why financial reporting matters - world...

Why Financial Reporting Matters

Vienna, 25 March 2009

John Hegarty

Head, World Bank Centre for Financial Reporting Reform


The Need for a Strengthened International Financial Architecture

1990s – Emerging market crises and contagion effects

East Asia (Thailand)

Philippines

Malaysia

Hong Kong

Indonesia

Taiwan

South Korea



2000s – Developed market crises and contagion effects

The persistent and global challenge of ensuring high quality financial reporting – this is neither a regional nor a one-time problem



Shift from ex-post crisis resolution

Ex-ante crisis prevention


Financial reportingA fundamental foundation

Insolvency & Creditor Rights

Corporate Governance

Insurance Supervision

Banking Supervision

Securities Regulation

Accounting & Auditing


Importance of high quality financial reporting

ECONOMIC GROWTH

Corporate Governance,Accounting

and Auditing

Development of Capital Markets

Job Creation

Financial Stability

Private Sector Growth

Financial Sector Development

Improved Access to Credit


The simple logic

“No transparency, no trust; no trust, no credit; no credit, no investment; no investment, no growth!

So there is a simple logic: financial reporting is an essential building block for financial intermediation, foreign investment,and sustainable economic development.”

Martin GruellRaiffeisen International


Importance of the infrastructure for implementation, not just standards

Monitoring & Enforcement

Statutory & Regulatory Framework

AccountingStandards

Education & Training

AuditingStandards

AccountancyProfession& Ethics


All supporting pillars need to be strengthened

Monitoring & Enforcement

GovernanceStandards

Statutory & RegulatoryFramework

Education & Training

Accounting & AuditingStandards

Professionalism& Ethics


European Union

International Dimension

Acquis communautaire CEBS (Banking)

CEIOPS (Insurance)

CESR (SecuritiesMarkets)

International benchmarks


Limited liability companies in the EU

5,000,000 –7,000,000

Total number of companies

3,700,000Small companies

66,000Medium-sized

companies

Large unlistedcompanies

8,000Listed

companies


The enabling environmentMarket demand for high quality financial reporting» The role of disclosure in governance and regulatory regimes» Public access to audited financial statements» Patterns of financial intermediation and enterprise ownership» Significance of foreign direct and foreign portfolio investment» The political economy costs and benefits of transparency

Capacity to comply» Education, training and experience» Reaching a critical mass of demand for relevant skills» Financial sustainability of reforms» Leveraging resources on an international scale

Determining role of oversight / monitoring / regulatory bodies


Scope of application of international standards» Severe risks to the culture of compliance when the scope of

application is inappropriate» IFRS/IAS not suitable for use by all enterprises - widespread general

purpose reporting obligations for enterprises other than “public interest entities”

» Managing the “Big GAAP / Little GAAP(s)” distinction» However, ISAs suitable for all audits – “an audit is an audit”» Risks of an excessively broad statutory audit requirement

» Possibility of different assurance engagements» Principles-based standards -v- rules-based enforcement» Future of national standard setters» Linkage between general purpose and prudential reporting

» Separate systems or IFRS + Prudential Filters


Oversight, monitoring, enforcement» The inability of third party users to observe compliance» Reliance on reputational agents; limits of self-regulation» Determining role of oversight / monitoring / regulatory bodies» Absence of agreed international best practice models» Lack of appropriate mandates, resources, methodologies» Lack of leverage when specialist regulators are not concerned with

general purpose financial reporting» Principles-based standards -v- rules-based enforcement» International audit firm networks acknowledge role of oversight in

ensuring quality


Strength of the EU acquis» Force of law, due process, legitimacy» Based on recognition that high quality corporate governance and

financial reporting are an essential underpinning for cohesion and competitiveness in the Single Market

» Comprehensive coverage of all pillars of the governance and reporting infrastructure

» Integration with other aspects of regulation» Europe in a global context – international standards and relations with

third countries» But … the challenges of implementation:

» Strengthening of institutional and human capacity required for effective implementation and enforcement

» The acquis is a moving target, tight deadlines


Role of the World Bank» Special mandate in the field of corporate governance and financial

reporting conferred by the international community as part of the standards and codes / international financial architecture initiative

» Responsible for the diagnostics underpinning program design (Corporate Governance and A&A ROSC assessments)

» Independence and objectivity» Participation in international regulatory and standard-setting

processes, and partnerships with relevant EU and international organizations

» Ability to mobilize global knowledge and expertise, and to manage multi-country programs

» Focus on relevance to developed MIC partner countries


Development of CFRR activities» Diagnosis (ROSC program) » Assistance with country action planning (IDF, FIRST, CTF)» Mobilization and management of financial resources to support

implementation (trust funds, fee-for-service, lending operations)» Interventions at regional as well as national level» Partnerships» Knowledge cascade» Donor cooperation and coordination» Knowledge management» Development of new tools and approaches


European Commissioner McCreevySound financial reporting is an essential condition for market economies to work properly. Improving the quality, comparability and transparency of the financial information is crucial for the Internal Market, as well as for strengthening economic links between the EU, candidate and potential candidate countries, and other third countries.

I am delighted to have been invited to the opening of the World Bank Centre for Financial Reporting Reform here in Vienna. This is an important milestone in the work of the World Bank and emphasizes its commitment to strengthening financial reporting standards in Europe and Central Asia. I am also convinced that the opening of this office will further strengthen the excellent cooperation between our institutions.

We have come a long way in our work towards creating an appropriate framework for financial reporting and auditing, but there is more to be done. This goes for national implementation, as well as our joint efforts to come to global financial standards. We are thankful for the commitment of the World Bank to support countries in their moves towards closer integration with the EU and towards better financial reporting.

We very much welcome the contribution of the World Bank to promote the use of international standards on auditing in the Member States that joined the European Union after 2004. The work of the World Bank greatly contributes to the effective implementation and enforcement of the EU acquis, in particular with respect to public oversight and external quality assurance systems.

www.worldbank.org/cfrr

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