INTOSAI Working Group on the Audit of Privatisation

The Role and Responsibility of the State as Minority Shareholder in Privatised Businesses

PAPER FOR THE SIXTH MEETING
WARSAW, 5 and 6 OCTOBER 1999

From the General Auditing Bureau of the
Kingdom of Saudi Arabia

Introduction:

In conformity with paragraph (4) of article (9) of its Statutes, the General Auditing Bureau carries out audits on each private enterprise or company with a state's capital share contribution in accordance with a special arrangement prepared by GAB and issued by a Cabinet resolution to specify the scope of audit according to the nature of its activities and to the extent of its financial relationship with GAB in a way as not to disrupt its activities.

The abovementioned arrangement was issued by the Cabinet resolution No. 390 dated 18-4-1398 H. that included in its first five articles GAB's approach in auditing the accounts of private enterprises and companies in which the state has capital shares, as well as the scope of this auditing which is proportional to the percentage of the state's share (either more than 25% or less) as the following:

Article 1: GAB shall audit the accounts of private enterprises and companies in which the state has capital shares or for which it guarantees a minimum profit. GAB's audits shall be executed according to the established commercial principles and within the scope of the provisions organizing the activities of such enterprises and companies. The audits shall be specifically carried out according to the prescribed manner contained in these regulations.
Article 2: GAB's audit on private enterprises and companies in which the state's capital share is more than 25% aims at establishing a conviction that such enterprises and companies consistently apply the financial and accounting rules and regulations that govern their activities, and that their financial actions are devoid of any contradictions to such rules and regulations.

In order to achieve the abovementioned objectives, GAB shall exercise the right to execute the following tasks:

1 - To examine the final accounts and the balance sheet to ensure that they contain the necessary information required to be shown, and that they truly show the net profits or losses, or the surplus / deficit of revenues against expenditures for each fiscal year, and the actual financial position of the audited enterprise or company.
2 - To review the auditors reports on the final accounts and balance sheet, consider their relevant reservations to ensure the validity of their justifications, if any, and to follow up actions ought to be taken.
3 - To review financial books and registers and to audit documents to the extent deemed necessary by GAB.
4 - To examine the efficiency of the management to make sure of the proper use of funds for the predetermined purposes, and to establish a conviction that the enterprise or company applies adequate modern systems of internal control including control over warehouses. The Board of Directors of the enterprise or company should present the comments raised by GAB to the shareholders ordinary General Assembly. GAB shall submit an annual report on the results of its audit of accounts and evaluation of performance of the auditees to the Prime Minister, the Minister of Finance and National Economy, the competent minister as well as other entities referred to in this article.
Article 3: All enterprises and companies referred to in the previous article are required to provide GAB with all the necessary clarifications, data and documents to be able to fully carry out its responsibilities. They should provide GAB with:
1 - The Articles of Association, the internal financial and accounting regulations, and the authorities and powers of the Board of Directors and managers with all relevant amendments.
2 - The final account as stipulated in the Articles of Association and the report of the Board of Directors on the activities of the enterprise and its financial position for the ended year at least 25 days before the General Assembly. The auditors shall provide GAB with their audit program and a copy of their report on the final accounts with the detected irregularities at least 15 days before the General Assembly.
Article 4: GAB may send a representative or more to discuss audit findings with the General Assembly. The enterprises or companies referred to above should inform GAB of the date of the General Assembly at least 15 days before its date.
Article 5: As for private enterprises or companies in which the government or public corporations or entities have a share of less than 25%, audits shall be carried out according to their Articles of Association, the provisions of Companies Act and any other relative regulations. These private enterprises or companies shall provide GAB with a full copy of their final accounts and the report of the Board of Directors or the General Director on the activities and the financial position for the ended year within a period of at least 30 days before the General Assembly in order for GAB to provide the state representatives with its remarks on such accounts and reports.

The above detailed arrangement is applied to audits carried out on the accounts of businesses that are currently being privatised as well as the ones to be privatised in the future. GAB believes this arrangement is adequate and sufficient as it increases GAB's responsibilities in proportion to the state's capital share in the privatised business. On the other hand where the state's capital share is decreased, other owners (the Private Sector) will have a greater role in proportion to their bigger share through the shareholders General Assemblies.

Undoubtedly, the gradual role of GAB in the above detailed way is quite adequate considering the following two important aspects:

1 - The amount of the state's capital share in the privatised business;
2 - the degree of flexibility needed by the private sector to carry out its activities in an undisrupted way in case of the state being the minority shareholder.

The General Auditing Bureau believes that there is no need to develop a new legislation or arrangement to organize its relationship with privatised businesses as the existing arrangement is quite sufficient.

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