The Investment Dar Wins Lawsuit (Administrative Court) Against Central Bank of Kuwait for Non Approval of Financials

The 1 January 2010 edition of AlQabas carries the news that TID has won a lawsuit in the Administrative Court against the CBB for its refusal to approve TID's 31 December 2008 financials.  The Court  abrogated the CBK's decision to refuse to approve TID's  financials and awarded provisional compensation KD 5,001 (US$ 17,500).  The competence of the court to hear the case was challenged by one of the parties (unstated, but presumably the CBK.) and this matter was referred to the Circuit Court  (?) #10 who are expected to review the matter on 28 January 2010.

Most of the article - roughly three-quarters - consists of a letter that TID says it sent the Central Bank on 14 July 2009 (and which appears to be part of the  documentary evidence submitted for the case).  The letter states that the financials were fully prepared and signed by both auditors, though the auditors stated that they were unable to give an opinion (in accountant-speak a "disclaimer of an opinion").   TID argues that the auditors had no issues with the company's assets, did not find any violations of law, etc.  and so the disclaimer does not mean there are any of these sort of problems.  TID states (in the letter) that CBK asked for the removal of the disclaimer.  TID pointed out that the auditors had the "first and last" word on their opinion and that the company could not compel the auditors to make a change and that to do so would be to violate Kuwaiti law.  The letter ends with a statement that CBK's refusal is causing serious damage to TID and its shareholders.

Some reactions to the news story:

Global Investment House released its financials on 26 April 2009.  These contain an audit disclaimer.  If the disclaimer in TID's report is broadly similar to that in GIH's, it is hard to understand why the CBK would approve GIH's financials but hold TID's.   Unless there were other serious factors involved.  The alternative explanation - that the CBK is engaged in a vendetta against TID -  doesn't seem credible to me.

As a side comment, GIH's audit opinion is dated 3 February.  The release date suggests that the CBK required roughly three months to content itself with GIH's financials.  

What might those factors be?  And what might be some signs? 

1. GIH's financials were submitted fairly quickly to the CBK.  The presumption is shortly after the auditors signed off on them - 3 February 2009 - and GIH's board approved them.  TID's took a bit longer.   TID explained this as the need for "additional reporting requirements" in April 2009. 
   
2. At the request of creditors, the CBK appointed a special monitor at TID.  It did not at GIH.
3. As a result of negotiations with creditors, TID appointed a Chief Restructuring Officer.  Creditors at GIH did not require this.  The two creditor groups are not exactly the same so this may reflect their different composition.   Or there may be another reason. 
   
4. TID's restructuring agreement - as described by AlQabas - contains strong statements about increasing transparency and strengthening corporate governance.   There is also what might be a telling condition:  All asset sales to be undertaken on a sound basis (sahih), legally done, at market prices and not to related parties.  Without direct knowledge of the negotiations between TID and its creditors it's not possible to know what motivated this requirement.  One might infer that a provision of this sort is designed to prevent the recurrence of an event.  Then again creditors often impose "silly"  or "belt and braces" conditions given the dynamics of restructurings.
5. Similarly, the restructuring agreement gives the creditors' committee power over the company's financial statements - that is, creditors have the right of approval over financials.  Again there is no way of knowing for certain why this was included.  One might infer that this reflects some creditor concern about the quality/integrity of the financials.  And then again it might simply be creditor "overkill" in imposing conditions.
   
6. Finally that same report said that TID was submitting its financials to the CBK for approval.  It may be that with progress in the restructuring negotiations the auditors were willing to remove their disclaimer (no opinion).  Or perhaps there were some changes to the contents of the report.  As outsiders it is difficult to know.  However, auditors are generally reluctant to stick their necks out.  And in difficult situations like a restructuring, their natural caution increases. I would expect that until the definitive legal documentation for the restructuring were signed by all parties, the auditors would be cautious about issuing a "clean" audit opinion.  One compromise could be a "matter of emphasis" opinion - in which they put their concerns into a note to the financials.
   

It seems to me that there is more to the delay than just the auditors' disclaimer.  I don't have the impression that the CBK is capricious or vindictive.   It would seem to have some questions or concerns about TID's financial position.  But we will have to wait to see what happens when TID's financials are released.