Accounting and Auditing of Financial Derivatives: The Case of Maridive & Oil Services (MOS)

Accounting and Auditing of Financial Derivatives: The Case of Maridive & Oil Services (MOS)

Mohamed Hegazy (American University in Cairo (AUC), Egypt) and Karim Hegazy (Crowe Dr A. M. Hegazy & Co, Egypt)
DOI: 10.4018/978-1-60960-583-4.ch002

Abstract

The Egyptian Capital Market Authority (CMA) examined the company’s financial statements for the year ended on December 31, 2008, while the auditors’ reports forced the company’s management, despite the objection of two of the company’s auditors, to restate its financial statements at December 31, 2008, and modify its profit appropriation statement after their publication to shareholders and the public. The research presents the problems related to the application of the International Accounting Standards no 32 and 38 “Financial assets and Derivatives,” their Egyptian equivalents, and the Egyptian Standards on auditing no 700 and 702. Further, the research identifies the differences associated with auditors issuing contradictory audit reports for a company’s single set of financial statements.
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Introduction

The following case is divided into three main sections. The first section provides a detailed background about Maridive & Oil Services Company, showing the development of the company from a medium size marine services company into an international company providing a variety of marine and oil support activities, including maintenance, installations, rescue aid, erections, towage whether above, outside, and/or under water, as well as land establishments. The same section also highlights the management structure and competitive strengths used to achieve the growth seen by MOS since 1978 and the company's future strategy that is required to maintain its competitive edge in the market for marine and oil services. The second section summarizes the financial information of the company for the period 2006-2008 showing its financial position, results of operations and elements of corporate governance applied to enhance MOS’s management performance. While, the third section presents the nature of financial derivatives, mainly the characteristics of the swap agreements made between MOS and the two international banks and the dispute occurring between the Egyptian Capital Market Authority (CMA), management of MOS and its auditors. MOS management charged the effects of ineffective swap analysis into the company’s special reserve for 18.6 million based on the Companies Act 159 for 1981 and the company’s articles of incorporations. Also, the company capitalized 1.6 million representing the cost of obtaining a loan, without taking in consideration the requirements of the Egyptian Accounting Standards. Details about the accounting and auditing treatments of the swap losses and capitalization of the costs of obtaining the loan are presented. The question of whether the requirements of laws have a priority over the application of both the accounting and auditing standards is discussed showing the need for future research to investigate such issue in other accounting and auditing cases.

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