Role of the Accounting and Auditing Framework: Relevance to Development and Stability

Accounting and auditing standards of high quality provide the basis for reliable and transparent disclosure of information to relevant stakeholders. Disclosure is crucial for informed financial decisions, efficient resource allocation, and effective functioning of markets. Chapter 4 discusses the fact that they form the core of the information infra­structure needed for financial development. Accounting, auditing, and disclosure require­ments of high quality for financial institutions are regarded as one of the key basic areas of financial reform necessary to prevent a financial crisis.5 By contributing to good corporate governance, high-quality accounting and auditing influence perceptions of risk, cost, and

 

Box 10.2 Main Weaknesses in the Transparency Practices in Financial Policies

 

1. Clarity of Roles, Responsibilities, and
Objectives of Financial Agencies Responsible
for Financial Policies

• Lack of legal basis for the objectives and respon­sibilities for some financial agencies

• Lack of documentation spelling out explicit and detailed definition of the institutional oversight role of some central banks with respect to pay­ment systems and its relations with banking activities

• Lack of explicit and clearly defined authority along with the necessary powers to issue and enforce accompanying regulations; little specific focus on the implicit risks of participation in pay­ment systems

• Insufficient published information on objectives, operations, and outcomes of financial agencies

• Legal requirements for submission of reports on developments not sufficiently comprehensive

• Lack of clarity with respect to terms of appoint­ment and dismissal of key officers

• Little information on formal arrangements for cooperation and exchange of information among various supervisory agencies

• Absence of information on investor protection schemes in securities regulations

• Lack of legal underpinning of the regulations and procedures for securities

2. Open Process for Formulating and
Reporting Financial Policies

• Absence of public disclosure of the relationships between financial agencies

• Lack of specific requirements for periodic report­ing on financial agencies

 

• Lack of disclosure of information-sharing arrangements among agencies

• Absence of public announcement of changes in payment systems policies

3. Public Availability of Information on
Financial Policies

• Inadequate coverage of payment system opera­tions and banking supervision in many annual reports; insufficient discussion of progress on achieving policy objectives in insurance super­visory agencies periodic reports

• Need for the body of applicable laws, regula­tions, and other guidelines for the insurance sector to be made more user friendly (especially for non-specialists)

• Sparse information on capital market develop­ment and processes for market supervision

• Poor disclosure of information on emergency financial support to institutions

4. Accountability and Assurances
of Integrity by Financial Agencies

• Accountability of financial agencies not clearly defined in legislation

• Lack of a code of conduct for the staff members performing supervisory functions

• Information on internal control and audit, inter­nal governance procedures, accounting policies, and so forth, not consistently disclosed

• Insurance sector frequently suffers from weak internal arrangements for the resolution of con­flicts and disputes settlement processes

 

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availability of capital, as well as foster financial stability through strengthened market discipline.

Standards such as these are not well implemented in many emerging market and tran­sition economies, and many countries do not require the reporting of key financial data by individual institutions, including their consolidated financial exposure. This gap can hamper the ability to filter out healthy from unhealthy institutions. Moreover, the lack of appropriate information can prevent the effective monitoring of financial institutions and their risk taking.6 For example, insufficient or incorrect disclosures of credit risks may con­strain the ability of investors to assess risks and the ability of supervisors to act in a timely manner (Mishkin 2001). Sound accounting and auditing standards and practices are also important prerequisites for financial liberalization because they form part of the proper institutional framework that places appropriate constraints on risk taking. Accounting and auditing are 2 of the 12 areas of standards that are recognized internationally as key to effective operation of domestic and international financial systems, as already outlined in chapter 1.

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