Monday, Sep 17, 2012

(Adds statements, detail.)

-- Arqaam and Ernst & Young To Pay $50,000 Apiece Within 28 Days

-- Arqaam Breached Reporting Rules, E&Y Breached Auditing Standards, Regulator Says

-- Case Related To Accounting For 2009 Valuation Of Artwork

By Asa Fitch

Of ZAWYA DOW JONES

DUBAI (Zawya Dow Jones)--Arqaam Capital and the international accountancy firm Ernst & Young have agreed to pay fines of $50,000 apiece to settle a case brought by the regulator of the Dubai international financial center over breaches of its rules in the way the Dubai-based investment bank valued eight contemporary artworks in its 2009 financial statements.

The Dubai Financial Services Authority, the financial center regulator, reached the settlement Sunday night with Arqaam and Ernst & Young on the eve of a public hearing before the center's Financial Markets Tribunal. In addition to the fines, a reduction from the $75,000 the DFSA initially sought, Arqaam has agreed to restate its 2009 accounts within 28 days, according to the text of a settlement agreement reviewed by Zawya Dow Jones.

Arqaam failed to comply with international financial reporting standards and Ernst & Young failed to comply with international auditing standards in relation to Arqaam's 2009 accounts, according to a DFSA statement issued on Monday.

"Where authorised firms and auditors are in breach of DFSA legislation, in this case by not meeting accounting or audit standards, the DFSA will hold such firms to account," DFSA chief executive Ian Johnston said in the statement. "It is important that the financial statements of financial services firms are clear and do not have the potential to mislead."

The DFSA had alleged that Arqaam and its auditors Ernst & Young had contravened the DFSA regulations and international accounting standards in the way Arqaam valued eight artworks by the contemporary Iranian artist Farhad Moshiri in its 2009 accounts.

After purchasing the artworks for $200,000 in 2007, Arqaam had them appraised at $2.45 million two years later and approached Ernst & Young about how to reflect the increase in value in its accounts, according to the DFSA statement. After those discussions, Arqaam in September 2009 executed a sale of the artwork dated June 29 and a buyback of the work which was dated June 30, the statement says.

The DFSA alleged that this constituted a breach of its rules, but did not allege that Arqaam and Ernst & Young acted dischonestly, intended to decieve or that the valuation on the art was not accurate.

Arqaam and Ernst & Young contested the allegations, which led to the tribunal hearing.

In a statement issued Monday, Arqaam said the settlement involved various conessions by the DFSA, including the reduction in the fines. While Arqaam restated its 2009 accounts and the notes to its 2010 accounts, the agreed settlement "confirms that there was no mis-statement of Arqaam's income or losses and will not affect subsequent years," the Arqaam statement said.

"Arqaam's balance sheet, income statement and cash flow numbers in its 2009 accounts remain the same (save for a correction to the netting off entries in the cash flow) and the notes and disclosures thereon will be improved," the statement said. On that basis, Ernst & Young has agreed to provide an unqualified audit for the accounts, the statement added.

Arqaam stressed that there was no allegation of dishonesty by the DFSA "or that the valuation was not genuine, or that anyone suffered loss."

Arqaam is an emerging markets investment bank that provides services including cash equity, asset management, credit trading, custody and research. It is owned privately by wealthy Arab Gulf investors.

Ernst & Young said in an emailed statement that "we are satisfied with the outcome of the process and are appreciative that all sides were able to reach this amicable agreement."

Although it was cut short by the settlement, the Financial Markets Tribunal hearing was the first of its kind in the DIFC. The DFSA, which oversees financial activity in the free zone, has taken many enforcement actions since its founding seven years ago, but none had led to a public tribunal hearing.

"This is the first occasion on which this tribunal has had to deal with a set of live proceedings," Stewart Boyd, the president of the tribunal, said Monday.

The DFSA's highest-profile enforcement to date is the case of Damas, a Dubai-based jewelry company. The DFSA in 2010 dissolved the company's board and leveled Damas with a $700,000 fine after an investigation revealed a series of unauthorized transactions. The three brothers who owned the company were also ordered to pay a $3 million fine.

-Write to Asa Fitch asa.fitch@dowjones.com

Copyright (c) 2012 Dow Jones & Co.

(END) Dow Jones Newswires

17-09-12 1334GMT