Conference on International Financial Reporting Standards
From Diagnostic to Reform: The World Bank’s Accounting and Auditing ROSC
Program
By Frédéric Gielen
Senior Financial Management Specialist, U.S. CPA, Réviseur d’Entreprises
Europe Central Asia Region, World Bank
Slide 1:
Your Excellencies, Ladies, and Gentlemen:
Minister Alekperov’s, Mr. Campbell’s, and Mr. Sharifov’s statements send a very strong
message to the observers in attendance and emphasize that the Government, senior
officials, and the corporate sector recognize the importance of the agenda.
In this presentation I would like to describe why we, at the World Bank, strongly believe
accounting, financial reporting, and auditing are of paramount importance to our mission
and then turn to the instrument we have developed to help interested countries, i.e. the
ROSC1 Program.
Slide 2:
When historians look back on the final quarter of the 20th century, they will no doubt
regard it as a defining period in the evolution of global financial arrangements. The
ascendancy of free market principles supported the transformation from a government-led
to a market-led global financial system. At the same time, we became aware during this
period of the emergence of financial instability as a key policy concern.
In 1997, the world observed major financial crises in Indonesia, South Korea, and
Thailand, soon to be followed in August 1998 by the Russian crisis and the crisis in
Brazil in 1999. These crises had a detrimental impact on the lives of poor people who
lost their jobs, their savings, etc.
The IMF,2 the World Bank, and the governments of the world major economies decided
on initiatives to reduce the risk of such crises happening again in the future. The answer
was to build the foundations of the financial system of the 21st century into a system that
1
2
ROSC = Reports on the Observance of Standards and Codes.
IMF = International Monetary Fund.
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is better capable of promoting robust improvements in living standards within an open
international economic and political order. They identified accounting and auditing as
key areas to mitigate the risk of crisis.
Slide 3:
We then had further evidence that bad accounting and auditing have negative
consequences. With all accounting scandals we see on the screen it is now obvious that
bad accounting and auditing are not only a problem in emerging countries but also in
developed countries.
As you know one of the consequences is that one of the major accounting firms simply
disappeared. A certain Mr. Arthur Andersen in 1932 had said: “If the confidence of the
public in the integrity of accountants’ reports is shaken, their value is gone.” When you
see what happened to the firm bearing his name 70 years later you can see how right he
was.
Slide 4:
What we draw from financial system crisis and company specific scandals is that good
accounting and auditing make a significant contribution to financial system stability and
economic growth.
Without high quality information and disclosure a market economy cannot work
efficiently due to distortions in resource allocation. If markets cannot work efficiently,
there is less or no economic growth, which results in less or no reduction in poverty.
This is why the World Bank takes a very close interest in matters of accounting and
auditing. This is key to the mission of the World Bank: the fight against poverty!
Slide 5:
After the crisis of the late 90s, the G7 got together with the IMF and the World Bank to
address this issue. The approach was to identify (sometimes, to develop) and implement
a set of codes or standards that pertain to key elements of the financial system
infrastructure.
The codes and standards define the “rules of the game” of a well-
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Conference on International Financial Reporting Standards
functioning and sound financial system. This endeavor has come to be known, somewhat
grandiosely, as building an international financial architecture.
The objective of the new international financial architecture is to ensure the public is
provided with reliable and essential information about the financial condition,
performance, and risk profiles of a country’s enterprises. The Reports on the Observance
of Standards and Codes, or ROSC, and more specifically the accounting and auditing
review module was born in this context. Financial statements prepared and audited in
accordance with reliable accounting and auditing standards is one of the pillars of this
new international financial architecture.
Slide 6:
The ROSC has two major dimensions.
One is to encourage countries to adopt
international standards and codes. A second is to assess countries to measure how much
progress they have made in implementing these standards. That is the purpose of the
ROSC.
With the permission of the country authorities, the ROSC reports are published so that
international market participants can assess the degree of care they need to take when
doing business in particular countries. But perhaps more importantly coming out of the
ROSC assessment is a Country Action Plan to improve the quality of financial reporting
in particular countries. The World Bank does not walk away, we actually stay with our
“client countries” to assist them in implementing the reform agenda.
After a few years we update the assessment to communicate with the outside world how
much progress has been made.
Slide 7:
In the Europe and Central Asia region, we have already covered a majority of countries,
including the countries, which have joined the European Union (EU) on May 1, 2004, the
countries, which are preparing to join the EU. We are also working in Kazakhstan and
Ukraine. On the bottom right hand corner of the screen, you can see some other countries
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Conference on International Financial Reporting Standards
elsewhere in the world where we have also conducted such assessments. All of these are
countries where the World Bank lends but you will also see here the United Kingdom.
The reason for mentioning all of this is to show you that we bring to the assessment all
the experience we have gathered to date from more than 50 countries.
Slide 8:
In this context, I would like to underline the proactive role of the Azeri Government and
its partners in the regulatory community and the corporate sector.
Azerbaijan has
expressed its willingness to conduct a ROSC accounting and auditing assessment, as
done by all other countries I have just mentioned. The diagnostic review will start in
June 2005 and we hope that the policy recommendations, which will be made in the
ROSC accounting and auditing review, will lay the foundation for a reform agenda and a
concrete action plan.
These reforms will need to be squarely addressed. The task is a broad one. It hinges on
ensuring a mutually supportive role between the Government, the regulators, the
corporate sector, and the auditors. The Government must ensure that the various parties
are endowed with the necessary means and incentives to pursue their tasks with
effectiveness, with appropriate degree of autonomy, and without hindrance of conflict of
interest. Given the spotlight of recent events in the United States and the European
Union, the environment is probably more propitious than ever to pursue these objectives
vigorously.
The World Bank is honored to play an active role in this process in close coordination
with our partners at the Asian Development Bank, the European Commission, and
bilateral donors.
Thank you.
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