Accountability Requirements of Development Projects

My paper today will focus on:

• Key tenets of financial accountability;
• the changing mood of the world in which we operate;
• the changing perspectives within the World Bank; and
• our response to reshape accountability requirements of
• development projects.

First, a few figures that help explain why this conference and this subject are important to the World Bank. We lend between $18 billion and $20 billion per year to our borrowing member countries. The International Bank for Reconstruction and Development (IBRD) accounts for around $14 billion and the International Development Association (IDA) for about $6 billion of the total. Our total loan portfolio is $165 billion for IBRD and $97 billion for IDA. We have nearly 2,000 projects under implementation at any time and these generate about 5,000 audited annual financial statements. Our exposure at any given time is between $5 billion and $15 billion, depending on the audit cycle. Government auditors and private sector auditors share these audit opinions in almost equal proportions across the world, although there are important regional variations. Private sector auditors issue more qualifications than do the government auditors. So for the Bank, accountability is extremely important to ensure that, as required by our Articles, we can ensure that the proceeds of loans are used economically and efficiently, and only for the purposes for which financing has been provided. The reputation risk to the World Bank Group institutions of any failure in this regard it potentially substantialÑour AAA rating is cherished and protected to ensure that we can have access to funds at the lowest interest rates and costs for the benefit of our borrowing member countries.

Financial Accountability

Financial accountability is a broad concept which embraces accounting and auditing as fundamental elements of stewardship. Stewardship requires integrity and an attitude of responsiveness and responsibility, which in turn leads to good governance. Good governance facilitates development. Without financial accountability, good governance is impaired and development is impeded. In seeking financial accountability, loan portfolio managers look at:

• mechanisms for ensuring compliance with loan agreements;
• the quality of project financial management and accounting arrangements at the start of lending; and
• the project concerns versus the broader national context for sustaining financial accountability principles.

As regards the national context, our concerns at the World Bank are focused on:

the existence of a financial accounting and reporting infrastructure capable of sustaining good project financial management. When it comes to financial accounting, there is no point in giving the patient a new limb if the body has cancer. The national context poses three kinds of associated risks:

1. Organizational risks at the project level related to traditional attributes of segregation of duties, clear procedures, competent staff, Physical control and independent verification.
2. Country risks associated with the overall environment of internal controls (including at the top), support for financial accountability infrastructure, respect for accounting and auditing in the culture and strong civil service ethic for honesty and independence.
3. Reputation risks to the Bank due to weak financial accountability requirements at the borrowing country level. There have been many recent threats to the Bank's credibility caused by weak accounting and auditing in borrower agencies.

Another concern in the national context is the overall proficiency of financial services in both public and private sectors, especially in countries that are privatizing their public sector enterprises.

The World Environment

During this decade we have witnessed a distinct shift in public attitudes. Acceptance of opulence, greed, offshore bank accounts and corruption has given way to demands for accountability and transparency. Radio, television, the Internet, and other media have collapsed the traditional boundaries to such an extent that few governments or agencies can escape public scrutiny. This has increased the pressure to provide mechanisms for open accountability. New Zealand has shown the way with the adoption of national accounts based on full accrual accounting, in compliance with combined private and public sector accounting standards.

The Declaration of Principles at the Summit of the Americas here in Miami three years ago signaled the emergence of a new era in this regard:

"We recognize that our people earnestly seek greater responsiveness and efficiency from our respective governments. Democracy is strengthened by the modernization of the state, including reforms that streamline operations, reduce and simplify government rules and procedures, and make democratic institutions more transparent and accountable."

The pioneering work of Transparency International and the influence that organization has had on the OECD in setting up a working group to look at bribery in international business transactions (especially public procurement) has advanced public interest in combatting corruption. Inevitably, that group also had to look at accounting requirements, financial reporting, internal controls and audit. Even World Bank president James Wolfensohn, only one year into his tenure, felt compelled to raise the issue of corruption in his annual meeting speech in October 1996. His remarks received very broad press coverage and substantial support. The Bank has since set up a task force that is completing a study and action plan to help mitigate the worst effects of corruption and to guard against the misuse of Bank funds.

The Bank's Internal Environment

Mentioning the word corruption inside the World Bank has gone from verboten to being fully acceptable. So it is with borrower financial accountability: we have moved from a situation of turning a blind eye to bad practices into one of threatening and, still only occasionally, suspending loan or credit disbursements because of an accounting or auditing compliance failure. When we carried out a special review in 1993 of our financial reporting, accounting and auditing practices, we found that the main problem was a failure to follow our own procedures. We have since rewritten and improved those procedures, which have introduced some specific criteria with regard to appraisal report processing and compliance with standards.

The Bank has reviewed the work of the accounting and auditing standard setters during the last four years and has made a point of supporting those standards by:

• requiring public sector enterprises to comply with International Accounting Standards of IASC or to at least indicate where they materially differ from IASC if compliance with national accounting standards is legally required;
• requiring independent auditors to use the International Standards on
• Auditing of the International Auditing Practices Committee of IFAC, unless national auditing standards are superior; and
• requiring Auditors-General to use INTOSAI Auditing Standards, preferably in conjunction with ISAs of IFAC/IAPC.

The Bank is also supporting the work of the Intergovernmental Group of Experts on Standards of Accounting and Reporting (ISAR Group), in Geneva, to develop environmental financial accounting guidelines and checklists. Harmonization of accounting and auditing standards is vital in today's global marketplace to ensure proper comprehension, relevance and comparability of financial statements. It is with this in mind that we are also encouraging the Public Sector Committee of IFAC to come up with a comprehensive set of international accounting standards for governmental accounting; the sooner we all work from the same bases, the better.

One of the World Bank's key problems in recent years has been a lack of financial management specialists and accountants in its overall skills mix. This was first identified publicly by Bill Wapenhans, a former vice president at the World Bank, who in 1992 tabulated the decline in the availability of these specialists over the previous decade. We subsequently raised the issue in a task force report in 1994 and in several annual reviews of our portfolio performance. It was not until 1996, when staff began complaining that they did not have adequate intellectual guidance on borrower financial accountability issues at the Regional level, that management began to take notice. This was despite the fact that we had taken several initiatives to help Bank and borrower staff through Financial Accounting and Reporting Handbook (FARAH), which has been translated into 5 languages in addition to English. Many of you will have read in the press about the debate between the president of the Bank and the board members regarding the renewal of the Bank. Improvement in staffing skills in the areas of project financial management and accounting are a key aspect of that Strategic Compact that resulted from that debate.

Reshaping Accountability Requirements

Throughout this time my department has been reviewing the way it does business and the procedures surrounding disbursement and borrower accountability issues. This process involved talking with around 400 people inside and outside of the Bank, and it gave us some good insights into key areas where we can improve. We also reviewed our step-by-step procedures. While our appraisal effort was weak in failing to capture the true strengths or weaknesses of financial accounting and reporting arrangements, our implementation activities through supervision and audit left us exposed to a series of potential and actual control breakdowns. This led us to redefine our disbursement and borrower accountability functions, adopt the LACI Vision (Loan Administration Change Initiative) and launch project design and implementation activities. The emphasis here is to move away from an invoice transaction approach into one of tranche payments through an enhanced special account arrangement. In order to do this we will require borrowers to establish sound financial accounting and reporting arrangements supported by adequate internal controls before we begin disbursement. We currently have 22 projects of varying complexity around the world that are entering a pilot phase intended to evaluate the efficacy of this approach.

If the pilots are successful, then all future projects will have to comply with these procedures, which demand that borrowers take charge of their own accounting and financial reporting arrangements instead of relying in many cases on the Bank's disbursement procedures to cover for the borrower's internal control weaknesses. The new arrangements also demand that the Bank deliver upgraded financial management skills at the operations vice president level, as well as in my own department. The key objective here is to move improved financial management into the development effectiveness mode instead of being a subsidiary activity that is often poorly done, adding substantial time and cost penalties when it comes to the annual audit. By having quarterly replenishments of special accounts and subjecting them to more rigorous review, the time between use of funds and accounting deadlines will be shortened, leading to a more timely suspension of disbursements, when necessary. Better accounting will lead to quicker disbursement request preparation and have an overall positive impact on development, while lowering the costs of audits.

We believe that our revised approach to accountability requirements for development projects financed by the World Bank is a wake-up call to governments and their executing agencies to get focused on financial management, accounting and reporting as well as the timeliness and quality of audits. We hope the greater accountability and transparency that usually results from attention to these issues will benefit human development as we move towards the 21st century.