Saudi regulators tighten their grip ahead of opening to foreign investment

After accounting scandals, there are signs of a clampdown before the kingdom’s stock market opens to foreign investors.

Investors were surprised when the telecoms company Mobily dropped its previous earnings result to a nine-figure loss. AFP Photo

When Saudi Cable said last month it was delaying the release of its 2014 earnings statement because it was still compiling information required by an external auditor, it was a sign of growing regulatory pressure on companies in the kingdom.

Regulators are signalling they want companies to tighten governance and strengthen internal controls as the $500 billion Saudi stock market prepares to open to direct foreign investment in the next few months.

The process has become more urgent since an accounting scandal at the telecoms company Mobily, which in February revised its 2014 earnings to a loss of $243 million from the $58.6m profit previously claimed.

The Mobily affair, and the investigation into it by the kingdom’s Capital Market Authority (CMA), have prompted many company managements, board members and even major shareholders to become more conscious of risk, executives and analysts say.

“What happened has set the alarm bells ringing and pushed board members to revise their roles, made investors carefully check financial statements, and caused company managements to review their accounts carefully,” said Turki Fadaak, head of research and advisory services at AlBilad Capital in Riyadh. “It has made analysts, keen on meeting company managements more often, and caused us to look more carefully at everything said and everything that managements announce.”

One sign of the new mood is that the fees charged by some auditors are rising as demand for their services grows.

“The risks associated with what happened to the listed companies have caused companies to raise their fees,” said a partner at a regional auditing firm, speaking on condition of anonymity because of commercial sensitivities. He said his own firm’s business had grown fast in the past few months as customers began to find fees charged by the big international auditors too steep.

Another sign of the regulatory pressure is a rise in fines levied by the CMA on listed companies for violations such as inadequate disclosure. Fines rose 46 per cent from a year earlier to 1.83 million riyals (Dh1.79m) in the first quarter of this year – not a huge burden for the companies involved, but a signal of the regulator’s intentions.

The CMA is acting to ensure a successful stock market opening, which is an important part of the government’s strategy to and diversify the economy beyond oil, said a Gulf executive who operates in Saudi Arabia.

“They have no choice but to step in, otherwise Saudi as a market will lose credibility and people won’t invest. Companies are preparing themselves to become more disciplined and regulated because they realise they will be questioned more,” the executive said.

Saudi Arabia has a good reputation for corporate governance in the Arab world, and the Mobily debacle – which the firm attributed to excessive booking of revenue from wholesale broadband leases and promotional campaigns – does not necessarily indicate more scandals waiting to explode. The CMA is viewed by fund managers as one of the strictest stock market regulators in the region.

But the Mobily shock came as regulators were already grappling with another thorny case, that of construction company Mohammad Al Mojil Group (MMG). The company ran into financial trouble several years ago and has had its shares suspended since July 2012 because of its losses.

Last November, the CMA advised companies to stop engaging the accountancy firm Deloitte & Touche for audits from June 1 this year, according to a circular seen by Reuters.

The CMA said its decision was owing to a case involving a company which it did not identify. Deloitte also declined to identify the firm, but said it believed its audit of the client met applicable standards. Industry sources said the company was MMG.

Authorities increased the pressure on both MMG and Mobily last month by raising the prospect of prosecuting individuals.

The CMA said it was investigating the possibility of insider trading of Mobily shares.

Meanwhile, the Saudi ministry of commerce said it had referred some MMG board members to the bureau of investigation and public prosecution over possible violations of the companies law. The decision “comes as part of a plan by the ministry to tighten oversight of violating companies,” the ministry said.

One reform that may emerge, some analysts believe, is clarification of who is responsible for supervising auditors. At present the ministry of commerce supervises accountants while the Saudi Organisation for Certified Public Accountants, a private body, reviews auditing standards. Some analysts believe such authority should be consolidated under the CMA to avoid confusion.

“Some entity like the PCAOP [Public Company Accounting Oversight Board] in the United States should be established in Saudi to monitor auditors, and it should be under the umbrella of the CMA,” said Mazen Al Sudairi, the head of research at Al Istithmar Capital in Riyadh.

John Sfakianakis, Riyadh- based Middle East director of the Ashmore Group, an investment firm, said the furore over irregularities at major Saudi companies would in the long term be a blessing in disguise. “Both investors and companies will now look at the things they need to avoid,” he said.

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