Why Financial Reporting Matters
Vienna, 25 March 2009
John Hegarty
Head, World Bank Centre for Financial Reporting Reform
Why Financial Reporting Matters
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
Why Financial Reporting Matters
The Need for a Strengthened International Financial Architecture
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
Why Financial Reporting Matters
The Need for a Strengthened International Financial Architecture
Shift from ex-post crisis resolution
Ex-ante crisis prevention
Why Financial Reporting Matters
Financial reportingA fundamental foundation
Insolvency & Creditor Rights
Corporate Governance
Insurance Supervision
Banking Supervision
Securities Regulation
Accounting & Auditing
Why Financial Reporting Matters
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
Why Financial Reporting Matters
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
Why Financial Reporting Matters
Importance of the infrastructure for implementation, not just standards
Monitoring & Enforcement
Statutory & Regulatory Framework
AccountingStandards
Education & Training
AuditingStandards
AccountancyProfession& Ethics
Why Financial Reporting Matters
All supporting pillars need to be strengthened
Monitoring & Enforcement
GovernanceStandards
Statutory & RegulatoryFramework
Education & Training
Accounting & AuditingStandards
Professionalism& Ethics
Why Financial Reporting Matters
European Union
International Dimension
Acquis communautaire CEBS (Banking)
CEIOPS (Insurance)
CESR (SecuritiesMarkets)
International benchmarks
Why Financial Reporting Matters
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
Why Financial Reporting Matters
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
Why Financial Reporting Matters
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
Why Financial Reporting Matters
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
Why Financial Reporting Matters
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
Why Financial Reporting Matters
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
Why Financial Reporting Matters
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
Why Financial Reporting Matters
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