Disclosure and auditing

Shareholders put greater concern on the disclosure policy of the company. Usually, there are two sources available for disclosure such as the regulation of the KSE for listed companies and company law. As mentioned earlier, companies usually disclose information at the general meeting, such as director’s remuneration, shareholder’s register and company’s agenda. According to Article 191/4 and 93, each of the shareholders has the right to receive the balance sheet, profit and loss statements of the year, official gazette and a list of the board of directors.

According to Article 161/11, all listed companies must appoint auditors who will be present at the general meeting and they will audit all the financial statements for the coming years. In order to ensure independence of the auditor, Kuwaiti law strongly prohibits any servant or officer of the company from being an auditor. Apart from this, none of the auditors can be a partner of the company; nor can they be an employee of the company; nor can they offer consultancy services to the company (Article 162). It is the power of the auditor to audit any and all types of books and

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documents, including the financial statement. According to Article 163, auditors will report to the shareholders about the accuracy of the financial statements and reports that have been examined; at the same time, they will also comment on the income statements and balance sheets that have been presented at the general meeting.

Moreover, after auditing the financial statements, the auditor will certify that from the explanation and based on their knowledge the financial statements are fairly presented without material mistake. Auditors will also certify that financial statements possess all types of information that are very essential for the concerned parties, and that they comply with regulatory requirements. The role of auditors is very significant for all concerned parties. The laws do not suggest the board to maintain an external auditor to observe the operation of external auditors. According to Article 164, auditors must report to the shareholders on the following facts:

1. Whether the auditors have got all sorts of cooperation and information to carry on audit independently

2. Whether company maintain proper records of their activities

3. When the book of accounts depicts the real picture of profit loss statement and balance sheet

4. Whether the books of accounts are prepared in accordance with director’s report

5. Any violation of the articles of association or violation of company law 6. Whether there are any fraudulent activities or breach of contract between

Shareholders and auditors.

Generally, the shareholders put greater importance on the audit report and director’s report because these reports contain information regarding company business, future plans, employment and financial position. According to Article 131/4, shareholders must collect all these reports. According to Article 151, shareholders have the right to know about the decisions of board and company. The board members cannot enter into any type of contract with the company without approval of the shareholders. The board will act to protect the interest of the shareholders. The KSE also bound companies to disclose information. Investors receive more and more information because of regulatory requirements. Listed firms must submit any type of statements

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to the KSE on their demand. According to Article 15, the KSE control unit must keep all records of shareholders. According to Law No 2 (1999), the company must report to the KSE regarding those shareholders who have more than five percent share in the company.

4.11 Conclusion

After reviewing the Kuwaiti market, laws and regulations governing the market and some of the corporate governance mechanisms, the following key factors may be concluded:

1 The capital market of Kuwait is not highly liquid and it is dominated by a small number of firms; at the same time trading volume is not significant. The equity market is not well improved. It has thin trading, and noisy stock price. Firms do not maintain a high disclosure policy.

2 In Kuwait, the practice of good corporate governance has not properly developed yet due to lack of dispersed ownership. For example, Kuwaiti companies exhibit very few outside directors, high takeover attempts, equity based incentives for management and an absence of proxy fights.

3 Company law does not suggest the board to maintain an audit committee that will observe the functions of external auditors.

4 The founding members of any company highly control and dominate the corporate world. They influence the decision of management by imposing their representative on the management or on the board. Family members and owners are dominant on the board of any company. According to Al-Shammari (2003), internal information of the company is available to these groups. Omet (2005) reported that family owned private companies control the capital market of Kuwait and few state- owned companies and the total number of large listed companies is very few.

5 The chairman, the CEO and the board members are not well organised. In the majority, the chairman plays the role of CEO.

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Though the market of Kuwait is safe and regulated through certain legislative bodies, they still have not developed a comprehensive structure for the security market. Therefore, no definite regulation can support companies to develop disclosure. Some of the relevant laws are: the new Kuwait Capital Markets Law (KCML), the rules and regulations of the Central Bank of Kuwait (CBK) for banks and investment companies, the Kuwait Commercial Companies Law (CCL) and the listing rules of the Kuwait Stock Exchange (KSE) for listed companies. Thus, the International Monetary Fund (IMF) advised the introduction of a new, distinctive, independent and single law that would regulate the operation of the capital market of Kuwait. This law would develop a regulatory body that would solely supervise the function of the capital market. In order to introduce a capital market authority, the government recently passed Law No. 7 of 2010. The new capital market law works to protect the interest of the minority as well as of the majority shareholders. It compels the listed companies to practise the code of corporate governance. According to the new law of the capital market, the managers of listed companies are bound to disclose their ownership percentage in the company concerned. The capital market authority compiles all the segregate issues of capital market and put it in a unique system.

To sum up, disclosure practice in Kuwait is not developed to the standard international practice and it is still practiced in a scattered manner. The laws usually cover the general concepts of disclosure, which are related to transparency, and accountability of the board to the Kuwaiti Stock Commission (KSC). Moreover, the practice of general concepts cannot ensure the highest standard of disclosure practice. Thus, Kuwaiti companies should follow the practice of the GCC, because they have made tremendous improvement in practising standard forms of corporate governance.

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