His Highness the Amir Receives the President of SAB AlRaqaba Magazine issued annually by the State Audit Bureau of Kuwait Issue No. 20 December 2024
AlRaqaba Magazine, a specialized audit and accounting magazine issued periodically by the State Audit Bureau of Kuwait, is pleased to open the call for professionals from all peer SAIs to contribute to the different sections of the magazine. Focusing on the fields of audit, accounting, finance, and law, AlRaqaba Magazine has a diverse range of sections, e.g., Legislations, Audit and Financial Standards, Audit Perspective, Environmental Audit, Audit and Computers, Research Papers, Studies, and Articles. The submitted contributions, whether a research paper, article, or study, shall be published successively upon meeting the following requirements: • Adds value and insight to the knowledge of readers. • Adheres to academic writing rules and standards. • Follows academic citation rules. • Has not been previously published elsewhere. • After being published in AlRaqaba Magazine, the submitted paper, article, or study shall not be published on another platform except with a prior permission from the editor-in-chief. • Has to be 2 – 6 A4 pages. When submitting contributions, it is preferable to attach relevant pictures, a personal photo, and a brief bio about the writer. The participants whose contributions are published will be granted special rewards upon approval of the committee in charge of the postpublication assessment of AlRaqaba Magazine. CALL FOR CONTRIBUTION! All contributions shall be sent via email to: magazine@sab.gov.kw AlRaqaba Magazine is available on SAB Website: www.sab.gov.kw
ALRAQABA . ISSUE 20 1 Editorial Chief Editor Dr. Saud Ghassab Al-Zamanan Since its establishment in 1964 and until 2024, the presidency of the State Audit Bureau has been succeeded by the best of Kuwait’s men, who have exerted precious and invaluable efforts to maintain the independence of SAB, promote its work, and establish effective rules for financial control. Mr. Esam Salem Al-Roomi is considered SAB’s protégé, who has progressed in various posts. He started his journey from an auditor to the president of SAB. This is a message from the political leadership to the Kuwaiti society stating that SAB is rich in its technical and administrative cadres. We congratulate His Excellency Mr. Esam Al-Roomi for assuming SAB presidency and gaining the confidence of His Highness the Amir of Kuwait, Sheikh Meshal Al-Ahmad Al-Jaber Al-Sabah. This confidence coincided with the historical speech of His Highness, which included sincere implications, illuminations, and noble directives about adhering to national constants and values towards a future roadmap of reform and the safeguarding of public properties. The appointment of H.E Esam Al-Roomi to head SAB comes in a new era that needs concerted efforts to combat corruption, safeguard public funds, and ensure their efficient and effective use, preservation, and sustainability. This effort is also necessary to push the wheel of development, align with the vision of the State of Kuwait for 2035, and move toward a prosperous and sustainable future. SAB plays an essential role in the accountability guaranteed by the Constitution of the State of Kuwait and SAB Establishment Law No. 30 of 1964, which established its high independence when exercising its competencies. This necessitates the need for the Bureau to keep pace with the latest developments and improve the supervisory performance to achieve the aspirations of Kuwaiti society as a whole, under the high directives of the political leadership to verify the efficiency of government administration in accordance with the terms of reference of the Bureau, and its establishment Law. Therefore, we are in a new stage, themain features of which are the continuous professional development in accordance with the powers of the Bureau, whether in pre-audit or post-audit, a comprehensive reform of the applied administrative systems, and the establishment of appropriate rules and information systems for the continuity of the Bureau as an effective tool to enhance financial management and preserve public funds. A New Era Has Begun
2 ALRAQABA . ISSUE 20 A New Era Has Begun 01 Editorial 04 SAB News Criminal Liability of a Legal Person 09 Legislations SAB Organizes “ Internal Audit Leadership and Sustainability ” Forum 14 Feature Article IFRS 18 Presentation and Disclosure in Financial Statements Application of INTOSAI P-12 Principle (on the Value and Benefits of Supreme Audit Institutions) in the Chamber of Accounts’ Activities 19 25 Audit and Financial Standards Combating Fraud, Corruption, and Money Laundering, and the Role of Oversight Bodies in their Reduction 31 Audit Perspective Sovereign Credit Rating: Role and Importance for State’s Economy Role of Auditing and Contract Management in Risk Mitigation 37 42 Articles The Future of Auditing: Key to Sustain Auditing in the Age of Artificial Intelligence Safeguarding Critical Infrastructure: A Deep Dive into Cybersecurity Audits in the Oil and Gas Sector 45 50 Audit and Computers Financial Inclusion Book 54 Featured Book SAB Participates in INTOSAI WGSDG KSDIs’s Fifth Meeting 57 Audit Institutions & Organizations AlRaqaba Magazine issued by the State Audit Bureau of Kuwait Chief Editor Dr. Saud Al-Zamanan Deputy Editor Hala Al-Shmaimri Editorial Board Members Hebah Al-Awadi Mohammed Al-Merri Ebrahim Bo Kobar Aisha Al-Kandari Mohammed Al-Mejady Dalal Al-Kandari Dr. Meshari Al-Ebrahim Editorial Secretary Fatma Al-Nasser Design Media and Information Center Department at SAB Translation Mariam Al-Nahedh Menira N. Boarki Sumayah Karam Yaqoub Al-Wazzan Zahra Al-Qattan Sarah Al-Aqeel Sarah Al-Musawi Correspondence Editor’s Name AlRaqaba Magazine State Audit Bureau P.O.Box 17 Shamia Kuwait 71661 Tel. +965-24957000 Ext. 7960 Direct: +965-24957960 Fax: +965-24957062 magazine@sab.gov.kw www.sab.gov.kw
ALRAQABA . ISSUE 20 3 28 17 34 48 Feature Article SAB Organizes “ Internal Audit .. Leadership and Sustainability ” Forum Audit and Financial Standards Application of INTOSAI P-12 Principle (on the Value and Benefits of Supreme Audit Institutions) in the Chamber of Accounts’ Activities Audit Perspective Combating Fraud, Corruption, and Money Laundering, and the Role of Oversight Bodies in their Reduction Audit & Computers The Future of Auditing: Key to Sustain Auditing in the Age of Artificial Intelligence Presented at a virtual seminar hosted by the Supreme Audit Institution (SAI) of Thailand
4 ALRAQABA . ISSUE 20 His Highness the Amir Receives the President of SAB SAB News His Highness the Amir Sheikh Meshal Al-Ahmad Al-Jaber Al Sabah, may Allah protect him, received at Bayan Palace on Tuesday, May 28th, 2024, His Highness the Prime Minister Sheikh Ahmad Abdullah Al-Ahmad Al-Sabah, where he presented to His Highness the President of the State Audit Bureau, Mr. Esam Al-Roomi on the occasion of his appointment to his new position. The President of SAB was sworn in before the Council of Ministers in preparation for assuming his new duties. A decree was issued appointing Mr. Esam Salem Al-Roomi as the head of SAB. Article 1 of Decree 37/2024 stipulates “Esam Salem Abdul Wahab Al-Roomi shall be appointed head of the State Audit Bureau.” It should be noted that the President of SAB, Esam Al-Roomi, holds a degree in Accounting from Kuwait University. He worked in the Ministry of Finance – General Budget Affairs from 1988 to 1999. He then moved to SAB as an Auditor in the Ministries and Government Departments Audit Sector from 2000 to 2005. After that, Al-Roomi obtained the position of Controller in said Sector from 2005 to 2008. Then, he became its Director from 2008 to 2020. He was then appointed Assistant Undersecretary for the Ministries and Government Departments Audit Sector from 2020 to 2023.
ALRAQABA . ISSUE 20 5 On Monday 28th of October 2024, His Highness the Amir of Kuwait, Sheikh Meshal Al-Ahmad AlJaber Al-Sabah, may Allah protect him, met the President of the State Audit Bureau, Mr. Esam Al-Roomi. Mr. Al-Roomi submitted the annual report of the State Audit Bureau on the findings of the conducted examination and review of the final accounts and budget implementation of entities subject to SAB’s control (FY 2023-2024). His Highness the Crown Prince, Sheikh Sabah Khaled Al-Hamad Al-Sabah met the President of the State Audit Bureau, who submitted a copy of the annual report to H.H. Al-Roomi also submitted copies of the report to the Prime Minister, Sheikh Ahmad Abdullah AlAhmad Al-Sabah. SAB News The Emir Receives the Annual Report of the State Audit Bureau from Al-Roomi
6 ALRAQABA . ISSUE 20 SAB News The Information, Public Relations, and Information Center Department organized an outreach seminar on the role of the Insurance Regulatory Unit (IRU) in regulating, controlling, and supervising the insurance sector. The event took place on Tuesday, June 11, 2024 as part of the Unit’s attempts to promote its supervisory role in the insurance market in Kuwait and put into effect its strategy to spread awareness and insurance culture in the society. The seminar was presented by Mr. Mohammed Al-Otaibi -Head of IRU; Mr. Abdullah Al-Sinan -Deputy Head of IRU; Mr. Osama Al-Soraya -Director of the Corporate Communication Department; Mr. Sulaiman Al-Aqaili -Director of the Regulatory and Licensing Department; Mr. Ahmed Al-Yassin -Principal Researcher in the Legal Affairs Department, and Ms. Hind AlKhuzam -Senior Specialist in the Supervision and Control Department. During the seminar, IRU’s representatives presented an overview of the establishment of the Unit, and a rundown of its objectives. The objectives mentioned included the regulation and control of the activities within the insurance industry in a fair, transparent, and competitive manner. They also discussed the development of insurance activities and their tools as per the best international practices to protect customers and the implementation of policies SAB Organizes Awareness Seminar in Collaboration with IRU
ALRAQABA . ISSUE 20 7 SAB News that guarantee justice and transparency. The speakers addressed ways to prevent conflict of interest and ensure compliance with laws and regulations related to the insurance business. In addition, the Unit demonstrated its aims to raise public awareness of insurance activities, their advantages, risks, and associated obligations. They further specified and encouraged means for their development. The seminar discussed several topics, such as the unit’s role and achievements in controlling and developing insurance activities. Moreover, the Unit’s various departments were introduced, mainly the Legal Department, Supervision and Licensing Department, and Regulation and Licensing Department. During the seminar, IRU+, which is the central system of the Insurance Regulatory Unit, was mentioned. The IRU+ is a system that targets the implementation of the concept of Supervision Technology (Suptech). It focuses on developing ways to process and resolve complaints and enhance the detection of violations. In addition to other objectives, advantages, and quality services, the system prioritizes establishing of a service structure that enables the provision of electronic services in an integrated institutional manner. Furthermore, the seminar addressed the initiative to unify insurance policies for civil liability arising from traffic accidents (compulsory vehicle insurance) or (thirdparty liability). This policy aims to regulate subscriptions by sending notifications through various electronic sale channels, and to clearly define the principles for claim settlement. It specifies the methods and means of reimbursement, amortization ratios, conditions of recourse, and the basis for compensation due. The policy also targets enhancing the efficiency of the payment of compensation for accidents in light of the rise in the prices of vehicles and spare parts, as well as wages. Likewise, it aims to provide better insurance benefits and more comprehensive coverage for the benefit of the insured and other parties. In conclusion, Dr. Saud Al-Zamanan -Acting Assistant Undersecretary of the Administrative and Financial Affairs and Information Technology Department, paid tribute to Mr. Mohammed Al-Otaibi -Head of IRU, and his team for their efforts in presenting the seminar.
8 ALRAQABA . ISSUE 20 SAB Organizes an Outreach Seminar on ENVIRONMENTAL SUSTAINABILITY The Information, Public Relations and Information Center Department organized an outreach lecture titled “Environmental Sustainability” on Wednesday, April 24, 2024, in the presence of SAB’s Acting President, Yousef Al-Mazroi. The seminar was presented in collaboration with the Environment Public Authority (EPA) and the participation of SAB’s Sustainable Development Team. The Head of the Projects Section at EPA, Ms. Munira Al-Wuhaib, and Principal Auditor at the Performance Audit Department at SAB, Mr. Talal Al-Wuhaib, both presented the seminar. The presentation included the first environmental audit report developed by SAB, “Environmental Audit to Assess Possible Effects on Marine Environment”. Other relevant reports that tackle matters of environment and sustainable development from 2002-2003 were disseminated. The seminar also reviewed performance audit reports on Sustainable Development Goals related to the environment from 2018 to 2023. 40 reports of which, were issued in light of the performance audit methodology as they discuss how the environmental audit works. SAB News
ALRAQABA . ISSUE 20 9 Legislations Nouf Fahad Al-Azmi Assistant Auditor, Legal Affairs Department Criminal Liability of a Legal Person With the emergence of life, the development of the world, and the evolution of humankind in all aspects, especially economic ones, the notion of a juridical or a legal person has materialized. This concept revolves around a group of persons or funds presented under a unified name and objective. A juridical person enjoys the legal personality and financial autonomy of the persons who have founded it. Today, the modern perception of juridical or legal personality has distinctively flourished in the age of capitalism due to its profound economic significance on society and economics. In the nineteenth century, economic markets bloomed, and companies robustly emerged as a result of the industrial revolution. Therefore, it became necessary to regulate the legal situation and manage the approach by which such entities are operated. Commercial corporations are among the most significant forms of these legal entities. As a matter of fact, a legal person’s liability is attributed to corporate crimes.
10 ALRAQABA . ISSUE 20 Among prominent and early examples are the collapse of the South Sea Company from 1719 to 1721 and the financial devastation caused by the dissemination of corruption and inland trade. Furthermore, more instances include accounting scandals in Enron and WorldCom, the United States, financial fraud in Parmalat, Italy, and corruption in Siemens, Germany. These cases are vivid examples of the overall scale and consequences of corporate crimes in the past decade and the immediate impact they had on stakeholders and markets. In liberal societies, especially in a free market system, the autonomy to conduct business without state intervention is crucial. However, the issues mentioned above require an adequate response from society and its legal systems. The prevailing culture back in the days suggested that civil liability only stems from corporate members and corporate bodies and the action of their subordinates with regard to the affiliated jobs. Given that the latter is but a legal entity, an immediate liability on the company is unconceivable, except that of a natural person. Thereafter, legal systems were developed, making immediate liability plausible for legal persons. Initially, these systems were limited to civil liability. However, with time, it has been supplemented by criminal liability. It is noteworthy that all arguments contradicting notions of this liability are unwelcomed at the present time. One of the most significant arguments called for by the opposite view is the argument that juridical persons are deprived of will and perception. Principle of Criminal Liability Before discussing the legal liability of a juristic person, we must address the basis or structure of such liability. The grounds for a person’s criminal liability is a fault. The rule stipulates that there shall be no liability without a fault, and there shall be no fault without aptitude. Criminal liability is based on a person’s willingness to commit a fault, whether intentionally or otherwise, while being aware of all its elements. The law defines this notion as the moral element or mens rea. The basis of a criminal personality is the moral element, which is the essence of criminalization, particularly when its anatomy is a material element. Mens rea can be defined as the psychologic constituent of a crime, which includes its psychological elements. Its foundations are knowledge and intent. Criminal liability, based on the foregoing, can only be applicable when a fault (whether intentional or otherwise) takes place. As long as the fault is found, liability shall also be found. A fault is conceivable when committed by a natural person because s/he is personally held accountable for her/his particular act and conduct. When a fault is affiliated with a distinctive person, then it is undoubtedly realistic. Nevertheless, it is not the case with a legal or juridical person. The conventional norm of criminal liability is that of a personal fault, therefore, it is inconceivable in the case of a legal person, for it has no actual will to be expressed. Comparatively, it can be said that the intention of a legal person is attributed to its representatives due to its subordination to a natural person, thus contradicting the Principle of Personality of Punishment. Anchored in the conventional grounds of personal fault, neither intention nor knowledge are to be attributed to a legal person. Applying such grounds is thereby considered inconceivable when it comes to criminal liability, as such liability is based on personal fault. The counter-response to this situation is to Legislations
ALRAQABA . ISSUE 20 11 adopt a policy that recognizes the immediate liability of a legal person. This policy is also known as a modern standard followed in legal systems. According to the contemporary opinion, the intention of a legal person exists and is expressed by its human representatives. However, this representation does not mean that the intention of a moral person is affiliated with a natural person; it is rather the result of it. This norm however does not insinuate that the liability is joint between both parties. Instead, it is an independent liability as long as it is under the name or account of the legal person. The Stance of the Legislators in Kuwait The legislation authority in Kuwait issued Law 2/2023 amending Code 31/1970 to modify provisions of the Penal Code 16/1960, which recognizes the criminal liability of a private legal person. Circulated as a response to the UN Convention against Corruption, this law is known to be one of the most significant legislations issued lately. Although its promulgation has been behind time compared to the neighboring countries, it is still considered a commendable step. With this law, not only did legislators in Kuwait regulate criminal liability, but also address this matter with a number of distinctive laws, namely: First: The Law of Capital Markets Authority (CMA): in this law, the legislator recognizes the legal person’s liability and addresses it in the provisions, specifically in the definition of persons: natural and juridical. Nevertheless, the CMA Law prescribes the criminal sanctions on a legal person such as imprisonment which is inconceivable. There has not been a clear distinction in the penalties imposed on legal and natural persons, which is deemed to be impractical. The question that imposes itself here is, how can imprisonment be enforced as a penalty on a juridical person? Under these circumstances, the judge is obliged to impose a fine on the legal person while penalize the natural person with imprisonment. In this instance, there is a contradiction to the Principle of Judicial Exclusivity. The law imposed an equal amount of fine for both persons which deviates from the Proportionality of Punishment principle, particularly since financial solvency of a legal person differs from that of a natural person. Second: Anti-Money Laundering and CounterTerrorism Financing Law: This law is an excellent example of how legislators avoided past mistakes. Its Article 32 stipulates: “Without prejudice to the criminal liability of a natural person, any legal person who is involved in money laundering or in financing terrorism shall be imposed to a fine. The minimum limit of this fine is KD 50,000 and KD 1,000,000 as a maximum limit, or an equivalent amount to the money associated with the criminal act in question (or whichever is higher). A legal person may be penalized with either a permanent or temporary prohibition from specific commercial activities, either directly or indirectly, for a minimum of five years. The legal person’s offices used in perpetrating the crimes shall also be (either permanently or temporarily) shut down. The business of the legal person in question may be penalized by liquidation or by appointing an official receiver to manage the funds. A relevant judicial decision shall be published in the Official Gazette.” Legislations
12 ALRAQABA . ISSUE 20 The Law 106 /2013 on Money Laundering and Terrorist Financing is one of the most robust laws in explaining the liability of a legal person and the difference between the penalties estimated for the legal and natural persons. The law specified the adequate amount of fine along with the complementary penalties for the legal person. Not only that, the law also prescribed the penalty according to the solvency of the person. This means that the fine is dissimilar based on the legal liability of the person, whether it is legal or natural. The Law 106/2013 is considered one of the best in the Kuwaiti legislation in addressing the criminal liability of the legal person. That is before the issuance of the most recent Law 2/2023 amending Law 31/1970. It modifies several provisions within the Penal Code issued by Law 16/1960, in which the legislator explicitly recognizes the criminal liability of the private legal person. The legislator prescribed articles by which penalties that commensurate with the private legal person were introduced, especially in crime acts relevant to corruption. In Law 2/2016 on the Establishment of the General Authority for Combating Corruption, the legislators itemize the following in Article 22: The criminal liability of a private legal person in the following acts of crime: First: Embezzlement of public funds as stipulated in Law 1/1993 on Safeguarding public funds. Second: Bribery and influence peddling as stipulated in Law 31\1970 amending provisions of the Penal Code 16/1960. Third: The acts of crime described in Law 106/2013 on combating money laundering and financing terrorism. Fourth: Forgery and falsification stipulated in Law 16/1960 promulgating the Penal Code. Fifth: Acts of crime related to the course of justice as stipulated in Law 16/1960 promulgating the Penal Code. Sixth: Illicit gains stipulated in the previously mentioned law. Seventh: Customs evasion as stipulated in Law 10/2003 on the Unified Customs Law in the GCC countries. Eighth: Tax evasion as stipulated in Decree 3/1955 regarding Kuwait income tax. Ninth: Obstructing the functions of the General Authority for Combating Corruption, putting pressure to obstruct it from its duties, interfering in its competencies, or refraining from providing the required information stipulated in this law. Tenth: Acts of crimes stipulated in Law 10/2007 on protecting competition. Eleventh: Acts of crimes stipulated in Law 25/1996 on the disclosure of commissions provided in the State’s contracts. Twelfth: Any other acts viewed in other laws as corruption crimes. Penalties In accordance with Law 2/2023, the Kuwaiti legislator penalizes the legal person with double the fine prescribed for any of the aforementioned corruption crimes. Complementary Penalties The legislator has enacted complementary penalties that are appropriate to the nature of the legal person. Namely, depriving it, whether directly or indirectly, from practicing all or some of its activities for no more than three years. Legislations
ALRAQABA . ISSUE 20 13 The penalties include permanent or temporary exclusion from contracting with government agencies for a minimum of three years and shutting down its offices that were used in committing the acts of crime. Furthermore, the legislator enforced the penalty of liquidating the business of the legal person in question and appointing an official receiver to manage the funds. Mandatory and Complementary Penalty The legislator stipulates publicization as a mandatory and supplementary penalty. That is when a final judgment of conviction is issued, it is to be publicized in the Official Gazette. The legislator also imposed a penalty on private legal persons in the case of submitting false data or when concealing information or documents related to corruption crimes. The penalty in this case shall be a fine of a minimum limit of KD 20,000 and a maximum of KD 100,000. Legislations Scientific Research: • Prof. Dr. Mishari Khalifa Al-Aifan, Dr. Hussain Jumaa Bu Ariki: Corporate Criminal Liability from a Comparative Perspective, Journal of Law - Kuwait University - Issue 4 - December 2022. Laws • Law No. (2) of 2023 amending Law No. (31) of 1970 amending some provisions of the Penal Code issued by Law No. (16) of 1960. • Law No. (7) of 2010 regarding the establishment of the Capital Markets Authority and the regulation of securities activity. • Law No. (106) of 2013 regarding Money Laundering and Financing Terrorism. • Law No. (2) of 2016 regarding the Establishment of the Kuwait Anti-Corruption Authority (Nazaha) and the Provisions on Financial Disclosure.
14 ALRAQABA . ISSUE 20 SAB Organizes “ Internal Audit ... Leadership and Sustainability ” Forum The Internal Audit Department at SAB organized a forum under the slogan “Internal Audit ... Leadership and Sustainability” in conjunction with the Internal Audit Awareness Month in May each year. The Forum was held in SAB premises on Wednesday, May 29, 2024, in response to the Institute of Internal Auditors (IIA) invitation to celebrate this occasion and raise awareness of the internal audit profession. The forum discussed modern practices in the internal audit profession, viability to achieve efficiency in internal audits using artificial Editorial Secretary intelligence, and ways to create an effective system to integrate internal audit and control with risk management. Government agencies and private sector entities were invited to share their experiences in this regard. The slogan “Internal Audit ... Leadership and Sustainability”, symbolizes the importance of internal audit and its role in improving the work of entities, correcting deviations, and supporting said entities. Through audit procedures, entities are assisted to improve the effectiveness and efficiency of their professional and administrative processes helping them commit Article Feature
ALRAQABA . ISSUE 20 15 to integrity, accountability, transparency, and in making relevant recommendations. The forum included a panel discussion in which speakers in the field of internal audit actively participated. Among the presenters were Director of Internal Audit & Enterprise Risk Management at PwC, Husam Samara; Vice President of the Kuwait Internal Auditors Association, Walid Al-Saeed; Executive partner at the office of TGS Al-Essa and Partners, a legal auditor, Abdullah Al-Essa; Executive Director of Risk Consulting at Deloitte Consulting, Fadi Berjawi; Head of the Internal Audit Team of the Petrochemical Industry Unit at the Kuwait Petroleum Corporation, Fatima AlAli, and the Middle East Risk Services Officer at Al-Bazie & Partners, Rami Wadie. SAB was represented by Raheel Al-Marai - Auditor at the Internal Audit Department. It should be noted that SAB established the Internal Audit Department in 2017. It is an independent audit department that reports directly to the President of SAB and has full and unlimited audit powers. The goal of establishing the Internal Audit Department is to tighten control over financial and administrative actions, and to make relevant recommendations to present SAB’s outputs with utmost efficiency. The Department also developed an annual plan that includes oversight tasks to examine SAB’s jobs. It carries out its functions based on the international standards for internal auditing. It verifies the procedures carried out by SAB sectors, provided that they are in line with evidence, decisions, and circulars. Al-Mazroi: Consolidating Governance Principles and Etablishing Preventive Control Mechanism During his speech at the opening of the forum, the Undersecretary of SAB, Mr. Yousef Al-Mazroi, stressed the importance of consolidating the principles of governance and contributing to the development of preventive control mechanisms. That is to contribute in predicting upcoming events and develop proactive methods and necessary means to confront issues. Al-Mazroi added that many variables, at all levels, have resulted in economic effects, which require cooperation to address them. SAB is keen to develop prospects for cooperation with the entities under its control to help regularize financial and accounting work. Article Feature
16 ALRAQABA . ISSUE 20 Al-Hassan: The Forum Aims to Raise the Efficiency of Auditing Director of the Internal Audit Department, Dr. Adnan AlHassan, said that the “Leadership and Sustainability” Forum aims to raise the efficiency of internal auditing in SAB and its auditees. He emphasized the importance of exchanging experiences between internal audit offices and government agencies as well as between the public and private sectors. Al-Hassan pointed out that SAB has trained more than 300 internal auditors in government entities. He added that about 35 trainers were qualified at a government level to raise the efficiency of relevant parties and train internal auditors to carry out their tasks. Al-Saif: Leadership is the Forefront.. and Sustainability is Continuity Acting Controller of the Internal Audit Department, Eman Al-Saif, explained that the forum’s slogan symbolizes leadership in the sense that internal audit as a profession is at the forefront for achieving success and the ability to innovate. As for sustainability, it is in the sense of the continuity of internal audit and the use of its best tools and professional practices to improve the outputs of the audit work. She also pointed out that SAB is keen to hold forums and conferences to dissiminate knowledge and focus on the development of human resources. Such events have clear, effective and tangible contributions stemming from SAB’s belief in its social responsibility. Article Feature
ALRAQABA . ISSUE 20 17 The most prominent recommendations of the Internal Audit Forum 1. The use of artificial intelligence in the audit process truly helps the internal auditor. However, the risks associated with it must be considered and assessed. 2. Entities should be aware of the security challenges specifically related to the uses of AI and try to address them to ensure safe and effective use of this technology. 3. Improving the control environment is the most essential role of the internal auditor, and he/she must use all available resources to achieve this goal. 4. Auditors must consider a risk-based internal audit methodology that will guide the audit plan in directions that increase the efficiency and quality of the internal audit report. 5. Emphasize the use of modern technologies to develop internal audit methods. 6. Continuous communication between the Internal Audit Department and the Information Technology Department to find appropriate programs based on artificial intelligence. 7. Select modern automated systems that help the Internal Audit Department utilize its potential while increasing the training of human cadres. 8. Develop internal control systems to prevent fraud and manipulation, and maintain such systems regularly to ensure their efficiency. 9. Determine a margin of risk to have a realistic benchmark that helps internal audit departments develop plans accordingly. 10. Dissemination of best practices for internal audit by international institutions and conferences held in forums and websites to facilitate their adoption by internal audit bodies. 11. Establish a risk depar tment in the entities of which structure does not include. 12. Cooperation between the public and private sectors to exchange and organize ideas and information related to internal control. This is achievable through training courses designed to exchange experiences between both sectors. Article Feature
18 ALRAQABA . ISSUE 20 Speakers at the Forum: Waleed Abdulmohsen Al-Saeed Vice President of Kuwait Internal Auditors Association Abdullah Marwan Al-Essa Executive Partner at TGS AlEssa & Partners, Legal Auditor Fadi Berjawi Executive Director, Risk Consulting Raheel Adnan Al-Marai Internal Auditor at the State Audit Bureau Husam Samara Director of Internal Audit & Enterprise Risk Management at PwC Rami Wadie Partner – Risk Advisory – Risk Service Officer, Middle East Fatima Hashem Al-Ali Internal Audit Team Leader – PIC Unit Article Feature
ALRAQABA . ISSUE 20 19 IFRS 18 Presentation and Disclosure in Financial Statements Due to globalization and international convergence, the financial business environment has drastically evolved. Such change has posed a challenge for the International Accounting Standards Board (IASB), generating the need to improve and develop international financial reporting standards that ensure greater transparency, accountability, and efficiency. IASB believes that this step is imperative owing to the fact that the IAS 1 Presentation of Financial Statements has failed to meet the demands of financial statement users. As you may be aware, this standard does not include specific requirements for financial statements, particularly income statements, to classify all items of income and expenses of a reporting period into distinct groups or categories (e.g., operating, financing, and investing) to better communicate an entity’s financial performance. The introduction of such requirements is deemed necessary to ensure efficient presentation and classification of line items in the primary financial statements and to help provide quality information for the users. Thus, the presentation of income statements under IAS 1 is deemed less efficient than intended, as it has undermined the role of the income statement in providing a useful, structured summary of an entity’s performance as well as its income and expenses. Dr. Saud Ghassab Al-Zamanan Director of Training and International Relations Department Financial Standards Audit &
20 ALRAQABA . ISSUE 20 To that end, IFRS 18 was issued by IASB in April 2024 and will be effective as of January 2027. This new standard will supersede the IAS 1 Presentation of Financial Statements. Main factors leading to the issuance of IFRS 18: • Current reporting practices lack consistency and are considerably diverse, as different methods are used to calculate operating profits. In a study of 100 companies, the IASB found that 63 companies reported operating profit figures using different calculation methods with at least nine different definitions. • Comparability across entities under current practice is challenging due to the diversity of methods used to calculate operating profits in income statements. • The main concept behind introducing this new standard is to help users have a better understanding of an entity’s income statement as well as to enhance its comparability with other entities. IFRS 18 is intended to improve the quality of financial reporting by introducing improvements with a focus on three main areas: Improvements Introduced by IFRS 18 Enhanced requirements for classification and the presentation of new subtotals in income statements Disclosures on Management-defined Performance Measures (MPMs) to ensure transparency Enhanced requirements for aggregation, disaggregation, and presentation to provide quality information 1 2 3 (1) Enhanced requirements for classification and the presentation of new subtotals in income statements: IFRS 18 introduces enhanced requirements for the classification of line items in the statement of profit and loss (income statement), as well as requirements for new subtotals to be presented to improve comparability and financial analysis. It requires classifying items of the income statement into three new categories, like those used in the statement of cash flows, namely: • Category 1: Operating • Category 2: Investing • Category 3: Financing Audit F F in inaa annnc ce ia&l i Standdards Auddiit &
ALRAQABA . ISSUE 20 21 In response to the needs of investors and financial statement users, the income statement will be presented differently under IFRS 18 to provide more transparent and quality information. New mandatory subtotals shall be presented on the face of the income statement, i.e., 1. Operating profit. 2. Profit before financing and income tax. Under IFRS 18, the income statement will be structured as follows: Cost of goods sold Other operating income Gross profit Selling expenses Research and development expenses General and administrative expenses Other operating expenses Operating profit Share of profit from associates and joint ventures Other investment income Profit before financing and income tax Interest expense on borrowings and lease liabilities Interest expense on pension liabilities Profit before tax Income tax expense Profit for the year Operating Category Investing Category Financing Category • The above line items clarify what is classified in each of the three categories and do not necessarily indicate the line items that an entity would present in its statements. An entity would present line items that help provide a useful, structured summary of its income and expenses. Financial Standards Audit &
22 ALRAQABA . ISSUE 20 (2) Disclosure of Management-defined Performance Measures (MPMs): IFRS 18 places a strong emphasis on the need to disclose Management-defined Performance Measures (MPMs). Such disclosures would enable entities to provide useful information that helps users of financial statements have a better understanding of the following: a) Management-defined Performance Measures (MPMs), e.g.: • Adjusted profit or loss. • Adjusted operating profit. • Adjusted earnings before interest, tax, depreciation, and amortization (Adjusted EBITDA). b) IFRS-specified Performance Measures, e.g.: • Operating profit. • Operating profit before depreciation, amortization, and specified impairments. c) Other measures that are not subtotals of income/expenses (Non-MPMs): • Free cash flow. • Return on equity. • Net debt. d) Non-financial performance measures (Non-MPMs): • Number of subscribers. • Customer satisfaction score. With respect to MPMs, the following requirements should be considered: • The measures used shall present useful information for investors and require a high level of transparency and objectivity. • A statement that the MPM reflects the management’s view of the entity’s financial performance as a whole and is not necessarily comparable to the measures used by other entities. • An explanation of why MPMs are used and how they are calculated. • A reconciliation between the MPM and the IFRS-specified subtotal, including the income tax effect and the effect on non-controlling interests for each reconciliation item. • An explanation of any new changes, e.g., changes to how measures are calculated or any newly introduced MPM. What is an MPM? A total or subtotal of income and expenses Used in public communications outside of the financial statements Reflects management’s view of an entity’s financial performance Financial Standards Audit &
ALRAQABA . ISSUE 20 23 Requirements for Aggregation and Disaggregation Roles of primary financial statements and notes Aggregation and disaggregation principles Disclosing specific expenses by nature Requirements for line items, including goodwill in the statement of financial position Presenting operating expenses by nature or function (it is permissible to use both options combined) Aggregating line items and using meaningful labels General Requirements Specific Requirements (3) Enhanced requirements for aggregation, disaggregation, and presentation: The IFRS Conceptual Framework for Financial Reporting focuses on terms relating to the aggregation, disaggregation, and presentation of items in financial statements. The term Aggregation refers to the process of combining or adding together elements of a financial statement that share similar characteristics and grouping them in the same category. Classification, on the other hand, is the sorting of assets, liabilities, equity, income, or expenses based on shared characteristics for purposes of presentation and disclosure. The term Presentation refers to the basis, considerations, and general requirements for presenting and reflecting information in financial statements in terms of its format or content. Therefore, IFRS 18 introduces enhanced improvements in the area of aggregation, disaggregation, and presentation of information in financial statements. It also provides specific guidance on whether to include information in the primary financial statements or in the notes. It is worth noting that the statements and the information presented within shall provide a useful structured summary and help realize the following benefits: • Obtaining a clear overview and a better understanding of an entity’s assets, liabilities, equity, income, expenses, and cash flows. • Making comparisons across entities and reporting periods. • Deciding on which items or areas users may wish to seek additional information about in the notes. Financial Standards Audit &
24 ALRAQABA . ISSUE 20 In addition, the notes to the financial statements shall realize the following: • Providing further information necessary to understand items included in the primary financial statements. • Supplementing primary financial statements with other information that helps achieve the objectives of financial statements. As we reach the end of this article, I hope I have given a clear brief on IFRS 18. I firmly encourage my colleagues to take due professional care by carefully reading this new standard to ensure a better understanding of its requirements in preparation for its application. Wishing you all the best in your future endeavors. Financial Standards Audit &
ALRAQABA . ISSUE 20 25 Application of INTOSAI P-12 Principle (on the Value and Benefits of Supreme Audit Institutions) in the Chamber of Accounts’ Activities Public sector auditing is carried out by the Supreme Audit Institutions (hereinafter - SAIs). SAI is an important institution that benefits society and makes a difference in the lives of citizens. Public sector auditing has a positive impact on gaining society trust by determining how well public resources are being used. The role of SAIs as auditors over the stewardship of public finances leads to an increase in the demands and expectations of stakeholders, which require said SAIs to set up their activity to meet the highest standards and adapt to the changes that occur. SAIs making difference to the lives of citizens To strengthen the transparency, accountability and integrity of govenrment and public sector entities Being a model organization Demonstrating ongoing relevance to citizens and stakeholders www.azernews.az Vugar Gulmammadov Chairman of the Chamber of Accounts of the Republic of Azerbaijan Financial Standards Audit &
26 ALRAQABA . ISSUE 20 The provision of benefits to society by the Supreme Audit Institutions is ensured by the fulfilment of the three outcomes that are directly related to accountability and transparency. This article deals with the work carried out by the Chamber of Accounts of the Republic of Azerbaijan to achieve these outcomes. First, regarding «Strengthening the transparency, accountability, and integrity of government and public sector entities». Achieving the outcome is measured on the basis of the level of SAI independence, as well as reporting on audits, and monitoring the audit proposals and recommendations implementation. The following can be mentioned as the sample of works carried out in this direction recently and their results: • According to Supreme Audit Institutions Independence Index: 2021 Global Synthesis Report 17 SAIs, including the Chamber of Accounts among 118 countries, had a high level of independence. The report was developed based on the Independence of Supreme Audit Institutions (InSAI) assessment and it includes 10 indicators (legal framework, transparency in the process for appointing the SAI head, financial autonomy, types of audits, operational autonomy, staffing autonomy, audit mandate, audit scope autonomy, access to records and information, right and obligation on audit reporting) • Recently, a significant increase has been observed in the number of information on audit results made to the public. In 2021, 54% of portfolio audits were disclosed, in 2022 this indicator increased to 60%, and in 2023 this number increased to 64%. Our goal is to increase this rate to 70% by 2025 • The annual reports on our activities reflect the overall implementation status of the proposals based on the audit results. In 2022, 163 out of 205 recommendations, and in 2023, 152 out of 214 proposals were fully or partially implemented by audited entities. • 72.2% of entities audited twice and more in 2022 and 69.6 of entities audited twice and more in 2023 have relatively strengthened their financial discipline taking into account the previous proposals and recommendations of the Chamber of Accounts. • To increase the audit impact, the section «Follow-up of Proposals” was created on the institution’s official website in 2024, and it reflects the implementation status of submitted proposals (implemented, partially implemented, etc.). • In terms of measuring the impact of our activities, the misstatements detected during audits have been grouped with a new approach, which reflects the damage to the budget and other financial violations. • Our opinions on participation in the budget process are among the main analytical documents that allow the formation of an image of public finances, having a wide readership. The full text of nine opinions and two reports on the draft budgets and budget implementation of the state budget and extra-budgetary state funds for 2022 and 2023 are available on the official website. for the remainder of 2024, five opinions and two reports were presented to the public. • One of the innovations is posting summaries on our official website, which serves to improve the readability of reports and opinions. Four summaries of opinions and reports were posted on the official website in 2022 and eight in 2023. Financial Standards Audit &
ALRAQABA . ISSUE 20 27 The next outcome is “Demonstrating ongoing relevance to citizens and stakeholders”. As mentioned above, the role of SAIs is to be auditors over the stewardship of public finances, which leads to an increase in the demands and expectations of the stakeholders. In this direction, the following can be noted based on the work done in recent years, as well as their results: • For the first time, the expectations of stakeholders were taken into account in the Strategic Plan of the Chamber of Accounts for 5 years. • Taking advantage of the risk-based audit approach, issues of public importance are also considered during the annual audit planning. National legislation also establishes the right of the President and the Parliament to make additions to the audit plan. Based on the proposal of Members of Parliament (MP), one audit was included in the Work Plan in 2022 and two audits in 2023. • According to the requirements of both international standards and national legislation information on all audit results, as well as annual reports were submitted to the Parliament. The participation of Chamber of Accounts top management in the Committee and Plenary sessions of the Milli Majlis has increased (more than 40 in the last two and a half years), MPs were invited to Board meetings of the Chamber of Accounts once in 2022 and 3 times in 2023 for the discussion of opinions and audit results. • The process of inviting the representatives of the audited entities to the Board meetings was reinstated, and management of the audited entities 3 audits of which were completed in the remaining period of 2024 attended the relevant meeting. • One of the works done to increase the audit impact is the submission of the information and recommendations on audit results to the higher executive bodies for the implementation of measures within their powers. Generally, in 2022-2023, information on 19, and in the first 6 months of 2024, information on 5 audits were sent to the Cabinet of Ministers. The report on the activities of the Cabinet of Ministers for 2022-2023 reflects information on the consideration of the Chamber of Accounts recommendations. • Accountability and transparency in the use of public funds are aimed at ensuring public control and also an effective preventive measure against corruption. Since the beginning of 2022 up to the present, relevant materials on the results of more than 20 control measures have been sent to the Law Enforcement Agencies. • To strengthen cooperation with stakeholders, a Communication Strategy based on a new results-based framework was adopted. This Strategy defines more than 100 targets for 5 SMART goals. The document was sought to be ambitious, an increase of 15-20% on an annual basis was envisaged for most of the targets. In the first half of 2024, the implementation level for about 50% of the annual targets for the year varied from 70% to 100%. • For public participation in the state audit, a sub-section «Propose an audit» was created, as well as a survey on monitoring the stewardship of state finances, including measuring the level of awareness and satisfaction of the activities of the Chamber of Accounts was posted on the official website. Financial Standards Audit &
28 ALRAQABA . ISSUE 20 • To strengthen relations, to organize joint activities for capacity building, to conduct parallel audits with foreign SAIs, Memorandums of understanding have been signed with SAIs of 8 countries, including Turkey, Pakistan, China, Kazakhstan, Korea, Saudi Arabia, United Arab Emirates, and Tajikistan since the beginning of 2022 to date. • Being assessed as a model institution in the field of strategic management, accepting the offer to evaluate the colleague’s performance within the framework of the international project, the Chamber of Accounts has supported the establishment of the Strategic Plan of SAI Tajikistan and conducted the SAI PMF evaluation. • The Chamber of Accounts, together with the delegation of the SAI of Kazakhstan, has audited ASOSAI financial statements for 2021-2023. • The role played by the Supreme Audit Institutions in accountability and transparency makes them the object of various evaluations conducted by international organizations. The «Open Budget Index» prepared by the «International Budget Cooperation» organization measures the transparency of budget processes in countries and the public access to budget information. The last assessment covered 125 countries, including Azerbaijan. In the report, the activity of the Chamber of Accounts was rated as «adequate» with 100 points out of 100 (11 points more than the previous one). The significant rise in our position was influenced by the assessment of our activity by an external partner, as well as the increased participation of the members of the Chamber of Accounts in Parliamentary discussions. • The Chamber of Accounts considers global challenges in its activities. The results of 5 audits carried out by the Chamber of Accounts in the last 2 years have been posted in the INTOSAI Atlas on Sustainable Development Goals (SDGs). Financial Standards Audit &
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