Annex 10.B Methodology for Assessing Accounting and Auditing
At the inception of the assessment, policy makers identify the relevant stakeholders who have an interest in accounting and auditing matters. The stakeholders may include securities market regulators, banking regulators, NBFI regulators, accounting and auditing firms, professional associations, institutional investors, and officials from the Finance Ministry. A National Steering Committee (NSC) composed of those selected stakeholders is then formed and chaired by a high-ranking government official. Throughout the ROSC process, the NSC provides input on all of the issues being reviewed. It also acts as the World Bank’s counterpart in preparing the ROSC report and country action plan, as well as the intermediary with the government in securing approval for the publication of the final report. Finally, it oversees implementation of the action plan. However, the actual degree and manner of the NSC’s involvement in the assessment phase varies across countries and is stipulated at the outset within the terms of reference. NSC members can, for example, assist Bank staff members through regular meetings as the Bank staff complete the questionnaires or can fill in the questionnaires themselves. The assessment is conducted by using the four-part diagnostic tool (described in the following four sections) and is carried out by means of prepared and standardized questionnaires.
This assessment involves gathering data on the following areas (this detailed list is not allinclusive) and essentially provides an overview of the country’s institutional framework.
• Statutory Environment: Companies Act, Commercial Code, securities market, and banking and NBFI regulations, as well as accounting and auditing laws
• Public Accounting Profession: regulations, professional bodies, certifications and licensing arrangements, public perceptions, and liability and indemnity insurance
• Academic and Professional Education and Training: academic and professional programs, examinations, and experience requirements
• Accounting and Auditing Standards: standards, code of ethics, and independence
• Monitoring and Enforcement: respective regulatory authorities for banking, securities markets, NBFIs, insurance and the auditing profession, and the stock exchange
• Quality and Availability of Financial Reporting: availability of reporting
• Various Issues: country data, securities markets, financial institutions, forms of business enterprises, and the accounting profession
This assessment involves gathering data to determine the framework for the preparation and presentation of financial statements and the major gaps between national and international accounting standards. The preparers also interview national experts, including those with jurisdiction over setting national standards. To assess the gaps, the assessment asks the following three questions (plus follow-up questions) for each of the 41 IAS and IFRS:
• Has the respective standard been adopted as a national standard?
• Are the following accounting treatments and disclosures (as they pertain to that IAS) specifically mandated by the national standards?
• What is the effect of any difference between national standards and IFRS on the relevance and reliability of the financial statements for external users?
This process reviews sample sets of financial statements of public interest entities, including the listed companies, to determine the level of compliance with existing national standards. The review, which requires the involvement of independent reviewers with appropriate technical knowledge, also focuses on institutional arrangements underpinning the quality of auditing and accounting practices. The response to the questionnaire is supplemented by a due diligence review that is conducted by members of the assessment team. The questionnaire addresses 18 topics, including components of financial statements; presentation of balance sheets, income statements, cash flows, and changes in equity; consolidated statements; interest; foreign currency translation; and income taxes. For each given topic, it presents the applicable IFRS requirement and asks the following three questions:
• What is the equivalent national accounting requirement?
• Do financial statements comply with the national accounting requirements?
• If no, then how has the item been treated?
The objectives of this component are (a) to determine the conformity of local auditing standards and requirements with ISA and the related IFAC Code of Ethics for Professional Accountants and (b) to assess the degree of compliance with local auditing standards and requirements. The questionnaire is supplemented by a due diligence review that is conducted by the assessment team, including a facilitated discussion among local professional accountants in public practice. Observance of the 33 ISAs is reviewed by means of the following format. A brief outline of the ISA is provided, followed by the following questions:
• Has this standard been adopted as a national standard, or are there local standards addressing all requirements of this standard?
• Has the local body issued guidance to facilitate the implementation of the standards? If yes, what are the key effects of such guidance?
• Are the following concepts (of the ISA) addressed in local standards?
• Have local standards on matters of relevance in the country (that are not covered by ISAs) been developed on the basis of the conceptual framework embedded in the standard?
• To what extent, if any, does practice tend to differ from the strict wording of the written local standard or standards addressing the requirement of this standard?
• What are the difficulties faced by professional accountants in public practice to fully comply with this standard?
After the assessment is completed, the assessment team conducts an extensive due diligence review on the basis of all the data collected. This process involves the following steps:
• A detailed review of the findings arising from the diagnostic tool
• An inception and closing meeting with the NSC
• Meetings with representatives of the Ministry of Finance, respective regulator of the securities industry, banking sector, insurance and other NBFIs, professional accounting bodies, listed companies, financial institutions, other public interest entities, and institutional investors
• A roundtable with the major auditing firms to discuss the issues faced in the conduct of audit engagements
• Interviews of knowledgeable in-country stakeholders, especially financial statement users
The assessment team then presents a final report outlining its factual findings and puts forth policy recommendations to help the country enhance its accounting and auditing standards and practices. The report is reviewed by the NSC. The team may also organize
workshops whereby various national stakeholders discuss the report’s findings and policy recommendations. Those deliberations should lead to improved policy recommendations.
The action plan is prepared by the NSC on approval of the final report by the authorities. The World Bank, on request by the authorities, may assist in developing the plan. The action plan addresses the most significant areas for improvement and focuses on specific, realistic, and achievable goals. Its implementation may be overseen by the NSC. Combined with the country report, the action plan can contribute to the design of loans, assist in the preparation of key policy documents, and provide benchmarks for the design and monitoring of technical assistance and capacity building programs. The World Bank may, if requested by the government, assist in gathering resources for implementation of the plan. However, long-term developmental programs are necessary for achieving results from accountancy reform initiatives.