April 5, 2015 / 10:35 AM / 4 years ago

MIDEAST MONEY-Saudi firms tighten controls in wake of Mobily scandal

* Regulators taking harder line before bourse opening

* Capital Market Authority, Commerce Ministry launch probes

* “Alarm bills ringing” at some listed firms

* Demand, fees for auditing services rise

* Pressure to clarify supervision of auditors

By Marwa Rashad and Hadeel Al Sayegh

RIYADH/DUBAI, April 5 (Reuters) - When Saudi Cable Co 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 corporate managements to tighten governance and strengthen internal controls as the $500 billion Saudi stock market prepares to open up to direct foreign investment in the next few months.

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

The Mobily affair, and the probe into it launched by the 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 bills 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 us, the analysts, keen on meeting with company managements more often, and caused us to look more carefully at everything being 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 added that his own firm’s business had grown substantially in the last few months as some 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 of information. They rose 46 percent from a year earlier to 1.83 million riyals ($488,000) 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 create jobs and diversify the economy beyond oil, said a Gulf executive who does business 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 sooner they begin this process, the less expensive it will be.”

REPUTATION

Saudi Arabia has a relatively 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 mobile promotional campaigns - does not necessarily indicate a string of scandals waiting to explode. The CMA is viewed by fund managers as one of the strictest stock market regulators in the Middle East.

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

Last November, the CMA advised companies to stop engaging the local unit of international accountancy firm Deloitte & Touche for audits from June 1, 2015, according to a circular seen by Reuters.

The CMA said its decision was due to a case involving a firm 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 firm 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 Ministry of Commerce said it had referred a number of MMG board members to the Bureau of Investigation and Public Prosecution over possible violations of the companies law. It did not identify the board members.

The decision “comes as part of a plan by the ministry to tighten oversight of violating companies and take necessary steps to protect shareholder capital,” the ministry said.

One regulatory reform that may emerge from the MMG and Mobily affairs, some analysts believe, is clarification of which part of the government is responsible for supervising auditors.

At present the Ministry of Commerce supervises chartered accountants while the Saudi Organisation for Certified Public Accountants, a private body, develops and reviews auditing standards. Some securities analysts believe such authority should be consolidated under the CMA to avoid any 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, 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 furor over corporate 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. (Editing by Andrew Torchia)

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