain the cost of living at a moderate level, and to keep inflation at the
minimum possible level.
5. To rationalize government expenditure and subsidies (both direct and
indirect) and to develop the existing tax system.
Achievement of these objectives requires that the following policies and
measures be pursued:
1. Achieve balance between government revenues and expenditures through:

٢٩
- Reducing the budget deficit to the lowest possible level over the plan
years, through rationalizing and reducing government non-investment
expenditure, maximizing government revenue wherever possible, and
financing the deficit (if any) through issuing development bonds.
- Developing an adequate mechanism for attaining long-term fiscal
stabilization, in order to avoid the adverse effects of fluctuations in
government oil revenues.
2. Use surpluses of government oil revenues to reduce the public debt and to
consolidate the Kingdom’s foreign reserves.
3. Maintain strict adherence to approved expenditure limits, ensuring that the
limits set are not exceeded during the fiscal year. Emergency and essential
increases should be funded through transfers from other allocations.
4. Expand application of the various privatization models that have proved
successful, and select new areas and modalities that are suitable for future
privatization, in line with the objectives, measures and considerations set
forth in the council of ministers’ decree No. 60 dated 1/4/1418.
5. Continue to rationalize prices of public utility services.
6. Gradually reduce subsidies in conformity with the Kingdom’s future
obligations to WTO. In the meantime, efforts should be made to increase
technical assistance provided to productive projects in areas of research,
development and guidance.
7. The development funds will continue to play their positive role in providing
loans for individuals and companies, provided that the total value of loans
be within the limits of repayments, while taking into consideration the
following:
- Loans should be linked to the rate of employment of Saudi nationals.
- Loans should also be linked to the use of domestic resources in the
implementation and operation of projects.
The objectives of monetary policy in the Seventh Development Plan are:
1. Maintaining stable prices and ensuring adequate liquidity in line with
macroeconomic developments, as well as ensuring an appropriate
environment for investment.
2. Continuing to maintain a stable banking system and enhancing its efficiency
and competitiveness to enable it to meet the challenges resulting from the
Kingdom’s accession to WTO.
3. Developing and upgrading the efficiency of financial markets to enable them
to perform an effective role in the future privatization process, along with
enhancing the efficiency of the private sector’s role in the development
process.
To achieve the above objectives, the following policies and measures shall
be adopted:

٣٠
1. Maintaining the purchasing power of the Saudi riyal and stability of exchange
rates in domestic and international markets.
2. Providing local liquidity according to the actual requirements of economic
activity within a framework free of inflationary pressures, through controlling
the growth of money supply in line with the development of relevant
economic variables, while engaging in open market operations (buying and
selling government bonds) and adjusting the legal reserve ratio, as key
instruments of this policy.
3. Enhancing the efficiency and supervision of the banking system to ensure its
soundness and maintain its resources, while promoting its support of the
national economy and removing constraints that impede the flow of bank
credits to the private sector along with developing the rules and regulations
governing bank lending, in addition to encouraging Saudization in banks and
financial institutions.
4. Continue supporting the credit risk center established by SAMA to increase
the accuracy and quality of data obtained by commercial banks, and
developing information systems related to banking technology in order to
enhance the efficiency of commercial banks.
5. Encouraging increased saving and capital formation through the
development of new savings channels to mobilize small savings, as well as
attractive investment channels to attract national capital currently invested
abroad.
6. Developing financial markets and enhancing their efficiency through:
-Reviewing and developing rules and regulations.
-Facilitating procedures for share trading operations.
-Encouraging the creation of independent information centers to compile
data on joint stock companies, along with analyzing and disseminating
information that will assist investors’ decision making.
7. Considering the possibility of trading new financial instruments in addition to
shares, such as bonds.
-Considering the possibility of allowing foreign investors to deal in domestic
financial markets under appropriate regulations.
2.3.2.8 The Eighth Development Plan (2005-2009):
The growth targets of the eighth development plan have been set as to reflect
the goals of the Kingdom's long-term economic development strategy, which
include: improvement of the standard of living, development of human
resources, diversification of the economic base, and raising productivity of the
economy.
The most important objectives and policies of the Plan are in summary:

٣١
1.Increasing economic growth rates.
2.Increasing employment growth rates.
3.Increasing contribution of the private sector to economic growth and national
income.
4.Diversifying the economic base.
5.Improving the balance of payments.
6.Realizing a high degree of economic balance and price stability.
7.Realizing balanced development in all regions of the Kingdom.
The eighth development plan aims at increasing real GDP from about SR 714.9
billion in 2004 to around SR 895.2 billion in 2009, i.e., at an average annual
growth rate of about 4.6% at 1999 constant prices, which will translate into an
increase in per capita income at current prices from SR 43.25 thousand in 2004
to around SR 48.2 thousand in 2009. Such growth would be in line with the goal
of improving the standard of living of the Saudi citizens.
The plan also envisages that in 2009, the share of the non-oil sector in GPD
would have increased to around 75.7%, compared with around 73.5% in 2004,
at 1999 constant prices. These indicators reflect an expected positive
development in performance of the national economy and a rise in per capita
GDP when compared with the targets of the seventh development plan and with
what had actually been achieved in that time.
In general, by the end of 2007, Saudi Arabia had completed 37 years of
development planning. During these years, the country had achieved a
considerable progress towards its general objectives. A modern infrastructure
was built nation wide, including water and power utilities, a nation wide
electricity grid and modern roads and telecommunication networks, airports,
and seaports. Modern universities, technical, and training institutions
mushroomed throughout the country. Two major industrial cities, the biggest of
their kinds in the Middle East, contain a multitude of factories and plants
specializing in basic manufacturing and petrochemical products. Moreover, the
private sector has steadily expanded its role in the economy. The real output
of the private sector recorded robust growth, and its share in the total GDP
increased from 28.3 percent in 1970 to 47.4 percent in 1997. Consequently,
the contribution of the oil sector to the GDP fell from 58.9 percent 34.8 percent
over the same period. It is worth noting that economic development has
brought about unprecedented prosperity to the people of Saudi Arabia, whose
population has more than tripled over the 37 year period. Per capita GDP has
increased by more than seventh fold from SR3697 in 1970 to SR27508 in1997
(SAMA, annual report).
Although the Saudi government has almost completed eight five-year plans
during the last four decades, the accounting practice and the significance of
accounting information in the economic process have been largely neglected

٣٢
in the first five development plans. In fact the accounting information has an
important role in facilitating government planning in controlling and directing
both private and public sector activities. Abdeen and Yavas (1985) stated that:
“A widely held belief is that if a country is to experience accelerated economic
development and be able to deliver a higher stander of living to its citizens, a
vitalization of the accounting professional and a development of qualified
accounting talent are necessary.”
In the sixth development plan, which does not make any direct mention to the
accounting practice, the planners recognized two issues directly related to
accounting. The first was the need to enrich the quality and flow of information.
In this context the plan points out that:
“Accurate and up to date information is of impeding benefit to users. The
alleviation of obstacles impeding the flow of reliable and timely information will
need the joint efforts and support of concerned agencies in the public and
private sectors, so that the formulation of policies of positive value to the
national economy and proper decision making can be based on such
information.” (Ministry of Planning, the sixth development plan, p.98)
The second identified the limitation of the Saudi financial market, such as:
 The limited scope of the financial market, which deals only in stocks and
has not yet extended its activities to include bonds (private or government);
 Its restricted organization and administrative inability to provide services
commensurate with the needs of the expanding private sector;
 The small size of the stock market, with share dealings limited to Saudi
companies and Saudi citizens1
.
 The weak link between commercial banks (as the main collector of savings)
and the financial market, because of a lack of suitable investment channels
and diversified savings instruments that can attract the various groups of
savers.
The planner mentioned that, within the framework of the sixth plan, the capital
market would be developed through the following major policies:
 Regulations will be reviewed and further developed;
 Buying and selling procedures will be simplified;
 Market efficiency will be increased and investors’ decision making assisted
through the establishment of independent sources for the collection,
analysis and dissemination of data about the performance of individual joint
sock companies;
 The possibility of introducing new financial instruments in trading(such as
bonds) in addition to shares will be studied;
 The possibility of allowing foreigners to deal with the capital market under
specific rules will also be studied. (Ministry of Planning, sixth development
plan, p.158-165).
1
- Later in 2006 the expatriates were permitted to deal on the Saudi Stock Market.

٣٣
The latest efforts made by the Ministry of Commerce to develop the
accounting profession (will be discussed later in this chapter), and efforts of
the Saudi Arabian Monetary Agency to develop the Saudi Stock Market (will
be discussed in the next chapter) has diminished some of these limitations.
2.3.3 The Role of the Private Sector.
From the outset, the Saudi economy followed free market principles in its
development planning. This has ensured that the private sector would always
be the main force of economic activity. However, the expansion of oil revenues
in the first three plans gives the government a leading role in guiding and
stimulating economic development. By the completed, and the government
encouraged the private sector to participate in economy. The fluctuation of oil
revenue forced the government to reduce and structured expenditure by giving
the private sector a central role in the overall development process. The
government also set policies to enhance the private sector’s contribution by
providing incentives such as:
1. Interest free loans extended by various development funds.
2. Exempting raw materials and machinery for manufacturing projects from
custom duty.
3. Guaranteed and / or priority in purchasing at a very profitable price by the
government.
4. Sites for agriculture and industrial projects free and / or at a nominal price.
As a result of the government’s initiatives, the private sector has steadily
expanded its role in the economy. The number of factories operating in Saudi
Arabia has increased from 199 in 1970 to 3906 at the end of 2006, and their
capital investments have risen from SR 2.8 billion to SR 296.5 billion for the
same period. The total number of individual proprietorship firm operating in
Saudi Arabia reached 646908, and the number of professional services offices
reached 6649 at the end of 2006. Additionally, the number of companies
registered in Saudi Arabia increased from 923 in 1972 to 16514 at the end of
2006, and their capital investment have risen from SR 1.3 billion to SR 414.7
billion over the same period. Table 2-3 shows companies operating in Saudi
Arabia at the end of 2006.

٣٤
Table(2-3)
Companies Operating in Saudi Arabia at the end of 2006.
Types of companies Number of companies Capital(In million)
Amount % Amount %
Joint stock companies 208 1.3 263117.3 63.4
Limited liability partnerships:
12194
73.8
137319.1 33.1
Saudi 9592
Joint venture 2151
Non Saudi 451
Joint liability partnerships:
2955 17.9 4446.4 1.1
Saudi 2920
Joint venture 34
Non Saudi 1
Mixed liability partnership:
1153 7 9811.1 2.4
Saudi 1143
Joint venture 8
Non Saudi 2
Mixed liability partnerships by shares 4 0.001 2.9 0.0007
Total 16514 100 414697 100
*Source: Saudi Arabian Monetary Agency, Forty Three Annual Report, 2007.
The activities of companies range from producing highly sophisticated
products, such as petrochemicals, electrical appliances, stainless steel, and
iron, to furniture stationary and beverages. Furthermore, the agricultural
industries produce different crops; some of which even exceed the country’s
needs, such as wheat, dates and some vegetables.
The ownership structure of companies takes different shapes, as stated by the
company act. This includes:
1. Joint liability partnerships.
2. Mixed liability partnerships.
3. Joint adventures.
4. Joint stock companies.
5. Mixed liability partnerships by shares.
6. Limited liability partnerships.
7. Co-operative companies.
However, only corporations are required by the company act to publish their
annual financial statements, due to the fact that these firms have a broader
investor base, and most of their shares are traded through the stock market.
Moreover, these firms are the most important kind of enterprises as they
usually own a huge capital.
The breakdown of companies registered in Saudi Arabia by capital at the end
of 2006 indicates that the paid up capital of the joint stock companies
represents 63.4 percent of the total capital owned by all firms, followed by
limited liability partnerships and mixed liability partnerships companies,
representing 33.1 percent and 2.4 percent of the total capital respectively.

٣٥
2.4 The Financial System:
The financial system plays an important role in the national economic
development. Several studies have found a significant relationship between
financial development and economic growth, and have emphasized the
important role that financial institutions play in the economic development
process (Fameron 1953, Gurley and Show 1955, Goldsmith 1969, and
Mckinnon 1973).
To implement the respective economic and social development plans, Saudi
planners recognized the importance of a strong financial system in the
economic development process. Hence, most of the financial infrastructure,
which channels government revenues through public and private financial
institutions, was established right from the outset, when the first five year
development plan became effective. In fact, private financial institutions have
grown significantly, due to the government encouragement of the private
sector to participate in the economic development process. As a result, the
Saudi financial system today consists of three major components: the Saudi
Arabian Monetary Agency (SAMA), the specialized credit institutions (SCIs),
and commercial banks.
2.4.1 The Saudi Arabian Monetary Agency:
Until 1951, Saudi Arabia lacked a central bank, which could issue and
regulate the currency, and develop a modern financial infrastructure. In
October 4, 1952, SAMA was established as the central bank of Saudi Arabia.
Its objective at that time included strengthening and stabilizing the country’s
currency, centralizing government receipts and payments, investing the
country’s resources, and controlling disbursements authorized in the
government budget. In 1957, SAMA’s responsibilities further expanded to
include the authorization and mentoring of Saudi commercial banks and
money changers as part of the banking control law introduced that same year.
SAMA’s responsibilities under this law include regulating foreign exchange,
banks’ deposits with SAMA and / or with foreign banks, and approval of any
expansion.
In 1984, SAMA took over control of the capital market in Saudi Arabia and
became the legislative body that regulates general and operational rules.
SAMA circulated to commercial banks, responsible for all share trading
activities, the rules and regulations controlling and supervising the Saudi
Stock Market. Additionally, SAMA participated in the development of the
financial system by implementing several automated systems. In 1987, the
automated clearing of cheques on the same day basis. In April 1990, SAMA
established a national payment system called the Saudi Payments Net Work
(SAPN). The system inter linked all the automated teller machines (ATM)

٣٦
operated by banks, enabling the holders of SPAN cards to draw cash and
make immediate payments for purchases. The SPAN is also linked with
international payment networks. SAMA also introduces the Electronic Share
Information System (ESIS) in 1990. ESIS provides a bottomless, continuous
order driven market, with up to the minute price, volume, and company
information.
To further modernize the payments and settlement system, SAMA instituted
an electronic funds transfer system in May 1997. The system, called the Saudi
Arabian Riyal Inter Bank Express (SARIE), enables banks to make and
receive payments directly from their accounts with SAMA on a real time basis.
It also enables banks to credit the beneficiary’s account with transfer of funds
on a same day basis. The system also provides a fully automated linkage
between all clearing systems in Saudi Arabia, including SAPAN, ESIS, and
Electronic Clearing System. With the implementation of the SARIE system,
the risk associated with monetary transfers has been greatly minimized, not to
mention that the operating costs of banks have been also reduced.
2.4.2 Specialized Credit Institutions (SCIs):
To achieve economic development and to accelerate the diversification of the
economy, the government established several institutions. These institutions
provide minimum and long term concessionary credit to the private sector,
commercially oriented public corporations, and individuals and families to
satisfy their investment and social needs.
These institutions were developed to provide interest free loans, although a
small service fee is charged. They are financed primarily by the government
and / or by loan repayments, especially during the last few years. Hence,
these institutions do not turn to the public nor accept private deposits to raise
funds.
The following is a brief description for the mentioned institutions:
2.4.2.1 The Saudi Agricultural Bank(SAB):
The SAB was founded in 1962 to provide loans through 13 branches and 57
subsidiary offices, spread throughout Saudi Arabia. It extends short term
agricultural loans (with a repayment period of no more than one year) and
medium term loans (with a repayment period not exceeding ten years). It also
grants subsidies for agricultural equipment. Eventually, the SAB adopted a
new policy to provide loans for encouraging the use of new and updated
techniques in the various agricultural sub sectors. Table 2-4 reviews the loans
extended by all specialized institutions, including the SAB, since their inception
until the end of 2007.

٣٧
2.4.2.2 The Saudi Credit Bank (SCB):
The SCB was established in 1971 to provide loans through 24 branches
spread throughout Saudi Arabia. It extends interest free medium term loans to
low income Saudis for social (marriage and house repairs) and economic
purposes, such as professions and handicrafts. Table 2-4 outlines the loans
extended by all specialized institutions, including the SCB, since their inception
until the end of 2007.
2.4.2.3 The Public Investment Fund (PIF):
The PIF was founded in 1971 to provide medium and long term loans to the
public and semi public corporate sector. Corporations which have benefited
from the fund included the Saudi Arabian Airlines, the General Petroleum and
Mineral Organization, and the Saudi Basic Industries Corporation. Table 2-4
outlines loans extended by all specialized institutions, including the PIE, since
their inception until the end of 2007.
2.4.2.4 The Real Estate Development Fund (REDF):
The REDF was established in 1974 with the aim of supporting urban
development in Saudi Arabia. In fact, it has played an important role in the
housing construction sector throughout Saudi Arabia. The REDF provides
personal long term loans for the construction of privately owned housing units
and investment oriented buildings. In 1980, the government introduced a new
policy which aims to encourage the repayment of outstanding loans by giving
discount incentives, whereby a 20 percent discount given on timely
installments, or 30 percent off for lump sum repayment. Table 2-4 outlines
loans extended by all specialized institutions, including the REDF, since their
inception and until the end of 2007.

٣٨
Table 2-4
Credit Disbursed By Specialized Credit Institutions (In millions)
Year Saudi
Agriculture
Bank
Saudi Credit
Bank
Public
Investment Fund
Saudi Indus-
Dev. Fund
Real Estate
Dev. Fund
Total
1969/70 16 - - - - 16
1974/75 146 40 603 35 0 824
1979 / 80 1129 38 2949 6486 8575 19177
1984 / 85 2322 252 3662 2416 8598 17250
1985 / 86 1551 276 1429 926 6795 10977
1986** 1019 240 130 355 4114 5858
1987 694 273 382 542 3972 5863
1988 627 288 130 440 3389 4874
1989 651 324 2520 828 2978 7301
1990 664 274 364 667 2445 4414
1991 601 276 44 1050 1740 3711
1992 689.5 279 20.4 1179.1 2678 4846
1993 769 331.3 5.9 1055.3 3235.4 5396.9
1994 546.7 283.4 0.0 1341.3 4760.7 6932.1
1995 363.2 295.9 117.5 2005.6 3731.6 6513.8
1996 262.1 315.1 300.1 2002.1 2400.5 5279.9
1997 430 337 542 2012 2228 5549
1998 605 353 930 1922 1633 5443
1999 ٨١٩٥ ٧٦٢ ٢١٨٥٢ ١٠٣٥٣ ٦٩٨٩٢ ١٢٥٥٥٤
2000 ٨٠٧٤ ٧٧٧ ٢٠٨٠٥ ١٠٢٦٠ ٦٩٥٣١ ١٢٣٩٤٨
2001 ٨٦٠٧ ٧٨٦ ٢١٠٨٦ ٩٦٠٣ ٦٩٣٧٣ ١٢٣٩٥٤
2002 ٩٤١٤ ٨١٩ ٢٥٥٦٧ ٩٢٨٠ ٦٨٧١١ ١٢٨٢٩١
2003 ٩٥٠٢ ٩٦٢ ٢٦٤٠٢ ٩٢٢٠ ٦٩٤٠٨ ١٢٩٩٩٣
2004 ٩٢١٦ ١٠١٠ ١٥٨٨٥ ٩٤٨١ ٦٨٩٩٦ ١١٩٠٨٧
2005 ٩١٨٠ ١٠٦٣ ١٧٤٦٩ ٩٨٤٥ ٦٨٨٨٩ ١٢٠٩٤٧
2006 ٩٤٥١ ١٣١٣ ١٧٨١٨ ١١١٣٨ ٧١٢٤١ ١٢٥٤٦١
2007 ٩٤٣٢ ١٧٩٩ ٢٢٥٦٧ ١٣٨٥٧ ٧٣٣٩٣ ١٣٥٥٤٧
Total 105899 66414 246574 114925 745626 1358572
Source: SAMA website
** For 10 month only.
2.4.2.5 The Saudi Industrial Development Fund (SIDF):
The SIDF was established in 1974 to provide long term loans for the private
sector’s industrial projects. It also offers technical advisory services and
marketing assistance to such projects. In fact, the SIDE has undertaken an
active role in the Saudi Arabian’s industrial development process. Table 2-4
outlines loans extended by all specialized institutions, including the SIDF,
since their inception until the end of 2007.
2.4.3 Commercial Banks:
In the early period, banking was limited to money changers, especially in the
two holy cities (Makkah and Al –Medina).The modern banking business
commenced with the opening of the first branch of Algemene Bank Netherland
in Jeddah in 1926.The first Saudi bank, the National Commercial Bank, was

٣٩
established in 1953. By the end of 1961, there were 12 commercial banks
operating in Saudi Arabia, of which three were Saudi banks with 27 branches
and 75 percent of total deposits. The 9 foreign banks had 23 branches with 25
percent of total deposits. At that time, the total deposits of banks stood at SR
484 million, loans and advances at SR 576 million, and capital and reserves at
SR 139 million.
The acceleration of commercial activities in Saudi Arabia in the early seventies
prompted the government to adopt the Saudization of the branches of foreign
banks through their conversion into joint ventures. The Saudization
programme through joint ventures sought to increase the capital banks to cope
with enlarged requirements of banking business and benefit from foreign
expertise and technology. Table 2-5 lists the different banks operating in Saudi
Arabia.
Consequently, the number of branches has increased all over Saudi Arabia,
reaching 1353 branches at the end of ٢٠٠٧. Table 2-6 demonstrates the
development of the branches of different banks operating all over Saudi
Arabia.
Furthermore, the total deposits of commercial banks rose to SR717.6 billion,
while credit facilities, total bank assets, and reserves grew to SR 595 billion,
SR 1075.2 billion, and SR 33.8 billion respectively at the end of 2007.
All commercial banks deal with traditional banking activities, such as accepting
deposits, dealing in foreign exchange, and facilitating the country’s import and
export trade. The banks are heavily involved in financing the imports of the
private sector in Saudi Arabia. Table 2-7 demonstrates how almost two thirds
of the private sector’s total imports is financed by Saudi banks.
In 1985, the function of commercial banks extended to become intermediaries
for share trade in the secondary market. At the present time, the Saudi
banking system is influenced by foreign banking services. For example, all
customers can access and deal with their accounts through automated teller
machines (ATM), and electronic point of sale (POS). Other services include
credit and debit cards, and personal credit programmes. Most recently,
customers are now able to access their accounts through special telephone
procedures and employers can pay their employees’ salaries by direct
transfers to their accounts.
Finally, Saudi banks have developed the aptitude to face the risk activity
emanating from the growing complexity of the economy as it continues to
move away from the relatively simple infrastructure related contracts (Presley
et. Al 1991, P.26).

٤٠
Table 2-5
Commercial Banks Operating in Saudi Arabia as of the end of 2007
Banks Year
Founded
Nature of Company
National Commercial Bank 1953 100% Saudi joint stock company
Riyadh Bank 1957 100% Saudi joint stock company
Bank Al-Jazeera 1975 94.17% Saudi public, 5.83% National bank of Pakistan
Saudi Hollandi Bank 1976 60% Saudi public, 40% Algemene Bank,Netherlands
Saudi Investment Bank 1976 90% Saudi public, 7.5% chase Manhattan Bank, 2.5% Japan
Industrial Bank
Saudi French Bank 1977 68.9% Saudi public, 31.1% Banque de Indochine de Suez
Saudi British Bank 1978 60% Saudi public, 40% Arab national Bank of Middle East
Arab National Bank 1979 60% Saudi public, 40% Arab Bank, Amman
Samba Financial Group 1980 60% Saudi public, 40% City Group
Al-Rajhi Bank 1988 100% Saudi joint stock company
Albilad Bank 2004 100% Saudi joint stock company
Alinma Bank* 2008 100% Saudi joint stock company
Gulf International Bank 1999 Foreign Bank Branch
Emirates Bank 2004 Foreign Bank Branch
BNP Paribas Bank 2005 Foreign Bank Branch
National Bank of Kuwait 2006 Foreign Bank Branch
Deutsche Bank 2006 Foreign Bank Branch
Source: SAMA Website. * Alinma bank was founded in 2008, while the author was preparing his research.
Table 2-6
Development of banks’ Branches Operating in Saudi Arabia Regions
Year Western and Southern Provinces Northern and Central Province Eastern Province Total
1981 142 120 90 352
1982 182 153 101 436
1983 226 184 114 524
1984 247 200 123 570
1985 267 222 128 617
1986 273 232 132 637
1987 293 246 135 674
1988 379 375 172 926
1989 409 397 179 985
1990 425 421 186 1032
1991 440 443 197 1080
1992 458 473 208 1139
1993 464 481 215 1160
1994 478 510 226 1214
1995 468 503 221 1192
1996 473 507 228 1208
1997 466 509 226 1201
1998 474 518 237 1229
١٩٩٩ 4٦٧ 5٠٧ ٢٢٢ ١١٩٦
٢٠٠٠ ٤٦٨ ٤٩٧ ٢١٩ ١١٨٤
٢٠٠١ ٤٧٣ ٥٠٥ ٢٢١ ١١٩٩
٢٠٠٢ ٤٨٠ ٥٠٣ ٢٢٠ ١٢٠٣
٢٠٠٣ ٤٨٠ ٥٠٩ ٢٢٠ ١٢٠٩
٢٠٠٤ ٤٨٢ ٥١٣ ٢٢١ ١٢١٦
٢٠٠٥ ٤٨٨ ٥٣٣ ٢٢٧ ١٢٤٨
٢٠٠٦ ٥٠٢ ٥٦١ ٢٢٦ ١٢٨٩
٢٠٠٧ ٥٢١ ٥٩٠ ٢٤٢ ٣١٣٥
Source: SAMA Website.

٤١
Table 2-7
Private Sector Imports Financed Through Commercial Banks (In millions)
Year Total Imports Imports Financed through Commercial Banks %
1993 105616 71629 68
1994 87449 56457 65
1995 105187 59147 56
1996 103980 64783 62
1997 107643 70685 66
1998 112397 69955 62
1999 104980 65680 63
2000 113240 71351 63
2001 116931 81026 69
2002 121088 79755 66
2003 138435 86175 62
2004 177659 96019 54
2005 222985 116183 52
2006 261402 132292 51
2007 338088 168518 50
Source: SAMA Website.
2.5 The Development of Accounting In Saudi Arabia
2.5.1 Brief Background
The two preceding sections dealt with the overall economic environment and
the financial system in Saudi Arabia, which are considered as important
factors influencing the development of the accounting practice. This section
deals with the development of accounting practice in Saudi Arabia. According
to Shinawi and Crum (1971), there was no accounting profession in Saudi
Arabia up to 1971. Accounting practices were imported either from Britain and
/ or the neighboring counties such as Egypt, Lebanon and Sudan. Ba-Eissa
(1984) identified two factors justifying the non existence of the accounting
profession in Saudi Arabia. These reasons were:
1. A lack of awareness among foreigners who dominated the accounting
practice in Saudi Arabia about the organization of accounting in a country
that was not theirs.
2. The establishment of a professional body was considered to be a political
activity not encouraged under the country’s political system.
However, the accounting practice in Saudi Arabia has developed rapidly
during the last decade. Several factors have contributed to this rapid
development.
Foremost among these are:
1. An increased awareness of the importance of the accounting profession
and its role in economic development, especially by some government
agencies, such as the Ministry of Commerce and SAMA.
2. The increasing importance of the private sector has stressed the need for
accounting information for utilization in the decision making process.
3. An increase in the number of academics and accounting graduates.

٤٢
2.5.2 The Influence of the Government
The government influences the accounting practice through its role as both a
user and regulator. The government has a responsibility to exercise control
over the accounting and reporting practice to protect the whole society from
manipulation and fraud by companies or individuals. It also influences the
accounting and reporting practices to meet the needs of other government
users and in order to prepare national planning and economic development.
Amesis(1971) points out that:
“……nothing is wrong with use of sound accounting disclosure as a tool of
national policy.”
The most authoritative government body influencing the accounting profession
in Saudi Arabia is the Ministry of Commerce. It derives its authority from Royal
Decree No. M6 of 1965 on the regulation for companies (Company Act), which
authorized it to put the decree into effect. Since then, the Ministry of
Commerce became the agency to regulate, enforce, and control rules over all
companies working in Saudi Arabia. In 1974, the Ministry of Commerce issued
the accountant law and until 1986, the two laws were the only legal basis for
companies and accountants.
In 1980, the Ministry of Commerce took a considerable step towards revising
and developing the accounting and reporting profession by appointing one of
the leading accounting firms (Al-Rashid Office) in Saudi Arabia. Tasks
assigned to Al-Rashid Office included studying current accounting problems
and potential improvement, and preparing a proposal for the development of
accounting and auditing standards, and an organizational structure for the
development of the profession.
The finding of the study was approved by the Ministry of Commerce as a
suitable foundation for the development of the profession (detail about the
study will be presented later in this chapter) (Ministry of Commerce, 1986 and
Al-Rashid 1983).
2.5.3 The Company Act
In 1965, Royal Decree M6 introduced the Company Act in Saudi Arabia. It was
the first legislative basis for the accounting and auditing practice. The act was
amended in 1982 and amended again 1985. It consists of 234 articles, mostly
providing a legal framework for companies and dealing with such issues as the
formation and dissolution of companies. Be that as it may, however, some
articles provide little guidance about the accounting and auditing practice.
Shinawi (1970) pointed out that the Company Act was adapted from the
Egyptian law, but that adoption did not take Saudi local needs into account.
The most relative articles to accounting and auditing concerns the preparation
of financial reports, consistency in the preparation of financial reports, the

٤٣
dissemination of financial reports, the appointment of auditors and their duties,
and the confidentiality of financial information during the audit process are
presented in appendix two.
2.5.4 Certified Public Accountants Regulation
The certified public accountant regulation is the second legislation to regulate
the accounting profession. It was first introduced in 1974, simultaneously with
the accountants’ law and then altered comprehensively and approved by
Royal Decree No.12 of 1992(SOCPA 1994). The regulations’ mandatory and
numerous articles regulate the accounting profession and outlines the rules to
be applied by auditors in Saudi Arabia. Some of the articles related to the
practice itself, the qualifications of accountants and their obligations, and
penalties that result from violation of the laws. These are presented in
appendix two.
2.5.5 Accounting Standardization Development
The rapid social and economical development in Saudi Arabia during the
1970s, accompanied by a pronounced growth in the private sector, resulted in
a great need for the development of the accounting profession and accounting
information. However, accounting and the accounting profession lacked the
ability to cope with these needs, largely due to the absence of local accounting
and auditing principles and unified methods of financial reporting which would
take the needs of the local environment into consideration. Consequently, by
1981, some accountants and academics started calling for the organization of
the first conference on accounting and the accounting practice.
The conference was organized and held by the Department of Accounting at
King Saud University (KSU). The conference sought to discusses the status of
accounting and the auditing practices in the country, evaluate the deficiencies
in the accounting profession, and offer recommendations to improve the
profession. Several researches and discussion papers were presented,
stressing the need for the development of accounting standards, while taking
into consideration the experience of other countries.
The government also recognized the deficiency in the accounting profession.
As a result the Ministry of Commerce appointed Al-Rashid Office (accounting
firm) to study the problems of the profession and to put forth recommendations
for addressing the efficiency. The firm was also asked to prepare a
comprehensive framework to develop the accounting profession and
accounting and auditing standards in the kingdom, taking into account the
specific requirement of the Saudi environment.
Al-Rashid Office proposed a comprehensive plan to develop the profession
and its standard, which were subsequently accepted by the Ministry of

٤٤
Commerce as a suitable start. The plan consisted of two phases. The first
involved carrying out a comprehensive study of the accounting profession in
other countries. The comparative study was deemed to be an important step
towards establishing an accounting system sensitive to the needs of the local
environment. Brison (1978) stated that:
“A comprehensive study of the evaluation of accounting under different
environment should provide important lessons regarding the true nature of
accounting and the extent to which it is possible to separate the fundamental
truths from historical accidents”
To accomplish the first phase, three country groups were identified:(1)group
one included the USA,UK and Canada;(2)group two consisted of France, West
Germany, and Sweden; (3) group three comprised of Tunisia, Venezuela, and
Brazil. Then, one country in each group was selected for the comparative
study. These countries were the USA, West Germany, and Tunisia, which
represent three different accounting systems. The comparative study
highlighted the internal organization of the profession, accounting and auditing
standards, and the professional ethics code in the three countries. In addition,
it provided a provisional conclusion as to the implication of the study for the
development of the accounting profession in Saudi Arabia.
The second phase involved carrying out three responsibilities. These dealt
with three areas:
1. Determining the objectives of financial accounting, defining the most
important concepts of financial accounting, and introducing standards for
general presentation and disclosure.
2. Determining and developing auditing standards.
3. Organizing the internal structure of the profession.
Three working groups were formed to undertake these tasks. The groups
consisted of technical and academic experts from the three countries in
question, as well as assigned to study one of the areas and was requested to
prepare a draft about that particular area and exchange it with the other two
group for discussion. Several meetings followed to discuss the drafts. Then,
the final proposals were turned to the Ministry of Commerce.
In 1986, the Ministry of Commerce approved the study conducted by
Al-Rashid Office, and subsequently issued Ministerial Decree No.692 stating
that the general presentation and disclosure standard is the official guide for all
accounting practitioners in Saudi Arabia. In 1990, Ministerial Decree No.852
was issued, mandating that all companies in Saudi Arabia comply with the
standard in the preparation of their annual reports. However, the decree
cancelled the requirement that a statement of sources and application of funds
should be provided, leaving their fulfillment to the discretion of individual
companies.

٤٥
2.5.5.1 Objectives of Financial Accounting
The objectives of financial accounting were determined by defining the outputs
of the financial accounting process and by the fundamental concepts in Saudi
Arabia. The importance of the output (financial statements) of financial
accounting has been stressed, as it represents the final product of the
accounting system. Hence, the general purpose of financial statements has
been defined as the need to provide information that is useful to the different
parties interested in the enterprise (Ministry of Commerce, 1992 para.51-52).
In paragraph 53, the primary external users were defined as current and
prospective investors, current and prospective lenders, current and
perspective suppliers, customers, and employees. The government was
extended as a primary user as it has the ability and power to prescribe the
form and content of the financial statement to meet its needs, para53 stated:
“This is because they (the government and its agency) have the ability by
virtue of their authority to determine the information that should be presented
to meet their needs”
The information disclosed in the financial statement attended to the common
need of users, as it was intended to help primary users in the decision making
process. The objectives, as stated in para70 to 76, were:
1. To provide information suitable to the primary users’ needs.
2. To provide information that helps in measuring the enterprises’ ability to
generate earnings.
3. To provide information that assists in the evaluation of an enterprises’ ability
to generate cash flow.
4. To provide information about the economic resources of the enterprise.
5. To provide information about the sources and applications of funds.
2.5.5.2 The Concepts of Financial Accounting
The scope of this statement contains four issues. The first relates to the
definition of the basic elements of financial statements of business enterprises.
Elements defined in this statements include: assets, liabilities, owners’
equities, revenues, expenses, gains, losses, net income (net loss), and
investment. The second relate to the definition of events, transactions and
circumstance concepts, i.e, whether they are internal or external. The third
relates to the concept of measurement by defining certain assumptions
underlying the measurement process. These concepts include: the entity
concept, going concern, periodic reporting, the measurement unit, recognition,
measurement basis, and matching. The fourth relates to the concept of quality
in accounting. The quality concept describes the characteristics of useful
information, mainly relevance, reliability, neutrality, comparability, timeliness,
comprehensible, materiality, and optimality in disclosure.(para.238-329).

٤٦
2.5.5.3 The General Presentation and Disclosure Standard
The general presentation and disclosure standard (GPDS) concerned the
general presentation and disclosure requirement in the financial statement. It
also concerned the presentation and disclosure of any changes in accounting
procedures and subsequent events and commitments finally, it addressed
disclosure by the business entity, including its nature, identity, and accounting
policies.
2.5.5.3.1 General Presentation
The first part of the general presentation required that all business enterprise
prepare a complete set of financial statements. These financial statements
include statement of financial position, statement of income (loss), statement
of retained earnings, statement of sources and application of funds, and notes
to the financial statement. These statements and the notes represent the
minimum requirements of the financial position of an enterprise.
In addition to these statements, the general presentation principles specify
some general issues, such as forms and titles of the statements, terminology
used in the statements, classification, and comparable figures for comparable
periods. (para.583-584)
The second part of the general presentation states the presentation
requirements for each individual financial statement. These requirements
include the statement title, which must express its contents, the accounting
period covered, the entity’s name, and the legal form. (para. 591)
Finally, the GPDS illustrates samples of each of the statement required. This
illustration is provided as a general guidance to assist in the preparation of the
financial statement.
2.5.5.3.2 General Disclosure
The general disclosure requirements related to the financial statement include
the nature of the business, significant accounting policies, accounting changes
and their treatment, contingencies, commitment and subsequent events (para
679).
Special requirements for the presentation and disclosure of the consolidation
and development stage companies have been mention exclusively.
Consolidated financial statements should disclose the policy of parent
company to consolidate, the ownership percentage and the accounting basis
of unconsolidated subsidiaries. Companies in the development stage should
disclose that the company is under development and give a description of the
activities it is engaged in (para. 744-775).

٤٧
2.5.6 Saudi Organization for Certified Public Accountants
The certified public accountant regulation (CPAR), introduced in 1992, called
for the need to establish a Saudi Organization for Certified Public Accountants.
Article 19 of the regulation stated that an organization shall be established
under the name of the Saudi Organization for Certified Public Accountants
(SOCPA) and shall operate under the supervision of the Ministry of
Commerce. SOCPA would seek to promote the accounting and auditing
profession and all matters that might lead to the development of the profession
and raising its status. SOCPA’s objectives, management, and current activities
are presented in appendix two.
2.6 Summary of the chapter
The objectives of this chapter were two fold. The first was to give a descriptive
overview of the country’s economic development, including the development of
the financial system. The second was to highlight the development of the
accounting profession in Saudi Arabia. The first three sections discussed the
economic development by presenting the major elements of each five year
development plan over the last three decades. The government was a major
contributor to the economy, due to its control of oil revenues. However, the
Saudi planner realized the importance of diversifying the country’s economic
base. This required a shift in focus towards giving the private sector an
important role in the economic development process. Consequently, the
private sector expanded and its contribution to the economy increased. This
expansion required the development of the financial system and stressed the
importance of the accounting profession.
The fourth section presented the major components of the Saudi financial
system, including the importance and function of the Saudi Arabian Monetary
Agency. It also reviewed the importance and role of five specialized credit
institutions in funding the private sector activities, and the development and
role of commercial banks in enhancing the private section’s activities.
The fifth section reviewed the framework of the accounting profession,
including its development, and its rules and regulations. It was noted that the
government (Ministry of Commerce) played an important role in establishing
the basic accounting practice by introducing the company act in 1965, and the
accountant law and regulation by introducing the Certified Public Accountant
Regulation in 1974. However, in recent years, control over the accounting
profession shifted in favour of academics and professionals, who work under
the supervision of the government. A major step in the development of
accounting in Saudi Arabia was the issuance of the objectives and concepts of
financial accounting in 1986. The section reviews its development and
contents. Finally, the formation of the Saudi Organization for Certified Public

٤٨
Accountants (SOCPA) to monitor and follow up on the implementation of the
standard has been presented alongside with its objectives and activities.
To sum up, the participation of the private sector in the economic development
increased the need to develop the accounting system, which in turn produces
the financial statements. These financial statements contain important
information useful in the private sector’s decision making process.

Dr. Ahmed PHD Thesis

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