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Overview of the Weaknesses in the Statutory and Institutional Framework for Corporate Financial Reporting and Consequences Mr. Frédéric Gielen, Senior.

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Presentation on theme: "Overview of the Weaknesses in the Statutory and Institutional Framework for Corporate Financial Reporting and Consequences Mr. Frédéric Gielen, Senior."— Presentation transcript:

1 Overview of the Weaknesses in the Statutory and Institutional Framework for Corporate Financial Reporting and Consequences Mr. Frédéric Gielen, Senior Financial Management Specialist, World Bank REPARIS Conference, Brussels, June 30, 2004

2 South Central and South East Europe Albania Bosnia and Herzegovina Bulgaria Croatia Kosovo (UNSCR 1244) Former Yugoslav Republic of Macedonia Romania Serbia and Montenegro Turkey

3 Financial System Stability Brazil Argentina Mexico Thailand Russia Indonesia South Korea Hong Kong

4 Private Sector Growth Path of financial development Productivity Capital Intensity Output Levels y/l 1 y/l 2 y/l 3 y/l 4 Source: Based on the econometric findings of Levine, Loayza, and Beck (2000) Effective functioning of the market economy requires a supporting infrastructure for information disclosure.

5 International Financial Architecture Codes and Standards International Financial Architecture Financial System StabilityPrivate Sector Growth

6 Reports on the Observance of Standards and Codes IMF Data Dissemination Fiscal Transparency … IMF and World Bank Banking Supervision Securities Market Regulation … World Bank Corporate Governance Accounting and Auditing Insolvency Regimes and Creditor Rights

7 Accounting Scandals Enron's Planned End (Washington Post) Symbol of Greed Has Shed Assets, Hopes to Drop Name and Emerge (…) If the plan goes forward as expected, only Prisma Energy International Inc., a holding company for nearly two dozen gas and electricity businesses with 4,900 employees located around the globe, would remain. Creditors, who lost about $63 billion, would get back from 17 to 22 cents on the dollar in cash and in Prisma stock. (…) At one point, Enron employed 32,000 workers in outposts around the globe, rapidly expanding from its home base in Houston to Brazil and India. (…) Dutch authorities probe Ahold (BBC) Ahold's AH flagship store is in talks with suppliers about its payments (…) the probe focused on secret letters relating to Ahold's Swedish joint-venture ICA. The paper reported that Ahold had counted the results in full in its results, but was not entitled to do so because it had only built up a large minority stake in the joint- venture. (…) In February, Ahold shocked investors after it admitted it had overstated profits at its US Foodservice in 2001 and 2002 by more than $500m (£318m). (…) If the confidence of the public in the integrity of accountants reports is shaken, their value is gone. Mr Arthur Andersen, 1932 WorldCom goes bankrupt (The Guardian) Telecommunications giant WorldCom has filed for bankruptcy in America's biggest corporate failure. (…) The bankruptcy would be twice as large as that of energy trader Enron in December, which set a record at the time, and four times as large as that of telecommunications firm Global Crossing in January. In its bankruptcy filing, WorldCom reported more than $107bn (£67.9bn) in assets and debts of $32bn. (…) How Parmalat Went Sour (Business Week) Here's the skinny on Europe's enormous financial scandal In the wake of the financial scandals at Enron, WorldCom (MCWEQ ), and Tyco International (TYC ), European chief executives smugly insisted no such fraud could ever occur in Europe. They spoke too soon. The accounting calamity at Italian dairy-foods giant Parmalat has prosecutors scrambling to find out what happened to $8.5 billion to $12 billion in vanished assets. (…)MCWEQTYC

8 Four Pillars of Good Corporate Financial Reporting Accounting Standards Accounting Standards Accounting and Auditing Practices Accounting and Auditing Practices Legislative And Regulatory Framework Legislative And Regulatory Framework Institutionalized Enforcement Mechanisms Institutionalized Enforcement Mechanisms Corporate Financial Reporting

9 The ROSC Program in South Central and South East Europe Assessment Completed Bulgaria Croatia Former Yugoslav Republic of Macedonia Romania Assessment in Progress Bosnia and Herzegovina Remaining Assessments (to be Completed in 2005 and 2006) Albania Kosovo (UNSCR 1244) Serbia and Montenegro Turkey

10 A Very Positive Note Major Steps Forward in the Process of Enhancing the Quality of Corporate Financial Reporting Challenge that Lies Ahead: Implementation and Enforcement.

11 Weaknesses in the Statutory and Institutional Framework Shortfalls in the Statutory Framework Weak Accounting and Auditing Profession Weak Academic and Professional Education Lax Accounting and Auditing Standards Weak Institutionalized Enforcement Capacity (Regulators, Supervisors, Judiciary)

12 A Necessary Reform Agenda

13 A Basic Building Block


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