Lessons from Latin America in improving financial reporting
The drive to improve frameworks for financial reporting is not unique to Europe. A recent World Bank study surveys the results of recent efforts to improve the quality of financial reporting in Latin America and the Caribbean (LAC) and finds many similarities between Europe and Latin America in the main challenges facing effective reform.
The book, Accounting for Growth in Latin America and the Caribbean: Improving Corporate Financial Reporting to Support Regional Economic Development (download to the full publication as PDF), identifies the broad trends in financial reporting reforms in the region’s 17 countries and distils the lessons learned.
The book finds that, although most of the countries in LAC now have what appear to be fairly complete statutory corporate financial reporting frameworks, this is not enough to produce a well-functioning system of financial reporting. In addition, efforts to improve capacity to implement the rules and to enforce compliance with them are also required.
Adjusting the statutory framework to meet business and public-interest needs
As far as the design of standards is concerned, most LAC countries have adopted or are moving towards adopting IFRS as the accounting standard for listed firms. However, state-owned enterprises (SOEs) are often subject to laxer reporting requirements, weakening the accountability of these firms and making it more difficult to manage such firms in the public interest. In contrast, small and medium-sized enterprises (SMEs) are often subject to excessively stringent requirements, discouraging entrepreneurs from setting up or expanding and encouraging them to operate in the informal or underground economy.
Improving financial reporting and audit capacity
Obtaining a university degree is the main entry point to the accounting profession in LAC but the content of university courses often lags behind recent developments. The study recommends that universities modernize their accounting curricula and that the professional bodies play a bigger role in setting the qualifications required to become an accountant. A certification system, ideally on a joint basis between countries, culminating in a professional examination would ensure that new entrants to the profession meet minimum qualification levels. This is particularly important for external auditors. In parallel, there should also be an increased emphasis on post-qualification training (continuing professional development – CPD) to allow existing members of the profession to keep up to date.
Ensuring compliance with the rules
Throughout LAC, there are problems in ensuring that financial reporting requirements are observed. Regulators of financial institutions and securities markets generally possess adequate legal powers but often lack the expertise to use them effectively. In addition, there has been much less progress in LAC than there has been in Europe in establishing independent oversight of the audit process. Instead, professional bodies still operate on the basis of self-regulation in much of the region. The book sees the establishment of genuinely independent oversight of auditing and improvements in the capacity of regulators to enforce the rules as priorities for reform.