AS ever, doing business and doing it successfully, is a cutthroat affair: Companies have to deliver — and at highly competitive rates. But now it is a professional cutthroat affair: Who you are and who you know is no longer the main path to commercial success. If companies want funding — and which company does not? — it is no longer like the old days when your uncle knew someone in a bank and would put in a good word for you. Contact is not enough. The banks want business plans; they want accounts, income projections, cash flow plans. They want to know that the business with which they do business will succeed.
An appreciation of this is crucial for small and middle-sized companies starting up or wanting to expand. Without a professional approach to business and the right paperwork, the answer to requests for funding is going to be "No". And it is not just banks that demand it. Saudi Arabia is part of a global market: Global trends and practices are working here too. Companies are developing relationships with other businesses, local and foreign, and they want to know that they are dealing with viable concerns. As elsewhere, mergers and acquisitions are beginning to become a part of the everyday business environment. They are going to be a even more regular feature of economic life as membership of the World Trade Organization approaches. Lastly, the Kingdom increasingly demands verifiably sound business practice. Companies cannot avoid it.
But what is the response of the Saudi businessmen, especially the small and middle-ranking businessmen and, even more crucially, the newcomers to the scene? Are they fully aware of the absolute necessity to keep accounts — not just management accounts but properly audited accounts? To find an answer to this and other questions, Arab News spoke to Dr. Abdullah A. Baeshen, a board member of the Saudi Accounting Association. Additionally, Dr. Baeshen serves on its Audits Standards Committee. He is also the country coordinating partner for Ernst & Young, one of the "Big Five" accountancy companies in the Kingdom, and has been with the company since 1978. He is also a member of Ernst & Young’s Middle East Advisory Council.
Q: For the sake of businesses and their customers, firms need to have accurate pictures of their financial position. Unfortunately, the world over, reports and accounts are not always what they seem to be. What is the position here in Saudi Arabia?
A: It is probably fair to say that financial statements, globally, are subject to a great deal of criticism for failing to meet user needs. The situation does, however, benefit from continuous improvement — and Saudi Arabia is no exception. The difficulty in presenting an accurate picture stems from financial statements having many different users, each with their own requirements and each, therefore, viewing the statements from different perspectives. An inherent limitation of any set of financial statements prepared using the traditional historical cost basis is that the balance sheet does not reflect the current value or replacement cost of the entity’s fixed assets but rather their original purchase price. This is of little use, for example, to analysts wishing to compare the return on assets earned by two or more companies which may have purchased their assets at different times and during very different economic circumstances. There are also a number of areas that involve judgment in determining the appropriate means of valuing certain transactions or assets. The most important aspect of the financial statements for any user is that they should clearly disclose the basis on which they have been prepared as well as the accounting policies used in their preparation. In that respect, Saudi Arabia has made significant headway in recent years as a number of accounting standards have been put in place and these set out certain disclosure requirements and accounting policies suitable for the Kingdom.
Q: Do companies in Saudi Arabia fully appreciate that business is greatly advanced by producing accounts which can be easily understood by everyone in the local or international business community?
A: There is certainly an appreciation of this fact among forward-thinking companies. In today’s world, a decent set of accounts has become less of an ideal and more of a requirement in order to be acceptable and credible to an increasing number of users. Most banks are reasonably alert to any signs of what is sometimes called "aggressive accounting" in financial statements presented by their borrowers and many will insist on those statements being accompanied by an audit from a leading firm of auditors. The Saudi Organization for Certified Public Accountants (SOCPA) which operates under the Ministry of Commerce has also introduced a number of standards for accounting and auditing — which I mentioned earlier — and these ensure the quality of financial statements.
Q: What about small, even medium-sized, family-owned businesses? Do they understand this? Is there still a lack of distinction between the company’s money and the owner’s money?
A: It is difficult to generalize on this issue. However, there is no reason why smaller and medium-sized companies should not share the same objectives in preparing their financial statements. They are often more in need of bank financing and must, therefore, be seen to be sophisticated in the way in which they present their business and its operating results.
Q: Have accountants been able to have an educative role pertaining to these questions?
A: Professional firms always have a role to play in educating the market. Even before the establishment of SOCPA and the standards they introduced, we as a firm encouraged our clients to adopt international accounting standards (IAS) in order to present their financial statements in a manner that found the widest acceptance. Since SOCPA set up its own local accounting standards, we have hosted regular seminars to inform and educate our clients — and the business community at large — about the impact and significance of accounting standards.
Q: What about the quality of auditing in Saudi Arabia?
A: The quality of auditing varies throughout the world and depends on the methodology of the particular firm as well as the education, experience and training of the professionals working on the audit. Larger firms are able to make use of the latest technologies and audit methodologies and are also able to attract the most talented staff. We run regular training courses to continuously improve the quality of our staff. In addition to issuing accounting and auditing standards, SOCPA has also undertaken to police the quality of audit work carried out by all firms within the Kingdom. It does this through a system of "peer group reviews" which focus on specific quality control aspects in evidence at each firm. We also have our own system of quality control reviews, which are carried out regularly to ensure that every Ernst & Young office complies with our firm’s international standards of service execution and delivery.
Q: What standards are being put in place? Are they internationally acceptable?
A: As I said earlier, SOCPA has introduced a number of local accounting standards which are broadly in line with both IAS and those used in the United States.
Q: How are these enforced? Are companies complying?
A: The accounting standards established by SOCPA are effectively law and it is, therefore, incumbent upon the management of companies to ensure that they are applied in the preparation of their financial statements. It is also one of the roles of the auditor to highlight any significant non-compliance in the audit and this would generally attract adverse notice and comment from the Ministry of Commerce.
Q: Are any regulations coming from the Gulf Cooperation Council?
A: No.
Q: Has GCC membership had an effect on accountancy in Saudi Arabia?
A: Not really. There are no uniform GCC standards. Some countries choose to adopt international accounting standards while others seek to develop their own. Saudi Arabia has chosen the latter policy.
Q: Is the sector dominated by international accountants or is the expertise of internationally-trained Saudis now becoming evident?
A: The Kingdom has witnessed a gradual increase in local accounting expertise. As you may know, audit reports can only be signed by accountants licensed by the Ministry of Commerce, it no longer issues licenses to non-Saudis and so one should thus see a growth in the number of Saudi accountants. We have Saudis at every level and in every department in our own firm. Each year we recruit a new group of Saudi trainees with the idea that they will eventually take a leadership role in Ernst & Young throughout the Kingdom. Two of my partners in fact started their careers in the firm as trainees.
