Investigation of Mobily accounting errors key test of Saudi Arabia’s governance resolve

The suspension of Khalid Omar Al Kaf took effect from November 21 until the audit committee submits its report to the board.

The suspension of Mobily chief executive Khalid Al Kaf, above, sends a bad signal, according to Shrouk Diab, assistant vice president research at NBK Capital. Philip Cheung / The National

An investigation into accounting irregularities at Saudi Arabia’s No 2 phone operator is shaping up as a key test of governance as the kingdom’s markets open up to foreign investment

Shares in the Saudi phone operator Etihad Etisalat, also known as Mobily, fell 0.2 per cent yesterday after it suspended its chief executive following accounting errors that led to the company restating 18 months of earnings. Its shares have fallen 30 per cent since that disclosure on November 3.

Mobily said that the suspension of the chief executive Khalid Al Kaf took effect from Friday. Until the company identifies the accounting errors and submits a report to the board of directors, Serkan Okandan, the deputy chief executive, will be running the company’s operations. Meanwhile an investigation by the kingdom’s Capital Market Authority is under way.

“The accounting restatements in Mobily’s financials is something major,” said Omar Maher, a telecoms analyst at the regional investment bank EFG Hermes. “As long as the Capital Market Authority investigation is taking place – along with an internal investigation – we will continue to see downward pressure on Mobily’s stock.”

Saudi Arabia is widely expected to open up its stock exchange to foreign investment next year, which is focusing attention on the region’s biggest and most liquid market as well as the standards of corporate governance expected by foreign institutions.

In July, the Saudi cabinet approved a law to allow foreign investors to directly access the kingdom’s stocks by the first half of next year.

At present, foreigners can access equities only indirectly, via swaps and exchange-traded funds.

Mr Maher said that the regulator’s investigation needed to “send a strong signal to the market and to incoming foreign investors that good regulation and governance is a key priority for the Saudi stock exchange”.

On November 3, Mobily said that a mistake relating to the timing that revenue from a promotional programme was recognised had affected earnings statements for 2013 and the first half of 2014. Other errors relating to revenues from the leasing of the telco’s fibre- optic network were also disclosed. Etisalat, the UAE’s largest phone company, owns more than 27 per cent of Mobily.

Etisalat has previously said that the impact of Mobily’s restatements on Etisalat Group’s financials will be accounted in the fourth quarter results. Analysts said that the financial impact will be minimal on Etisalat, however the incident is a major embarrassment for both companies.

“The suspension of the chief executive officer sends a bad signal,” said Shrouk Diab, assistant vice president research at NBK Capital.

“As far as the bad news, we hope this is the last one. We are now waiting for two major events: the conclusion of the Capital Market Authority investigation and the end of year results for Mobily,” she added.

Etisalat said yesterday that it fully supported the steps taken by the company so far in finding out what why the company's earnings were restated.

“In line with the highest standards of corporate governance, Etisalat believes that in such cases, it is in the best interests of all shareholders and stakeholders, and in the best interests of Saudi Arabia that the board should commission an independent investigation to be conducted to identify exactly what happened and why and that the independent investigation should be thorough and should proceed unhindered,” Etisalat said in a statement.

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