World Bank tightens grip on governance

In a move that elevates the governance debate to new heights, the World Bank has launched a global campaign to tighten up financial controls and strengthen corporate governance. Its mass recruitment drive for accountants follows the recognition that poor financial management caused the collapses that have blighted the Tiger economies of East Asia over the last two years.

World Bank vice-president Jules Muis is claiming that there is a ‘great deal of catching up’ to be done to develop financial standards in developing countries, but he lays much of the blame with the Big Five accountancy firms.

Muis explains that, over the past year, the bank has realised that a stronger international financial architecture is vital to encouraging transparency.

‘In the wake of the East Asian crisis there is a move towards better and stronger financial structures and the finance profession is a part of that, both in the way it is organised and the way it improves skills by example,’ he says.

In April, Muis condemned the Big Five firms for ‘associating their names with financial statements prepared (and/or audited) far below any international standards’. He also criticised the IASC and FASB for their territorial quarrels.

Mary Kegan, head of PricewaterhouseCoopers’ global reporting group, defends the firm’s record abroad, but agrees that much needs to be done to achieve a truly global economy.

‘We have to get beyond national agendas,’ she says. ‘The world’s money works on a global basis and all this is about getting financial information to the world market.’

Muis supports this, arguing that all the relevant players have done enough talking and it is time, particularly for the standard setters, to talk seriously about global solutions.

As part of its commitment to building stronger foundations for the profession, the bank – which provides about £12.5bn in new loans each year to more than 100 developing countries – is taking on accountants to strengthen its skills base.

Among the bank’s most recent recruits is FEE secretary general John Hegarty, who will leave behind a 12-year career as head of the European accountancy body to take up his post as regional financial management adviser for Europe in Washington in August.

Hegarty will take with him an intimate knowledge of the workings of European institutions, including the Commission, which recently issued a lengthy action plan providing the firmest signal yet that it is committed to allowing large companies to use international accounting standards.

Hegarty’s background will prove essential in advising countries as the more European-orientated IASC and the US-backed FASB come head to head in their battle to become the global accounting standard setter.

This concerns Muis. ‘The world could end up with two excellent international accounting standard setters, for the likely price of three, and the probable value of one,’ he says.

The bank is pushing for one standard setter ‘with teeth’ but, while the debate rumbles on, there is concern that countries such as the UK should be discouraged from abandoning their national standards.

Perhaps surprising for the bank which, by its nature, operates on a global scale, Muis is actively raising awareness that eliminating national standards would be a pity given that they keep global standard setters ‘on their toes’ – a view supported by business leaders.

Glaxo Wellcome finance director John Coombe who, although supportive of international standards as a means of achieving global harmonisation, is still wary that global standards could fall short of UK guidelines. He wants the IASC to take into account countries which have far less sophisticated regimes than in the UK.

Muis is doubtful that the world will be using global standards for at least another ten years but he, supported by the World Bank, will be making a concerted effort to undermine vested interests in the banks bid to shake up financial controls and corporate governance.

HOW POOR GOVERNANCE LEFT ASIAN ECONOMIES IN TATTERS

Summer 1997 saw economic collapse spread throughout the previously buoyant economies of South-East Asia. By late 1998, many of the economies of Eastern Europe and South America were also hit; the inferno threatened to engulf Western Europe and North America as well.

The World Bank wasted no time in identifying the problem at a tense annual meeting with the International Monetary Fund in September 1997.

Gathering in Hong Kong – itself reeling from the transfer of sovereignty from Britain to China earlier that summer – finance ministers and the world’s most powerful bankers elected to put governance at the top of their agenda.

In the short term, it proved to little avail. Exposure of chronically weak financial institutions and an unsustainably strong local currency brought Thailand to its knees. Despite protestations across the region that this was a uniquely local problem, the Philippines, Indonesia, Malaysia, Hong Kong and – to a lesser extent – Singapore soon followed suit. By last winter the crisis had spread to Russia and Brazil, with devastating effects for local and neighbouring economies.

In comparison, 1999 has been a relief for the World Bank. But, with its firefighting duties much reduced, the institution can now turn its full attention to tackling governance, the underlying cause.