Title: Financial Reporting Risks

Student Name: Robert Pablo

Hand in Date: 30-06-2016
School: de Haagse Hogeschool
Education: Bedrijfseconomie
School Supervisor: R. Fortuin
Company: Aramco Overseas Company BV
Company Supervisor: T. Zoetbrood
Dissertation Type: Confidential

Authorisation by company supervisor:

Signature: ____________________ Date: ________________________

T. Zoetbrood
Preface
This research focuses on the term financial reporting and the risks a company might face when
undertaking this process. Infamous events regarding this subject was inspiration for this research.
(Enron, WorldCom, etc.) Throughout history, it has been shown that accounting scandals were
the cause for many issues in financial markets. These issues affect the public, since their
decisions are made with information disclosed by companies. This implies the proper execution
of financial reporting is crucial and must be handled delicately. Being grateful does not convey
the right emotion felt when receiving the opportunity to conduct my research at Aramco
Overseas Company B.V. Therefore, I would like to thank T. Zoetbrood for this opportunity. His
knowledge and wisdom has guided me during this process. Furthermore, I would like to thank
my supervisor R. Fortuin for his timely responses, critical feedback and guidance. Without the
help of these key individuals, this research could not be possible.

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Contents
Executive Summary ........................................................................................................................ 5
1 Introduction .................................................................................................................................. 6
1.1 Research Question ................................................................................................................ 6
1.2 Methodology ......................................................................................................................... 7
1.3 Practical Implications............................................................................................................ 7
1.4 Research Design.................................................................................................................... 7
2 Defining Financial Reporting ...................................................................................................... 8
2.1 The Definition and Objective of Financial Reporting .......................................................... 8
2.2 The Development of Financial Reporting............................................................................. 9
2.2.1 History of Financial Reporting ...................................................................................... 9
2.2.2 The ‘RJ’ and IFRS Mission Statement Comparison .................................................... 10
2.3 The Function and Quality Characteristics of Financial Reporting ..................................... 11
2.3.1 The Function ................................................................................................................ 11
2.3.2 The Quality Characteristics.......................................................................................... 11
2.4 The Issues with Financial Reporting................................................................................... 12
2.5 The Risks in Financial Reporting ....................................................................................... 13
2.5.1 People........................................................................................................................... 15
2.5.2 Processes ...................................................................................................................... 16
2.5.3 Systems ........................................................................................................................ 17
2.6 Summary ............................................................................................................................. 17
3 The Role of Management in terms of Reporting ....................................................................... 19
3.1 Executive Management Team and The Board of Directors ................................................ 19
3.2 Management Financial Reporting Responsibilities ............................................................ 19
3.3 Summary ............................................................................................................................. 20
4 Methods Used to Enhance Financial Reporting......................................................................... 22
4.1 The Audit ............................................................................................................................ 22
4.1.1 Internal Auditors .......................................................................................................... 22
4.1.2 External Auditors ......................................................................................................... 22
4.2 IFRS .................................................................................................................................... 23
4.3 Accounting Manual ............................................................................................................. 23
4.4 Summary ............................................................................................................................. 24
5 Financial Reporting at AOC ...................................................................................................... 25
5.1 Decentralisation from Parent-Company ............................................................................. 25

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 5.2 Dual Reporting Standards and Financial Requirements ..................................................... 25
5.3 Mergers and Acquisitions and Consolidation ..................................................................... 26
5.4 Summary ............................................................................................................................. 27
6 Measures Implemented for Reducing Reporting Risks at AOC ................................................ 28
6.1 Accounting Manual ............................................................................................................. 28
6.2 Single Financial Reporting Standard .................................................................................. 29
6.2.1 Internal Team ............................................................................................................... 29
6.2.2 Financial Services Firm ............................................................................................... 30
6.2.3 External Audit Firm ..................................................................................................... 30
6.3 Summary ............................................................................................................................. 30
7 Conclusion and Recommendations ............................................................................................ 32
7.1 Conclusion .......................................................................................................................... 32
7.2 Recommendations ............................................................................................................... 32
Bibliography ................................................................................................................................. 34
Appendices:................................................................................................................................... 36
Appendix 1: Interview 1 ........................................................................................................... 36
Appendix 2: Interview 2 ........................................................................................................... 37
Appendix 3: Interview 3 ........................................................................................................... 38
Appendix 4: Interview 4 ........................................................................................................... 39
Appendix 5: Meeting PWC....................................................................................................... 40
Appendix 6: Meeting EY .......................................................................................................... 41
Appendix 7: AOC Strategy Alignment with Saudi Aramco ..................................................... 42
Appendix 8: Accounting Manual for Financial Reporting (unfinished) ................................... 43
Appendix 9: Thesis Solution Based on the Three Components ............................................... 48

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Executive Summary
Financial reporting is the process of disclosing financial data of a company to the public or
specific entity. The current health of the company is conveyed in the financial statement, which
is used for making economic-decision. To minimise the chances of fraud being committed,
regulatory bodies have implemented rules that management has to comply with. In order to
provide comparability between companies, a general set of standards has been created known as
the International Financial Reporting Standards. (IFRS) Naturally, even with the regulatory
bodies, there are various issues with financial reporting. Aside from fraud, errors might occur
during the process of reporting. At Aramco Overseas Company B.V. (AOC), the process of
financial reporting will also have to take place. The difference in comparison to preceding years
is that, AOC has recently acquired additional shares of the South Korean company S-Oil. The
acquirement of the shares requires AOC to consolidate its figures into a group financial
statement. This refers to the research question chosen, which is ‘how can management reduce its
financial reporting risks’. To properly answer this question, a set of sub questions have been
used. The sub questions divide’s the research into two sections: the theoretical and the empirical
section. The theoretical part consists of research regarding the definition of financial reporting,
the responsibility of management and methods to enhance financial reporting, whereas the
current situation at AOC has been elaborated and compared with the theoretical section. During
the research, the risk in terms of financial reporting has been identified. The risk is the chance of
misstating information on a financial statement. From the research conducted, it has been
established that the financial reporting is currently being done according to the Dutch GAAP
(Statutory Reporting) and IFRS (Parent Company Reporting). To minimise the reporting risk and
to increase the reliability of the financial statements, AOC has opted to switch from the Dutch
GAAP to IFRS. Furthermore, it has been established that in order to make a financial statement,
a company uses three specific resources, namely: People, Processes and Systems. All three
resources have to be working in harmony in order for any operation to be correct, especially
financial reporting. There have been certain situations during the research period, where there
has been a lack of performance regarding the resources. There was no clear understanding in
what the mechanics of each account was. To minimise errors in the financial reporting process,
an accounting manual was created and used to provide insight on how each account works. The
other task was to assist AOC during the making of the financial statements according to IFRS.
The group is being consolidated through its ERM system and is reviewed in order to determine if
everything is up to par. The use of external services is required in order to ensure the validity
financial statement. AOC relied on the services of PWC for the group audit and EY for providing
assistance during the making of the financial statement. Regarding the three resources: Out of
own observation and experience, it is acknowledged that AOC was dependent on EY, which
resulted in high costs for its services. The dependency would decrease if proper education is
provided, which would result in lower costs regarding the EY services. Concerning the
processes, it is clear that there is no standard procedure for the making of the financial statement
at the moment. Although the accounting manual helped with the understanding of the accounts, it
did not describe the process. Coming up with a proper process and recording it in an accounting
manual is recommended. In terms of systems, it has been noted that due to the segregation of
systems, certain issues occurred, which resulted in the delay of operations. Although this had no
actual impact on the financial reporting process, having a stable system would prevent any
mishaps. Applying these changes will ensure the efficiency of the financial reporting process,
which will reduce AOC’s reporting risk in forthcoming events.

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1 Introduction
Aramco Overseas Company B.V. (AOC) is a subsidiary of the Saudi Arabian company: Saudi
Aramco. In short, its main purpose is to connect European suppliers to Saudi Aramco. As a
middleman, AOC buys supplies needed by Saudi Aramco and sells it via its transfer price
system. At the moment, AOC is required to consolidate its figures and report to Saudi Aramco
each quarter according to the IFRS. Next to that, they are also reporting according to the Dutch
GAAP for statutory purposes. AOC recently purchased extra shares of the petroleum and
refinery company S-Oil Corporation, established in South Korea. S-Oil is currently worth 4
billion dollars and generates around sixteen billion dollars’ worth of revenue each year
depending on the oil price. The amount of shares that AOC currently possess is more than 50%,
which means that S-Oil has to be consolidated in the financial statement of the current and
forthcoming years. AOC’s auditor, PWC the Netherlands, must work together with PWC South
Korea (Auditor of S-Oil), in order to determine if the audit that took place was according to
standards. Furthermore, the correctness in the figures is important regarding the signing off on
financial statements. This falls under one of the responsibilities of the management team of
AOC. The signing off of financial statements means, that management will be held accountable
for any misstated information. By consolidating the S-Oil figures, it would mean that AOC’s
financial position will increase considerably. This in turn causes an increase in reporting risks for
AOC. Therefore, information is needed regarding these risks. Aside from that, information
concerning the methods used to mitigate/reduce these risks will also have to be given. In order to
determine the risks and methods, a research has been conducted on the theoretical aspects of
financial reporting and the current situation of AOC regarding financial reporting. The research
is meant to provide further insight on the risks regarding financial reporting and how
management can mitigate these risks. In the following section, the design of this research will be
given. This is done with the use of one research question used to properly define the scope.
Based on this question, a conclusion and recommendations will be provided. The design of the
research is described in the following paragraph.

1.1 Research Question

The research question is as follows:

“From what is mentioned in the motivation, what can management do to reduce/mitigate their
financial reporting risks?”

To find a proper answer, the research question has been divided into several related sub
questions.

Sub question 1:
What is financial reporting?

Sub question 2:
What are the responsibilities of management within a company in terms of financial reporting?

Sub question 3:
How can financial reporting be enhanced?

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Sub question 4:
How is financial reporting currently being done at AOC and what are the risks?

Sub question 5:
What measures are being taken to reduce/mitigate these reporting risks at AOC?

1.2 Methodology
This research is based on qualitative research. Some articles used for the production of this report
are based on quantitative information, but used solely to support certain assumptions made
within those article and papers.

1.3 Practical Implications

The research performed may be useful to AOC and other companies implementing risk
management to their company operations with an emphasis on financial reporting. Providing
proper guidance will aid AOC regarding efficiency and reliability regarding the financial
statements.

1.4 Research Design

The topic of each chapter conveys the answers of each sub question, meaning that the research
will be comprised out of 6 chapters (excluding this chapter) together with the conclusion and
recommendations. With that said, the second chapter is based on the definition of financial
reporting. It provides detailed information on the definition and its importance for the relevant
stakeholders. Aside from that, the problems and risks with financial reporting are also provided.
The roles and responsibilities of management regarding financial reporting are provided in
chapter three. This chapter covers the responsibilities with an emphasis on what management is
required to do in order to reduce the financial reporting risks. The methods that serve as added
value in mitigating/reducing risks are given in chapter four. In chapter five, the current situation
at AOC regarding financial reporting is provided together with the risks they are currently
fronting. The sixth chapter describes the current way AOC is dealing with these risks. To end,
my conclusion and recommendations are expressed in the last chapter of this research.

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2 Defining Financial Reporting
The purpose of this chapter is to provide clarity regarding the definition of financial reporting
together with key factors that involves risk. It is important to understand what financial reporting
is and its function for stakeholders. Firstly, the definition of financial reporting will be given.
Next to that, elaborations on the purpose and how it has developed over the years will be noted.
Furthermore, the problems with financial reporting will be provided. In addition to that, the
different types of standards that are allowed in the Netherlands will be given. At the end, a
proper summary of these topics will be provided.

2.1 The Definition and Objective of Financial Reporting

Business economics can be divided into three categories of operations, namely: Management
Accounting, Financial Accounting and Finance. (Heezen, 2012) In terms of management
accounting, its function is to provide information used for internal decision-making, which
assists in the achievement of the company goals. Financial accounting on the other hand is the
practice of disclosing company information to the public. The disclosed information is based on
past company performances. (Horngren, 2012) Finance can be defined as the science and art of
managing money. (Gitman, 2012) Although each subject plays an important part in each
company, the scope of this research focuses on financial accounting. Typically, when elaborating
on a company’s annual figures, financial reporting is likely the subject of the topic. There are
various interpretations regarding financial reporting regarding its definition. Financial reporting
is the process of disclosing company information to the public with an emphasis on the
company’s financial status. (Epe, 2014) The process involves the annual production of financial
statements regarding the records of the financial activities of a company in a given period. This
in turn will portray the financial status of a company. The information placed in these statements
has to have a sense of relevance to the needs of the stakeholders. (Kieso, 2014) These needs can
be seen as the necessary information needed to make economic-decisions. (William, 2014) This
could be either for providing loans to the company in question or buying the company’s stock.
With that being said, it is determined that the economic-decisions made by relevant stakeholders,
are made in the financial market and are usually binding, which raises the stakeholder’s risk.
This makes the reliability and accountability of the statements quite important, seeing that the
absence of one or both components in the statement could potentially hurt stakeholders operating
in the financial market in terms of their financial status. Next to that, it is required for companies
to publish their financial statement in most countries. This is in compliance with the statutory
and/or tax authorities. From what was just stated, the objective of financial reporting becomes
clear. To support the statements made in defining the objectives of financial reporting above,
here follows the objective statement made by the US Financial Accounting Standards Board
(2010):
‘The objective of general-purpose financial reporting is to provide financial information about
the reporting entity that is useful to existing and potential investors, lenders, and other creditors
in making decisions about providing resources to the entity. These decisions involve buying,
selling, or holding equity or debt instruments and providing or settling loans and other forms of
credit.’
This provides a clear view on the definition of financial reporting and for whom it is meant for in
regards to compliance.

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2.2 The Development of Financial Reporting
In this paragraph, the development of financial reporting is provided. It will cover how the
developments have taken place up until now. Furthermore, a brief comparison is given regarding
the two different bodies responsible for the establishment of the reporting standards available in
the Netherlands by looking at their mission statements. Aside from that, the quality
characteristics that a financial statement should have according to the Dutch regulatory body will
be given. In addition, the issues with financial reporting will be described. And lastly, a summary
made of this chapter to close.

2.2.1 History of Financial Reporting

In the definition of the financial reporting described in the previous paragraph, it was mentioned
that companies are required to report to relevant stakeholders at a point in time during a period.
Back then the term financial reporting did not exist. The first records regarding financial
reporting can be trace back to the ‘Middle Ages’. Luca Pacioli published the first book ever
written regarding the basics for financial accounting in 1494. (Epe, 2014) This is ultimately
linked to financial reporting, since the data recorded in a company’s ledger, is eventually
disclosed in the financial statement. Although Pacioli did not invent these accounting methods,
he was the first to describe these methods in his book, which included methods still used today,
for example: the balance sheet and income statement. Pacioli provided the mechanics for each
method in terms of the registration of financial activities, monthly procedures and year-end
closings. The writing of this book was monumental for business owners since there was no
benchmark available when it came to accounting. Financial reporting rarely took place at that
point in time. The only exception was that merchants were obligated to show records concerning
financial activities to company owners. This was the first form of reporting to relevant
stakeholders. The merchants can be considered as the modern day management of a company,
whereas company owners can be seen as the modern day shareholders. With the passing of time,
things would become more complex due to the creation and development of complex company
structures. One of the first company’s established with a complex structure was the Dutch East
India Company. (Chaudhuri, 2009) Its structure can be closely compared to the Limited Labiality
Company (LLC) known today. It was considered as the first multinational corporation ever
created and was the first company to make company stock available to the public. This made it
crucial for the company to start reporting periodically so they could retain current shareholders
and attract potential new shareholders. An activity that still occurs in today’s financial markets.
With the changes brought to the economy because of the Industrial Revolution (Deane, 2010),
most family owned companies made a quick switch to a LLC type company in order to receive
the benefits presented to them at that point in time, namely; the benefits received in terms of
selling stock. With the current change in events, the importance of financial reporting to relevant
stakeholders became of highest priority and was adopted by most listed companies operating in
that period. Later in 1928, a law was passed in the Netherlands, which stated that listed
companies were obligated to report their financial figures to shareholders at the end of each
period. This logically happened annually, since the yearly measuring of a company’s
performance would provide enough information for proper economic-decisions. At the end of the
19th century, shareholders were uncertain of the accuracy of what was published in the
company’s financial statement. Assurance regarding the reliability of the financial statements
had to be provided. This was needed in order to minimise the risks of the shareholders
concerning its current and potential investments. There was a demand for an independent

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controller type function after the occurrences of several scandals during this period. The most
known scandal in the Netherlands was the infamous story of the African Trade Union. (Epe,
2014) This involved the owner of the company, hiding losses from the public by committing
fraudulent acts that ultimately led to the company’s bankruptcy. Because of various events like
the one just mentioned, it became customary for independent accountants to provide their
opinion regarding what was reported to the public. It became even more important when the tax
authorities implemented the income tax law, which meant that companies had to pay taxes on the
profit they made each year. With the introduction of the tax law, business owners had more
costs, which led to less profit. This led to the integrity of independent accountants being
compromised, from what was seen over the course of years. That is why the establishment of
independent organisations for guidelines concerning the construction of financial statements was
expected. In the Netherlands there are two types of accounting standards allowed for financial
reporting. The following bodies created these, namely:
 The Raad voor de Jaarverslaggeving (RJ) for statutory reporting within the Netherlands;
 And the IFRS (under the guidance of the IASB), which can be used for statutory and
international reporting.

Although these organisations serve the same purposes, they are in certain aspects different from
each other. In the next section follows the comparison of these two bodies.

2.2.2 The ‘RJ’ and IFRS Mission Statement Comparison

The ‘Raad voor de Jaarverslaggeving’ (2010) mission statement:
‘The “RJ” Foundation aims to promote the quality of the external reporting of unlisted companies and
organizations in the Netherlands. This is achieved through the publication of "Guidelines for Annual
Reporting 'and RJ-Expressions and solicited and unsolicited advice to the government and other
regulatory bodies such as the International Accounting Standards Board (IASB) and the European
Financial Reporting Advisory Group. (EFRAG)’ (Raad voor de Jaarverslaggeving, 2015)

The IFRS Foundation (2012) mission statement:

‘Our mission is to develop International Financial Reporting Standards (IFRS) that bring transparency,
accountability and efficiency to financial markets around the world. Our work serves the public interest
by fostering trust, growth and long-term financial stability in the global economy.’ (IFRS Foundation,
2012)

Mission statement comparison:

When looking at both statements, it is clear that the main purpose of the ‘RJ’ is to provide a set
of rules when it comes to domestic/statutory reporting, whereas the IFRS organization provides
reporting standards for companies operating in financial markets. Although these organizations
are different in terms of the requirements for the presentation of the financial statement, there is a
key factor in which the traits are similar. Both organizations strive to provide proper data to the
public. This is of highest importance seeing how the market has developed over the years. From
company scandals to financial crisis, it is safe to say that the market is not what it was during the
era of commencement. For example, if a bank provides a loan to a company based on a
fraudulent financial position or income statement, it could have quite disastrous consequences
for the capital provider and the financial market if the company defaults, seeing that it is highly
likely that the bank’s degree of involvement in the financial market is extensive.

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2.3 The Function and Quality Characteristics of Financial Reporting
This paragraph describes the functionality of financial reporting according to the Dutch
Standards for Reporting and the quality characteristics that is needed to provide proper
information to the public.

2.3.1 The Function

Although the ‘RJ’ and the IFRS might be different in terms of the presentation of the financial
statement components, they ultimately share the same function, namely:
 Accountability function to the capital providers;
 And information function to other stakeholders.

2.3.2 The Quality Characteristics

According to the literature, it is stated that a financial statement needs to meet a certain set of
quality characteristics in order to provide the relevant stakeholders with information they need.
(Hoogendoorn, 2012) The four mentioned by Hoogendoorn (2012) will be elaborated. The
quality characteristics are as followed:
 Understandability;
 Relevance;
 Reliability;
 Comparability.

In the following subparagraphs, detailed information will be provided regarding these qualitative
characteristics and their purpose in terms of serving the purpose of financial reporting.

2.3.2.1 Understandability
Understandability is a quality characteristic used to raise the presentation of the financial
statement to a level where the information disclosed should be comprehendible, assuming that
the user or reader has a business background. To increase the understandability of the
information, it has to be classified characterized and presented clearly and concisely. (Beest,
2009) A financial statement will have no point if a user, even with the proper background, is not
able to understand the information disclosed.

2.3.2.2 Relevance
Naturally when elaborating on the topic of relevance, it is generally referred to the importance of
providing information needed to meet the information necessities of the relevant stakeholders.
Without this characteristic, companies would have the freedom to publish any information in its
best interest. This would most likely include non-relevant information to the public, making it
quite difficult for stakeholders to make economic-decisions in the financial market. (Aerts, 2013)

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2.3.2.3 Reliability
The word reliability is self-explanatory. The user of the financial statement should be able to
trust the information published to the public. If it was possible for the user to go through all the
records of the company in question, then there would be no purpose for financial reporting.
Unfortunately, stakeholders do not have that kind of luxury and are forced to resort to what is
being provided to the public in the financial statements. As seen in the previous paragraph, the
role of the independent accountant plays an important role within this characteristic. (Nor, 2010)

2.3.2.4 Comparability
The information provided should have a sense of comparability. This entails that the information
presented, should permit the user to compare previous data with current ones. Companies
usually report at the end of the year, quarter or month, depending to whom the information is
being provided to. An important aspect of this characteristic is the consistency of the
presentation. For example, in order for lenders to give out loans, they need to give company a
score based on certain merits. This allows the lender to calculate an interest rate. These are
measures taken in order to prevent the risk of lending out money without receiving the planned
return back. Therefore, one of the most interesting components of a financial statement for a
bank is the cash flow, which provides the flow of cash distribution for the company. (Kieso,
2014) This information conveys the payback possibilities of the company. The lender’s decision
will be based on what is stated. Referring back to the consistency aspect, the lender will not
make its decision based on just one year of financial records. That is why it is necessary to also
have financial statements from previous years, in order to have enough comparable data to make
proper decisions in terms of providing financial services to a company.

2.4 The Issues with Financial Reporting

In this paragraph, information will be provided regarding the issues of financial reporting and
why it is so important to use measures to help with these issues. From what has occurred over the
years regarding accounting scandals, the prevention of misstating information has become quite
important. With the development of the accounting language, large companies have become
more cunning in the sense of withholding information from the public. According to Rezaee
(2005), the misstatement of financial reports is an attempt by entities to deceive or mislead
investors and creditors through information in financial statements. The reasons are usually for
personal gain in terms of operating in the financial market or in order to receive compensation
for reaching certain targets, as seen in previous paragraphs. During the development of financial
reporting, ‘creative accounting’ was used quite frequently. The definition of creative accounting
in simple terms, is the adjustment of financial figures to give a desired effect. (Epe, 2014) With
that being said, companies with an unhealthy financial status, still could have positive results due
to adjustment made in their accounting, which would convey positive results in their financial
statement. This is an unethical action to keep shareholders or to gain services from other capital
providers. According to Vanasco, R. (1998):

‘Fraudulent financial statements are of great concern not only to the corporate world, but also
to the accounting profession. Every year the public has witnessed spectacular business failures
reported by the media. These catastrophic events have shocked the public, undermined auditors’
credibility in their reporting function and eroded public confidence in the accounting and
auditing profession. Events such as unreported revenues, manipulation of losses, inflated sales,

12
fraudulent write-offs of uncollectible accounts, unusual related- party transactions,
misappropriation of assets and many other irregularities have spearheaded several court rulings
shaped the auditing standards.’

On the one hand, seeing that if fraud is being committed, it is highly likely that management is
committing it. The motive for this is endless and usually happens because management is forced
to. (Riley, 2010) Some reasons could be for achieving set targets, to have an effect on the stock
exchange or to convey a desired financial position of the company. Other reasons might be to
hide illegal means of generating revenue. On the other hand, there are auditors that are willing to
provide positive auditors’ opinion, in spite of the discoveries made during the audit procedures.
A well-known event that resembles this statement is the infamous Enron scandal. Enron was a
well-known energy producing company and one of the largest companies in its industry in
United States. Because of the company’s highly unethical operating methods, they were forced
to misrepresent their earnings and alter their financial position statements in order to hide
unappealing and to an extent illegal financial records. The company used a specific type of
accounting method and various tactical schemes that made company figures look profitable for
many years. This was published in the financial statements, which satisfied investors and
stimulated the stock exchange share price of the company. The accounting method in question, if
not applied properly, can lead to many complications and repercussions. Unfortunately, the
unthinkable happened, when Enron filed for bankruptcy in 2001. Its auditor at the time, Arthur
Andersen, who was aware of Enron’s accounting history, withheld information and was later
prosecuted for obstruction of justice. Because of the bankruptcy many stakeholders and other
entities were negatively affected. This incident shows that financial reporting, if not done
correctly, can lead to negative effects for stakeholders.

2.5 The Risks in Financial Reporting

From what was mentioned in the previous paragraphs, financial reporting can be seen as a tool
used by external stakeholders. Aside from that, it is also certain that the risk in terms of
disclosing company data has increased, due to the inventive ways created for publishing these
reports over the years. Before jumping into the risks within financial reporting, it is necessary to
understand what risks to company. Uiterlinden, R. (2011) definition of risk is:

‘Risk is the chance of impairment that can occur as a result of external or internal conditions,
which has a negative effect on the result of an organization's’

When looking at this statement, it is clear that risk has an uncertain factor to it, which can have a
negative effect on a company. With a clear definition of risk, it can now be related to financial
reporting. These risks can be divided into two groups: Dynamic and Static risks. Dynamic risks
can result in either profit or loss, whereas Static risks contribute only to negative consequences.
(Marcus, 2012) Therefore, financial reporting shall be placed under the category of static risk. As
already mentioned, due to a change in financial reporting, the risk of a company for producing
misstatements has increased. Misstatements happen as a result of: accounting errors, not
complying with the GAAP, fraud and misrepresentation. Assuming that the company publishing
the statement is of good faith, errors still can occur in accounting procedures. These errors can
happen during two events according to Riley (2010), namely:
 Administration of financial activities;

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  And compilation of the financial statement.

With the current changes happening with the accounting standards used by companies, there are
bound to be errors in the financial statements. These errors if not mended properly, will result in
a misstated information, which will cause various negative events for the company. These could
result in a decrease in stock price, to a decrease in credit rating, to image impairment. It is clear
that this subject can cause serious impairment to the company. According to Alan Melville
(2015), the rules stipulated by the IASB, demands that if the financial statement’s integrity is
compromised due to the results of a misstatement, that the company in question is required to
state the correct figures since the date of discovery. This will not only give a negative image of
the company, but also cause an increase in costs for the restatement. With that being said, the key
risk within financial reporting has been made clear, which is the chance that information is
misstated in the financial statement. According to the Deloitte Development LLC (2010) report,
all of the following situations attribute to an increase in reporting risks:
 Increasingly Complex Business Models;
 Mergers and Acquisitions;
 Globalization;
 Decentralization;
 Third-party Administration;
 Evolving Accounting and Financial Reporting Requirements.

These items can be characterized as issues that a company may face during its operation.
Because these issues are for the most cases inherent (constant), the company is required to tackle
these risk factors, since they are recurring issues and will definitely have implications on the
financial report. When looking at the production of financial reporting, it can be divided into
three components, namely: people, processes and systems. (Deloitte Development LLC, 2010)
Coincidentally, these same components are responsible for carrying out the operations in terms
of resolving the situations mentioned. (inherent risks) These components are therefore seen as a
company’s resources. (Warnier, 2013) This means that if these key components (resources) were
weakened, the company would most likely have to deal with an increase in reporting risks,
whereas if they were strengthened it would reduce reporting risks. Furthermore, it is also
important to realise that these components are variables, meaning that they are interchangeable.
The following table will help illustrate these factors:

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 Figure 2.1

Risk: Level 1 Risk Factors (Inherent Risks) Level 2 Risk Reducing Resources
Complex Business Models
Mergers and Acquisitions
Globalization
People, Processes and Systems
Misstatements Decentralization
Third-party Administration
Evolving Accounting and Financial Requirements
Constant Variable
Source: Made to help illustrate the risks using Excel

In the first column, the centralized risk regarding financial reporting has been set, which is the
chance of a misstatement occurring. The second column provides the risk factors that raise
company-reporting risk. These are marked orange seeing that these factors are permanent. To
mitigate these risks, a company uses its workforce, processes and systems, given the assumption
that a company keeps these up to date regarding changes that might occur. Although these
resources are seen as ways to lower reporting risk, it is required to monitor them constantly
regarding performance. The following subparagraphs will contain information on how and why
these factors will raise a company’s financial reporting risks if weakened.

2.5.1 People
In terms of people, they can be seen as the carry out function of all financial activities within a
company. According to Leeftink (2014), a company’s personnel is of great importance, seeing
that without people an organisation would not exist. The importance mentioned can concern a
number of things: It could be from selling of goods to customers, to the recording of financial
data in the company-ledger. In terms of financial reporting, people can be defined as: a specific
group of people responsible for the extraction, assembly, aggregation and analysis of financial
data. (Deloitte Development LLC, 2010) Therefore, people should be assigned according to their
expertise. Having people assigned to any position within the company while being inadequate for
the role, can be quite devastating for the company’s operations. The operations might not be
done accordingly, which will result in errors made or the likeliness of inefficiencies in terms of
time spent on tasks. Aside from that, not having the functions properly defined also raises risk.
(COSO, 2004) When defining the function of each employee, it usually concerns the roles and
responsibilities of member of the workforce. It is noted that having overlapping roles also raises
risks. As a result of overlapping roles, the amount of conflicting or redundant information will
most likely increase, which will make the output information unclear or incorrect. To illustrate
this component, here is the Input-Process-Output model:

15
Figure 2.2

Source: (Nickols, 2012)

Assuming that the company has efficient processes and a system that fits all of its needs, it is
clear that the only component left responsible for the input is people. It may occur that two
different employees have done the same task, which means that the same data was inserted twice
into the system. In terms of financial reporting, this would cause an unnecessary increase in the
balance of the account that will likely have an effect on the financial results of the company.
Occurrences like this will make it difficult for the construction of the financial statement, seeing
that the information provided when grouped might not be accurate. Another factor that may raise
risk is the amount of people needed to perform financial activities. Having few workers doing the
same tasks may result in overworked employees, which will cause a lack in performance for this
and other activities. (Deloitte Development LLC, 2010)

2.5.2 Processes
According to Jans (2012), there are various ways to describe a process. What all processes have
in common is the way it resolves. Each process can be subdivided into three categories as seen in
the figure 2.2, namely Input, Transformation, and Output. In short, the data that is entered, is
transformed into information that will be used for other purposes in a later point in time.
Therefore, processes depend on people at the data entry-level. The goal that management
ultimately strives for regarding processes is, having standardized efficient processes, in which
little to no errors are made. The correct term for this event is called automation. Having
standardized processes makes it easier for the execution of financial activities. Unfortunately, the
aspect of change is seen as a constant. Many changes in a company’s situation can occur. This
causes a change in the way things are being done as seen in previous paragraphs. For example,
the Dutch GAAP changes its rules almost every year in order to remain up to date with recent
developments. All these changes would also have to be up to date in the company’s accounting
policies. If not done properly it would raise the company’s reporting risk, since errors will be
likely the case due to the unchanged policies. Naturally, the financial reporting part of the
company would also face these risks. Using the same example, if the processes are not up to date
according to the latest accounting rules, it will result in different amounts for the accounts due to
the differences in the accounting procedures. By looking at another issue, for example Merger
and Acquisition, other risks may surface. In this situation, a company acquires another company.
For the sake of discussion let us name them company A and B. When company A acquires
company B, it also has to take in consideration that the acquired company has its own accounting
policies that might differ from company A. This raises the reporting risks for the parent
company, since the accounting policies might differ, which could lead to changes in the
company’s results in the financial statement. (Marcus, 2012) This can lead to a misstatement due
to the inconsistency in policies. From these examples it is shown that, the biggest threat in terms
of process is change. Change is a situation that most companies find difficult to deal with and
could suffer if it is not able to bear with these changes.

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2.5.3 Systems
‘Systems’ can be defined as a set of components working together towards an objective. This can
be from control systems set in place in order to achieve company goals (Management Control
Systems) to the information and communication systems within a company. (Marcus, 2012) The
objective of information systems is to provide desired information. (Output) This could be for
internal and external stakeholders. To obtain this desired information, people and processes are
incorporated in order to convert input data to output data. Information systems are in constant
development due to innovations in the information and technology (IT) market. These
developments take place in two areas, namely: software and hardware systems. Naturally, the
developments taking place, are meant to fulfil a company’s needs in order for them to achieve
their goals. This is highly beneficial, but can also be seen as a risk. In the previous sections, the
company risks factors have been established. If a system is not able to adapt to the change in
question, it would have an effect on the company operations. The risk factor in terms of
information systems therefor, is being able to adapt to change. Naturally, most system
developing companies nowadays are quite innovative and the systems they provide are able to
adapt to various situations, but likely at a very high cost. Referring back to the operations, these
systems are also responsible for financial reporting. In most companies, data is recorded in an
Enterprise Resource Management (ERM) system. (Rorink, 2015) When a company purchases its
system for commercial use, it expects that it will be in use for a number of years. This due to the
fact, that most systems used by companies are very expensive, which requires a large sum for an
initial investment. Another risk factor is when the system in question is complex in terms of
functionality. (Leijnse, 2015) This links directly to people that are inadequate as already
mentioned. Aside from that, when implementing new/updated systems to a company, it is bound
to have a few issues. This makes it very difficult to perform one’s job, since the people and
processes are highly dependent on the system used for the company’s operations.

2.6 Summary
From what has been shown, there is a lot of information concerning financial reporting. In this
chapter, the definition of financial reporting has been illustrated in broad detail. In short, it is the
art of disclosing financial information to the public. It is clear that due to developments in this
practice, the risks for stakeholders have risen. From the company’s perspective, it is noted that
the risk concerning financial reporting, is the chance of a misstatement occurring. The resources
used to mitigate these risks are: People, Processes and Systems. These risks measures are also
seen as risk factor seeing that they require constant development due to changes that might
occur. Each factor raises risk in its own way. Having inadequate personnel raises the risks in
terms of the operations of the company. Aside from that, it has been illustrated that processes are
very vulnerable to change. Changes in accounting policies can happen at any moment, which
causes a change in the processes. And lastly, it has been recognized that systems that cannot
adapt to change will have an impact on the company in terms of not being able to fulfil certain
tasks. Therefore, it has been determined that all three factors are effective when operating
harmoniously together and should always be closely stimulated in order to perform properly.
Ultimately, a company has to be able to deal with these risks and operate accordingly using these
components. It is noted that these components are highly dependent of one another meaning that,
if one of the three is not performing adequately, the other two are likely to suffer. When looking
at the Enron case mentioned, it is a perfect example of how a company should not act in terms of
operations and financial reporting. In this case, the people within the company committed fraud.

17
The process was likely defined, but was not used in terms of financial reporting. The key issue in
this case, was simply the people within the company. Ways to prevent such things from
happening will be elaborate in the following chapters of this research. In the next chapter, the
responsibilities of management in terms of financial reporting will be provided and analysed.

18
3 The Role of Management in terms of Reporting
This chapter contains the role of management regarding financial reporting. It provides
information on the responsibilities of management leading up to and during the reporting
process. To conclude this chapter, a summary will be provided at the end.

3.1 Executive Management Team and The Board of Directors

A management team usually directs companies. (Rorink, 2015) The management team’s task is
to ensure that the company operations are running accordingly in order to achieve company
goals. The decisions made by management are based on reports consisting of the financial
activities occurring in a given period that are processed in the company’s system. Usually these
results are compared with past results or targets set for a given period. Based on the actual results
and difference, management is able to formulate strategies for the coming period. The
management team usually consists of a: Chief Executive Officer (CEO), Chief Financial Officer
(CFO) and other department heads. (Which may differ due to various types of industries in
which a company can operate in.) In large companies it is required that a supervising body is
implemented, namely the Board of Directors. This body identifies and evaluates important
company policies, procedures and practices proposed by Executive Management. (Riley, 2010)
Therefore, any changes in these items should be consulted with the board, which in turn will
judge if the change is of importance or not.

3.2 Management Financial Reporting Responsibilities

Management plays an important role within a company. It is their responsibility to ensure that
the company operations are running accordingly in order to achieve the set goals as seen in the
previous paragraph. The decisions made by management are based on reports on the financial
activities occurring in a given period. Relating back to the risk paragraph, if inaccurate
information is being recorded, it is highly likely that decisions made by management could have
different effects than desired. These effects could jeopardize company opportunities or even
cause damage to the company. According to Riley (2010), Management is required to design and
implement sound accounting systems that provide reliable and high quality financial reports,
establish and maintain an effective internal control system, and comply with applicable laws and
regulations. This not only raises accuracy of information, but also minimises chances that issues
might occur during processes. This means that, that management is primarily responsible for the
financial reports and the Internal Control over Financial Reporting. (ICFR) Riley (2010) also
mentions certain ways management can ensure that the published financial statements are not
misleading and are free of material errors, irregularities and fraud. The following items will
explicitly depict the roles and responsibilities of management regarding the process of setting up
the ICFR:
 Identify and assess the circumstances, conditions, and factors that can lead to
misstatements or fraud;
 Assess and manage the risks of financial statement fraud associated with the identified
circumstances, conditions and factors;
 Design and implements an adequate and effective internal control process for prevention
and detection of financial statement fraud.

19
As seen in the previous chapter, there are various situations that raises the chance of having
misleading financial statements. It is also seen that the risk reducing resources can also be seen
as risks if not properly monitored and maintained according to standards in which the situations
are dealt with accordingly. Aside from designing proper internal controls, management must also
evaluate if these controls are up to par. Using frameworks designed with internal controls will
assist management with this process. In the United States, the Securities and Exchange
Commission (SEC) stated that public companies must use recognized framework established by
a group exercising diligence and due process and must be tailored to the company’s
circumstances. (SEC, 2007) An example of such groups is the Committee of Sponsoring
Organizations (COSO), which is responsible for the design of an internal control framework that
has been used by many other groups in creating their governance frameworks. Notable
governance frameworks using COSO as a base, are the Sarbanes-Oxley Act (SOx) and the Dutch
‘Code-Tabaksblat’. (Uiterlinden, 2011) According to the SEC (2007), the selected ICFR must
abide to a certain set of rules in order for it to be accepted by the SEC. The framework must:
 Be free from bias;
 Permit reasonably consistent qualitative and quantitative measures of the company’s
ICFR;
 Be sufficiently complete by including all relevant factors that may influence the
effectiveness of the company’s ICFR;
 Be relevant to the thorough evaluation of internal control.

These items will provide the ICFR system with enhanced features that will allow for it to be
effective during the processes regarding the ICFR. Naturally, before most processes become
automated, companies go through test phases in order to fine tune these processes for it to be
efficient. When looking at the roles of management, it is seen that the creation of processes is of
great importance. Next to that, designing control systems for process efficiencies is of equal
important. Ultimately, with the control system in place, processes will become efficient, which
will lead to automated processes. If it should happen that errors are have been made, back-up
plans are needed in order to go through this situation swiftly. In terms of the occurrence of a
misstatement, it is traced back to management, since it was previously mentioned that
management is primarily responsible for financial reporting. This in turn conveys that
management is not in total control over the company’s processes regarding financial reporting.
Another reason might be that management is purposely committing these acts in order to obtain
the trade-offs for reaching targets. When a misstatement occurs, it is seen as negligence
regarding the changes, as seen in the previous chapter. Methods used to improve financial
reporting will be elaborated in the following chapter.

3.3 Summary
It is made clear in this chapter; what the role management is, in terms of the production of
financial statements. The responsibility for creating a financial report lies with management. The
management team usually consists of a CEO, CFO and other department heads depending on the
industry the company is operating in. Naturally, when producing a financial statement, it has to
be done according to a certain standard. Furthermore, it is required that the financial statement is
truthful in terms of the figures presented to the public. In this chapter, it has been acknowledged
that management has to implement control measures in order to assure that the figures published
are as accurate as possible. If a misstatement due to fraud or negligence were to occur,

20
management would be held accountable. That is why it is required by the SEC, that public
companies operating in the US use ICFR frameworks in order to minimise these chances.
Notable frameworks used in the US are the COSO and the Sarbanes-Oxley Act. Companies
operating in the Netherlands also have this luxury, namely by using the ‘Code-Tabaksblat’. In
the input from management with the internal control systems, processes will become automated
with will ensure that the production of financial reporting will become a less risky task.

21
4 Methods Used to Enhance Financial Reporting
In the previous chapters, it was shown how financial statements could be easily influenced by
key individuals in order to achieve goals. Furthermore, it was acknowledged that it is important
that companies present statements that are true and fair in order to provide a proper view of the
company. Unfortunately, due to the constant changes in the reporting standards, it is hard to trust
in the reliability of financial statements. In this chapter, methods regarding the improvement of
the financial statements will be elaborated. These methods will have a direct effect on the events
mentioned in the risks paragraph, which are: The administration of financial activities and the
compilation of financial information.

4.1 The Audit

The objectives of an audit usually depend on the type of audit that is being conducted. Although
they might differ at times, the process of an audit usually depicts; the analysis of accounting
records using a variety of generally accepted techniques. (Hayes, 2014) Audits are supposed to
be conducted with a sense of objectivity, hence why auditors are considered fair and do not allow
bias to override their objectivity. It is the objective of an auditor to obtain and evaluate their
findings during the audit process, which allows the auditor to provide a fair view of the current
status of the company in question. Therefore, an audit can be seen as a risk measure used to
mitigate financial reporting risk. Risks in terms of disclosing inaccurate information can be
categorized at two levels, according to Hayes (2014), one at the financial statement compilation
level, which refers to the process of grouping financial and non-financial data in order to create
the financial statement, and the second risk, which refers to the operation level. There are
currently two types of auditors: Internal and External Auditors.

4.1.1 Internal Auditors

Many large companies and organisations have incorporated auditors as staff members. Internal
auditors are employed to provide the president or board of directors with information that
involves the current situation within the accounting department. The scope of their objectives is
mostly based on the investigation and appraisal of the internal controls. Although these
employees are acting as auditors and must be independent from department heads, they can
never be fully independent, since the company being audited also employs them. (Boyle, 2015)
In terms of the financial statement, Holt (2009) mentions that internal auditors will have two
primary effects:
 Their existence and work affects the nature, timing and extent of audit procedures;
 And maybe used by external auditors to provide assistance in performing audits.

4.1.2 External Auditors

External auditors also known as independent auditors are a group of people with the
responsibility of providing assurance that the financial statement is in compliance with the
criteria stipulated by regulators. (Gray, 2011) This service falls under what is called statutory
compliance. In order to test if the financial statement complies with the rules, audits are
conducted on the records in the general ledger. Although their scope is mainly the financial
statement, it often happens that auditors provide services to management designed to improve the
organisation’s operations in terms of managing risk. Although statutory auditing is not

22
mandatory, complying with statutory laws is, which entails that a company must provide a
financial statement concerning its financial position each year.

4.2 IFRS
IFRS is considered to be the best option in terms of financial reporting. It has become a universal
language, which is used to convert financial data into financial information for relevant
shareholders. It was shown in the first chapter how the developments in the financial market,
caused for necessary measures to be taken in order to protect shareholders and other capital
providers. After the Lisbon Treaty, the formation of the European Union took place. (Kieso,
2014) The EU was seen wholly as a market. After the formation of the EU, there was a lack of
harmony in terms of financial reporting. (Epe, 2014) Aside from that, due to the accounting
scandals that took place, it was clear that something had to be done in order to preserve this
newly formed financial market. The IASB was in charge for the creation of new standards used
for financial reporting. Together with standards already made by the International Accounting
Standards Committee, IFRS was formed. These standards are to be used by listed companies,
because it was created to provide clarity to the public. Naturally, private companies can use it as
well, but it is not mandatory in the Netherlands. IFRS adds value to the information disclosed to
the public, which can be seen as a risk reducing measure for both investors and the issuing
company if applied properly. The reason why IFRS is seen as a risk-reducing item is because of
the amount of information disclosed to the public. Like the Dutch GAAP, IFRS is based on a
number of quality characteristics, therefor making these standards more than adequate to be used
as a reporting standard. According to EY (2010), these quality characteristics can be
distinguished into two categories: Fundamental and Enhancing. Fundamental characteristics
involve relevance and faithful representation. Enhancing characteristics includes comparability,
timeliness, verifiability and understandability. All these characteristics can be linked to the Dutch
GAAP characteristics, explained in the second chapter. With the globalization of finance gaining
ground, the exchange of financial information has become imperative for the operations of
(large) companies. Although most GAAP are of high quality in their own way, having an
understandable and uniform accounting standard would benefit the financial markets immensely.
Reasons to apply IFRS are endless. According to the IASB (2012), IFRS is being used in a 143
jurisdictions. This means that it is becoming the norm for financial reporting around the world.
Having a uniform reporting standard would make the reporting process for group companies
more efficient, since the data provided will be according to the same standard for reporting. This
enhances efficiency and the reliability of the financial report process and the financial report
itself.

4.3 Accounting Manual

An accounting manual is a manual that provides information on the accounting procedures
applicable to the company. (Investopedia, 2012) The accepted way to administer accounts is
according to the standards that are allowed in the Netherlands, namely: the ‘RJ’ and the IFRS.
The reporting standards all have detailed specifications in how the mechanics of each account are
and how it should be presented to the public. The term accounting manual is a broad term and
can be used for many purposes, especially for managing risks in terms of financial reporting.
With that being said, an accounting manual is compiled using the rules and regulations of the
standards that are applicable for the company. Next to that, it gives an in-depth look at the
mechanics of each account, since in some cases; the company may choose certain accounting

23
methods that may be beneficial in terms of financial reporting. An example may be a
depreciation method. This will affect the costs stated on the income statement, which could
either lower or raise profit. Ultimately, the manual will provide the company with guidelines for
all its accounting and financial reporting needs according to the chosen standard for reporting.

4.4 Summary
It was noted in this chapter, the many risk measures that can be used by companies. The
measures mentioned were categorized under internal and external risk measures. Internal risk
measures are considered as measures implemented by the company itself, whereas the external
risk measures are implemented by external entities with the consent of the company’s
management. It was established that errors are likely to occur during the administration process
and during the compilation process. The measures mentioned are applicable to both events
mentioned and affect the outcome of both events greatly. The internal auditor is used as a semi-
independent entity that reports to the board of directors or other key personnel depending on the
company structure. Its purpose is to provide the company with up to date internal controls used
during the operations. Aside from that, external auditors have been defined, which are used to
test the validity of the financial statement. During this process it was shown that the external
auditor provides extra control measures that can be added to the company’s internal controls.
This assures that the company’s accounting standards are according to the most recent update,
which leads to accurate financial data in the statements. Furthermore, it is imperative that a
company has records regarding its processes. These records are also known as a company’s
Accounting Manual. This manual can be used as a reference when going through processes. This
can be used for virtually any process within the company, especially for the administration and
compilation process. This is according to the chosen reporting standard the company currently
uses. In terms of the standard, it is noted that using IFRS is best for larger companies, since
larger companies are likely to be listed. This conveys needed information used by investors and
other capital providers in order to make economic-decisions. Due to the strictness of the
standards, companies are required to disclose specific information concerning their accounts,
which adds value to the financial statement. This minimises investor and company risks.

24
5 Financial Reporting at AOC
This chapter contains how financial reporting is being done at AOC. The construction of this
chapter is based on an empirical research done at AOC. This chapter will relate to the risks
mentioned in the first chapter. The content of this chapter is based on own observations,
interviews and meetings held with key personnel and external individuals. The notes made
during these interviews and meeting can be found in the appendix section of this research and
shall be referenced when mentioned.

5.1 Decentralisation from Parent-Company

As already mentioned, AOC’s ultimate parent company is Saudi Aramco. According to Visser
(see appendix two), AOC is required to come up with their own strategies for the company’s
operations. The correct term for this situation is decentralisation, which entails that the decision-
making powers are distributed over a number of positions. (Horngren, 2012) Referring back to
AOC, since the beginning of the year, its system has been segregated from the parent company.
This clearly makes AOC independent in terms of network operations, which means that the
responsibility of the network, will ultimately fall on the company’s IT department. Visser also
mentioned that, this gives AOC more room to apply different applications in order to facilitate
processes, since the IT department manages the ERM. Unfortunately, this brought several
complications in terms of system operations. In some cases, because of system errors, delays
occurred during processes, which caused conflicts with deadlines. The amount of outstanding
invoices grew due to these issues with the system. According to Denash (see appendix one), this
has its implications on the company itself. Paying the bills after due dates will lead to interest
payments aside from the current invoice, which will lead to more costs for the company. AOC
deals with thousands of invoices on a monthly basis. It is clearly not in AOC’s best interest if it
were to pay interest on all of those invoices. It is also mentioned that, even though AOC is
decentralised, it is still linked to the parent company. This can be seen in appendix seven. This
image illustrates the key strategies used at AOC and Saudi Aramco. It is clear that the AOC
strategies are designed to add value to Saudi Aramco in order for it to reach its objectives. The
reason behind this strategy is, because AOC is a service company that services to the parent
company. Therefore, it is logical that its strategy is aligned with the parent company strategies.
Furthermore, out of own interpretation, it is clear that AOC does not really provide services to
other companies other than to the parent company, but if it were to start providing services to the
public, being decentralised would be beneficial, seeing that there are many cultural differences in
the locations of operation. Being decentralised will give management the freedom to adapt to the
situation within the Netherlands. Referring to the systems resource (see chapter two), it is clearly
seen that due to system issues, certain tasks could not be performed. Although this is not the case
for financial reporting at AOC, a faulty system might cause delays in the reporting process.

5.2 Dual Reporting Standards and Financial Requirements

As stated in the introduction, AOC is currently reporting according to two standards allowed in
the Netherlands, namely: The Dutch GAAP and The IFRS. This can be related to the issues
mentioned in the risk paragraph. The issue entails that the standards for accounting and reporting
are in a constant change. The reason for the constant change in reporting standards as seen in
previous chapters, is to provide enough information to shareholders. This means that AOC needs
to be able to adapt to these changes. From the interview with Denash seen in appendix one, it
became clear on how the procedures are being done regarding financial reporting. AOC is
25
currently reporting on two occasions, namely: On a quarterly basis to the parent company
according to the IFRS and on a yearly basis for statutory purposes according to the Dutch
GAAP. The main difference in the standards for AOC is in the way the investments are being
valued on the balance sheet. Aside from the differences, conflicts might also increase. It was
mentioned (see appendix one) that these conflicts are regarding the differences in materiality.
These material differences occur during the conversion phase. For example, the parent company
might find that some accounts are considered immaterial for them when reporting according to
IFRS, whereas these accounts might cause a material difference for AOC when reporting
according to the Dutch GAAP. Furthermore, regarding the accounting policies, it was mentioned
that the accounting standards used at AOC are according to IFRS. In order for AOC to create a
financial report, it has to convert the figures from IFRS to the Dutch GAAP, which is then used
to create the financial statement. Regarding risks, it was recognized that AOC uses a reliable
Enterprise Resource Management (ERM) system. A lot of controls are implemented, which are
integrated in the ERM to ensure the validity of the data being processed through the system. An
example is during the invoice entry process. AOC processes on average around forty thousand
invoices on a year basis according to Denash (see appendix one). To avoid the double entry of
invoices, a control has been implemented to recognize the invoice number being entered when
processing the invoice in question. Aside from these controls, AOC also uses a six-eye principle,
which entails that if an error occurs, it would have to go through three employees currently
working in the financial accounting department. If an error manages to get through, it will be
found during the review at the end of the month. (In total it would have to go through eight eyes)
From the two events that were mentioned where financial reporting errors occur, AOC’s
reporting risk raises during the compilation process. Measures to aid AOC in this process will be
elaborated in the following chapter.

5.3 Mergers and Acquisitions and Consolidation

Mergers and Acquisitions (M&A) are situations that can occur to an entity, which has its
advantages and disadvantages. The term merger can be defined as, the merging two or more
companies into one. This happens in cases where two or more companies perform better when
merged than when operating separately. (Synergy) M&A make it difficult for a company to
report financially since there are different factors that play a part in this situation. With that being
said, AOC has a number of investments that has to be presented in its financial statement. Some
of which, are non-domestic companies. This means that these companies are active in other
countries and report according to the Generally Accepted Accounting Principles applicable in
those countries. During a meeting with PWC (see appendix five), it was noted that because of the
standards used by S-Oil, it would become difficult to convert its accounts to Dutch GAAP. This
would raise AOC’s reporting risk regarding the reliability of the figures. Aside from the risk
mentioned, it was also noted that audit risks are also a concern for PWC. S-Oil has been audited
by its auditor, which provided an auditor’s report in order to validate the financial report
published. Although a renowned audit firm has audited S-Oil, there is no assurance that the
practices done, has been according to the standards used by PWC. In the end if it appears that the
figures of S-Oil are inaccurate, the management team of AOC as well as PWC, will be held
accountable. During the meeting with the PWC, it was stated that in order to provide assurance,
the audit team together with the management at AOC, would have to go to South Korea, in order
to control the audit procedures used during the audit. Management would have to meet S-Oil
management in order to raise concerns regarding findings found during the compilation phase of

26
the financial statement. This in turn will show that necessary steps have been taken in terms of
the consolidation of S-Oil. According to Hofstede (see appendix five), the larger the company
gets, the higher the costs for making the financial statements will get. This entails the costs of the
workers working on the financial statement and the auditors auditing the company in question.
Therefore, it is always important for management to be diligent when considering the
acquirement of a company. Proper analysis has to be conducted in terms of risks that may affect
the company. For the analysis, AOC used the services of a financial services firm (EY) for the
acquisition of S-Oil. Little data has been given in terms of the calculations of the purchase price
and other analysis, seeing that it is considered as classified information.

5.4 Summary
It has been made clear in this chapter that AOC is decentralised. This means that management
can govern the company according to their own methods. With the segregation of the systems,
certain issues arose regarding the network. These had repercussion for the processes regarding
the accounting procedures, seeing that the company’s system is highly dependent on the
network. The accounting procedures are being done according to IFRS for efficiency purposes.
The reason being that AOC has to report to the parent company according to these standards at
the end each quarter. During the reporting period, the accounts are converted to the Dutch GAAP
in order to produce the financial statement required for statutory reporting. Naturally, before this
phase commences, the consolidation of the group has to take place. In order to consolidate S-Oil,
their figures are sent to AOC, which is then uploaded in its ERM system. After the incorporation
of the figures, the consolidation process begins. With the figures being consolidated, it is now
ready to be used for the financial reporting phase. The methods used in order to mitigate
reporting risks will be elaborated in the following chapter.

27
6 Measures Implemented for Reducing Reporting Risks at AOC
In this chapter, the tasks performed will be described together with the other activities that took
place during the research period. The content in this chapter are based on own experiences with
the tasks and on information provided during interviews/meetings with key individuals.

6.1 Accounting Manual

During the period of employment, it was required that a tool be created in order to facilitate the
process of making a financial reporting. The company did have certain manuals recorded but
they were not up to date. The main task was to provide an accounting manual (see appendix
eight) based on the reporting standards used by AOC, namely: The Dutch GAAP and the IFRS.
Later on due to the fact that AOC initiated the assignment of switching over to IFRS as its only
standard for reporting, the task was given to create an accounting manual according to the IFRS.
The main assignment was to create a manual consisting of the accounting policies and
procedures applicable to AOC. The team in charge would use this with the activities regarding
the compilation process. The execution of this task has been done by carefully going through the
accounting procedures used at AOC. Although the accounting procedures were straight forward,
there was no clear information on how to design an accounting manual. After going through and
comparing a financial reporting books published by accounting firms (KPMG, 2015), it was
clear what the design of the accounting manual had to be. The design of the book was made to
describe the accounting principles for each account. It was determined that in the accounting
manual each component in terms of the income statement and the balance sheet had to be
described. The reason for this is because, when making the financial statements, the notes for the
accounts also have to be provided. Therefore, understanding each account is crucial regarding
the making of the notes. This design for the manual will provide the reader with knowledge on
each component. In order to understand the mechanics of each account, the chart of accounts was
provided. Since AOC has a large number of accounts, going through each account was not an
option. Therefore, understanding the account types was important. (Due to discloser policies, the
chart of account is not available) Each account type if grouped, will give the total amount of the
ending balance account for balance sheet or income statement. After identifying the account
types, the explanation for each balance sheet account was possible. During the creation of the
manual, certain aspects were quite difficult to comprehend. The main reason was that it was
difficult to comprehend the accounts because of two factors: One being that the names for the
accounts were in English and the other reason was because of the size of the ledger. Being
accustomed to Dutch account names made it difficult to interpret which account was which. The
size of the ledger also played a part because of the amount of accounts used by the company.
Certain accounts were used for specific situation only, which made it difficult to be determined.
This relates to some components that according to IFRS. For example, the valuations of
investments, which is done according to fair value. This entails that the investment is valued at
the current market value. To gain clarity on the matter, interviews were held with key personnel
concerning certain policies and procedures, in order to provide a detailed description of the
accounts that have been conveyed in the accounting manual. Aside from interviews, all the
accounting standards and the financial reporting standards created by the IASB have been made
available, which made the comprehension of all accounts possible. Unfortunately, the accounting
manual for financial reporting could not be finished due to the new task given. The elaboration
on this topic will take place in the following paragraph.

28
6.2 Single Financial Reporting Standard
In the previous chapter, the current situation at AOC has been given. Here it is stated that AOC is
preparing its financial statement according to IFRS for the first time. During this period, it was
required that the financial statements be made. External services were required, which consisted
of an external auditor (PWC) and financial services firm (EY). In order to provide detailed
information on the matter, the role of each group will be elaborated in the following
subparagraph.

6.2.1 Internal Team

The internal team consisted of the intern and the senior accountant. It is important to know that
the team had experience with the International Accounting Standards (IAS), but not the IFRS. It
was difficult to find a solid planning seeing that the internal team did not have support of people
with experience in this field. In order to get a clear view of what was expected, it was required to
go through financial statements of companies that are currently reporting according to the IFRS.
The use of various conversion tools was also a part of the development. At first there was a
confusion, seeing that all the rules for IFRS was mandatory for listed companies and that certain
rules did not apply for private companies. The confusion arose during the acquirement of a
document that mentioned that there was an IFRS specifically for private companies. In the end it
was made clear by EY that if a company applies IFRS, that it is required to apply all the rules
that are applicable. (see appendix six) Because AOC already reports according to IFRS, the
conversion of the figures does not have to take place. The notes on the other hand do have to be
provided. During the meeting with EY, (see appendix six) it was established that the notes
regarding the IFRS are more extensive than what is expected when reporting under the Dutch
GAAP. Therefore, for it was essential that the internal team be oriented on these differences.
Because one of the first tasks given was to create an accounting manual, it assisted the team in
knowing what the mechanics of each account was in order to provide corresponding notes. This
would facilitate the grouping of the numbers and the compilation of the notes for the financial
statement. For example, a section that is required to be disclosed is the accounting policies used
by the company. After carefully analysing the IFRS and other financial statements it became
clear that when reporting according to the IFRS that this section has to be disclosed in order to
fully comply with this standard of reporting. The accounting policy provides the way all of the
procedures are being done at AOC in terms of the administration process of financial activities.
This could be from depreciation methods to ways assets should be disposed accounting wise.
This is quite extensive information, but with the use of specific templates provided by EY, it was
possible to adjust these templates according to AOC standards. In the end with the help of the
financial services firm, it was possible to complete the financial report, which would be audited
later on in order to present an auditor’s report with the financial report. The notes were made
based on the changes of in account balance and proper explanation in terms of why these
changes occurred. In terms of the first time adoption, EY provided specialist in this field to
assist, since AOC had a deadline for the creation of the financial statement. During the research
period it was observed and acknowledged that AOC was highly dependent on EY, which results
in high costs for this service. The reason why AOC was dependent was due to the fact that the
internal team did not have enough knowledge regarding this process. This refers back to the
‘people’ resource mentioned in the risk paragraph. Having proper schooling would result in less
dependency on EY. The role of EY will be described in the following section.

29
6.2.2 Financial Services Firm
As already mentioned, AOC requested the help of a financial services firm in order to provide
their expertise regarding the first time adoption of IFRS for the financial statements. Their input
has been mostly to aid the internal team during this phase. Their activities were mostly to
provide information on specific data regarding the financial statements. The “do’s and don’ts”.
As mentioned in the interviews with EY (see appendix six), choices had to be made regarding
the valuations of certain accounts. An example is the pensions; the pensions provision has to be
calculated every year. An actuary does this. The revaluation of this account leads to gains or
losses. The gains or losses are recorded in the Income Statement under the Other Comprehensive
Income section. This can be seen on the account called: actuarial gains or losses. (See appendix
eight) By adopting IFRS, the company has a choice to either reset this account or reconcile it.
This decision has to be made upfront before the start of the first time adoption. All this type of
information has been provided by EY during their services provided.

6.2.3 External Audit Firm

The time frame of this research period does not fall within the planning regarding the group
audit. It was mentioned in the interview with PWC that the audit had to be done according to
ISA 600, which is the standard that auditors have to abide to when performing a group audit.
Furthermore, it was established during this interview that the management together with PWC
would have to travel to South Korea in other to visit S-Oil. During this visit the following items
will be addressed. (See appendix five) PWC shall conduct test regarding the audit procedures
used during the audit of S-Oil. Based on these test, PWC will determine if the figures published
by S-Oil are accurate, which has already been used in the consolidation of the AOC group.
Naturally, if irregularities were to surface, it would mean that changes would have to be made to
the already completed financial statement. Next to that, the management team of AOC will be
meeting with the management team of S-Oil. As mentioned in the previous section, the findings
made by the internal team and EY during the making of the financial statement will be discussed.
The amount of findings might be little, because there are currently no differences between EU-
IFRS and Korean-IFRS according to Moolenaar M. from EY. In spite of that, the finding would
still have to be discussed. Though there are no differences in standards, there might be
differences in accounting policies used by both companies, which could cause issues in terms of
the different valuations of accounts based on the methods applied.

6.3 Summary
As seen in this chapter, the efficiency regarding the financial reporting process is of high
importance. During the early stages of the research period, it was requested that an accounting
manual be made that captures the mechanics of each account used in the balance sheet and other
accounting items, which would facilitate the financial reporting process. It will later serve as
instructions for the accounts and for newcomers joining the accounting team unfamiliar with the
financial reporting processes at AOC. Aside from the accounting manuals, it was mentioned that
AOC is going through this process of adopting IFRS for the first time. The internal team
consisting of a senior accountant and the intern is doing this. Aside from this team, EY has been
requested to join this project in order to facilitate this process with the use of their specialist in
this field. After the creation of the financial statement, it shall be audited by PWC, which
requires for the external auditor to go to South Korea and test if the audit procedures used to

30
audit S-Oil are up to par. AOC management would have to meet with S-Oil management in order
to address findings regarding irregularities established during the making of the financial
statement. By going through this process, it will show that the necessary steps have been taken in
regards to properly publishing a financial statement for statutory purposes.

31
7 Conclusion and Recommendations
This last chapter contains the conclusions formed during the research period. These conclusions
are based on the tasks performed and other observations that took place. Aside from that, the
conclusions and recommendation will also be based on the three resources mentioned in chapter
two. Recommendations will be provided for each conclusion made. Ultimately, the conclusions
and recommendations will provide an answer on how AOC can minimise their reporting risks.
For an illustration of this section please see appendix nine.

7.1 Conclusion
1. Due to the high quality aspects of the ERM system used by AOC and the Six Eye
Principle (it becomes eight during the review phase) applied by the personnel, eliminates
any risk regarding the data entry process.
2. To avoid any uncertainties when going through the data entry process, an accounting
manual can be used. This eliminates any uncertainty concerning the process.
3. S-Oil provides their financial figures, which is then consolidated with AOC figures. The
risk lies in the reliability of the numbers.
4. At the moment the accounting policies used by the AOC group as well as the new
acquired company (S-Oil), are according to IFRS. AOC figures can be converted to
Dutch GAAP for the making of the financial statements. Because S-Oil has been
acquired, the conversion of S-Oil figures to Dutch GAAP might be difficult due to
unknown accounting practices.
5. Switching over to IFRS requires extensive knowledge regarding the first time adoption of
IFRS. Not enough knowledge regarding this subject will lead to inefficiencies regarding
time and cost. Time in terms of the research of IFRS and cost regarding high rates
charged by financial services companies. This conveys a dependency on EY due to lack
of knowledge. (People)
6. There is no process for financial reporting. (Processes)
7. During an occasion, the system failed. This resulted in delays regarding the use of the
system. (Did not affect the financial reporting process) (System)

7.2 Recommendations
1. Since the risks regarding the administration process have been eliminated, it ensures that
the AOC figures are according to reporting standards. Therefore, no recommendations.
2. To maximize the affectivity of the accounting manual, detailed descriptions of the
processes should be provided. A detailed description entails, step-by-step descriptions of
the process. This should be referenced with the accounting policies already made. This
would reduce the dependency of the company on the personnel, since all processes are
properly recorded. This would serve during employee turnovers or for training new
employees.
3. To eliminate any risk regarding the S-Oil figures, a group audit has to be performed.
After this process, an auditor’s report will be provided, which will show that necessary
steps were taken during the consolidation process. The steps have been taken, therefore
no recommendations.

32
4. Since the accounting policies are already according to IFRS, it will add value to AOC by
switching over to IFRS as its reporting standard. (Instead of Dutch GAAP) This will add
value regarding the efficiency and reliability of the financial statement. Time efficiency,
meaning less time spent on the conversion of the financial data from IFRS to Dutch
GAAP. Less time will also mean a cost reduction regarding fees charged by external
auditors and financial service providers. The figures will be more reliable due to the use
of the same standards. Accounting policies might differ meaning different valuations for
accounts. AOC management should address this issue with S-Oil management.

5. Providing courses regarding IFRS would ensure time efficiency. The first time adoption
of IFRS is a large project, which requires a considerable amount as an initial investment.
AOC has taken the necessary steps in requesting assistance from EY, but having
personnel with extensive knowledge on this matter, would have provided more efficiency
during this first time adoption regarding external fees. For the subsequent reporting
events, please consider providing IFRS courses to minimise the dependency regarding
external assistance. This will reduce financial services costs.

6. Although, there is a manual describing the mechanics of the accounts, there is no manual
on how the financial reporting process has to be. It is advised that AOC establish a proper
process for financial reporting and document this for future references. This enhances
efficiency of the process and reliability of the financial statement in question.

7. Having a dependable system ensures the process of financial reporting. It is advised to

have IT constantly monitor the status of the network.

33
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35
Appendices:

Appendix 1: Interview 1
Interview Details
Company Name: Aramco Overseas Company BV Date: 6/6/2016 Time: 16:00

Interviewer Name: Martin Denash (Senior accountant at AOC)

Topic: Financial Reporting

Questions to Ask Interviewer

Question: How is the financial reporting process being done at AOC?

AOC reports on two occasions: On a quarterly basis to the parent company according to IFRS and
on a yearly basis according to Dutch GAAP for statutory purposes. The accounting standards used
during the administration is based on IFRS and is later on conver ted to Dutch GAAP in order to
Notes: create the financial statement.

Question: From experience, have you ever encountered any conflicts regarding this subject?
The most recurring issue concerns the materiality of certain accounts. When reporting to Saudi
Aramco (SAO) some accounts might be considered immaterial, whereas for statutory reporting it
might be considered material. Therefore, it is required that the personnel making the financial
statement be aware of what these material issues might be. Usually it is highlighted by the auditor
Notes: to prevent any issues which might cause a misstatement.

Question: What are the risks regarding the administration process?

There are hardly any risks in terms of the administration process. AOC uses the SAP as its ERM
system. There are a lot of controls in place, for example controls regarding Accounts Payable.
AOC processes on average around forty thousand invoices yearly. For that reason, controls
regarding having invoices enter twice is one that is mandatory. Aside from that, AOC uses a three
eye principle. This means that if errors occur, it would have to go through three employees, which
ensures that if there is an error that it would be taken care of. Let’s say that one error manages to
Notes: get by, it will surely be dealt with during the review at the end of the month.

Question: In which areas would you like to see improvements?

Right now, AOC does not use any KPI’s in order to measure the reporting process. By
Notes: implementing KPI’s during this process, it will increase productivity and efficiency.

36
Appendix 2: Interview 2
Interview Details

Company Name: Aramco Overseas Company BV Date: 6/8/2016 Time: 9:30

Interviewer Name: Gert Visser (Senior accountant at AOC)

Topic: M&A, Complex Structures and Consolidation

Questions to Ask Interviewer

Question: Did the acquisition of S-Oil bring any complication to the administering process?
The only complication that arose from this acquisition was in terms of financial reporting. Regarding
the accounting, S-Oil has their accounting system and AOC has its accounting system. AOC does not
add value to S-Oil’s accounting. AOC only receives data from S-Oil, which is then converted from the
Notes: currency it was sent in based on an average of the currency rate.

What are the risks concerning the acquisition of S-Oil? What has been done to mitigate these
Question: risks?

Since AOC does not contribute to S-Oil’s accounting, the only risk left is the accuracy of the data
provided by S-Oil. Although its external audit firm has audited it, AOC needs assurance that the audit
procedures were according to standards. This is mitigated with the use of AOC’s auditor PWC, which
Notes: will perform a group audit.

Question: Does AOC have a complex business structure? If so, are there difficulties during the process?

AOC does not have a complex business structure. It only has one subsidiary, one financial assets and a
few satellite offices used for specific purposes. Although it is a large company, it is still not classified
Notes: as complex in my opinion.

Question: How is the consolidation being done? Any risks? If so, how is it being mitigated?
This is done based on different inputs. AOC uses SAP as its ERM system. All financial activities of
AOC and the satellite companies are recorded in this system. Financial assets are valued at Fair Value
according to IFRS. S-Oil then sends its data via an Excel file, which is then uploaded in the SAP
software. With the use of tools added in the SAP program, the consolidation process happens. Mistakes
might happen, but these are usually found in the review phase and then corrected according to
Notes: standards.

37
Appendix 3: Interview 3
Interview Details

Company Name: Aramco Overseas Company BV Date: 6/8/2016 Time: 9:45

Interviewer Name: Gert Visser (Senior accountant at AOC)

Topic: Decentralization

Questions to Ask Interviewer

Question: To what extent is AOC decentralised?

AOC is a very independent company. Management may formulate strategies based on what they think
is right. Although management has the freedom to apply strategies, it must report to the parent
company every quarter, which is mandatory. Until recently, AOC together with Saudi Aramco were
using the same network and ERM system. This is no longer the case. The system has been segregated.
In the beginning this caused many faults in the system. In some cases, network connection was lost,
which paused activities seeing that SAP is highly depended on network connection.

Notes:

Question: Are there any risks by being decentralised?

The risks are that nothing is standard regarding the accounting procedures. This can cause
inefficiencies. For example, the way to do it is from A to B, but because of the lack of specifications,
the way it is being done is from A to C to D then finally B. Although this does not happen in every
Notes: occasion, it still does happen.

Question: Was AOC always decentralised?

Management wise it was, system wise until recently yes. The segregation of the network brought the
introduction of a new ERM that is operates only on the AOC network. The old system is still being
used for procurement purposes, but all other accounting processes have been integrated and are
required to be performed on the new system. This also allows the IT department to add new features,
Notes: which might be beneficial to the processes used at AOC.

Question: Ways to improve procedures while being decentralised?

Manuals based on the accounting policies have been written but never finalized. That is why AOC is
highly depended on the people. This is divided in the knowledge people have and asking management
Notes: what to do in certain occasions.

38
Appendix 4: Interview 4
Interview Details

Company Name: Aramco Overseas Company BV Date: 6/13/2016 Time:12:45

Interviewer Name: Ton Zoetbrood

Topic: Reporting Risk

Questions to Ask Interviewer

Question: Does AOC have any reporting risk?

Yes, with the acquisition of the extra shares concerning S-Oil, AOC is required to consolidate S-Oil in
its financial statement. This raises risks in the sense of the reliability of the S-Oil figures. Aside from
that, in previous years it was seen as a financial asset due to the amount of shares AOC had. Because it
is required to be consolidated, it is seen as a new company. Their policies and procedures are not
known. It is important to know these type of things in order to consolidate this company properly.
Knowing this information will provide the AOC with enough knowledge in order to provide notes for
the consolidated figures. Another risk is that, for statutory reporting, AOC is reporting quite late. This
provides differences in what is reported to Saudi Aramco. AOC reports on a quarterly basis to its
parent company. Right now, the statutory reporting happens on a later date. This causes a difference
for events after the balance date. It requires more work in grouping data happening after the quarter
Notes: report in March. With the change to IFRS, AOC is hoping to align both reporting deadlines.

Question: What are the necessary steps that need to be taken to properly consolidate S-Oil?
AOC currently reports according to the Dutch GAAP for statutory reporting. This would mean that
AOC would have to convert S-Oil figures in order to comply with the Dutch GAAP. Because it is
unknown what the S-Oil accounting policies are, AOC has opted for a change in financial reporting
standards. The main reason is to provide a sense of reliability regarding the accounts provided in the
financial statement. If everything is according to IFRS, it eliminates the conversion process, which
minimises the risk of any wrongly converted accounts during the financial reporting process. To
properly execute this IFRS adoption, the assistance of specialists is needed. They will provide
assistance in the making of the financial statements. If there are any findings regarding certain
irregularities, it will be discussed with S-Oil. After the production of the financial statement is finished,
it is required that the financial statements be audited. To do this, the audit firm would have to go to
South Korea in order to perform tests on the audit procedures executed during the audit of S-Oil. Aside
from that, management will also have to make the trip in order to get a clear view on how things are
done at S-Oil and to raise concerns regarding the findings established during the making of the
financial statements. After all tasks have been executed, management and the board of directors shall
sign the financial statement. The external auditor will also provide its auditors report to assure the
Notes: validity of the financial statement.

Question: Does risk management form part of controls implemented by AOC?

AOC has not adopted risk management, the reason being that AOC is a service company. Its biggest
client is the parent company. In terms of finances, it will never need risk management due to the
constant technological advancements happening around the Europe. That is the main purpose of AOC,
to facilitate procured items and other service to Saudi Aramco. This is regarding external risks.
Regarding internal risks, an assessment has not yet been made, but AOC does apply the COSO model I
Notes: for internal controls.

39
Appendix 5: Meeting PWC
Audit of the AOC Financial Statement (IFRS)
Minutes MAY 18, 2016 14:00 ARAMCO OVERSEAS COMPANY BV

Meeting called by T. Zoetbrood

Type of meeting Clarity on the type of audit is required (first time adoption IFRS)
Company AOC PWC
T. Zoetbrood N. Hofstede
Attendees F. van Ginkel M. Soeters
G. Visser
R. Pablo
Agenda topics
IFRS

Discussion First time adoption IFRS for statutory reporting and in how far can PWC be involved?

Seek consultation at EY seeing they are more experienced in that field. After the creation of the
Conclusions
financial statements, it shall be audited by PWC.

Group Audit

What is PWC’s responsibility in terms of signing of on the financial statements of AOC regarding
Discussion
the consolidation of S-Oil?

To show that the necessary steps have been taken, PWC and AOC management must go to S-Oil.
Here PWC will run their tests on the audit practices performed during the audit of S-Oil and AOC
management will meet up with management of S-Oil. This will show good faith and seriousness for
Conclusions
the situation, which could satisfy supervising bodies such as AFM. Other topics regarded the ISA
600, which is the standard regarding group audits. It was also stated that the costs of financial
reporting would increase due to the growth in size of the company and because of the IFRS audit.

EY vs PWC

Discussion Meeting between EY, PWC and AOC must be scheduled before execution phase.

Because PWC will ultimately be used as the external auditor, it should be clear to EY and AOC
Conclusions
what PWC wants to see in order for a more efficient audit of the financial statement

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Appendix 6: Meeting EY
First time Adoption IFRS
Minutes JUNE 6, 2016 13:30 ARAMCO OVERSEAS COMPANY BV

Meeting called by T. Zoetbrood

Type of meeting Requesting EY assistance for first time adoption
Company AOC EY
T. Zoetbrood M. Moolenaar
Attendees
G. Visser
R. Pablo
Agenda topics
IFRS

Discussion First time adoption IFRS for statutory reporting and AOC manpower available.
Differences in EU-IFRS and Korean-IFRS

It was made clear that AOC had an internal team already busy with the first time adoption. M.
Moolenaar mentioned that EY specialist in this field will be made available to assist AOC’s internal
Conclusions team on the matter. Furthermore, AOC was informed that there were no differences between EU-
IFRS and Korean-IFRS. It was mentioned that the notes for IFRS are more extensive than the ones
for Dutch GAAP.

IFRS 1 standard

Discussion Choices that should be made regarding the IFRS 1 standard. (Amendments or exemptions)
This is in regards to certain accounts that differ from the Dutch GAAP. For example, the valuation of actuarial
accounts. (starting from zero or reconciling from a certain date)
Furthermore, the question regarding the degree IFRS application. It has been clarified that private companies like
AOC would have to apply IFRS completely.
Conclusions Based on the choices made regarding IFRS 1, planning regarding the conversion can start.

Deadlines

Discussion Deadlines for the finalisation of the financial statements

The financial statement has to be ready by July first, before the departure to South Korea of PWC
Conclusions and AOC management. Key points that need to be discussed to with S-Oil management have to be
noted in order for the trip to be effective and efficient.

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Appendix 7: AOC Strategy Alignment with Saudi Aramco

Source: AOC portal

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Appendix 8: Accounting Manual for Financial Reporting (unfinished)
1. Purpose and Scope
The purpose of this Accounting Manual is to explain the procedures that are taken at AOC in
terms of making their financial statement according to the IFRS. The financial statement needs to
be reported to Saudi Aramco, so it can be consolidated with their figures. This happens each
quarter and should always be done according to the procedures mentioned in this manual. Aside
from that, the roles and accountability of the specified organizations and officers within AOC
will be given. Ultimately, the scope of this manual falls on the Principles, Policies and
Procedures in relation to AOC’s compliance needs. Next to that, the definition of AOC’s
framework which is used for accounting. The data is recorded in SAP during the given period
and is exported to an excel document, making it possible to group the accounts and assign them
to their corresponding financial statement component and eventually prepare the ending balances
for each account. Furthermore, it is important to know that AOC uses two entity accounts in its
accounting, i.e. 4000 used by AOC and 4030 used by AOC UK. At some point in this manual,
account numbers will be given and it is essential to know which are allocated to which entity.
Moreover, some accounts are seen as inactive due to the fact that they are not applicable
anymore in the AOC used accounting procedures.

2. Balance Sheet
The procedures that need to be taken in terms of the financial statement will be explained in this
section. Because the balance sheet is made out of an amount of components, each component
will be explained thoroughly regarding their procedure according to the IFRS. The procedures
for making the balance sheet are given in the following paragraphs:

2.1 Non-Current Assets

2.1.1 Property, Plant and Equipment
According to the standards, it is required for assets to be depreciated. The amount of years it
takes for the asset to be written off, depends on the characteristics of asset. AOC uses three types
of depreciable assets, namely: PP&E 10 years, 5 years and 3 years’ depreciation system. Because
AOC reports each quarter, all of the assets are depreciated on a monthly basis. Accounts that
start off with 200 numbers are the depreciable assets, whereas 205 accounts are the accumulated
depreciation accounts. To obtain the current book value of the asset, you must first subtract the
accumulated depreciation from the price of acquisition.

Additions
Typically, when dealing with PP&E, it is highly likely that additions may take place. In most
cases, these can be related to new constructions, purchases and subsequent improvements or
replacements made to existing assets. The procedure involving additions is relatively simple.
Additions are added on a separate line and are depreciated individually. They are rated and
depreciated according to their characteristics, which were given in the previous section.

2.1.2 Investments
AOC currently has three company investments, namely; S-Oil, Team Terminal BV and Showa
Shell.

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S-Oil
Will be elaborate once all the processes have been defined (new component within AOC balance
sheet)

Team Terminal BV
The investment in Team Terminal BV is valued using the historical cost method. The value of
this investment therefor is to remain the same as the value on the date of acquisition.

Showa Shell
Showa Shell is a publicly listed company. This implies that it operates on the stock market in
Japan. To properly compute the valuation of this company on the balance sheet, the previous
ending balance needs to be taken into account. This amount must be adjusted according to fair
value, which means that the amount of shares should be multiplied by the amount of ending
share rate. The amount computed is the current value of the investment and will be the closing
balance for this account. The adjustment will be registered in the specifications section. It is
required for this to be done each quarter by employee in charge of this task. AOC also receives
dividend from this investment and records this in the income statement under the account ‘Other
Income’ in the given year. Please note that the currency differs and that the proper exchange rate
needs to be taken into account.

2.1.3 Deferred Tax Assets

Deferred tax assets are created due to taxes paid or carried forward but not yet recognized in the
income statement. Its value is calculated by taking into account financial reporting standards for
book income and the jurisdictional tax authority's rules for taxable income. Let’s take
depreciation as an example. If the depreciation method used by the tax authority increases the
amount of income tax that needs to be paid, in comparison with what is calculated according to
the company’s method of depreciation, the difference will be placed on the asset side of the
balance sheet and will eventually be written off as the asset depreciated.

2.1.4 Other Non-Current Assets

AOC is able to make deposits for the activities of its subsidiaries. These are recorded as long
term receivables and can be seen as accrued based long term loans that AOC is able to provide to
its subsidiaries. Logically, the balances are recorded according to what they have received from
AOC and later accrued with the amount the entity paid in a given period. The accounts that are
applicable in this procedure, are as followed:

2.2 Current Assets

2.2.1 Accounts Receivables Related Companies
In Accounts Receivable, every mutation, invoice issue and cash payments are recorded, which
adds/subtracts certain amounts to the account balance. Every time a client request’s a good or
service, AOC issues an invoice. This is registered in SAP and will cause an increase in the
account balance. During the quarter, payments will be received for the good/services delivered to
the entity, which will consequently cause a decrease in account balance. AR account increases
and decreases can be traced back to the mutations made to each client. To trace the mutations
made to these accounts, please look at the accounts that start with number 12. Usually an
increase means that there were invoices issued. A decrease means that there was a payment that

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took place. Payments can be traced back to the cash flow statement. Another way the account
can receive a decrease is by intercompany mutations. A better way to interpret this is,
downstream sales or non-cash payments. Since the amount of customers are relatively low and
are based on the same recurring clients, they each have their own account, which makes it easier
to group the payments received, invoices issued and intercompany mutations executed. After the
transactions have been recorded in the given period, the summation of the following accounts
will give the ending balance of the AR account. Here are the AR accounts:

2.2.2 Unbilled Materials and Supplies (Inventory)

To properly understand the inventory system within AOC, you must first understand that in most
cases, the goods are sent to SAOC directly, but are recorded as if they were physically received.
In rare cases, the goods are stored at AOC until they are sent off to SAOC or other AOC clients.
This is a clarification to why AOC has an account for inventory. The assortment of goods
ordered are quite diverse and are recorded according to what the cost of purchase was. There are
several accounts used in the process of receiving and sending goods. Typically, the summation of
the following accounts will give the current value of the inventory account. The accounts are:

2.2.3 Other Current Assets and Deferred Charges

2.2.4 Short Term Investments (if Applicable)

This account involves investments with a duration that is less than a year.

2.3 Cash and Cash Equivalents

The Cash Flow statement shows all the cash inflows and outflows that the company experiences
in a given period. Every transaction made by AOC will be charged via the bank account. Next to
that, all payments received will also be visible on this account. The balance for Cash and Cash
Equivalents can be found on the bank statement at the end of the period needed. But it is required
for AOC to report the specifications, which includes the inflows and outflows regarding CCE.
AOC uses the indirect cash flow method for the calculation of the CCE. The indirect method
adjusts accrual basis net profit or loss for the effects of non-cash transactions. The following
instruction will provide an in-depth look at how this account is calculate. To start things off, a
component from the income statement is taken into account, namely: ‘net income before taxes’.
This will be the starting amount used in calculating the current CCE. The reason is because all
the current costs have already been subtracted making the list shorter and less complicated to
interpret. By subtracting the costs made in a given period, the cash mutation is calculated. The
cash mutation will be added to the opening balance of the previous year. Naturally if the
mutation is negative, it will be subtracted from the CCE opening balance. Ultimately, by adding
or subtracting the mutation, the current account balance for CCE will be identified. This should
be identical to what is stated on the bank statement that was mentioned at the beginning of this
paragraph. To avoid differences in AOC records regarding the bank account, the process of bank
reconciliation is implemented.

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2.4 Equity
2.4.1 Stated Capital & Additional Paid in Capital
The Stated Capital & Additional Paid in Capital amounts are valued at their historical value.

2.4.3 Unappropriated Retained Earnings

The procedure for calculating the retained earnings of a given year can be done by; taking the
opening balance of the account and adding/subtracting the results calculated in the income
statement also known as the net income. AOC, AOC subsidiaries and AOC investment results
should always be managed in this account. The specification of each net income should be
recorded in the Equity section of the financial statement for further clarification on the matter.

2.4.4 Comprehensive Income-Hedging

This account is used for the adjustments made concerning the fair value of assets that are usually
not recognized in the income statement. It concerns the following items:

1. Unrealized gains and losses on available for sale securities

2. Gains and losses on derivatives held as cash flow hedges
3. Gains and losses resulting from translating the financial statements of foreign subsidiaries
4. Actuarial gains and losses on defined benefit plans recognized
5. Changes in the revaluation surplus.

To illustrate the mechanics of the procedures concerning these items, the tangible assets will be
used as an example. The tangible assets are depreciated every year according to the standards.
Aside from that, these assets are revaluated at a point in time each year. Ultimately, the fair value
at the date of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses will be the ending balance of the tangible asset. Naturally, any
surpluses/shortages have to be recorded somewhere. These can be found in this account. Any
change in the assets carrying amount will be added to this account. So if there is an increase, it
would mean that an assets value has become greater or vice-versa. Moreover, any surpluses or
shortages must be recognized in the income statement as such.

2.4.5 Other Reserves

2.5 Long Term Liabilities

2.5.1 Long Term Notes Payable
AOC is able to receive loans from certain stakeholders, namely; SAOC and Pandlewood. These
companies provide AOC with long term loans, which falls under this account. An increase in the
balance would mean that AOC received a loan or in some cases an additional amount aside from
the current loan. Like other accounts, ending balance minus beginning balance gives the
mutation made in a certain period. The accounts that are applicable to this case are:

2.5.2 Deferred Tax Liability

Because the rules that govern financial and tax accounting differ, temporary differences arise
between the two sets of books. This can result in deferred tax liability, when the real tax payment
according to tax accounting is lower than that according to financial accounting. Deferred tax
liability commonly exists when there are differences between tax and financial accounting in

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depreciating fixed assets, recognizing revenues and valuing inventories. According to the IFRS,
it is required that this account be valued at nominal value.

2.6 Current Liabilities

2.6.1 Accounts Payable
Accounts Payable account is meant for the payment of the vendors and other costs in relation to
AOC activities. This account is divided into four different accounts, i.e. vendor, ASC, Bolanter
and Interest Accrued.

Vendor
Essentially, this account works like any other AP account. If there is an increase in the balance
amount, it would mean that goods or services were purchased. Contrary, if there is a decrease,
logically it would mean that some of the outstanding balances have been paid. The ending
balance for this is account is, the outstanding balances at the end of the given period for
reporting.

ASC
ASC is a separate company operating in the US. It executes assignments on behalf of AOC and
bills the costs made to AOC. The procedures for this account is the same as for the vendors.

Bolanter Corporation N.V.

Like ASC, the account represents the service done by Bolanter on behalf of AOC. The
procedures for this account is the same as for the vendors.

Interest Accrued Pandlewood

The interest that has to be paid to Pandlewood, has been accrued in this account and decreases
steadily each time a payment is made. Taking the accrued amount into account minus the
payments made to this account in a period, will give you the current balance. Naturally, if there
has been an increase in the account balance, it would mean that AOC has received an additional
loan and the amount of accrued interest has become greater.

Interest Accrued S-Oil

Like Pandlewood, the total interest that has to be paid to SAOC has been accrued. The same
rules that are applied to the Pandlewood account, are applied in S-Oil.

2.6.2 Retentions Payable

2.6.3 Income Taxes Payable

2.6.4 Other Accrued Liabilities

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Appendix 9: Thesis Solution Based on the Three Components

Risk: Consequences: Inherent Risks (Level 1) Residual Risks (Level 2) Solution Result
Ousting of Executives Complex Business Models
People Having educated employees on IFRS or providing further educational development on this standard
Credit Rating Impairment Mergers and Acquisitions
Decrease in Stock Price Globalization Reporting risks mitigated
Misstatements Processes Defining the compilation process and have it recorded in an accounting manual for future references
Restitutions (in Case of Fraud) Decentralization internally
Bankruptcy Third-party Administration
Systems IT Monitoring, External Service Provider to support IT
Company Image Impairment Evolving Accounting and Financial Requirements

Constant Variable