FEATURE STORY

Effective and Transparent Financial Reporting is Good for Business

October 1, 2013

In the current economic climate, many countries across Europe face the dual challenge of stimulating growth in fragile economies while at the same time implementing fiscal discipline. The protracted recession and the slow growth recovery have had long-term implications not only for employment but also for competitiveness and business enterprise in the region.

Businesses - both large and small - are competing for credit and capital, while banks and other financial institutions are now much more cautious in their investment decisions.

In this environment, therefore, it is increasingly important for businesses to be financially transparent and for governments to establish a sound regulatory environment for corporate financial reporting.

With financial resources limited, investment needs to be targeted ever more effectively in order to yield the highest returns. Financial transparency can help businesses to attract such investment, which is particularly important for small and medium-sized enterprises (SMEs) that often lack the collateral that banks usually require. Businesses with good prospects and effective financial reporting practices but lacking collateral are more likely to receive credit as the banks will have more information on which to base their lending decisions, reducing their need to require high levels of collateral. It is essential for investment and doing business, therefore, that countries have effective systems of corporate financial reporting in place.

Corporate financial transparency must also traverse national borders. As highlighted by the financial crisis, economies have become ever-more interconnected and interdependent, with increasingly important regional production networks and high volumes of intra-regional trade. In Eastern Europe and Eurasia, for example, many countries are striving towards closer economic ties with the European Union (EU), aiming to benefit from access to Western European markets and networks.

Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine – the six countries of the EU’s Eastern Partnership (EaP) – are among those working to increase economic links with the EU. To gain the maximum benefit from these links, the six countries need to move towards adopting the common framework for corporate financial reporting included in the EU’s system of law and regulations, or its acquis communautaire. Having initiated important reforms in the 1990s, with the support of the development community, the EaP countries have made some progress towards this goal, but much work remains to be done.

Since 2004, the World Bank has been reviewing the accounting and auditing standards and practices of the EaP countries to assist national authorities and key stakeholders in developing policy proposals to strengthen their corporate reporting environment. While recognizing the progress that has been made in building accounting professions, the EaP countries continue to face challenges in establishing adequate institutional frameworks and in building sufficient capacity to sustain sound financial reporting practices.

Strengthening Auditing and Reporting in Countries of the Eastern Partnership (STAREP) is a new World Bank program that aims to assist the EaP countries in this regard, by helping them to set up effective and sustainable frameworks for accounting and auditing that are in line with international standards and take account of the requirements of the EU’s system of law and regulations. STAREP supports a broad range of stakeholders, including Ministries of Finance, the accounting profession, financial regulators, and teachers of accounting in universities. The program focuses on enhancing accounting education systems; improving institutional frameworks for corporate financial reporting; fostering the adoption of EU-compliant standards; and building closer international ties and sharing best-practices between key institutions.

STAREP is based on a model of peer-learning, bringing together policy makers and practitioners in professional education, corporate financial reporting, and financial regulation to enable participant countries to learn from each other’s reform experiences and avoid potential difficulties.

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The World Bank Centre for Financial Reporting Reform (CFRR) located in Vienna, Austria, is responsible for the World Bank’s corporate financial reporting activities across the Europe and Central Asia region. The Centre provides knowledge services and capacity development assistance. Services include analytical and advisory services, learning and skill development, know-how and knowledge transfer, and technical assistance and institutional strengthening.