Soukeyna Kane, Practice Manager, Governance, Europe and Central Asia, World Bank
Concerns over the quality of financial information have been an important element of policy dialogue between the World Bank, donor partners and client countries. What we mean by financial information in this context is not merely an annual report produced to comply with legislation — then often filed away and forgotten.
Instead, we refer to dynamic financial information which is timely, accurate and provided in a format which is user friendly and informs decision making. When developed in a thoughtful manner, data and information provide insights which can underpin efforts to support innovation, investment and growth.
There are undeniable benefits of greater transparency and depth in financial information to guide future actions and allow for greater scrutiny. The link between the quality of policy making and the availability of timely and reliable information is particularly vital in a world that is more integrated financially.
Poor financial information can cost investors billions of dollars
Establishing a solid empirical link with growth has been a continuing challenge — and some may even dispute its existence — citing examples of countries managing solid decades of growth, while limiting the availability of financial information. The response to such doubts is pointing to the consequences of poor or insufficient information, both for the public and private sectors.
In the corporate sector, we can all cite examples of major corporate and accounting scandals that have cost investors billions of dollars and undermined public confidence in the securities markets. Despite attempts by member countries of the Organisation for Economic Co-operation and Development (OECD) to strengthen corporate accounting and investor protection, accounting scandals — including within publicly listed companies, continue to make the headlines.
This includes, for example, the recent case of a major retailer which shocked the market and the public by revealing that it had overestimated profits by more than the equivalent of US$350 million.
The importance of fiscal transparency
In the sphere of government financial reporting, a lack of transparency has been flagged as a contributory factor to financial turmoil — including sovereign debt crises. Government activity accounts for a major part of gross domestic product (GDP) and government assets and liabilities are usually substantial in all economies.
It is therefore vital that they are managed effectively, and that governments are accountable to their citizens. Objective analysis of the causes of the sovereign debt crises concluded that many countries have a significant amount of unreported contingent liabilities and financial assets.
While we acknowledge that improvements in fiscal transparency cannot eliminate all fiscal risk, they can unquestionably help policy makers and the public understand and respond to them.
What are some of the key factors that influence dialogue with policy makers?
- Financial information needs to be reliable and relevant. This requires effective regulation and enforcement of laws, as well as the political will to identify and mitigate systemic risks, such as fraud or corruption.
- There must be an investment in skills and knowledge. This is especially important within the accountancy and auditing professions to ensure that the skills and qualities needed to produce, interpret and make decisions using the financial information are available. More broadly, greater financial literacy in the business community and civil society will contribute to better governance and accountability.
- Information technology must be used to its fullest extent. Technology can have a profound effect on the quality of financial information because it can now capture more relevant data and swiftly convert it into information at a lower cost and at a faster rate than ever before.
The contribution of reliable financial information to sustainable growth
We do not underestimate the challenges involved in improving the quality of financial information, and it is important to acknowledge that the availability of the data alone will neither change behavior — nor will it be the sole ingredient for driving positive economic reforms.
However, it is reassuring that, as a community of donors, investors, and more importantly policy makers, we can all agree on the undisputable benefits of reliable financial information to help support the achievement of sustainable growth.
By connecting our voices and reinforcing our commitment, we can drive forward the improved availability of, demand for, and use of good financial information — thereby contributing to the public good and acting as a catalyst for global growth.
The World Bank Centre for Financial Reporting Reform has organized a series of events between 26-28 April, 2016 related to the topic "Financial Information: Catalyst for Growth." For further information, please visit: www.worldbank.org/cfrr