In an unprecedented action, the Dubai-based Financial Markets Tribunal (FMT) sanctioned Arqaam Capital and global consultancy and auditor Ernst and Young and ordered each to pay $50,000 for failing to comply with reporting and auditing standards, respectively.

The basis of the ruling was an art deal done by investment bank Arqaam, located in Dubai's financial hub DIFC and regulated by the Dubai Financial Services Authority (DFSA). In 2007, Arqaam bought eight paintings from the same artist for $200,000. Only two years later in 2009, the investment bank later marked the collection up to $2.45 million.

This revaluation reduced Arqaam's annual losses of the year 2009, when the global financial crisis culminated, by 21 percent.

The marked up value was audited by Ernst and Young. The DFSA saw the transaction and the consequent auditing in violation with International Financial Reporting Standards (IFRS) and with International Standards of Auditing (ISA). "Arqaam failed to make disclosures, as required under IFRS as to the nature of the increase that such a treatment would require," the DFSA said.

Regarding the auditing, the DFSA said that "Ernst and Young gave an unqualified audit opinion that the 2009 Accounts present fairly, in all material respects."

However, the DIFC-regulator added that neither Arqaam nor its auditing firm Ernst and Young had any bad intentions or dishonesty when they did re-valuation and the auditing, respectively.

During the hearing at the FMT is an independent tribunal of the Dubai Financial Services Authority (DFSA), which Xinhua followed in court, a controversy came up over the DFSA's demand to open the hearing to the public which the court sustained.

Arqaam's appointed law firm Clifford Chance raised concerns over the DFSA's move to do the hearing in public "because some of the details and documents of the case are not related to it and Arqaam regards them as confidential."

As a comprise, both sides agreed to settle the issue mutually and to keep the details of the settlement agreement private.

In its written order, which Xinhua has seen, the FMT, headed by its president Stewart Boyd, said that Arqaam Capital and Ernst and Young failed to comply with IFRS and ISA, respectively.

"Arqaam and E&Y will each pay a fine of 183,500 Dirham ($50,000) to the DFSA within 28 days and Arqaam and Ernst and Young will pay the DFSA's costs of the investigation and the FMT proceedings within 28 days," said the order.

It was the first time that the DFSA was a disputing party at a tribunal, the Financial Markets Tribunal.

The Chief Executive of the DFSA, Ian Johnston said: "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.

It is important that the financial statements of financial services firms are clear and do not have the potential to mislead. "

He added that "The action taken by the DFSA and the FMT's orders confirm the DFSA's commitment to maintaining international standards within the Dubai International Financial Centre (DIFC)."