Summary

The World Bank's concern for governance is driven by its mandate to promote sustainable economic and social development. There are two reasons for this: "First, both history and the Bank's own experience show that good governance is central to creating and sustaining an enabling environment for development. Second, from the Bank's perspective, sound development management is inextricably linked with the efficacy of the investments that the Bank helps finance and thus with the Bank's goals: to assist countries in reducing poverty and increasing sustainable growth."

The capacity of the public sector to manage the economy and deliver public services is tied directly to the prospects for development. The Bank's concentration in this area has been to encourage governments to create the legal and institutional framework for transparency and competence in the conduct of public affairs and the management of economic development. Its concern with accountability, transparency and the rule of law is exclusive to their contribution to social and economic development, and to its fundamental objective of sustainable poverty reduction in the developing world.

Public sector management as the most viable of the four dimensions of governance (public sector management; accountability; legal framework for development; and, transparency and information), serves to assist governments with the resources and expertise necessary to improve the civil service, the government budget, the public investment program, accounting, auditing, and other financial management systems. Experience has shown that imperfect accountability has gone hand in hand with weak financial management institutional capacity.

Financial accountability demands a properly functioning government accounting system for effective budgetary control and cash management; an external audit system which reinforces expenditure control by exposure and sanctions against misspending and corruption; and mechanisms to review and act on the results of audits and to ensure that follow-up action is taken to remedy problems identified. Without a well-functioning system of financial accountability, governmental efficiency is poor, the probability of corruption increases greatly and the prospect of economic growth and development is impaired. The need for improved financial accountability is of particular relevance in countries where the Bank is providing substantial resources directly to governmental budgets, since problems encountered at the national level are generally symptomatic of similar financial accountability weaknesses throughout the state and local levels.

The Bank's September 1992 Portfolio Management Task Force report on Effective Implementation: Key to Development Impact, included deteriorating country institutional environment as a contributing factor in the "borrower's compliance with legal covenants - especially financial ones - remaining startlingly low." The Bank's Financial Reporting and Auditing Task Force Report issued in July 1994, recognized that poor accounting standards in borrowing countries, lack of experienced staff, and "unduly burdensome" reporting requirements continued to result in inadequate monitoring and reporting. These problems have led to a great deal of concern by member countries regarding the effectiveness of the Bank's programs. Although the Bank has issued Financial Reporting and Auditing of Projects Financed by the World Bank, and Operational Directives 10.60: Accounting, Financial Reporting and Auditing and 10.30: Borrower Compliance with Audit Covenants, the Task Force found that these requirements had not been fully followed probably due to limited oversight and inadequate accounting and auditing capability in many of the borrower nations. Although the directives outline the Bank's minimum standards for the accounting and auditing systems that borrowers should have established and maintained to ensure accountability for resources used to implement projects, much more effort was considered needed in assisting countries in individually developing those very systems that vary widely from country to country. Consequently as a result of the Task Force's recommendations the new Financial Accounting Reporting and Auditing Handbook (FARAH) has recently been published and is available in English from LATPS. New operational directives are also being developed which will replace OP/BP 10.02: Accounting, Financial Reporting and Auditing. This provision updates the Bank's accounting requirements for its task managers, borrower management and finance staff.

Lynette Asselin