Well, as for Egypt, you know, Egypt's stock market has been one of the strongest stories in emerging markets this year.
The EGX 30 is up around 25% year to date and is once again approaching the all-time high it set in May.
And here's why this is notable.
Foreign investors have been net buyers of Egyptian equities in every recent session, even as they have pulled back from Egyptian government debt.
Foreign capital, in other words, is becoming selective.
It's picking companies, not just markets, and this raises the question every serious investor should be asking what makes a company worth picking?
And it comes down to trust in the numbers.
So are companies disclosing their real risks?
Are auditors challenging management?
Are boards providing genuine oversight?
With the 2nd quarter earnings season about to begin and interest rates holding at 19%, those questions are about to be tested.
And joining me today to answer them is Dr.
Riem Assam Bir, associate professor of accounting at Cairo University and at Graceland University in the United States.
Her research covers audit quality, corporate governance, and the future of the audit in the age of AI, including work on Egyptian listed companies themselves.
Dr.
Reem, it's a pleasure having you.
Thanks for having me today, Basil.
So Dr.
Rehm, you've done something you people in this debate have done.
You've actually tested the quality of Egyptian listed companies' numbers empirically in your research on accounting consistency and earnings quality on the EG.
Based on that evidence, when a foreign investor reads an Egyptian financial statement today, how much can they trust what they see?
Indeed, the foreign investors can really trust the financial statements for the companies and firms listed in the Egyptian stock exchange, and this is like when I compare it with 1520 years ago, there was a huge improvement in financial reporting.
Why?
Because the Egyptian market regulatories and also financial authority regulatory did a lot of effort in increasing the reporting quality and increasing the compliance requirements.
On my research, as you said, that I tried to investigate the relation between account inconsistency in the financial statements from one side and also. earnings quality from the other side.
Moreover, how they affect the stock return synchronicity in the Egyptian stock market.
My results indicates that it's not only about financial statements.
It's a lot of variables around the market when investors, more specifically, as you said, the foreign investors, they focus on the financial statements as well.
As a lot of variables around the financial statements, and let me clarify it.
When you invest in emerging markets like Egyptian stock exchange, it is quite different than investing in developed markets like, for example, the New York Stock Exchange.
Why?
Because financial statements analyzed a lot of the evaluation in the emerging market.
But in the market, yes, there is a lot of factors.
The investors can focus on the financial statements and do the evaluation, but in the emerging market they need to read a lot of supplementary data like corporate governance report, independent audit report, and a lot of other variables like ownership structures and concentration to make a whole evaluation.
For the stock price, thank you for highlighting this very important difference.
And if we focus right now on what's on the issues, let's say, of the Egyptian market, where do you think is the biggest gap right now?
Disclosure quality, auditor independence, board oversight, or enforcement maybe?
If you had to tell an investor where to be most skeptical, what would you say?
It's very hard to tell the investor where to be skeptical or where to focus more because a lot of variables they're affecting the evaluation process and decision making also.
So if we take, if we look at the audit independence in Egypt, we have a lot of independent CBAs firms that they meet high level of auditor regulations of the independence.
They perform professional.
Skepticism, professional judgment, so other factors like you said, enforcement in Egyptian Financial Regulatory Authority in Egypt, they did a lot of enforcement effort.
They high or increased the requirements for listing companies in the Egyptian stock exchange, and they are very hard or sharp to meet this listing requirement.
And also for the corporate governance characteristics or how we evaluate the board of directors, there's a lot of criteria for the board of directors, like for example, diversification, the number of meetings, the quality and independency of the board of directors.
So a lot of factors.
So I cannot pick one and ask the investor, be careful for this.
It has to be rather the overall picture.
Yes, it's the overall picture.
It's a lot of variables affecting the decisions.
I see now in Egypt, 2nd quarter results are about to hit the market after a huge run in valuations, as we know.
Historically, is a rising market when reporting discipline improves or when it quietly deteriorates because everyone is making money and no one is asking questions.
Absolutely this is a question to answer from behavior finance, not really about the pure finance or the traditional finance theory.
We need to take behavior, behavior finance in consideration because the people who are making the decision at the end of the day, they are human.
They have their own thoughts, their own beliefs.
They was, if there was a rumor, if there was, for example, her behavior, so.
From finance behavioral finance perspective, yes, they are very happy with a very good image.
We call it bull market.
They are very happy with high returns, with really high valuation for the price, but be careful.
I advise the investor, be careful.
Remember, let me go back very quickly for the financial crisis.
In 2006 and 2005, what happened in 2008, that all of the risk indicators were there, by the way, but because the expanding in mortgage market and investors were very happy with the results, with the valuation, with the prices, they ignored the risk indicators of the red flags.
So yes, it's very A buoyant to take into consideration that we need to be careful, not every raising or good indicators of the price.
Maybe they are hiding or masking a lot of weakness of performance or a violation of the standards or requirements.
Absolutely.
So going back to your research once.
It shows that key audit matters, that the section of audit report that is supposed to flag the real risks can actually reduce management's ability to hide bad news and reduce the risk of a stock price crash.
In practice, on the, are these disclosures giving investors real warnings, or have they become boilerplate that nobody reads?
Absolutely, we can answer this question how the CBAs use this paragraph to indicate or to deliver a message to the financial statements user or the board of directors or the stockholders.
So this paragraph, which is like one decade issued like from 2017 when the public accounting oversight. encouraged auditors to report about this key or critical audit matters in their report so they can take it as a message to deliver to the shareholders, but at the same time, OK, we keep the management or the board of directors' right to have a clean audit report.
So I'm paying attention or grabbing the attention.
For the investors, there were some red flags or risk indicators.
At the same time, I cannot reach the level that I will issue negative audit report or unqualified audit report.
So yes, it could be taken as an indicator for any risk that the investor can face in the future.
Dr.
Riem, it's been amazing getting this kind of insight, valuable insight through your own research.
Doctor Reemaamvier, thank you very much for being with us today.
Thank you.
Have a good one.
