Oil and gas-rich Qatar is one of the fastest-growing economies in the world, reporting GDP growth of more than 14% in 2011. Since the turn of the century, though, the country has taken steps to diversify its interests and has established a successful financial services sector in Doha, known as the Qatar Financial Centre (QFC).
The relative newness of Qatar’s financial services industry means that the regulatory system around it has also been created almost from scratch. The Qatar Financial Centre Regulatory Authority (QFCRA) was established in March 2005 and was tasked with building a principles-based regulatory and financial reporting regime that is aligned with best practice internationally. “We began almost with a blank piece of paper,” says Ewald Müller, director, financial analysis at QFCRA. “We haven’t entirely thrown out the old, but it has been an interesting journey.”
QFCRA’s objectives include the ‘maintenance of efficiency, transparency, integrity and confidence in the QFC, as well as the maintenance of financial stability and reduction of systematic risk’. Effective risk reporting is an essential element of that objective, but is something that is relatively new to companies based in Qatar.
“The prevalence of risk reporting has increased across the Middle East in the past few years, but there is a lack of a broad understanding of risk reporting, a lack of skills around risk reporting, and a lack of understanding among users about what risk reports are meant to convey,” says Mr Müller. “The wish not to share information is definitely a constraint. Not everyone wants to be the first to take the leap. In the Middle East in general, a lot of information is marked as unavailable but I think that may change.”
In many developed countries, the global financial crisis has been a catalyst for a more focused conversation about the value of risk reporting. One of the difficulties for those hoping to encourage better risk reporting in Qatar, though, was that the impact of the crisis was not felt as keenly in that country. “The extent of cross-border investment activity, with the exception of sovereign funds, is small and as a country Qatar is very cash-rich so there is not a strong demand for external funding , with the result that we were very well shielded from the major impact,” says Mr Müller. “It’s true to say that there is not the momentum for better risk reporting in Qatar that there is elsewhere.”
One of the benefits of starting with a blank piece of paper is that the QFCRA has been able to focus on what it sees as the essentials of good risk reporting and for Mr Müller, that means brevity. “The extent of disclosure around risk in Qatar is fairly limited when compared to the UK, US, Australia and other developed markets,” he says. “Risk reporting has maybe gone too far in some regions, in terms of the amount of disclosure. In Qatar a lot of what we’ve focused on in terms of risk reporting has come from the IMF’s financial stability indicators, which is not a vast set of data. It is a very good starting point, in the sense that it reflects the work of the entire world and focuses only on key indicators.”
“The biggest issue for me around risk reporting is quality versus quantity. Internationally, I think there’s so much disclosure that often users can’t see the wood for the trees and risk reports do more to confuse them than they do to help them. You need to be very aware of analysis paralysis – you can provide a huge about of information that users can use for calculation, but what does it mean? As far as I’m concerned, the crux of successful risk reporting is that it tells me what is useful – and materiality plays probably the single biggest role in that. Brevity is the key, and that is driven by materiality.”
Mr Müller has little patience for the argument that risk reporting can mean giving away potentially sensitive information. “Companies often use sensitive information as a useful excuse,” he says. “I don’t think that risk reports provide any sensitive information – if you are interested in a company you should not be surprised by anything by the time the annual report is published.”
Overall, he favours risk reporting that is short, to the point, concentrated on materiality and uses useful graphs rather than detailed text: “My ideal risk report would contain more pictures than words, and should explain what matters to the company, the big issues that could affect it, and explain what the company did right, what it did wrong, and what it changed. It should endeavour to provide the user with the information they need to link past and future performance. Investors are not buying history, they are buying the future, and risk management needs to reflect that.”
He adds that honesty is vital: “If you’ve got something wrong, you should admit it. Investors aren’t stupid.”
So far, says Mr Müller, companies in Qatar have been “very appreciative” of the work of the QFCRA from a prudential perspective and he feels that there is an appetite for better risk reporting. It is his hope that users and preparers will begin to see the value of good risk reporting and that this will create a positive momentum. “Good risk reporting, which is linked to transparency, is a cornerstone to good governance, that has been well proven; poorly governed companies do not perform as well,” he says. “If risk reporting becomes a habit, it will create value. The problem is that the flipside is easier to prove - those who do not report risk well probably have something to hide.”
Ewald joined the QFC Regulatory Authority in April 2012 from the South African Institute of Chartered Accountants (SAICA) where, as Senior Executive: Standards, he influenced developments in international standard-setting and South African legislation and regulation. Prior to his position with SAICA, Ewald held senior roles in financial management, regulation, financial analysis and investor relations, primarily in the financial services industry