Corporate Governance for Banks in Southeast Europe: Policy - IFC

Supervisors also expressed skepticism about the ability of disclosure to signal impending problems; they feltthat banks would not reveal truly relevant information. They suggested credit ratings as a way to strengthenand complement disclosure. One benefit of independent credit ratings is that they provide an easy shorthandthat allows the public to understand bank risk. On the other hand, ratings agencies were unable to warn ofrisks during the recent financial crisis, which suggests that their effectiveness is not a foregone conclusion.Some countries such as Bulgaria have requirements in law for banks to undergo credit ratings.All of these doubts merit consideration. However, they also emanate from a partial view of how disclosurebasedregulation functions. True, the information that is compiled and reported is intended to be read,scrutinized, and understood by an intelligent reader, yet a considerable part of the value of disclosure-basedregulation is that disclosure forces the bank and management to seriously examine the issues that are thesubject of the disclosure, to take a position, and to make a public assertion. Such a public assertion usuallymakes the board and management legally responsible.The role of the board in disclosure under best practiceUnder best practice, the specific responsibilities of the board regarding disclosure and transparency canbe divided into four areas: 1) ensuring transparent governance; 2) reporting on company performance; 3)ensuring an effective and independent external audit; and 4) ensuring effective internal control. 64In the first area, ensuring transparent governance, the board is expected to develop formal written mandatesor policy statements that set out the general duties and operating principles of the board, and disclose them.Best-practice boards report on the bank’s governance structures, policies, and governance performance.Basic information such as the charter and bylaws should be publicly available under any circumstance. Boardreporting may take a variety of forms, including, for example, statements of compliance with a national codeof corporate governance, and a consolidated annual report on the company’s governance. In addition, boardsare increasingly being asked to report on their own work and performance. 65It is generally accepted that the board has responsibility for reporting on the financial and operating resultsof the bank. The basic responsibility of the board is to review financial statements, approve them, and thensubmit them to shareholders. In addition to the external auditor, the board provides some level of assurancethat the financial statements accurately represent the situation of the company. Providing credible assurancesis a difficult and complex task that involves checking the consistency of accounting and financial statementsand the external auditor’s report, ensuring the integrity of the company’s accounting and financial reportingsystems, overseeing the independent audit, and maintaining an appropriate relationship with the company’sauditors. 66It is typically the audit committee that helps the board fulfill these tasks. The audit committee’s principalrole is overseeing the internal and external audit, assisting the board in supervising the selection of externalauditors and the audit process, and addressing the accounting issues of the company. Another responsibilityof the audit committee is to assess the reliability of the systems whereby the accounts are drawn up and thevalidity of accounting methods. 67An important aspect of this responsibility is the process of selecting and monitoring the external auditor toensure the quality and independence of the audit. Best-practice audit committees are expected to prepare the64 For a detailed examination of best practice, see R. Frederick, “The Role of the Board in Disclosure: An Examination of What Codification Efforts Say,”Paper developed for the OECD and presented at the OECD’s Fifth Meeting of the South East Europe Corporate Governance Roundtable (2004).http://www.oecd.org/dataoecd/55/33/32387383.pdf.65 Ibid.66 Ibid.67 Ibid.Corporate Governance for Banks in Southeast Europe Policy Brief 45