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November 14, 2007

Accounting for the developing world

Accounting for the developing world

During the past two decades, the Manila-based Asian Development Bank has been one of the most active multilateral lending agencies in the Asia-Pacific region. David Hayes explores the development function and accounting practices of one of the world’s leading lenders.

The Asian Development Bank (ADB) lent a total of $119 billion to finance projects in developing countries over the past 40 years. Best known for its social and economic infrastructure project funding activities, the bank also operates an important technical assistance programme, which includes improving and developing public sector accountancy practice.

Energy development, transport and communication development, and agriculture and natural resource development each accounted for about 20 percent of accumulated lending, while social infrastructure constituted almost 20 percent of total lending.

Improving governance and transparency and preventing corruption is at the core of the bank’s activities. To assist developing countries achieve economic and social development progress, the ADB, along with the World Bank, has taken a lead in the Asia-Pacific region by encouraging developing member country governments to adopt high accounting standards and ethical practices when they are implementing multilateral loan projects.

“About $7 billion a year goes out from here in project loans and grant finance. We have to ensure also that all grant money is disbursed in line with donor country requests for their grants’ intended purpose,” explains Asian Development Bank accounting department controller Chiu Ping-Yung. “Grant finance is 10 percent of our disbursement but it takes 60 percent to 70 percent of our time because of our funding oversight responsibility. Before we make a final disbursement, we make a final check that everything is in line with our regulations. Although ADB equity is not listed, we issue quoted bonds and must adopt the highest standards for a triple-A rating to raise capital at the lowest cost to benefit our borrowers.”

The ADB’s project funding activities cover major national infrastructure needs in a wide range of sectors. Educational projects may involve the construction and equipping of schools, colleges and training centres, while health care projects often include the construction of hospitals, clinics and other health care facilities. Electricity projects often involve the construction of powerplants along with electricity transmission and distribution networks. Transport and communications schemes include building railway lines, sea ports, roads and highways, and the installation of telephone networks.

Borrowing countries agree to comply with the ADB’s strict code of practice governing the procurement of all equipment and services. The method of procurement is competitive bidding, which is intended to provide the best range of bidders and prices. A team of consultants carries out an initial feasibility study and prepares the initial project outline in co-operation with the appropriate ministry of the borrowing country’s government. Once the study is approved by ADB and the government of the borrowing country, consultants prepare the detailed project design, help draw up procurement tenders and oversee the bid evaluation process.

The consultancy team also oversees project implementation. International accounting firms are appointed as consultants when their specific expertise is required to assist project management or to provide training and other support to government departments, agencies and enterprises.

The ADB, through its project loan and technical assistance programme, assists requesting governments in accounting development, improving governance and financial management capability, plus a range of related activities. However, each country has its own development priorities when seeking ADB assistance.

“The ADB operational department handles requests for assistance with accounting development. The bank has so many developing country members and they have to prioritise their projects. We have spent a lot to strengthen accounting in China and other countries. Over the last 20 years there have been many projects. We have accountants to help institutions in borrowing countries,” Chiu explains.

“Each country has its own accounting laws and institutions. We must respect the rule of the land. It is up to them whether they choose IFRS or their own standards. Accounting is a man-made science. It’s not one size fits all; and, in countries like East Timor or Afghanistan, accounting standards are not the governments’ first priority.”

Governance focus During the past five years, ADB technical assistance projects have focused more on governance and financial management than purely accounting as developing member countries have learned from the earlier phases of technical assistance that focused purely on accounting.

The 1997-1998 Asian financial crisis exposed structural weaknesses in the banking and corporate sectors of many Asian countries that were caused by poor governance, lack of transparency and weak supervision and regulation. As a result of the widespread problems throughout Asia, the ADB launched a regional technical assistance programme in 2000 under which diagnostic studies of accounting and auditing were prepared and published for Cambodia, China, Mongolia, Pakistan, Papua New Guinea, Uzbekistan and Vietnam.

The studies were designed to identify gaps and weaknesses in government accounting and auditing programmes for which a series of strategies was recommended for each government to adopt, in some cases as part of ADB-funded projects and technical assistance schemes. Other countries that were supported by similar bilateral schemes to improve government accounting and auditing practices were Azerbaijan and the Maldives.

The ADB also supports international initiatives to develop accounting standards that benefit its developing member countries. The bank has provided $245,000 in funding to the International Public Sector Accounting Standards Board (IPSASB) under the Inernational Federation of Accountants to support work to produce a series of accounting guidelines and standards to enhance financial reporting, accounting and auditing in the public sector.

ADB technical assistance funding supported the preparation of guidelines for governments on cash basis accounting and the application of International Public Sector Accounting Standards. As a result, the IPSASB has issued guidelines on transition to accrual basis accounting, while International Public Sector Accounting Standards have been issued for cash basis accounting and financial reporting.

Represented by Chiu Ping-Yung in his capacity as Asian Development Bank controller, the ADB closely monitored and assisted the IPSASB in drawing up exposure drafts and standards. After attending board meetings and conferences that accompanied the preparatory work, Chiu was able to disseminate documents and details about the board’s activities to relevant divisions within the ADB, enabling the knowledge gained to spread to the bank’s developing member country governments.

Technical assistance As part of the growing focus on public sector and corporate governance, the ADB recently approved a $1.8 million technical assistance package to the Philippines to strengthen local government fiscal management and administration in selected provinces, towns and cities. Consultants will be appointed to support development of a legal framework for decentralisation and an efficient intergovernmental fiscal transfer system, also to support establishment of more effective and transparent budget processes and public expenditure management.

To achieve these targets, ADB consultants’ tasks will include preparing action plans for creating an effective internal audit function in local government administrations, developing a framework for local government expenditure management, drawing up forward estimates, and developing a more efficient procurement process, including preparation of a local government procurement manual.

Other ongoing ADB technical assistance projects include a $1 million financial governance and social security reform scheme to help Indonesia restructure its insurance sector, develop the country’s actuarial profession and develop a national social security scheme.

Kazakhstan is using ADB consultancy services to improve and strengthen financial sector governance, while China is using them to support efforts to develop and strengthen corporate governance at the state-run Bank of China. Vietnam is using ADB consultants to assist preparations for a major state enterprise reform programme that will include the introduction of improved corporate governance along with selection and preparation of government-owned banks and industrial enterprises for listing.

In 1995, the ADB became the first multilateral development bank to adopt a governance policy that applies to all its operations. The initiative was followed three years later by the adoption of an anti-corruption policy that applies to all its operations.

After carrying out an implementation review of its governance and anti-corruption policies in 2005, the bank concluded that while it has succeeded in raising the profile of governance in the Asia-Pacific region, considerable work remains to be done towards embedding implementation of governance and anti-corruption in the mainstream of ADB operations.

The review found that the sheer scope of the governance policy has resulted in too many small projects of short duration and consequently thinly spread staff resources. As a result, the review’s conclusions call for governance activities to be more focused and for the ADB to renew its commitment to fight corruption. These recommendations will be incorporated into the bank’s new medium-term strategy. In addition to providing accounting and governance support services to developing member countries, the ADB also runs a sophisticated financial management operation to administer the growing volume of loans, grants and other disbursements that its development activities involve.

“The Asian Development Bank is an international organisation. We do not fall under any jurisdiction,” Chiu notes. “We report to a board of directors first and then a board of governors; the governors approve. The board is made up of 66 member countries and it is majority decision.” The ADB controller’s department has a staff of about 160 local employees plus a team of 21 CPAs from various countries. “Most accounting staff recruitment is direct to this department. We are the training section. They then move to other ADB sections. Accountant recruits need a [professional qualification], a master’s degree and at least ten years’ accounting experience in more than one country. They could have a banking background,” Chiu explains.

“Training is by the human resource department but we help define training for accounting and internal control. Here at the ADB there is a division between local and professional staff though local staff can apply for a professional position.

“Recruits start with a three-year contract and then become permanent. Some want to be involved in social and economical development. Some leave to work with other development banks while some move [to other] departments in the bank.”

The ADB operates a co-ordinating office in each member country that reports to the ADB controller’s office in the Manila headquarters. “We have an oversight function in which we have two roles – to support the client country and oversight like internal audit,” Chiu remarks. “The member country co-ordinating offices report monthly to us and we visit them regularly. We assess the adequacy of the internal control of each resident mission to ensure there is no irregularity.”

Moving to IFRS

While the bank’s member countries are free to choose their own accounting standards, the ADB follows the US’s Financial Acounting Standards Board (FASB) standard.

“We have followed the United States FASB standard for about 30 years as it was the most developed standard at the time we issued bonds on the US stock market. Now IFRS and FASB are converging,” Chiu says. “We are exempt from the Sarbanes-Oxley 401 requirement but we are implementing it to make sure our system control is adequate. We are not doing it in a big way like some organisations but at minimum cost and interruption to the bank. We saw a need and proposed to the ADB’s management to do this.”

All expenditure is carefully monitored and reported, including expenditure on projects and technical assistance, as well as the bank’s internal administrative and operating costs. “We follow all measures for transparent accountable reporting. All transactions are done in an accountable way,” Chiu says. “For all expenditure there is an ADB policy; for example, travel expenses. Our job is to monitor this. It’s a watchdog role as well, sometimes we act as a bloodhound. We are semi-policemen. This department has a reporting and support function. If we find something wrong we send it to the bank’s auditor general to investigate.”

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