SOCPA: Main objective is to apply IFRS by the end of 2016 in Saudi Arabia

Interview with Dr. Ahmad A. Almegames, Secretary General of SOCPA

How do the accounting standards in Saudi Arabia compare to GAAP in the United States or to the International Financial Reporting Standards (IFRS) in Europe? Because Saudi Arabia has Sharia law, how do you then adjust these practices to the local context?

Saudi Arabia has decided to move towards the IFRS and they will be applied in early 2017. All companies trading in the market must apply the IFRS.

The GAAP is based on rules but the IFRS is based on principles. The two systems have major differences. Since the IFRS is now becoming accepted in more than 120 countries, Saudi Arabia has decided to move towards the International Financial Reporting Standards in order to be compatible with other countries worldwide.

When it comes to localising the IFRS, we actually did not find that there was a need to localise the IFRS except in the area of disclosure. More disclosure is required in some specific areas than are required by IFRS, especially when it comes to investments and loans.

We require more disclosure to aid investors to be able to look into which companies are suitable for their investment, loans, or for buying stocks. The IFRS is based on principles; therefore, each country must do interpretation for applying those standards.

What have been the quality procedures that you have put in place in order to improve the quality of auditing?

Doing business has two parts: managing the capital of the companies (management), and the auditors who check that the management have applied the accounting standards and that the financial statements give a true and fair view in conformity with IFRS. If there are any departures from the accounting standards, auditors will issue either an adverse opinion or qualified opinion.

Over the past few years, the regulations and compliance in Saudi Arabia have become stricter. The Capital Markets Authority and the Ministry of Commerce are now supervising companies. Entities that do not follow the standards and laws are punished. Saudi Organization for Certified Public Accountants (SOCPA) approves of the stricter regulations.

How does Saudi Arabia compare to other countries particularly in the MENA region?

The International Federation of Accountants (IFAC) has proclaimed that SOCPA is number one in the region. SOCPA is becoming part of the foundation of the Trustees of the IFRS and is the translator of choice of IFRS into Arabic for the use in the Arab world.

International organizations recognize SOCPA as a professional organisation capable of supervising the accounting profession in Saudi Arabia. This is one of the reasons why we are number one in the Arab region.

What are your plans?

We have many plans. Our main objective is to apply IFRS by the end of 2016. Concurrently, we have a program, which is unique in the region. It is a depository system of financial reporting.

Saudi Arabia is the only country in the Arab region that requires each company to deposit their financial statements or accounting firm’s clients financial statements besides their audit reports through a pilot program called “Qawaem”. The program uses extensible business reporting language (XBRL). This language is being used in other countries such as Great Britain or New Zealand. It is becoming very popular worldwide and Saudi Arabia is the only country in the region that uses the system.

Saudi Arabia is the only country in the Arab region that requires each company to deposit their financial statements or accounting firm’s clients financial statements besides their audit reports through a pilot program called “Qawaem”.

The benefits of the program are numerous: companies, investors, banks and governments will have one source of information. In the past the decision maker had many sources of information; there used to be specific financial statements for the banks, another for the tax authorities, another for another organisation etc. but now there is only one source of information.

With the electronic method, we can do a lot of analysis, view financial ratios and the most important benefit is that we will have only one unique financial statements used in the banks, with the tax authorities, by the Ministry of Commerce or by any other organisation.

These financial statements give you a good indication of where the economy is heading by looking at the historical data and projecting into the future. What is happening at the moment with the economy? Are the companies doing well?

SOCPA is ensuring that the auditors are performing their duties responsibly and correctly and that they are using the auditing standards to make sure that the financial statements are prepared according to the IFRS.

From the published financial statements, I opine that that that the economy is very strong. Many companies have accumulated retained earnings that are not being used and will help to propel the economy in the future. Once the depository system has been running for a few years, we can look at the trends and forecast the economy.

What is the difference between the Sharjah law and IFRS?

IFRS is a way of recording business activities and disclosures. Accountants record all economic transactions, they do not opine if the transaction is in accordance or not in accordance with Sharjah principles. CPAs provide information to the final users of the financial statements: investors and other stakeholders. The information will be used in decision-making process for the users. The will decide if the information violates some of their beliefs.

For example, if I am interested in the environment and I see a company that has published in their financial statements that they are not adopted measures to protect the environment, by looking at these numbers and this information I may decide not to invest or do business with this company.

This is what we are looking for. In Saudi Arabia, our mission is to oblige companies to disclose more information about transactions and present them in the financial statements.

When it comes to Shariah law, it normally concerns loans (interest) and source of income. Shariah is not actually driving us; we are just objectively informing stakeholders about the details of the transaction.

For example how about prohibition on interest rates?

For example if a company has taken a loan from X bank, they will describe and present the transaction as follows “we have taken a loan from X bank”. The investors or partners have available information, presented and reported in the financial statements so they can make an educated decision.

Tell us about the organisation itself. Tell us about the size of SOCPA and the level of Saudi compliance.

SOCPA was established in 1992. We have two types of membership, full membership for people who have passed our fellowship exams and have received a certificate; there are around 600 full members and they are working with the CBAs, banks, private companies or the government.

SOCPA was established in 1992. We have two types of membership, full membership for people who have passed our fellowship exams and have received a certificate; there are around 600 full members and they are working with the CBAs, banks, private companies or the government.

The others are associate members who apply for our membership and have a Bachelor’s degree in accounting or business and there are more than 3000 members. We are satisfied with compliance and that companies are following our accounting standards.

We are pleased with our auditors. Our goal is to develop them further, increase responsibilities for the auditor’s report and to stress independence. We have about 250 certified accountants.

How many companies are required to have their statements audited?

It is required by law that limited liability companies and traded companies like public companies be audited. They are around 25,000 companies.

What are some other measures to improve the reputation of the profession?

The extensible business reporting language depository system will improve the quality of auditing in Saudi Arabia. It would also help us to draft new laws and regulations.

With the new system and cooperation between the banks, tax authorities and the Ministry of Commerce, we will know just how many financial statements have been audited and who the auditors were.

At the same time, the system will allow us to know how long the auditor has worked with each company. This information will facilitate more procedures and regulations to increase the number of auditors and the quality of the auditors.