Reports on the Observance of Standards and Codes (ROSC)

Frédéric GielenLead Financial Management

SpecialistEurope and Central Asia Region

LATVIA

THE WORLD BANK

Background:

ROSC - LATVIA

The Need for a Strengthened International Financial Architecture1990s – Emerging Market Crises and contagion effects

Mexico

Brazil

Argentina

Philippines

Background:

The Need for a Strengthened International Financial Architecture1990s – Emerging Market Crises and contagion effects

East Asia (Thailand)

Philippines

Malasya

Hong Kong

Indonesia

Taiwan

South Korea

ROSC - LATVIA

Background:

The Need for a Strengthened International Financial Architecture

Shift from ex-post crisis resolution

ROSC - LATVIA

Ex-ante crisis prevention

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Background:

Origins of the ROSC program

The G-22 Reports: focus on crisis prevention

- Transparency and Accountability (Led to ROSC program)

- Strengthening National Financial Systems

- Government guarantees to the private sector

The ROSC program: Comprises 12 Fundamental Standards

Securities Regulation

Banking Supervision

Accounting & Auditing

Corporate Governance

Insurance Supervision

Insolvency & Creditor Rights

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Importance of High Quality Accounting and Auditing

Accounting and

Auditing

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Development of Capital Markets

Job Creation

Financial Stability

Private Sector Growth

Financial Sector Development

Improved Access to Credit

Financial Information

ECONOMIC GROWTH

A&A ROSC: Assessing the Quality of the A&A Framework

ROSC - LATVIA

Economic Context

Legal & Institutional Framework

Accounting in Practice

Auditing in Practice

RecommendationsFINDINGS

Factu

al A

ssessm

en

t

Perc

ep

tion

s

A&A ROSC: Assessing the Quality of the A&A Framework

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Benchmarks:

International Financial Reporting Standards

International Standardson Auditing

Acquis communautaire Good international practice

A&A ROSC: Global Coverage

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Latin America and the Caribbean

Europe and Central Asia

Middle East and North Africa

Africa

South Asia

East Asia

A&A ROSC: in Europe and Central Asia (August 5, 2005)

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The Case of Latvia: Economic Goals

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- Access to credit, particulary for SMEs

- Development of capital markets

- Development of the private sector

- European Union Integration

Promote: Avoid:

How can A&A help?

ROSC - LATVIA

Accounting and

Auditing

Development of Capital Markets

Job Creation

Financial Stability

Private Sector Growth

Financial Sector Development

Improved Access to Credit

ECONOMIC GROWTH

ROSC is a the first step in the process of reform

Statutory Framework

Monitoring & Enforcement

Education & Training

Accounting Profession &

Ethics

Accounting Standards

Auditing Standards

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All supporting pillars need to be strengthened

ROSC - LATVIA

Statutory Framework

Monitoring & Enforcement

Education & Training

Accounting Profession &

Ethics

Accounting Standards

Auditing Standards

Latvia A&A ROSC Findings

ROSC - LATVIA

Substantially adopted and implemented

Acquis Communautaire regarding Company Law

IFRS

ISA

Acquis Communautaire

Good International Practice

(+)(-)

ROSC - LATVIA

Latvia A&A ROSC Findings

Financial information is not always readily available

(45% of companies do not comply with reporting

requirements)

IFRS

ISA

Acquis Communautaire

Good International Practice

(+)(-)

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Latvia A&A ROSC Findings

High quality at entry into the audit profession

IFRS

ISA

Acquis Communautaire

Good International Practice

(+)(-)

ROSC - LATVIA

Latvia A&A ROSC Findings

Possible shortage of auditors (Supply /

Demand imbalance)

IFRS

ISA

Acquis Communautaire

Good International Practice

(+)(-)

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Latvia A&A ROSC Findings

Lack of external quality control for auditors;

lack of public oversight over the audit

profession

IFRS

ISA

Acquis Communautaire

Good International Practice

(+)(-)

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Latvia A&A ROSC Findings

Existence of a multi-disciplinary regulator

(FCMC)

IFRS

ISA

Acquis Communautaire

Good International Practice

(+)(-)

ROSC - LATVIA

Latvia A&A ROSC Findings

Enforcement of accounting standards is

not high on FCMC’s agenda

IFRS

ISA

Acquis Communautaire

Good International Practice

(+)(-)

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Latvia A&A ROSC Findings

Potentially material departures from IFRS might go undetected

IFRS

ISA

Acquis Communautaire

Good International Practice

(+)(-)

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Latvia A&A ROSC Findings

The quality of IFRS financial statements of

listed companies is generally high

IFRS

ISA

Acquis Communautaire

Good International Practice

(+)(-)

ROSC Recommendations: Promoting Confidence in Latvian MarketsFinancial Information

that Meets Users’ Needs

Trust in Audit Quality

Availability of Financial

Information

Monitoring& Enforcement

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Financial Information that Meets the Needs of Users

Good financial information promotes better business and investment decisions

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- Full transposition of acquis communautaire

- Remove potentially conflicting or ambiguous financial reporting requirements

Trust in Audit Quality

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If users cannot trust audit reports, the cost of doing business increases.

- Continuing professional education, quality assurance and discipline

- Public oversight of the audit profession

- Relevant statutory audit requirements

- Ethics

Availability of Financial Information

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Information that is readily available makes business and investment more efficient.

- Audited financial statements of listed companies and limited liability companies should be readily and publicly available.

Monitoring and Enforcement

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Essential to guarantee the quality of financial information.

- Enhance the authority of FCMC

- Enhance institutional capacity of FCMC

- Promote a healthy but challenging dialogue between FCMC and auditors

Implementing the ROSC Recommendations

National Steering

Committee

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IAIS

IFAC

IASB

DevelopmentPartners

Basel Committee

European Commission &Committees

World Bank