The managements of the companies are needed to take into consideration various aspects at the time to conduct the business operations of the companies. Some of these crucial factors are the effective corporate governance structure as well as framework, corporate social responsibilities and financial factors. Corporate governance can be considered as the specific mechanism for governing all the activities of the business organizations (Tricker and Tricker 2015). Corporate Social Responsibility (CSR) is considered as the effort of the companies for improving the society in some specific manner (Schwartz 2017). Earnings management is considered as the process that the managements of the companies use intentionally to influence the process of financial reporting with the aim to obtain some private gains (Ball 2013). The main aim of the report is to conduct a discussion about the above-mentioned there items in respect to a Kuwait Stock Exchange. For this reason, Kuwait Real Estate Company, commonly known as AQARAT, is taken into consideration. This report takes into consideration the analysis of the above aspects in respect to AQARAT.
AQARAT is considered as one of the leading real estate companies in Kuwait. AQARAT was the first company in the real estate sector that was listed in the Kuwait Stock Exchange. AQARAT is also the first company to use the mixed-use retail business model, office and car park, Build-operate-Transfer concept in the real estate business (aqarat.com.kw 2018). The presence of the business of AQARAT can be seen all over Kuwait. In addition, international presence of this company can be seen in Europe and United States where this company is known for their ultra luxurious residential hubs as well as investment units (aqarat.com.kw 2018). AQARAT has two major focuses in their business operations; they are the delivery of superior value to their customers with the help of uniqueness and innovation; and to become a world leader in their business segment with the help to establish and consolidate their presence in the world real estate market (aqarat.com.kw 2018). The mission of the company is to provide leadership that can lead to successful real-estate venture, prosperous commercial properties, residential communities and others. The presence of certain core values can be seen in the business operation of AQARAT; they are integrity, innovation, history, talent, cooperation and community (aqarat.com.kw 2018).
It needs to be mentioned that real estate industry has been a major contributor of the non-oil economy of Kuwait. In the year of 2014, both the real estate and construction industry contributed to 10.6 percent to the gross domestic product (GDP) of the country (oxfordbusinessgroup.com 2018). There are certain factors like the price of oils and others have major impact on the growth of the real estate industry of Kuwait. At the same time, certain factors have positive impact on the growth of the real estate and construction industry of Kuwait; they are strong macroeconomic fundamentals of the country, high per capital GDP, stable rate of inflation, recent budget surpluses worth ten billion dollars and others (oxfordbusinessgroup.com 2018). The government of Kuwait works through different agencies for ensuring the growth of their real estate industry. In this process, Kuwait Investment Authority (KWI), the Kuwait Credit bank (KCB) and Public Authority for Housing Welfare (PAHW) plays a major role in the development of this industry. The presence of short supply in land in Kuwait is a major dynamic factor for the growth of the real estate industry. All these factors are major drivers in the development of the Kuwait’s real estate industry (oxfordbusinessgroup.com 2018).
According to the management of AQARAT, Corporate Governance can be considered as a set of processes and procedures that help the business organizations in effective direction and control. The structure of corporate governance assist in the specifying the allocation of rights as well as responsibilities among different contributors in the companies like the board of directors, organizational managers, shareholders as well as other stakeholders for the purpose of effective decision-making. In regards to corporate governance, the main aim of the company is the creation of a safe environment for the stakeholders with the help of complying with the laws and regulations, principles of corporate governance and these aspects help the companies in maintaining the integrity as well as honesty at the time to deal with the other companies and third parties (Ball 2013).
The main aim of the board of directors of AQARAT is to safeguard the interest of shareholders, customers and other stakeholders with the help of effective decision and actions. In the process of corporate governance, the directors of AQARAT ensure the implementation of highest standard and best practices for effective governance and internal control. Under the corporate governance structure of AQARAT, the responsibility of the board of directors is the general assembly of shareholders, entrustment with the role to preserve the company interest, development of the business, achievement of the mission, vision of the company and the development of strategies for the long-term growth (Armstrong et al. 2015).
The main characteristic of the formation of the company’s board is its structure that ensures their compliance with the nature and activity of AQARAT and the majority portion of the board of directors’ non-executive members. Under the corporate governance structure of AQARAT, separation can be seen between the positions of their Chairman with the Chief Executive Officer so that there is not any negative impact on the independence of this decisions. Sufficient number of members can be seen in the board of AQARAT with the aim to form relevant committees (aqarat.com.kw 2018). The main committees of AQARAT are Nomination and Remuneration Committee, Audit Committee and Risk Committee. The corporate governance of AQARAT ensures that each of this committee has charters and provisions that define their work scope, responsibilities, powers and duties. There are eight members in AQARAT’s board and General Assembly of the company elected them for three years. Diversity can be seen among the members of the board in terms of expertise, knowledge and qualification (aqarat.com.kw 2018).
AQARAT has defined the tasks and responsibilities of the Board that includes approval of policies, issue of budgets, supervision of the company, review of financial performance, review of the company’s compliance with the regulated standards and regulations and many others. The corporate governance structure of AQARAT includes the strategies and policies of the company for respecting the rights of the shareholders. In addition, AQARAT has ensured the disclosure as well as transparency of all of their operations in the most accurate and timely manner (Edmans 2014).
The above discussion indicates towards the fact that AQARAT has their own structure for corporate governance that has some effective characteristics. First, the company has formed the Board of Directors that consists of people from diverse background of expertise and knowledge (aqarat.com.kw 2018). This aspect is majorly helpful in maintaining transparency, integrity and honesty in the works of the directors. After that, there is not any clash of duties of the directors as the company specified certain roles and responsibilities of the directors. In addition, the presence of regulations can also be seen for maintaining the rights of the shareholders. All these aspects indicate towards the fact that AQARAT has a good corporate governance structure (aqarat.com.kw 2018).
AQARAT has contributed towards the sustainable development of the society and the community. In addition, major contribution of the company can be seen for the reduction of unemployment along with the optimal utilization of the available resources (Servaes and Tamayo 2013). In the year 2016, AQARAT has contributed towards the sustainability development in the following manner:
In the accounting and financial activities of the companies, the managements of the companies have many items or options for managing earnings; and this aspect is also applicable for AQARAT as the management of the company can use specific items for earnings management. They are discussed below:
Changes in the Assumptions of Accounting Standards: The most common option for the companies to involve in the process of earnings management is to change the assumptions used in the accounting standards; and the management of AQARAT can do the same to engage in earnings management; and the flexibility in the accounting standards of International Financial Reporting Standards (IFRS) provides the scope to the managements for this (Gao 2013). At the same time, it is difficult from the outsiders like investors and other stakeholders to view these changes in the accounting assumptions for manipulating the earnings. For this reason, the management of the company can easily get away with these manipulative changes; and they can also justify the changes by showing them as the requirements for the industry standards. For example, the managers of AQARAT can adjust the depreciable lives of some of the assets on periodical basis and can show them as per the industry requirement (Kothari, Mizik and Roychowdhury 2015). It will help them in maintaining the increase in revenue intact.
Transactions Management: The management of AQARAT an engage in earnings management from through managing specific transactions. The management can accelerate the process of revenue recognition just prior to the year ending; and these last minutes sales are genuine sales in some cases (Ali and Zhang 2015). However, this can also be the attempt of the management for getting the inventory off company’s financial statements so that they can be looked like revenue, even in the absence of the consent of the buying firm to buy the additional quantities. This attempt of revenue recognition is considered as ‘channel loading’. As per the result of the above-mentioned process, the management of AQARAT will be able in showing large increase in receivable for sales (Badolato, Donelson and Ege 2014).
Consideration of Large One-Time Charges: The management of AQARAT can also engage in earnings management by breaking down certain large one time charges. Under this specific process, the management of AQARAT has the option to show down the recognition process of top down revenue of their business and it will help the company in showing their in good position (Wongsunwai 2013). Apart from this, the management of AQARAT also has the option for the reduction of some of the restructuring charges associated with certain business acquisitions as it will help the company to increase the income for the particular year. These are the major items that the management of AQARAT can use with the aim to engage in the process of earnings management (Kim and Sohn 2013).
Conclusion
The above discussion indicates towards the fact that AQARAT is one of the leading companies operating in the real estate industry of Kuwait. The success and failure of the real estate industry of AQARAT depends on certain aspects like oil prices, macroeconomic fundamentals, inflation rate, annual budget and others. It can also be seen from the above discussion that AQARAT has an effective corporate governance structure where the roles, actions and responsibilities of the directors are mentioned in accurate basis. The above discussion also indicates towards the fact that AQARAT committed to their corporate social responsibilities with the help of major financial contributions, donations and aids. According to the above discussion, the management of AQARAT has certain options for engaging into the process of earnings management; such as changes in accounting assumptions, transaction management, break-down of some large onetime expenses and others.
References
Ali, A. and Zhang, W., 2015. CEO tenure and earnings management. Journal of Accounting and Economics, 59(1), pp.60-79.
Aqarat.com.kw. (2018). Kuwait Real Estate Company | AQARAT. [online] Available at: https://aqarat.com.kw/about-us-company-profile.html [Accessed 28 Nov. 2018].
Aqarat.com.kw., 2018. Annual Report 2016. [online] Available at: https://aqarat.com.kw/pdf/2016/English/Annual%20Report-2016.pdf [Accessed 28 Nov. 2018].
Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17.
Badolato, P.G., Donelson, D.C. and Ege, M., 2014. Audit committee financial expertise and earnings management: The role of status. Journal of Accounting and Economics, 58(2-3), pp.208-230.
Ball, R., 2013. Accounting informs investors and earnings management is rife: Two questionable beliefs. Accounting Horizons, 27(4), pp.847-853.
Edmans, A., 2014. Blockholders and corporate governance. Annu. Rev. Financ. Econ., 6(1), pp.23-50.
Gao, P., 2013. A measurement approach to conservatism and earnings management. Journal of Accounting and Economics, 55(2-3), pp.251-268.
Kim, J.B. and Sohn, B.C., 2013. Real earnings management and cost of capital. Journal of Accounting and Public Policy, 32(6), pp.518-543.
Kothari, S.P., Mizik, N. and Roychowdhury, S., 2015. Managing for the moment: The role of earnings management via real activities versus accruals in SEO valuation. The Accounting Review, 91(2), pp.559-586.
Oxford Business Group., 2018. Kuwait’s real estate market remains healthy and records price increases. [online] Available at: https://oxfordbusinessgroup.com/overview/confidence-building-property-markets-have-remained-healthy-recording-price-increases-some-segments [Accessed 28 Nov. 2018].
Schwartz, M.S., 2017. Corporate social responsibility. Routledge.
Servaes, H. and Tamayo, A., 2013. The impact of corporate social responsibility on firm value: The role of customer awareness. Management science, 59(5), pp.1045-1061.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Wongsunwai, W., 2013. The effect of external monitoring on accrual?based and real earnings management: evidence from venture?backed initial public offerings. Contemporary Accounting Research, 30(1), pp.296-324.
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