competitiveness, and profitability. sound accounting systems also enable investors in assessing the real financial value of enterprises. the systems also assist in attracting capital, both foreign and domestic. looking ahead, i believe that a major challenge for directors and executive management is to find directors who are sufficiently independent but still knowledgeable about the business of the financial institution. independence reflects qualities of objectivity, experience, insight, and force of character. the need for directors to possess this blend of technical knowledge plus independence is critical, given the increased complexity of most banking activities and the rapid pace of change in financial markets and practices. getting the right balance of expertise and independence so that the board does not rubber - stamp the decisions of top management is a major challenge. now, turning to saudi arabia, as the central bank and the banking supervisory authority, sama has played a leadership role in strengthening corporate governance in the banking industry in saudi arabia since its establishment. you may be surprised to learn that as early as 1981, sama issued a document entitled " powers and responsibilities of the board of directors of commercial banks in saudi arabia ". this document, in a comprehensive manner, guided the board members on compliance to banking control and company laws, required the implementation of a system of accounting and internal controls and assigned the board the responsibility for monitoring the assets and liabilities, investments and profitability of the bank. this was followed by a guidance document in 1996 on the role of the audit committee of the board. this document in substantial detail provided guidance to the banks on the composition, mandate, role and responsibilities of their audit committees. in 2004, sama issued another important circular affecting the bank directors and senior managers entitled : " qualifications and requirements for appointments to senior positions in banks licensed in saudi arabia ". the circular is aimed at ensuring that directors and senior managers have sound reputation and are persons of integrity and honesty. furthermore, over the past two decades, sama has issued additional governance related regulations and guidance to banks operating in saudi arabia. these include circulars on internal controls ; know your customers rules, anti - money laundering and combating terrorism financing and prevention of fraud. also, there are specific regulations on the role of the external auditors and on the internal audit function. sama also requires the board of directors to establish a specialized compliance function that monitors the compliance of the organization with regulations and standards, and has a reporting line to the board or one of its committees. moreover, sama requires all banks to apply the

roles in this respect. the senior management should set a comprehensive business strategy ; oversee day - to - day decisions that support the long - term objectives and policies determined by the board. to ensure financial stability, the execution of the overall objectives of the firm must be supported by rigorous internal supervisory controls and effective risk management. an effective internal control system is critical for providing reasonable assurance and producing appropriate timely information by the organization that would help in discovering and correcting errors promptly. such a system will also promote the organization's operational efficiency and ensure compliance with managerial policies, laws, regulations, and other prescribed mechanisms. effective risk management is based on a foundation of good corporate governance and rigorous internal controls. risk identification in all activities is a core function of any financial institution. at the same time, the institution must have in place the technical systems and management processes necessary to effectively measure, monitor, and control risks. an effective risk management and control structure must be supported by an institutional culture that ensures that written policies and procedures are actually translated into practice. the institution's culture is determined by the philosophy and the behaviour of its board of directors and the senior management. in particular, the actions of senior management and consistency of their decisions and behavior with the values and principles they articulate are critical in shaping the institution's culture. it is vital that senior managers should emphasize their commitment to ethical behaviour, effective risk management and rigorous controls and that these principles should be continuously applied to all levels of the organization. the other important factor that supports financial stability is effective market discipline, which also contributes significantly to good corporate governance. when market participants obtain timely, accurate, realistic and latest information about the institution's performance, their investment and credit decisions can be a means of pressure and incentives for managers and boards of directors for managing their risks soundly. equally important, the same market participants can penalize firms that fail to manage their risks soundly. therefore, market discipline must be supported by adequate public disclosure and compliance with sound accounting standards. knowing a company's risk appetite and its approach and methodologies for managing risk is essential to assessing the institution's future. progress in the disclosure area, however, requires that accounting standards are enhanced to ensure proper valuation and to reflect innovations, in terms of both new products and modern risk management techniques. accounting systems serve a variety of purposes, the most prominent of which is helping creditors and investors make rigorous and informed decisions as to which enterprises meet the market needs in terms of efficiency,