AUDIT COMMITTEE - World Bank · MIGA – FY11 Review of Guarantee Portfolio, Risk Management and Provisioning Arrangements. Discussion focused on improvements in MIGA’s regional

AUDIT COMMITTEE

2011 Annual Report to the Board of Executive Directors

March 2012

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2011 Audit Committee Annual Report

Abbreviations and Acronyms

AOB Approval on an absence of objection basis BCM Business Continuity Management CoW Committee of the Whole COSO Committee of Sponsoring Organizations of the Treadway Commission CRS Conflict Resolution System FMTAAS Funding Mechanism for Technical Assistance and Advisory Services FY Fiscal Year GAAP Generally-Accepted Accounting Principles IAD Internal Audit Vice Presidency IBRD International Bank for Reconstruction and Development ICSID International Centre for the Settlement of Investment Disputes IDA International Development Association IFC International Finance Corporation IFIs International Financial Institutions IFRS International Financial Reporting Standards INT Integrity Vice Presidency IT Information technology LEG Legal Vice Presidency LTIP Long-term Income Portfolio MAAG Multilateral Audit Advisory Group MDB Multilateral Development Banks MICs Middle-income countries MIGA Multilateral Investment Guarantee Agency MTSF Medium Term Strategy and Finance OP/BP Operational Policy and Bank Procedure SBL Single Borrower Limit TORs Terms of Reference TRE Treasury Department VPU Vice Presidential Unit WBG World Bank Group

2011 Audit Committee Annual Report

2011 ANNUAL REPORT TO THE BOARD OF EXECUTIVE DIRECTORS

TABLE OF CONTENTS

I. INTRODUCTION ........................................................................................................................... 1

II. FINANCIAL REPORTING ............................................................................................................. 1

III. FINANCIAL POLICY..................................................................................................................... 2

IV. RISK MANAGEMENT ................................................................................................................... 4

V. INTERNAL AUDIT VICE PRESIDENCY (IADVP) ................................................................... 5

VI. INTEGRITY VICE PRESIDENCY (INTVP) ................................................................................. 6

VII. OTHER ............................................................................................................................................ 6

ANNEX I: TERMS OF REFERENCE OF THE AUDIT COMMITTEE ............................................ 8

ANNEX II: LIST OF COMMITTEE MEETINGS: NOVEMBER 2010 – OCTOBER 2011 ............. 13

2011 Audit Committee Annual Report 1

AUDIT COMMITTEE

2011 ANNUAL REPORT TO THE BOARD OF EXECUTIVE DIRECTORS

I. INTRODUCTION

1. This report provides an overview of the main issues and recommendations that emerged from Audit Committee deliberations from November 2010 through October 2011. It is organized thematically, addressing: (i) financial reporting, (ii) financial policy, (iii) risk management, (iv) Internal Audit Vice Presidency, (v) Integrity Vice Presidency, and (vi) other issues.

2. Membership. The Committee was composed of Messrs. Chatterji, Cipollone, Fayolle, Hagan, Manao, Solomon and Studart and Ms. Mokate. Mr. Chatterji and Mr. Hagan began the period as Chair and Vice-Chair, respectively. During the period, Mr. Chatterji left the Board and was replaced on the Committee by his successor Mr. Prasad. Also during the period, Mr. Hagan left the Board and was replaced on the Committee by his successor Mr. Whitehead. After these departures, Ms. Mokate was selected as Chair and Mr. Cipollone was selected as Vice-Chair.

3. Work Program. The Committee met 28 times and considered 67 items between November 1, 2010 and October 31, 2011, including several joint discussions with other Standing Committees, three Committee lunches and a retreat. The Committee also met time to time in Members-only closed sessions for briefings from INTVP on specific cases. These meetings resulted in 43 Reports to the Board from the Audit Committee (“green sheets”) for the year. Annex I contains the Audit Committee’s Terms of Reference, approved by the Board on July 15, 2009. Annex II lists the work program with items discussed by the Audit Committee during the period of November 1, 2010 to October 31, 2011. In February 2011, the Committee began the practice of grouping regular quarterly reporting into a single meeting, called “Quarterly Day.” These discussions covered quarterly financial statements for IBRD/IDA, IFC and MIGA, an update on recent market developments, the Board Quarterly Risk Report, the Treasury Quarterly Report and the IAD Quarterly Results and Activity Reports.

4. Acknowledgement. The Committee wishes to express its appreciation for the valuable assistance provided by the following, without whom it would not be able to conduct its work effectively: The Chief Financial Officer, CFRVP, CROVP, CTRVP, GSD, IADVP, INTVP, LEGVP, OES, OPCS, TREVP, the management and staff of IFC and MIGA who contributed to the Committee’s work, and the partners and staff of KPMG LLP (external auditors).

II. FINANCIAL REPORTING

5. IBRD/IDA Financial Statements. During 2011, the Committee discussed IBRD/IDA quarterly financial statements on February 9 and May 9. In February, Management highlighted two recent accounting changes and their impact on the statements and the Committee discussed the rising cost of financing employee pension liability. In May, the discussion centered around factors that drive volatility in the financial statements and Management’s efforts to address this. In each case, the Committee recommended approval of the financial statements by the Board on an absence-of-objection basis. On August 1, the Committee discussed the FY11 Annual Unaudited Financial Statements and draft Management’s Discussion and Analysis. Management confirmed that the performance of IBRD and IDA was consistent with projections made throughout the year. KPMG confirmed that the significant deficiency reported in 2010 regarding systems change management controls had been fully remediated. The Committee endorsed the financial statements as audited and recommended them for Board approval.


6. IFC Financial Statements. The Committee met three times in the period under review to discuss IFC’s financial statements, quarterly statements on February 9 and May 9, and the FY11 annual statements on August 1. On February 9, discussion topics included the product mix of new commitments, the outlook for IFC’s net income, overall growth rates for IFC business, the rising cost of financing employee pension liability, the decline in Deployable Strategic Capital and reporting on development effectiveness in financial statements. On May 9, the discussion covered the role of benchmarks in IFC’s quarterly and annual reporting and planning, the accounting treatment of IFC’s investment portfolio, and the effect of credit risk ratings on IFC’s portfolios. On August 1, the Committee discussed IFC’s annual financial statements. Members praised the quality of IFC’s documents, particularly the clear and concise executive summary. In response to questions, IFC clarified that the decline in equity investment commitments was not related to the AMC, that it saw country credit risk increases in 10 countries this year and that there were two large equity write-downs and one large loan going into NPL status in the MENA region in the last quarter. On risk appetite, IFC agreed to come back to the Committee at a future date after consulting the group CRO. The Committee endorsed the annual consolidated financial statements and recommended them for Board approval.

7. MIGA Financial Statements. The Committee discussed MIGA quarterly financial statements on February 9 and May 9, and MIGA annual financial statements on August 1. On February 9, there was discussion of MIGA’s reinsurance framework and some technical questions about certain items on the balance sheet. On May 9, topics included the effect of recent developments in the MENA region and the decline in effective premium rates. On August 1, discussion focused on MIGA’s cover for Non-Honoring of Sovereign Financial Obligations (NHSFO), which, after discussions with KPMG, MIGA had decided would receive the same accounting treatment as MIGA’s other political risk insurance covers.

III. FINANCIAL POLICY

8. Medium-Term Strategy and Finance (MTSF) Paper. On April 25, 2011 the Committee met jointly with the Budget Committee to discuss the IBRD/IDA MTSF. Members and speakers expressed broad support with the strategic directions outlined in the paper, the South Sudan Trust Fund and the building of institutional contingency funds to allow flexibility in responding to unexpected crises and events. There was extensive discussion of loan pricing and principles. There was broad support for the principle of covering lending related costs which amounted to 70% of administrative costs and for the need to have a lending spread of 44 basis points for covering these costs. There was also broad support for keeping FY12 loan prices unchanged and for maintaining total loan price spreads at the current level of 54 basis points as a critical element of the commitments made at the 2010 Spring Meetings. While a number of shareholders supported the proposed approach to pricing principles, others expressed concerns with terming the 10 basis points as “borrowers’ contribution to financial sustainability and development” as they had concerns on its analytical basis and label. Several members and speakers expressed doubts that the Bank can remain relevant and effective over the medium term with a continued flat budget policy, while others welcomed Management's commitment to a flat budget. There was also discussion of the connections among Post Crisis Directions, regional strategies and budget priorities and tradeoffs. Other issues discussed on the budget side included: cost savings associated with the modernization agenda, decentralization costs and depreciation policy; and on financial side: real value of equity, waivers and reasons for Asian Development Bank (ADB) having more competitive pricing than the Bank.

9. Allocation of FY11 IBRD Net Income and Waivers of Loan Charges for FY12, 2011 Review of New Loan Pricing, and FY11 Credit Risk and Loan Loss Provisioning. On April 25, the Committee held a discussion of an interim assessment of FY11 Credit Risk and Loan Loss Provisioning. Discussion focused on the use of benchmarks, specifics of the various scenarios and assumptions used by the team, and the Single Borrower Limit (SBL). On June 10, the Committee met to discuss FY11 IBRD Net Income and Waivers of Loan Charges for FY12, a Final Assessment on FY11 Credit Risk and Loan Loss Provisioning and the 2011 Review of New Loan Pricing. Discussion focused on the application of the


SBL and loan pricing principles. The Committee recommended that the Board approve all of Management’s recommendations in the three papers on an absence of objection basis. On August 1, the Committee reviewed the final Net Income Allocation numbers and approved Management’s recommendations.

10. Use of IFC’s FY11 Net Income. On July 20, the Committee discussed the Use of IFC’s FY11 Net Income. The primary focus of discussion was the amount and timing of IFC’s transfer to IDA. The Committee recommended that the Board approve Management’s recommendations.

11. MIGA Financial Policy. On May 18, the Committee discussed a Review of MIGA’s Exposure Limits and Portfolio Risk Management. MIGA briefed the AC on its ongoing review and reform of exposure and risk management, and presented their updates to country and project-specific limits in this context. Members welcomed and supported the limit updates, and urged MIGA to move expeditiously on Phase II of its risk management review. On August 1, the Committee recommended that the Board approve the recommendations in MIGA – FY11 Review of Guarantee Portfolio, Risk Management and Provisioning Arrangements. Discussion focused on improvements in MIGA’s regional and sectoral diversification.

12. Retirement Benefit Plans. On May 25, representatives from the IBRD Treasury made an annual presentation on the status of the Post-Retirement Benefit Plans. Topics covered included the plan history, the 1998 World Bank Group pension reform, current governance structure, investment policy, funded status, and outlook for contributions. Members expressed a strong interest in possible methods to smooth volatility in Plan contributions.

13. IFC Financial Risk Management and Capital Adequacy. On June 15, the Committee discussed IFC FY 11 Annual Report on Financial Risk Management and Capital Adequacy Paper, and forwarded the paper to the Board for information. The Committee supported IFC's use of economic capital as a useful management tool. The discussion focused on: (i) the IDA premium; (ii) Basel III requirements; (iii) countercyclical buffer and stress testing; (iv) country concentration risk and; (v) Overall risk appetite.

14. IFC Treasury. On June 15, the Committee discussed Review of IFC’s FY11 Treasury Activities and Proposed FY12 Program, and recommended that the Board approve the recommendations in the paper. After discussing the use of local currency operations, IFC’s approach to its liquid asset portfolio, borrowing trends and the use of external managers, the Committee endorsed the Corporation's proposed FY12 funding program.

15. Procurement. On January 31, the Committee discussed the FY10 Annual Report on Procurement in World Bank-Financed Projects. Subjects discussed included the alignment of the FY10 Procurement Annual Report with the four pillars of the Procurement Strategy and the update on the progress in the use of country systems, external and Bank-wide partnerships, policy matters, the new Procurement Risk Assessment and Management System (P-RAMS), trends in prior and post reviews and misprocurement, decentralization, staffing and capacity development. The Committee welcomed Management’s proposal to combine the Procurement and Financial Management Reports into a single Integrated Annual Report, starting FY11.

16. Financial Management in Bank Projects. On January 31, the Committee discussed Financial Management in World Bank Operations – Annual Report for FY10. Subjects discussed included: launch of the FM Sector Strategy FY11-13; expanded use of country FM systems; capacity building initiatives in the public and private sectors; strategic partnerships including OECD-DAC Task Force on PFM, MDBs, PEFA, INTOSAI and IFAC; policy matters, decentralization and staffing. A key area of interest was the July 2010 roll-out of the Portfolio Risk Management System (PRIMA) - the first Corporate FM Management Information System for the Sector - to record and monitor FM aspects of investment lending


operations throughout the project cycle. Starting in FY11, the Committee welcomed the proposal to integrate the Procurement and FM Reports into a single Annual Report.

17. Trust Funds Investment Strategy. On June 22, the Committee discussed the paper Investment Strategy Review for IBRD/IDA Trust Funds and Financial Intermediary Funds. Management summarized its current investment strategy and presented three updates to the investment strategy it is implementing beginning in FY12. These updates are (i) broadening the range of asset classes to achieve stronger diversification benefits and address the challenges of the low interest rate environment, (ii) providing the option for eligible funds to participate in a new five-year liquidity tranche (Tranche 4), which will feature a longer-term investment option than currently available, and (iii) establishing a more formal Trust Fund Investment Committee, with representatives from CFP, Corporate Finance and Treasury. The Committee supported Management’s plans.

18. IDA Investment Strategy. On June 22, the Committee discussed the paper Review of IDA’s Investment Strategy. For the IDA16 period, the strategy is being adjusted in three main ways: (1) Tranche 1 will be reclassified as the “Donor Asset and Liability Management” tranche; (2) Voluntary credit repayments will be added to the first tranche, along with donor funds, so they can be invested in order to meet committed disbursements; and (3) The third tranche will be rebalanced more regularly in order to more optimally invest the liquidity. Issues discussed included effects of the current low interest rate environment, the risk/return balance in the investment portfolio and the possible development impact of IDA’s investment strategy. The Committee welcomed the adjustments.

19. Single Borrower Limit (SBL). On December 8, the Committee discussed A Review of SBL Methodology and Process and Aspects of Exposure Management. Committee members and Management discussed whether a rules-based or flexible approach backed up by a pre-agreed, structured process to SBL decisions was the more appropriate choice, and whether all the appropriate criteria were being considered.

IV. RISK MANAGEMENT

20. Integrated Risk Monitoring Report. On April 4, the Committee took up Integrated Risk Monitoring Report (IRMR) for IBRD/IDA, IFC and MIGA. The Committee welcomed the cross-institutional integrated taxonomy and framework as well as the systematic and holistic view of risks across the Bank Group, while recognizing the differences among the three entities. The Committee’s discussion mainly focused on: (i) Senior Management’s view of risks; (ii) the overall risk governance structure of the World Bank Group; (iii) an update on the IDA 14 controls review; (iv) risks associated with engagement in Fragile and Conflict affected states; and (v) risk appetite.

21. Board Quarterly Risk Report. The Committee discussed Board Quarterly Risk Reports (QRR) four times during the period. On December 8, 2010, the Committee discussed the Q1 report, and issues discussed included the reduction in the projected funding cost component of fixed spread IFL loan spreads, the implementation of the equity duration extension strategy, how the Bank's approach to counterparty risk has evolved over time, and the explanation of risk categories in the QRR. When the Committee took up the Q2 QRR on February 9, 2011, issues included the method for determining the spread on IBRD fixed spread IFL loans, liquidity management, the use of stress tests, the Bank’s stop-loss methodology, and the Bank’s model validation process. On May 9, 2011, at the discussion of the Q3 QRR, Management informed the Committee that it was performing a detailed analysis of the investment guidelines, in light of the financial crisis and other recent developments, and will be presenting a proposal for revisions to the CFO in FY12. At the Q4 discussion on September 7, 2011, the CRO reported the launch of a series of initiatives aimed at enhancing Group-wide governance of risk issues and at more directly tying risk to return. The Risk Council, comprising of World Bank Group Senior Management, began meeting in May and is currently reviewing the overall managerial structure for operational risk (as


distinct from operations risk). The Council is also reviewing risk reporting to identify ways to make it more timely and streamlined. A director-level Risk Advisory Group has also begun meeting, and is working on developing a uniform model risk management policy as well as an effort to define risk appetites and tolerances for each of the risks in the WBG risk taxonomy.

V. INTERNAL AUDIT VICE PRESIDENCY (IADVP)

22. Internal Audit Vice Presidency – FY12 Risk Assessment and Work Program. On May 18, 2011, the Committee discussed IAD’s proposed FY12 Risk Assessment and Work Program. The Committee recommended the inclusion of an audit of AMC in IAD’s FY12 Work Program, subject to legal clarification by the IFC General Counsel, and focused its discussion mainly on: (i) IAD’s coverage of AMC; (ii) the Scope and coverage of IAD’s FY12 work program; (iii) Integrated Risk Management (IRM) processes and engagement with the Chief Risk Officer (CRO); (iv) decentralization; and (vi) Budget and staffing adequacy. The Committee requested some revisions in the document, and subsequently approved it on an absence of objection basis.

23. Quarterly Results Reports. The Committee discussed IAD’s four quarterly Results Reports as part of its Quarterly Day agendas. These discussions focused on overdue Management action plans, the balance between rated and unrated engagements, and specific “Needs Improvement” audit results. Also, on October 26, IADVP provided the Committee with a briefing on several “Needs Improvement” audits and the status of overdue management action plans.

24. FY11 Annual Report. On October 26, 2011, the Committee discussed IAD’s draft FY11 Annual Report. The Committee welcomed the report and noted with appreciation the coverage of and balance between broader matters, such as the Group risk appetite, the Modernization Agenda as well as more specific issues of IAD’s work such as the IDA controls review and the IMT strategy.

25. External Quality Assessment (EQA). On February 23, the Committee discussed the report entitled Internal Audit Quality Assessment, which was prepared by the Institute of Internal Auditors (IIA) at the request of the Internal Audit Vice Presidency. The Committee welcomed the overall positive report and noted that most of the issues raised in the 2005 EQA have been addressed, with a more strategic focus on audits with significant impact, a re-structured audit universe and an enhanced quality improvement program based on Key Performance Indicators. Links between annual risk assessment and engagement-level risk assessment have been strengthened. The elevation of IAD to a Vice-Presidency, the changes in methodology and the new Access to Information Policy have also made a positive difference. The Committee focused its discussion on the reported general confirmation of IADVP’s adherence to industry standards, the innovative and leading audit practices and areas for continuous improvement identified by the IIA, the IADVP Draft Terms of Reference (TORs), a broad comparison of this EQA report to the 2005 EQA, terminology used for EQA conformance ratings and the ongoing external review of oversight units.

26. Group Staff Benefits Audit. On March 21, the Committee discussed the report entitled Audit of the Management and Administration of World Bank Group Staff Benefits. IAD noted that the corrective actions developed by Management were adequate and sufficiently robust to address the issues identified in the report. Management indicated that the thrust of the corrective actions was on policy simplification, standardization and a self-service approach with an overall shift from a transaction oriented process to an automated process which enables better oversight and service delivery. The Committee noted that the process of engagement between IAD and Management had been collaborative. Management assured the Committee that the President and Senior Management were committed to ensuring that the prioritized action plan proposed was responsive and duly implemented.


27. Approach to Providing and Overall Opinion. On May 18, IAD presented a proposal to provide an overall opinion based on the body of work undertaken in the fiscal year (Approach to Providing an Overall Opinion). The Auditor General (AG) explained that the Institute of Internal Auditors (IIA) standards do not require internal audit functions to issue macro-level opinions at an institutional level. The AG highlighted the specific factors that would not support the issuance of a positive assurance opinion, specifically: (i) the early stage of the development of the risk management framework; (ii) the absence of clearly defined risk thresholds and tolerances, and (iii) the incomplete integration of the COSO framework into all business processes in the Group. The AG also noted even if these prerequisites were in place, the level of effort and the significant overheads associated with an exercise of that scale may very well exceed the perceived benefits of positive assurance. She also noted that unlike an opinion on financial statements, where the numbers are capable of being substantiated to a level of reasonable assurance, internal audit involved testing a much more abstract set of conditions and therefore there was no “point in time” reporting. In conclusion, she noted that the issuance of such a blanket statement poses unnecessary risk to the institution, since the opinion could be taken to have a broader meaning than intended. IAD proposed that they issue an opinion in the form of an Executive Summary in the annual report which would contain thematic conclusions, provide insights beyond the individual results of audit reviews, and also include an update on the follow-up work on Management Action Plans. The proposed Executive Summary would leverage the results of the work of other oversight units and incorporate the Auditor General’s observations on the institution’s control environment. This would also be consistent with the Access to Information policy (AIP) since the Annual Report is publically disclosed, and there is currently no provision under AIP to disclose individual IAD engagement ratings, as the ratings are covered by the ‘deliberative information’ clause. The Committee agreed with the approach proposed by the Auditor General and suggested that the Executive Summary also include a commentary on the general level of the institution’s risk appetite, emerging trends and the lessons learned.

VI. INTEGRITY VICE PRESIDENCY (INTVP)

28. Quarterly and Annual Reports. The Committee met four times in the period to discuss INT’s quarterly reports. These meetings were on December 15, 2010, February 9, 2011, May 9, 2011 and September 7, 2011. In addition to specific investigations, these discussions generally focused on the development of the Integrity Compliance Office (ICO), progress in pursuing cross-debarment agreements with other institutions, INT referrals of investigation results to member countries, caseload management, and the development impact of INT’s work. On September 7, the Committee discussed, and offered suggestions on, INT’s draft FY11 Annual Report.

29. Independent Advisory Board. On June 2, 2011, the Committee met with the Independent Advisory Board (IAB), an external advisory body for INT, to discuss its 2010 Annual Report. The Committee focused its queries on: (i) the sanctions process; (ii) INT outreach; (iii) case settlements; (iv) the Integrity Compliance Office (ICO); (v) data standardization; (vi) IAB Terms of Reference; (vii) referrals; and (viii) World Bank external oversight mechanisms.

VII. OTHER

30. Sanctions Reform. On July 25, the Committee reviewed a proposed terms of reference for a review of the sanctions regime. The proposed review will be carried out in two-phases: the first phase will focus on the legal adequacy of the current process including the implementation of the reforms since 2004 and the challenges encountered. The second phase of the review would address the larger issues of efficiency and effectiveness of the Sanctions regime. The Committee agreed with the proposal to conduct the first phase of the review internally, and to take a fresh look at the Phase II proposal, including on the question of internal vs. external review, following the results of Phase I.


31. Annual Financial Statement Timing. On April 4, the Committee discussed Considerations Associated with Moving the Schedule of the Audit Committee’s Discussion of the Annual Financial Statements. Management provided three options for the Committee’s consideration: (1) change the fiscal year-end to remove its proximity to the Board recess, (2) adjust the Board calendar by either delaying the recess or considering financial statements after the recess, and (3) enhance engagement with the AC on financial issues but not changing the timing. The first two options involve considerable additional costs associated with realigning accounting and management systems. The Committee agreed to support Option three. A series of seminars was programmed and the Committee was provided early “first glance” previews of the financial statements.


ANNEX I

Approved July 15, 2009

Terms of Reference of the Audit Committee

1. PURPOSE

1.1 The Audit Committee is appointed by the Boards, including the MIGA Board of Directors to the extent separately authorized by the MIGA Board, for the primary purpose of assisting the Boards in overseeing the World Bank Group’s finances, accounting, risk management and internal controls, including:

(i) The integrity of financial statements for IBRD, IDA, IFC and MIGA and financial reporting related to trust funds;

(ii) The appointment, qualifications and independence of the External Auditor;

(iii) The performance of Internal Audit and of the External Auditor;

(iv) The adequacy and effectiveness of financial, accounting and administrative policies and internal controls (including mechanisms for dealing with fraud and corruption); and

(v) The effective management of financial, fiduciary (including procurement procedures), compliance and administrative risks in IBRD, IDA, IFC and MIGA, including trust funds.

1.2 Consistent with this function, the Audit Committee should encourage continuous improvement of, and should foster adherence to, IBRD’s, IDA’s, IFC’s and MIGA’s policies, procedures and practices at all levels. The Audit Committee should also provide an open avenue of communication with the External Auditor, financial and senior management, Internal Audit, the unit responsible for institutional integrity, risk management functions and the Boards.

2. COMPOSITION AND MEETINGS

2.1 Audit Committee members, who for the purpose of this paragraph include alternates and temporary alternates, as designated by individual chairs, shall be free from any relationship that, in the opinion of the Boards would, and interfere with the exercise of their independent judgment as a member of the Audit Committee. All members of the Audit Committee shall have a working familiarity with basic finance, accounting governance, internal audit, and risk management practices and principles and are encouraged to enhance their familiarity with them by participating in educational programs. The Audit Committee shall perform from time to time an annual self-assessment relative to the Audit Committee’s purpose, duties and responsibilities outlined herein.

2.2 The Audit Committee shall meet periodically in separate executive or, where specifically required, closed sessions with Management, the Auditor General, the External Auditor and the head of the unit responsible for institutional integrity to discuss any matters that the Committee or any of the foregoing believes should be discussed privately.


3. RESPONSIBILITIES AND DUTIES

To fulfill its responsibilities and duties, the Audit Committee shall:

3.1 Financial, Fiduciary and Administrative Policies

3.1.1. Review financial policies and other matters having a significant bearing on financial sustainability, portfolio concentration, credit risks, financial risks and exposures, reserving and loan-loss provisioning and the allocation of net income, as well as the integrity of the World Bank Group’s financial reporting and risk management processes.

3.1.2. Review fiduciary aspects of activities, undertakings, and policies of the World Bank Group institutions, focusing in particular on effectiveness and integrity.

3.1.3. Review administrative policies with a focus on the adequacy and reasonableness of controls.

3.2 Documents and Reports

3.2.1. (a) Review and discuss with Management IBRD’s, IDA’s, IFC’s and MIGA’s quarterly and annual financial statements.

(b) Review prior to their release, other relevant and significant reports or financial information (including press releases) submitted by IBRD, IDA, IFC and MIGA to any governmental body, analysts, underwriters, or the public, including management assertions (Committee of Sponsoring Organizations (COSO) and financial statements assertions) and relevant reports submitted by the External Auditor (or summaries thereof).

3.2.2. Recommend annual financial statements for approval to the Boards; review with financial management and the External Auditor the financial statements prior to their publication.

3.2.3. Receive regular activity reports from Internal Audit, the unit responsible for institutional integrity, risk management functions, treasury operations (including information on off-balance sheet exposures) and legal (including any legal matter that could have a significant impact on the organization’s financial statements).

3.2.4. Review periodically for possible update these Terms of Reference, and recommend any necessary amendments to the Boards for approval.

3.3 External Auditors

3.3.1. Review the performance and recommend to the Boards for approval the appointment, compensation, removal and plan for the work performed by the External Auditor for audit and audit-related services, in accordance with the “Principles Applicable to the Appointment of an External Auditor for the World Bank Group”, approved by the Boards in January 2003 (R2003-0005/1, IDA/R2003-0010/1, IFC/R2003-0011/1 and MIGA/R2003-0002/1).

3.3.2. Review and confirm at least annually the independence of the External Auditor by obtaining statements from the External Auditor on relationships it has with the World Bank Group; review annually the Board-approved additional audit-related services provided by the External Auditor to the World Bank Group.

3.3.3. Review annually with the External Auditor, as part of the year-end audit, the External Auditor’s management letter, any problems or difficulties and Management’s response; review the annual External Auditor attestations and report on Management’s internal control report; and hold an annual discussion in


executive session with the External Auditor regarding all critical accounting policies and practices that have been discussed with Management.

3.3.4. At least annually, obtain and review a report by the External Auditor describing its internal quality procedures and any material issues raised by the most recent quality control review. In addition, obtain updates from the External Auditor, as necessary, in connection with any material issues raised by regulators or other authoritative bodies in connection with the External Auditor's practice as a public accountant.

3.4 Financial Reporting Processes and Accounting Policies

3.4.1. Meet with representatives of Management on a periodic basis to discuss any matters of concern arising from the process to assist the President and senior Management in the disclosure of financial information and the annual COSO assertions.

3.4.2. Review with Management major issues regarding accounting policies and financial statement presentations, including any significant changes in IBRD’s, IDA’s, IFC’s and MIGA’s selection or application of accounting principles, and major issues regarding the adequacy of internal controls over IBRD, IDA, IFC and MIGA and trust funds and any special steps adopted in light of potential significant or material control deficiencies.

3.5 Risk Management

3.5.1. Meet regularly with those responsible for risk assessment and risk management; such discussions should include the fiduciary aspects of and risks related to IBRD’s, IDA’s, IFC’s and MIGA’s major exposures in the areas of finance, accounting, operations, trust fund management and administration and stakeholder confidence, and the appropriateness and effectiveness of such functions and strategies for managing or mitigating exposures.

3.5.2. Review Management’s actions to ensure that appropriate risk management functions are in place, and meet regularly with those responsible for risk management functions to exercise oversight.

3.6 Supreme Audit Institutions

3.6.1. Ensure appropriate oversight for audits of the World Bank Group by Supreme Audit Institutions (SAIs) and monitor communication with these SAIs on behalf of the Board in accordance with “A Framework for Audits by the World Bank Group Members’ Supreme Audit Institutions” (R2000-234/1).

3.6.2. Receive regular reports from Management on requests for audits by SAIs and liaise appropriately with the Multilateral Audit Advisory Group as described in the above-mentioned framework.

3.7 Anti-Fraud and Anti-Corruption Measures

3.7.1. Review and recommend to the Board(s) for approval provisions to ensure that the World Bank Group has established and maintained appropriate, efficient and consistent procedures for the confidential and anonymous receipt, retention and treatment of complaints and anonymous submissions from World Bank Group employees or others regarding fraud and corruption, unethical behavior, or questionable accounting or auditing matters.

3.7.2. Review and discuss with the head of the unit responsible for institutional integrity its annual report and work program for the coming year.

3.7.3. Meet quarterly with the head of the unit responsible for institutional integrity to receive updates on the significant activities and outcomes of this unit, in executive session or closed session if required.


Periodically review, with the head of the unit, the operations, organizational structure, budget, staffing, and responsibilities of the function.

3.7.4. On a regular basis and not less than quarterly, meet in closed session with the head of the unit responsible for institutional integrity to discuss any matter that the Audit Committee or the head believes should be discussed in this format.

3.7.5. At its discretion, meet with the head of the unit responsible for institutional integrity, between regularly scheduled meetings, as deemed necessary, to discuss Management plans to address cases, fraud-related or otherwise, related to the reputational and/or financial standing of IBRD, IDA, IFC and MIGA, especially those of possible public interest, in executive session or closed session if required.

3.7.6. Review periodically the role and functions of the Sanctions Board (including the appointment and removal of its members) and other sanctions-related staff and units.

3.7.7. Consult with Management with respect to the Independent Advisory Board (IAB) Terms of Reference and selection criteria; refer matters to the IAB, seek the IAB’s advice and consult with the IAB according to its Terms of Reference; participate in the process for selecting, renewing, and removing the IAB’s members, according to the selection criteria; be regularly updated on the nature and scope of the IAB’s activities and on significant developments relating to the IAB’s activities, and receive and review annual reports and periodic evaluation reports on its activities.

3.8 Internal Audit

3.8.1. The Audit Committee shall assist the Boards in the selection and removal process for the Auditor General as follows, reporting to the Boards and recommending Board actions as appropriate:

(a) In light of the important relationship between the Audit Committee and the Auditor General, and as a part of the Audit Committee’s and the Board’s oversight function and on behalf of the Boards, oversee the processes of selection, replacement and removal of the Auditor General, as follows:1

(i) Participate in, review and advise on the selection of the Auditor General, including participation by the Chair and the Vice Chair of the Audit Committee or another member designated by the Chair in the candidate shortlisting process and on the interview panel for short-listed candidates and consultation by these members with the other Committee members during the process;

(ii) Participate in, review and advise on any intended replacement or removal of the Auditor General prior to the end of his/her term of appointment, at least 30 days in advance of any such action being taken, unless waived by the Committee, in order to give the Committee sufficient opportunity to consider the reasons therefore and to meet with the Auditor General if it considers such action appropriate; and

(iii) Refer any intended replacement or removal to the Board for full consideration of the matter if it considers such action appropriate.

3.8.2. Review and recommend to the Boards for approval Terms of Reference of Internal Audit; periodically review, with the Auditor General, the operations, organizational structure, budget, staffing and responsibilities of the function.

3.8.3. Review and recommend annually to the Boards for approval the Internal Audit work program; request, as circumstances dictate, that specific audits be added to this program.

1 This provision on appointment, replacement and removal of the Auditor General is subject to further review.


3.8.4. Review a summary of the reports to Management prepared by Internal Audit and Management’s response and be regularly briefed on the status of subsequent actions; have access to full audit reports on request.

3.8.5. Review and discuss regularly internal controls over operations and compliance to determine whether such controls are in place and are functioning properly in an effort to prevent misuse of funds and to ensure compliance with key provisions of IBRD’s, IDA’s, IFC’s and MIGA’s charters and policies relating to financial operations, reporting, and management, including trust funds.

3.8.6. On a regular basis and not less than quarterly, meet in closed session with the Auditor General to discuss any matter that the Audit Committee or Internal Audit believes should be discussed in this format, including any significant difficulties, disagreements, or delays with Management, or scope restrictions encountered in the course of internal audit work.

3.8.7. At its discretion, meet with the Auditor General on specific matters between regularly scheduled meetings, as deemed necessary.

3.8.8. Review the effectiveness of the internal audit function, including any plans for and results of external assessment of quality and compliance with the International Standards for the Professional Practice of Internal Auditing, promulgated by the Institute of Internal Auditors.

3.9 Management and Organization of Risk Management and Finance Functions

3.9.1. Review and discuss periodically with Management how IBRD’s, IDA’s, IFC’s and MIGA’s organizational structures ensure the continued integrity of financial management and reporting and the continued adequacy of the governance, risk management, internal controls framework and accounting policies in the respective institutions, taking into account any prospective changes involving these key areas then under consideration by management.


ANNEX II

LIST OF AUDIT COMMITTEE MEETINGS HELD NOVEMBER 2010 THROUGH OCTOBER 2011

Monday, November 22, 2010

Selection of Chairman and Vice Chairman

Wednesday, December 8, 2010 Regular Session A Review of SBL Methodology and Process and Aspects of Exposure Management Followed by Restricted Executive Session Board Quarterly Risk Report - Q1 FY2011

Wednesday, December 15, 2010

Report of the Integrity Vice Presidency (INT) on Fiscal Year (FY11) Quarter 1 (July 2010-September 2010)

Internal Audit Vice Presidency (IAD): (a) FY10 Annual Report (Draft) (b) FY11 First Quarter Results Report (July-September 2010) Monday, January 31, 2011

Procurement Under World Bank-Financed Projects - FY10 Annual Report Financial Management in World Bank Operations - Annual Report for FY10

Wednesday, February 9, 2011 (First Quarterly Meeting Day)

Restricted Executive Session IBRD/IFC/MIGA: Overview of Recent Market Developments (Lead by IBRD) IBRD/IDA Update:

(a) IBRD and IDA Management's Discussion & Analysis and Condensed Quarterly Financial Statements as of December 31, 2010 (Unaudited)

(b) Treasury Quarterly Report - Second Quarter FY2011

(c) Board Quarterly Risk Report - Q2 FY2011

IFC Update: (a) IFC Draft Management's Discussion & Analysis and Condensed Consolidated

Financial Statements as of December 31, 2010 MIGA Update:

(a) MIGA Condensed Quarterly Financial Statements as of December 31, 2010 (Unaudited) The External Auditor (KPMG) Q2 FY11 Presentation (discussed together with the Financial

Statements) Internal Audit Vice Presidency (IADVP) - FY11 Second Quarter Results Report (Draft) Report of the Integrity Vice Presidency on Fiscal Year (FY11) Quarter 2 (October 2010-December 2010)

Wednesday, February 23, 2011

IAD: Internal Audit Quality Assessment Tuesday, March 8, 2011

Lunch with the Auditor-General, IADVP (members only) Monday, March 21, 2011 (Restricted Executive Session)

Internal Audit Vice Presidency (IADVP) Audit Report


Friday, April 1, 2011 Audit Committee Annual Retreat

Monday, April 4, 2011

Restricted Executive Session World Bank Group Integrated Risk Monitoring Report Followed by Regular Session Considerations Associated with Moving the Schedule of the Audit Committee's Discussion of the Annual Financial Statements

Tuesday, April 19, 2011

Lunch with the Vice President, INTVP (members only) Monday, April 25, 2011

Audit Committee Meeting FY11 Credit Risk and Loan Loss Provisioning - Interim Assessment Followed by Joint Audit and Budget Meeting Medium-Term Strategy and Finance Paper

Thursday, April 28, 2011

Informal Meeting - Briefing by INTVP on: (1) Emerging Lessons from World Bank Review of Roads Projects; and (2) Regional Review of INT's Portfolios (members only)

Monday, May 9, 2011 (Quarterly Meeting Day)

Restricted Executive Session IFC/IBRD/MIGA: Overview of Recent Market Developments (Lead by IFC) MIGA Update: (a) MIGA Condensed Quarterly Financial Statements as of March 31, 2011 (Unaudited) IBRD/IDA Update: (a) IBRD and IDA Management's Discussion & Analysis and Condensed Quarterly Financial Statements as of March 31, 2011 (Unaudited) (b) Treasury Quarterly Report - Third Quarter FY2011 (c) Board Quarterly Risk Report - Q3 FY2011 IFC Update: (a) IFC Draft Management's Discussion & Analysis and Condensed Consolidated Financial Statements as of March 31, 2011 The External Auditor (KPMG) Q3 FY11 Presentation (discussed together with the Financial

Statements) Internal Audit Vice Presidency (IAD) - Draft FY11 Third Quarter Results Report

Tuesday, May 17, 2011 Lunch with the Vice President and Group Chief Risk Officer, CROVP

Wednesday, May 18, 2011

Review of MIGA's Exposure Limits and Portfolio Risk Management Internal Audit Vice Presidency (IAD): (a) Draft FY12 Risk Assessment and Work Program (b) Approach to Providing an Overall Opinion Report of the Integrity Vice Presidency (INT) on Fiscal Year (FY11) Quarter 3 (January 2011-March 2011)


Wednesday, May 25, 2011 (Joint with the Budget Committee) Post-Retirement Benefit Plans (Slide Presentation)

Thursday, June 2, 2011

Meeting with the Independent Advisory Board (IAB) (members only) Friday, June 10, 2011

FY11 Credit Risk and Loan Loss Provisioning: Final Assessment Allocation of FY11 Net Income and Waivers of Loan Charges for FY12 2011 Review of New Loan Pricing

Wednesday, June 15, 2011

IFC FY11 Annual Report on Financial Risk Management and Capital Adequacy Paper Review of IFC's FY11 Treasury Activities and Proposed FY12 Program

Wednesday, June 22, 2011

Review of IDA's Investment Strategy Investment Strategy Review for IBRD/IDA Trust Funds and Financial Intermediary Funds

Wednesday, July 13, 2011

KPMG Presentation - FY2012 Audit Plans and Draft Engagement Letters: (a) IBRD/IDA and World Bank Group Trust Funds Operations - Audit Plan

IBRD/IDA - Draft Engagement Letter, and World Bank Group Trust Funds - Draft Engagement Letter

(b) IFC - Audit Plan and Draft Engagement Letter (c) MIGA - Audit Plan and Draft Engagement Letter (d) IFFIm - Draft Engagement Letter (e) GFA - Draft Engagement Letter

Wednesday, July 20, 2011

Use of IFC's FY11 Net Income: Retained Earnings and Designation of Retained Earnings Monday, July 25, 2011

Sanctions Reform - Proposed Terms of Reference for a Review of the Sanctions Regime Monday, August 1, 2011 Regular Session

Unaudited Financial Statements and Draft Management's Discussion and Analysis - June 30, 2011: (a) IBRD and IDA (b) IFC (c) MIGA The External Auditor (KPMG) Presentation (discussed together with the Financial Statements) MIGA FY11 Review of Guarantee Portfolio, Risk Management and Provisioning Arrangements Allocation of FY11 Net Income - Final

Followed by Restricted Executive Session (Members only) Year-end Briefing by External Auditors (KPMG LLP)


Wednesday, September 7, 2011(Executive Session) Selection of Vice Chairman IFC/IBRD/MIGA: Overview of Recent Market Developments Treasury Quarterly Report - Fourth Quarter FY2011 Board Quarterly Risk Report - Q4 FY2011 Internal Audit Vice Presidency (IAD) - Final FY11 Fourth Quarter Results Report Integrity Vice Presidency (INTVP): (a) Annual Report Fiscal Year 2011 (b) Report on Fiscal Year (FY11) Quarter 4

Wednesday, October 26, 2011 Regular Session

IADVP Fiscal Year 2011 Annual Report (Draft) Followed by Restricted Executive Session

Internal Audit Vice Presidency (IADVP) Audit Report IADVP Briefing

For Information

IAD FY11 First Quarter Activity Report IAD FY11 Second Quarter Activity Report IAD FY11 Third Quarter Activity Report Audit Universe Supporting FY12 Risk Assessment and Work Program IAD FY11 Fourth Quarter Activity Report Review of Audits by World Bank Group Members' Supreme Audit Institutions (October 2009-June 2011)

Streamlined Procedure/Endorsed on Absence-of-Objection

Audit of the World Bank Group Headquarters 401(k) Plan Financial Statements Information Statement for 2011: International Bank for Reconstruction and Development