COMMENTARY
Following the financial crises that engulfed the world in the mid-to-late 90s, the World Bank, IMF and others developed standards and codes ... but the use of these standards and codes was never meaningful.

It was apparent to me by the late 1970s that the financial information reported by most governments and central banks around the world was a huge exercise in fiction ... yet institutions like the World Bank and the IMF were using these data as if they had a reasonable basis in fact, when in fact they had little or none.

In old fashioned corporate audit there was a requirement to verify that corporate financial reports reflected the data in the underlying books of account and vouchers. There are generally accepted rules and principles used to prepare accounts and report in complicated corporate structures ... but when it comes to governments and national level financial information and reporting, the methodology is 'all over the place' and the reports almost pure fiction.

Efforts to improve the situation by the World Bank, the IMF, the UN and others have not been particularly useful. Some governments have seen fit to reform their own financial accounting and reporting, but mainly as independent soveriegn activities independent of a global standard. Some ... maybe most ... of the major of the large powerful institutions have also done what they determined was in their own best interest.

The notes below relating to standards and codes were prepared in 2003 relating to work done since the 'financial crisis of the mid-to-late 90s'. Clearly the work did not have the rigor to help the financial sector avoid the subsequent crisis of 2007-2008 which continues to impact Europe and maybe other situations that are not yet obvious.

While the use of data to feed into analytical models has exploded over the past three decadses since 1980 ... the quality of the data is very much an ongoing issue. I used to be friendly with Dr. John Gulland who was the head of the FAO Fisheries Resource Office at the FAO ... a mathematician who helped develop the science of fisheries population dynamics ... he was made a Member of the Royal Society for his work when he retired. As the mathematics and the computer simulation models were getting better and better ... the underlying data being used to feed the models was getting worse and worse. We might have seemed to know more, but in fact we did not. We had merely compensated for poor knowledge with every more sophisticated models.

My preference is for much better data, and much less data manipulation. Sophisticated analysis to compensate for too little data is a formula for disaster ... and 'too complex' is dangerous just as 'too big' is dangerous and creates systemic risk.

The following 'standards and codes' summary shows how complex things have become ... merely listing the main areas where there are standards and codes is quite an exercise. Within each area there are hundreds of sub-sections and sub-sub-sections and eventually the meaning gets lost. This is a problem that needs to be solved. The data being used to report on the financial performance of society needs to be organized so that it is simple and easy to use and easy to understand. The following does not do this adequately. Something is wrong.

I have worked in a national government accounting environment where the government 'balanced the books' to the penny every day before the office staff went home. Old fashioned ... but this government did not lose pennies, let along thousands or millions of dollars to corruption and just plain waste and sloppyness.

Financial control and financial management in the world's governments and large institutions leaves a lot to be desired. It is really a crime for this situation to exist in 2012!
Peter Burgess

Standards & Codes

Following the financial crises that engulfed the world in the mid-to-late 90s, and the increased instance of international contagion, there has been strong pressure to improve the international financial architecture.

Part of the official effort has been in the area of “Standards & Codes”, which has so far taken three steps:

1. 1. 12 Key Standards were highlighted and a set of standards/principles/best practices were developed for each of them by a specialist international organization.
2. 2. A methodology for assessing countries on the 12 Key Standards was then drawn up on the back of the established principles.
3. 3. Assessment at the country level was then undertaken as part of a joint initiative by the IMF and World Bank titled Reports on the Observance of Standards and Codes (ROSC). ROSC modules, a module refers to an assessment of one of the 12 key standards, have generally been derived from the broader IMF-World Bank Financial Sector Assessment Program (FSAP).

As specified by Cornford (2002)1, the 12 Key Standards for Financial Systems are split into 3 subject areas (the ones of greater interest to New Rules are likely to be 4, 8, 10, 11, 12):

Macroeconomic Policy and Data Transparency

1. Monetary and Financial Policy Transparency

1. Standards: Code of Good Practices on Transparency in Monetary and Financial Policies (Endorsed by the IMF in Sept 1999).
2. Methodology: Supporting Document to the Code (in development).
3. Issuing Body: IMF
4. Assessments: 38 ROSC Modules completed by IMF (FSAP/ROSC).

• Standards: Code of Good Practices in Fiscal Transparency (Endorsed by the IMF in April 1998).
• Methodology: Manual on Fiscal Transparency (Endorsed by IMF).
• Issuing Body: IMF
• Assessments: 39 ROSC Modules completed by IMF (ROSC).

• Standards: Special Data Dissemination Standard (SDDS) (Endorsed by IMF in Mar 1996)
• General Data Dissemination Standard (GDDS) (Endorsed by IMF in Dec 1997)
• Methodology: Within Standards
• Issuing Body: IMF
• Assessments: 24 ROSC Modules completed by IMF (ROSC). 50 countries have subscribed to the SDDS.
• SDDS – Prescribes the data that countries wishing to use the world’s capital markets are expected to provide publicly. This includes real, fiscal, financial and external data and also lays down minimum benchmarks in terms of how often data should be published.

Institutional and Market Infrastructure

4. Insolvency and Creditor Rights

• Standards: Principles and Guidelines on Effective Insolvency Systems (Presented to the Bank Executive Board on April 10, 2001).
• Key Areas:
• 1. Creditor rights and enforcement procedures
• 2. Legal framework for corporate insolvency
• 3. Regulatory framework to implement the insolvency system
• 4. The enabling framework for credit risk management and informal corporate workouts.
• Other related issues: there is an ongoing debate on sovereign insolvency. Anne Krueger of the IMF has proposed a Sovereign Debt Restructuring Mechanism (SDRM) and this appears to be the IMF’s current line; there are a number of other proposals on the table including ones by John Taylor of the US Treasury and Chapter 9 by Kunibert Raffer and Jubilee Research. There is also a separate initiative on Bank Insolvency.
• Methodology: Insolvency Regimes Assessment Template (Published in Dec 2000).
• Issuing Body: World Bank
• Assessments: 1 ROSC Module completed by World Bank (ROSC/FSAP).

5. Corporate Governance

• Standards: Principles of Corporate Governance (Endorsed by OECD in May 1999).
• Methodology: Corporate Governance Assessment Template (Published by World Bank in Dec 2000).
• Issuing Body: Standards by OECD and Methodology by World Bank.
• Assessment: 15 ROSC Modules completed by World Bank (ROSC/FSAP).

• Standards: International Accounting Standards (IAS) (IASC has promulgated 34 standards).
• Methodology: Accounting & Auditing Assessment Template (Draft published by the World Bank in Dec 2000).
• Issuing Body: Standards by International Accounting Standards Committee (IASC) and Methodology by World Bank.
• Assessment: 3 ROSC Modules completed by World Bank (ROSC/FSAP).

• Standards: International Standards on Auditing (ISA)
• Methodology: Accounting & Auditing Assessment Template (Draft published by the World Bank in Dec 2000).
• Issuing Body: Standards by International Federation of Accountants (IFAC) and Methodology by World Bank.
• Assessment: 3 ROSC Modules completed by World Bank (ROSC/FSAP).

• Standards: Core Principles for Systemically Important Payment Systems
• Key Risks:
1. 1. Credit Risk: the risk that the counterparty will default.
2. 2. Liquidity Risk: the risk that the counterparty cannot meet a claim in the short term.
3. 3. Legal Risk: an inadequate legal framework exacerbates credit and liquidity risk.
4. 4. Operational risk: operational problems that can accentuate both credit and liquidity risks.
• Concerns: an integrated system suffers from Payment System Risk, which is a risk that there are bottlenecks in the payment systems that can slow down the flow of funds. What this points to is contagion and the potential for a domino effect of problems and failures within a financial system.
• Core Principles (Part 1):
1. 1) Legal basis for payments system
2. 2+3) The need for rules and procedures enabling participants to have clear understanding of credit risk, liquidity risk and system risk.
3. 4 + 6) Prompt settlement and for medium of settlement to carry minimal credit risk
4. 5) Minimum standard of robustness for multilateral netting systems
5. 7) Ensuring a high degree of security and operational reliability
6. 8, 9, 10) General issues on system’s efficiency and practicality: access into the system with publicly disclosed criteria; governance arrangements.
• Core Principles (Part 2):
1. 1. Identifying systemically important payment systems
2. 2. Identifying structural, technical and institutional factors
3. 3. Identifying participants
4. 4. Identifying cross-border payment systems.
• Methodology: Work in progress.
• Issuing Body: Committee on Payment and Settlement Systems (CPSS), a sub-organization of the BIS.
• Assessment: 26 ROSC Modules completed by IMF and World Bank (ROSC/FSAP).

• Standards: The 40 Recommendations of the Financial Action Task Force on Money Laundering.(Published in 1990, revised in 1996, expanded in 2001 to include countering terrorism, and now under review).
• Methodology: No methodology yet.
• Issuing Body: Financial Action Task Force on Money Laundering (FATF).
• Assessments: None so far. Under discussion with FATF.

Financial Regulation and Supervision

10. Banking Supervision

• Standards: Core Principles for Effective Banking Supervision (Published by BCBS in Sept 1997).
1. 1. Preconditions for effective banking supervision
2. 2. The licensing and structure of banks
3. 3. Prudential regulations and requirements
4. 4. Methods of ongoing supervision
5. 5. Information requirements
6. 6. Formal powers of supervisors
7. 7. Cross border banking
• Methodology: Core Principles Methodology (Published in Oct 1999)
• Issuing Body: Basel Committee on Banking Supervision (BCBS), a sub-organization of the BIS.
• Assessment: 38 ROSC Modules completed by IMF and World Bank (ROSC/FSAP).

• Standards: Objectives and Principles of Securities Regulation (Published by IOSCO in Sept 1998).
• Objectives:
1. 1. Protection of investors
2. 2. Ensuring all markets are fair, efficient and transparent
3. 3. Reduction of systemic risk
• Principles covered: responsibilities of the regulator, self-regulation, enforcement of regulation, domestic and international co-operation in regulation, the responsibilities of issuers, rules and standards for collective investment schemes, requirements for market intermediaries, and rules and standards for the secondary market.
• Methodology: Implementation of the Objectives and Principles for Securities Regulation (Published by IOSCO in May 2000).
• Issuing Body: International Organization of Securities Commissions (IOSCO)
• Assessments: 17 ROSC Modules completed by IMF and World Bank (ROSC/FSAP).

• Standards: Insurance Supervisory Principles (Published by IAIS in Sept 1997).
• Focus: organization and practice of supervision of the insurance sector; corporate governance, companies’ internal controls, prudential rules, supervision of cross border business.
• Prudential rules covers such things as management of a company’s assets, identification and classification of liabilities, capital requirements, disclosure and monitoring of off-balance sheet items such as derivatives etc, and reinsurance and retrocession insurance.
• Methodology: Core Principles Methodology (Published by IAIS in Apr 2000).
• Issuing Body: International Association of Insurance Supervisors (IAIS)
• Assessments: 20 ROSC Modules completed by IMF and World Bank (ROSC/FSAP).

13. Debt Management

• Standards: Guidelines for Public Debt Management (Presented to the Bank Executive Board on March 6, 2001, by IMF and World Bank).
• Methodology: Sound Practices in Government Debt Management (To be published at end-2003).
• Issuing Body: IMF and World Bank

• Transparency: that processes are observable to all participants and therefore was able to help rid the system of uncertainty.

• Accountability: ensuring that a system is in place to hold authorities, institutions and corporations accountable for their actions and hence create good governance and trust in the system as a whole.

There are two other related initiatives being pursued by the IMF: research on liberalization of the capital account and Financial Soundness Indicators (FSIs). The latter are indicators designed to monitor the health of the financial system.

1... Andrew Cornford (2002) of UNCTAD, “Annex: Guide to Key Financial Standards.”

According to the IMF website this are 'Reports on the Observance of Standards and Codes (ROSCs)'

ROSCs summarize the extent to which countries observe certain internationally recognized standards and codes. The IMF has recognized 12 areas and associated standards as useful for the operational work of the Fund and the World Bank. These comprise accounting; auditing; anti-money laundering and countering the financing of terrorism (AML/CFT); banking supervision; corporate governance; data dissemination; fiscal transparency; insolvency and creditor rights; insurance supervision; monetary and financial policy transparency; payments systems; and securities regulation; AML/CFT was added in November 2002. Reports summarizing countries' observance of these standards are prepared and published at the request of the member country. They are used to help sharpen the institutions' policy discussions with national authorities, and in the private sector (including by rating agencies) for risk assessment. Short updates are produced regularly and new reports are produced every few years.