As Prepared for Delivery “ACCOUNTING FOR CRISIS:
PUBLIC AND PRIVATE SECTOR PERSPECTIVES” Chuck McDonough Vice President and Controller The World Bank Remarks at at the IFAC Council Seminar Berlin, November 16, 2011 Thank you Göran for those words of welcome, and good afternoon to everybody. Let me start by offering a word of apology for not being able to join you in person. I have a number of commitments in Washington this week that have precluded me from coming to Berlin, and I’m very disappointed that I wasn’t able to be with you today, but I am grateful to the organizers for arranging this opportunity to speak to you on video. This seminar will be considering various perspectives on the global financial crisis, so I thought I’d get things started by talking a little bit about: • The economic significance of the crisis and some of its consequences, especially the implications for the poor which is the focus of the World Bank; • The important role of accounting, auditing and financial management of governments; and • The Bank’s commitment to addressing problems in this area I’ll then wrap up with a couple of observations about the profession. It’s difficult to overstate the global economic significance of the financial crisis. What started as a collapse of the sub-prime mortgage market in the United States quickly spread through the financial system, eroding the value of capital and undermining the creditworthiness of global financial institutions. Concerns about underlying asset valuations caused liquidity to dry up, making it difficult to finance transactions in the real economy and the financial sectors. This in turn resulted in a contraction in demand and employment, and a collapse in consumer and business confidence. The drop in output in the developed world had real direct knock-on effects in the developing countries, especially those that are relatively export-dependent and reliant on external borrowing. The collapse in demand has affected levels of remittances to developing countries, contributed to falling trade volumes and created a sharp drop in trade finance, and resulted in a dramatic decline in the level of foreign direct investment across all regions the Bank works with. As a result, millions of people in low income countries have been pushed back below the poverty line, where they are likely to remain as long as fuel and food prices – typically the largest components of household budgets – remain at historically high levels. Whereas previous financial crises have been quarantined in particular regions –Latin America in the 80s, Asia in the 90s – this crisis is different as it demonstrates that the interconnectedness of the global economy and it has also demonstrated the possibility of contagion. Previous financial crises have also tended to be of limited duration, with countries growing their way out of trouble. That hasn’t happened this time. A number of intersecting factors have created the perfect storm for governments and for the people that they serve – Losses on securities due to the first wave of the crisis Losses created through the bailouts of financial institutions Shrinking tax revenues due to the recession following the initial crisis And increased borrowing costs due to all of these factors, and because lenders are demanding an additional risk premium given uncertainty around the world – and because banks are contracting their balance sheets. Against this backdrop, it’s striking how the financial management practices of governments, which have been a major factor in the length and the severity of this downturn, have escaped serious scrutiny. National governments are responsible for the management of significant assets and liabilities, and the associated inflows and outflows of resources – including volumes of publicly traded debt that dwarf equity trades in all capital markets. Yet they’re not subject to the same disciplines that publicly listed corporations face. Governments don’t have to report according to a designated set of financial reporting standards, and most governments do not even have a balance sheet. This lack of transparency in reporting and accountability to stakeholders is what enabled the Greek government to misreport its debt position over an extended period; it is a contributor to the Euro crisis. Reporting practices regarded as acceptable during a time of plenty have created panic at a time when precision is needed. It doesn’t seem unreasonable to expect that in the 21st century governments would Report on a more sophisticated basis than cash accounting Account for all activities and controls associated with their work And account for assets, liabilities, revenues and expenses in a manner consistent with private sector practice, except in those very rare cases where there are good public sector reasons for adopting different treatments. We know that most governments don’t even get the basics right. But in the wake of the crisis we’re not hearing loud demands for reform – quite the opposite. In fact, it’s because the crisis itself strengthens the incentives on governments to remain opaque – but it’s disappointing that there have not been more vocal calls for action from stakeholders. A credible commitment from the G-20 to facilitate the adoption of accrual accounting by governments would be a very useful first step – and I commend the lobbying efforts of IFAC leadership to make this a reality. The Bank is committed to tackling these problems in a number of different areas and I would like to address these in two parts – first, I’d like to say a few words about the Bank’s direct response to the crisis. Then I’d like to talk a little bit about our involvement in international accounting and auditing. Since the onset of the crisis in 2008, the World Bank Group has committed 200 billion dollars to developing countries, including record commitments in education, health, nutrition, population, and infrastructure, providing much-needed investments in crisis-hit economies. Throughout the crisis, the Bank Group has helped keep children in school, health clinics open, and microfinance flowing to women. To boost food security, we’ve increased annual financing for agriculture to 8 billion dollars a year, up from 4.1 billion in 2008. And we’ve increased support to the drought-stricken Horn of Africa to approximately 2 billion dollars. But although growth has recovered in many developing countries, demand for our assistance remains high. The World Bank Group committed 57 billion dollars in fiscal 2011, including 16.3 billion to the poorest countries. In terms of the work we do on international accounting and auditing, we’ve long recognized the contribution that high quality accounting and auditing can make to sustainable economic development and financial stability. We view accounting and auditing as a global public good and the Bank has long-established a tradition of involvement in international discussions on financial reporting. Our level of engagement has substantially increased since the Asian Crisis, as has the extent of our analytical and advisory work in support of partner country reforms. For example, the international community conferred responsibility for carrying out Reports on the Observance of Standards and Codes assessments for Accounting and Auditing to the Bank, and we take the lead among the Bretton Woods institutions in this field. In addition, as a preparer of financial statements in its own right, and being significantly dependent on audit assurance for fiduciary purposes in relation to our investments and our projects, the Bank has a special direct interest in accounting and auditing and its performance. Our engagement has multiple objectives To support the development of high quality international accounting and auditing regulations, standards and pronouncements – dissemination and implementation of accounting and auditing standards at national level We recognize that these are important global public goods that contribute to economic development, financial stability, and the fight against poverty. We try to ensure that governance arrangements for setting international accounting and auditing requirements are such that the public interest is decisive, and that proper regard is paid to the perspectives and constraints of the Bank’s partner countries. We also try to ensure that setting international financial reporting requirements takes into account the Bank’s specificities both as a preparer of financial statements and as a user those statements to evaluate the quality of our projects and investments. To serve the international community through the provision of high quality diagnostic studies on financial reporting and requirements, the Bank performs A&A ROSC which attempt to evaluate accounting and auditing practices in our partner countries. We also try to support our partner countries with the design and implementation of government-led accounting and auditing reform programs, primarily to respond to their own development needs, but also – indirectly – to facilitate greater fiduciary controls over the use of the funds that Bank provides our clients. Our engagement extends across multiple organizations: • We’re involved in the Financial Stability Board • We’re also involved in the Public Interest Oversight Board • The Monitoring Group • And various organizations of IFAC and the IASB • We’re also involved in the International Forum of Independent Audit Regulators • And the International Public Sector Accounting Standards Board, which we look to take the lead in driving the adoption of accrual-based accounting by governments Building on the Bank Group’s association with the Global Reporting Initiative, we recently became active in the International Integrated Reporting Council. The Bank is active on a number of fronts as you can see, and we have some degree of influence in the development of international accounting and auditing standards. The issues these organizations are tackling are not easy to resolve, but we believe the time we’re contributing is an investment in the future. Let me close by offering a few observations on the state of the accounting profession globally, noting at the outset that I think the challenges are very different in developed world versus the developing countries. In developed countries, the profession faces a crisis of relevance. In repeated financial crises, the perceived early warning function of effective audit has clearly not been effective: many governments around the world now own financial institutions that received clean audit opinions prior to collapse. I don’t think it’s fair to place all the blame on the audit profession – I am from the profession and I believe the profession is doing all that it can. And I also recognize, that management is primarily responsible for financial statements and regulators for oversight. But I do think there are difficult questions to be asked, and I also believe that the profession needs to be more at the forefront of answering these questions and leading the way rather than responding to regulatory mandates. I also think we need to be clear about how best to manage the tensions that arise when the profession’s commercial interests collide with its public interest obligations. For this reason, we fully support initiatives that stimulate debate on the issues, and we’ve been adding our own voice to the public discussion. In developing countries, the challenge is radically different. In many environments, the capacity challenges are severe. The quality of accounting education is low, there’s a shortage of good recruits, training opportunities are limited, professional bodies are weak, and a culture of compliance with standards is unfamiliar. Weak capacity in accounting and auditing is a finding that emerges consistently from our ROSC work. To address the chronic capacity issues, the Bank is active in a couple of ways: first, with its analytical and advisory work to support country programs for reform in the accounting and auditing arena. Second, at a global level, working towards a memorandum of understanding with IFAC and the donor community to build strong professional accountancy organizations in our partner countries. Finally, let me underline a point I made earlier – I think the leadership IFAC has shown in the wake of the crisis and its proactivity in keeping governmental financial reporting issues front and center of the debate have been exemplary. Such leadership is much needed and must continue. All that remains for me at this point is to wish you the best of luck with your deliberations today. May all of you have a very successful seminar. |
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