GCC Needs Transparent Auditing Standards

The most recent World Economic Forum Global Competitiveness report listed the GCC as one of the best regions to do business. All the six countries were in the top 40, an accolade not even Western Europe can claim. However, not all variables are consistently high. For ‘Strength of auditing and [financial] reporting standards’ Qatar ranks fourth out of 144 nations, while Kuwait is down in 60th place. The UAE is doing comparatively well, at 28th, but there is room for improvement. It might be tempting to simply reflect that the region is in a strong position, but the GCC faces possible unique challenges in the future that will make audit and financial information far more important.

Audit and economic development

The GCC is currently seeing a period of sustained economic growth but falling oil prices are demonstrating the urgency of economic diversification, according to the latest ICAEW Economic Insight report. GCC countries have long recognised the need to develop non-oil sectors of the economy and attract businesses and inward investment. High quality, trustworthy financial information will be vital, especially for current or aspiring financial services hubs such as the UAE, Saudi Arabia, Bahrain and Qatar. The quality of financial information will become more important than ever, especially in the event that a shock to oil revenues moves the region to become more reliant on other areas of the economy.

Underpinning business confidence

Transparent and dependable financial information is what underpins confidence in businesses and markets. This is why ICAEW has signed an agreement with the GCC Accounting and Auditing Organization (GCCAAO) to help create an Audit Quality Monitoring Programme across the GCC. This agreement will see a Gulf Monitoring Unit (GMU) set up by GCCAAO – advised by ICAEW – to monitor audit quality in each country. The GMU will report to the national regulatory body in each GCC country. It is the first time that a project of this size has been tried anywhere in the world.

High quality audit is fundamental for any economy because it provides an independent verification that the underlying numbers are trustworthy. This means shareholders, investors, clients, customers and business partners can have confidence when doing business. Knowing auditors in each country are subject to exactly the same checks and balances means this confidence can continue across both different countries and markets. The new unit will both assess quality and identify where improvements are needed; vital for regulators who need to enforce standards. In this way the quality of audit can be enhanced right across the GCC.

Entities of all sizes

It is not just international trading companies that rely on audit quality, small and medium sized companies (SMEs) also require quality financial operating standards.SMEs make up a huge proportion of GCC businesses – typically over 90 per cent in most countries, perhaps higher in Bahrain and Oman. However, they often face tremendous barriers to doing business and the one most often cited is access to finance. In the UAE just four per cent of bank loans go to SMEs, and the rejection rate can be 75 per cent.

In June this year, HSBC announced it was scaling back SME lending to focus on (more profitable) larger international clients. Many SMEs are service businesses, meaning they cannot offer assets to banks as surety, and they are typically asked to present three years of audited financial statements to the bank. Audit is therefore important for companies of all sizes, meaning an increased role for slightly smaller audit firms. Moreover, independent auditors are able to offer valuable advice to businesses. This sort of information and services, from reputable firms belonging to international networks, can be invaluable for smaller firms that wish to expand or begin trading internationally. It is telling that the World Bank lists ‘strengthening financial infrastructure’ including audit and accounting standards a key area for creating a business environment enabling SMEs.

Safeguarding confidence

High quality audit is vital to thriving economies and hence it is very positive that the GCC will soon have a programme in place to monitor and enhance audit quality across the region. But this is just one facet of the benefits audit and accountancy can bring to business in the Middle East. As more companies look to grow or trade overseas, there will be increased demand for trusted audit and accountancy services below the level of the large listed firms.