CMA examines samples of listed firms’ financial statements to assess IAS compliance: Official

Sami Alshorafa, Financial Statements and Auditors General Director at the CMA

The Capital Market Authority (CMA) takes samples of the financial statements of listed companies annually to evaluate their compliance with the certified international accounting standards (IAS) issued by the Saudi Organization for Chartered and Professional Accountants (SOCPA).

The market regulator examines several items in these statements, based on its commitment to enhance transparency, disclosure and investor protection, Financial Statements and Auditors General Director, Sami Mohammad Alshorafa, told Argaam.

The CMA also studies the notes included in auditor reports, and investigates the complaints and reports submitted to it with respect to the listed companies’ financials.

The market regulator will release a report in the next few days to provide an overview of the key remarks and deficiency aspects that must be improved, based on the studies and examination it conducted. This report is expected to be the focus of all financial statement issuers, the auditors of the establishments supervised by the CMA, audit committees, investors and other stakeholders showing intertest in enhancing the quality of financial statements.

Alshorafa added that this report aims to raise the awareness of those responsible for or participating in the issuance of financial statements about the aspects of deficiency in these financials and stress necessary compliance with SOCPA’s certified IAS.

He also underlined the significance of promoting the role of preparing and auditing financial statements to ensure their quality by all parties.

Here’s the full interview with Sami Alshorafa:

Q. Stock market participants ask about the monitoring of listed companies’ financial statements. What is the role the CMA plays with respect to these financials, in detail?

A: The CMA periodically monitors the financial statements of listed companies and studies the notes stated in auditors’ reports to ensure corporate compliance with the certified IAS. It also investigates the complaints and reports submitted to it with respect to the listed companies’ financials, and takes the necessary measures. Further, the market regulator periodically takes samples of the listed firms’ financial statements to assess their compliance with IAS issued by SOCPA through examining several items in these statements.

The CMA also takes an annual sample from the audit bureaus registered therein to ensure compliance by these bureaus and other certified chartered accountants with the establishment auditor registration rules, subject to its supervision.

Several articles and sections in the Companies Law, the Capital Market Law and the related executive regulations, pointed to the necessary compliance with the accounting and auditing rules approved by SOCPA, when preparing and auditing the financial statements of listed firms. These articles also provided the penalties imposed in case of fraud or creating manipulative impressions about financial statements.

The listed companies are required to prepare, examine and audit their interim and annual financial statements, according to the accounting and auditing standards approved by the SOCPA.

Q. Will the CMA announce remarks about this sample of financial statements? Can you give us more insight into the results of this process?

A. Yes, the CMA will soon issue a report including its key remarks about disclosure of financial statements. The market regulator initially studied and examined a sample of financial statements for 53 listed companies, or 26% of total listed firms, in 2020 and 2021. The market capitalization of the sample firms reached SAR 330 billion, compared to the combined market cap of all listed firms, which stand at SAR 10 trillion.

Through this report, the CMA aims to provide an overview of the key remarks and aspects of deficiency that should be improved, based on its study.

Q. Why was this sample taken specifically?

A.  We periodically follow up the statements of listed companies and study auditors’ notes. We also investigate complaints and reports. For the sample under study, the CMA selects and uses this sample for a risk-based methodology, according with the best international practices in stock markets to serve investor interest and help the market stabilize. It is worth noting that the CMA changes this sample on an annual basis.

Q: Were the abovementioned remarks sent to the respective companies? What are the actions taken by these companies to correct their status?

A: Yes, the CMA sends remarks to direct the parties involved in preparing the financial statements. In addition, some companies are working to correct the accounting treatments and disclosures in the financial statements as per the CMA remarks.

If the company or its management does not comply with the relevant laws or regulations, the necessary actions are taken in accordance with the authority's regulations.

Q: What  actions are taken against the companies to whom remarks were sent?

A: The actions vary depending on the nature and impact of remarks on corporate financial statements, and the relevant companies are followed up to ensure that they correct their status in order to take the necessary actions as per the CMA regulations.

Q: If a sample of companies faces problems, doesn't this mean that other companies in the market also suffer? Does not this also mean that the CMA-registered accounting offices do not perform their assigned role?

A: The report does not necessarily show cheating, fraud, or misleading. It includes remarks, most of which are related to non-compliance of some companies with some paragraphs of the 42 IAS standards approved by SOCPA. The report aims to educate those in charge of preparing the financial statements about deficiencies and the most prominent remarks to raise the quality of disclosures in the financial statements.

However, the compliance of companies and their managements, as well as accounting offices in any market with the accounting and auditing standards varies.

Q: Some companies are very late in disclosing their financials within the specified period, or disclose on the last day of that period. What are the actions taken by the authority in this regard?

A: The rules on offer of securities and continuing obligations clarify the statutory periods for disclosing financials, and companies must abide by these periods.

The procedures for suspending listed securities as per the listing rules available on Tadawul website also stipulate the actions taken when companies fail to disclose their financial statements within the specified regulatory deadlines.

Q: Do you think that the regulations followed by the authority currently with regard to listed companies are sufficient to cover all deficiencies companies may face and affect their activity as well as investors?

A: The CMA regulations cover a large number of aspects, and the authority always works on developing its regulations in order to protect investors and improve the sectors under its supervision.

Q: What is the message that the authority wishes to convey via this report?

A: This report is a message from the CMA to all parties involved in preparing and reviewing the financial statements. It also focuses on the importance of the financials quality, to boost confidence in the market and deliver the statements to relevant users and allow them make proper decisions in due time. Further, the report shows the authority’s continuous supervision over financials preparation.

The CMA expects these parties to pay close attention to the quality of financial statements in order to provide the target transparency to investors through compliance with the capital market law and its executive regulations.