1. SAUDI ARABIA
20
NEW BEGINNINGS
In January2015KingSalman
binAbdulazizAlSaudwas
crownedasthenewKingofSaudi
Arabiafollowingthedeathofhis
brotherKingAbdullah.Inthoselast
sixmonthsitwasclearthatthe
Kingdomwasenteringanewera.
2015 has seen Saudi Arabia
undergo drastic changes at many
levels in both the government
and private sectors. It would
appear that a button has been
pressed to accelerate changes in
the Kingdom in a speedy, yet very
transparent, manner.
GOVERNMENT
REORGANISATION
The first signs of noticeable
change were the introductions
of third generation members
of the royal family, the Crown
Prince, HRH Mohammed bin
Naif bin Abdulaziz Al Saud and
the Deputy Crown Prince, HRH
Mohammed bin Salman Al Saud,
each bringing with them a modern
perspective. Another change
was a reshuffle of the cabinet of
ministers and the introduction of
a younger generation of ministers
into the Government.What we
have seen happen in the first half
of the year is a streamlining of
the various councils that report
to various ministers.Two new
councils have been created, and
12 different councils, including
ANEXPERT’SVIEW
BIO:
Mohammed Alariefy, based in
Saudi Arabia, has been engaging
with decision and policy makers in
the region for the past two years
as the Director of Government
Initiatives, GCC, forThomson
Reuters. Prior to that, Mohammed
was at Ernst & Young Advisory
services for six years, where he
worked with leading private and
public sector organisations.
MOHAMMED ALARIEFY
Director of Government
Initiatives, GCC,
Thomson Reuters
MOHAMMED ALARIEFY RUMINATES ONTHE
PIVOTAL CHANGES SAUDI ARABIA HAS SEEN IN 2015
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2. SAUDI ARABIA
21
the Supreme Economic Council,
have been replaced. Of these two
newly created councils, one will
be responsible for economic and
development affairs and the other
will be responsible for political
and security affairs.
One of the departments most
affected by this reorganisation
is the Ministry of Finance.The
Ministry of Finance is no longer
burdened with the responsibility
cont. overleaf
of overseeing numerous different
government funds. Instead, the
funds have been linked with
their respective government
bodies. For example, the Saudi
Industrial Development Fund now
reports directly to the Ministry
of Commerce and Industries,
and the Public Investment Fund
now reports directly to the newly
established Council of Economic
and Development Affairs.
WHATWE ARE SEEING IS
THE REORGANISATION
OF GOVERNMENT
OFFICES SOTHATTHEY
ARE FOCUSED ONTHEIR
CORE FUNCTIONS
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3. SAUDI ARABIA
22
This means that the Ministry of
Finance is free to focus on its
normal duties.
Whatweareseeingis the
reorganisationofgovernment
officessothattheyarefocusedon
their corefunctions.Webelievewe
willseeareductioninbureaucracy,
anincreaseintransparencyandin
somecases, amovetostandardise
inlinewithotherG20nations from
acapitalmarkets perspective.
MARKET DEVELOPMENTS
Themostnoticeablechange
tothecapitalmarkets,anda
landmarkeventforthecapital
marketsintheMiddleEast,wasthe
qualifiedforeigninvestment(QFI)
announcementthatallowsforeign
investorstodirectlyinvestinthe
SaudiStockExchange.Previously,
foreigninvestorscouldonlybuy
stocksintheSaudimarketthrough
indirectchannelssuchasswapsand
participatorynotes.However,with
theQFIrulesnowinplaceitmeans
itisnoweasierforforeigninvestors
toaccesstheSaudimarket.Whilst
wewillnotseeanimmediateflurry
oflargescaleinvestors,asthe
internationalmarketsstarttolearn
abouttheopportunitiesintheSaudi
Market,wewillseemoreandmore
investmentinthelongterm.
However, it seems that
the Capital Markets Authority
(CMA) is determined to start
as it means to go on, sending a
clear message to the markets
that certain failings would not
be acceptable. A good example
of this no-nonsense approach
occurred when the CMA banned
all publicly traded companies and
organisations that are under the
CMA regulatory umbrella, from
dealing with one of the ‘Big Four’
accountancy firms due to a failed
Initial Public Offering.
WealsosawMobily,oneof
thelargestlistedcompaniesin
thetelecom’sindustrylosemore
thanhalfofitsmarketvaluedueto
errorsintheirfinancialreporting.
Thesecametolightwhenthey
revisedtheir2014earningsfrom
a$58.6millionprofittoaloss
of$243mlillion. Whilstbothof
thesecasescausedconcern,many
believethiscouldbeablessing
indisguiseinthelongtermasit
promptedtheCMA,longviewed
asoneofthestricterregulatorsin
theMiddleEast,toenforcecertain
standardsinreportinginorderto
preventfuturescandals.
FINANCIAL REPORTING
Saudi Arabia is under a spot light.
As the only G20 nation in the
Middle East it is important that
Saudi Arabia implements strong
control measures. One of the key
developments is the adoption of
International Financial Reporting
Standards (IFRS).
IFRS is a key milestone in the
country’s economic development.
It is hoped that by adopting IFRS
the Kingdom will give confidence
to foreign investors and increase
foreign direct investment into
Saudi Arabia.This is a major
objective of the new Government
in order to diversify the country’s
revenues from oil.
Another driving force
behind IFRS is that its adoption
enhances transparency and
enables a structured analysis
of Saudi companies.This means
that financial performance
can be easily compared and
benchmarked against businesses
elsewhere in the world enabling
mergers, acquisitions, and
business transactions to be
considered with ease.
Today,theCentralBank,Saudi
ArabianMonetaryAgency(SAMA),
requiresbanksandinsurance
companiestomandatorilyreport
underIFRS.Allotherpublicly
listedandunlistedcompaniesare
currentlyrequiredtofollowthe
localGAAPaccountingstandards
issuedbytheSaudiOrganization
forCertifiedPublicAccountants
(SOCPA).SOPCA’sresponsibilities
includethedevelopmentand
approvalofaccountingand
auditingstandards.
It is worth mentioning that
the IFRS standard approved by
SOCPA would be slightly modified
by adding more disclosure
requirements, removing optional
treatments, and amending the
requirements that contradict
Shari’ah or local law.
SOCPA,whichoperatesunder
theumbrellaoftheMinistryof
CommerceandIndustries(MCI)
hasapprovedaplantoadoptIFRS,
withlistedcompaniesbeingIFRS-
compliantby1January2017.Other
entitiesarerequiredtoreport
underIFRSfrom1January2018.
CHALLENGES OF IFRS
However, despite all of the clear
benefits of IFRS there are some
major stumbling blocks; one of the
cont. from page 21
ITISHOPEDTHAT
BYADOPTINGIFRS
THEKINGDOMWILL
GIVECONFIDENCETO
FOREIGNINVESTORS
ANDINCREASEFOREIGN
DIRECTINVESTMENT
INTOSAUDIARABIA
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4. SAUDI ARABIA
23
IT SEEMS THATTHE
CAPITAL MARKETS
AUTHORITY (CMA)
IS DETERMINED TO
START AS IT MEANS
TO GO ON, SENDING A
CLEAR MESSAGE TO
THE MARKETS THAT
CERTAIN FAILINGS
WOULD NOT BE
ACCEPTABLE
THE CHALLENGE
IS THATTHERE IS
NO VISIBILITY OR
CENTRAL REPOSITORY
OF ACCOUNTS SO
THAT BANKS AND
DZIT CAN CHECK THE
ACCURACY OF WHAT IS
SUBMITTED TO THEM
havetheabilitytomakeeducated
assessmentanddecision-making
beforeenteringinanybusiness
transactionwithanenterprise,this
includesgovernmenttendersand
bankloans.
BRIGHT FUTURE
In2015,forahostofreasons,Saudi
Arabia’sinternational position
intheEaseofDoingBusiness
rankingsdecreased.Thiswas
amajorconcernatall levelsof
GovernmentandtotheSaudi
ArabianGeneral Investment
Authority(SAGIA).Although
changesinfinancial reportinghave
beenevolvingforsometime,with
thenewgovernmentstructure
andtheclearstepsbeingmade
towardstransparency,coupled
withastrongregulatorwhois
preparedtotake toughstances
withcompanies,2015hasbeen
ayearinwhichSaudi Arabia
hasleaptforwardinall areasin
ordertobecomearobustand
transparentenvironmentinwhich
todobusiness.Weexpect2016
toseeSaudiArabiaclimbingup
theinternational EaseofDoing
Businessrankstoapositionthat
befitsaG20nation.
largest being a lack of qualified
accountants in the Kingdom.
According to SOCPA, there are
147 licensed accountancy firms,
and a total of 238 certified
public accountants to cover
more than 45,000 companies (an
average of 190 companies per
certified accountant a year). All
accountants must be SOPCA-
certified and the first rule in order
to attain a SOCPA certificate is to
be a Saudi National, which makes
it almost impossible to cover
all companies in the Kingdom
without the support from non-
licensed accountants.The second
major challenge is the reliance on
the four largest audit firms and
the gap between the big four and
their closest competitor.
REPORTING TRANSPARENCY
It comes as no surprise to find
that there could be more than
one audited financial report for
some of the smaller companies
in Saudi Arabia: a first report to
provide to banks to show inflated
financial standing, allowing them
to maintain/increase lines of
credit; a second report to provide
to the Department of Zakat and
IncomeTax (DZIT) to show a more
conservative financial standing,
meaning the business pays less
tax. Perhaps, in some cases,
a third report may be needed
to show shareholders how the
business actually performed.
The challenge is that there is
no visibility or central repository
of accounts so that banks and
DZITcan check the accuracy of
what is submitted to them.
The Ministry of Commerce
and Industries in cooperation
with SOCPA and DZITestablished
a project named ‘Qawaem’ (the
English translation from Arabic
roughly means ‘Reports’).The aim
of this project is to provide a set
of systems relating to financial
reporting where all reports can
be stored and accessed from
one place. Similar to Companies
House in the UK, it will enable
companies and accountancy firms
to upload and send their financial
statements into a consolidated
repository using XBRL language,
a global standard for exchanging
business information.
StartinginJanuary2015,all
accountancyfirmsarerequired
touploadalltheirclients’audited
financialstatementsintoQawaem
programme.Thisinitiativeisa
significantturningpointinthe
country’seconomicreporting.It
createsaconsolidated,controlled,
consistent,transparent,credible
singlesourceoffinancialdataof
theKingdom’scommercialindustry.
Thisrepositoryenablesaccuracy
andprovidesawealthofdatafor
financialandeconomicresearchfor
both,publicandprivatesectors.
UtilisingQawaem,government
entitiesandfinancialinstitutionswill
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