World Bank Group: Important Steps Taken on Internal Control but Additional Assessments Should Be Made
Released: 2003-06-16T00:00:00

Letter

Scope and Methodology

Public Law 106-429, Appendix A, Title VIII, identifies 10 MDBs to be included in the scope of our work. In prior work, we addressed 6 of the MDBs listed in the law—the African Development Bank, African Development Fund, Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, and the Inter-American Investment Corporation. As agreed with your offices, this report focuses on the external financial statement audit and internal control reporting process of the remaining four MDBs—which are all part of the Bank Group—listed in the law: International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), and Multilateral Investment Guarantee Agency (MIGA).

To meet our objectives, we met with Department of the Treasury officials and a representative of the office of the U.S. Executive Director for the Bank Group. We also reviewed the Bank Group entities’ 2002 and 2001 audited financial statements and the external auditors’ opinions on the financial statements and identified the accounting principles and auditing standards used, inquired of World Bank management and obtained information on the audit committee, external audits, and the extent of the external auditor giving opinions on internal control over financial reporting, operations, and compliance matters, analyzed and compiled relevant financial information from the Bank Group entities’ annual reports and their audited financial statements, reviewed the banks’ terms of reference to identify the scope of the audit committee’s oversight and compared them to relevant guidance on widely accepted internal control frameworks, reviewed widely accepted internal control frameworks, such as Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and Guidelines for Internal Control Standards developed by the International Organization of Supreme Audit Institutions, and discussed various options for reporting on internal control with representatives from the international accounting firm responsible for the financial statement audits of the Bank Group entities.

The Bank Group entities are multilateral, international entities that are autonomous, and the United States, as an individual member country, generally does not have audit authority over their operations. Thus, it was not part of our scope to evaluate the components of the Bank Group entities’ internal control governance structure, nor did we evaluate the quality of the external auditor’s work on their financial statement audits and internal control examinations over external financial reporting. Moreover, it was not part of our scope to determine whether the audit committee members were independent of the Bank Group entities they served.

It was also not part of our scope to make any site visits to review any Bank Group entities’ projects or programs. In accordance with GAO’s agreement with the Bank Group and the Department of the Treasury on this assignment, our interaction with officials from the Bank Group was limited to the designated representative from the office of the U.S. Executive Director for the Bank Group. The articles of agreement establishing the Bank Group entities require the United States to deal with those organizations only through the Department of the Treasury. Therefore, we used Treasury officials as a conduit for obtaining information to conduct our work.

We conducted our work in Washington, D.C., from May 2002 through March 2003 in accordance with U.S. generally accepted government auditing standards. In May 2003, we received comments from the World Bank Group and the Department of the Treasury, which are reproduced in their entirety in appendixes III and IV. In addition, the Bank Group also provided a number of suggested technical changes to our report, which we incorporated as appropriate.

Background

The Bank Group entities included in this report—IBRD, IDA, IFC, and MIGA—are multilateral, international entities with a mission to fight poverty and improve the living standards of people in developing countries throughout the world by providing development assistance in the form of loans, equity investments, loan and equity guarantees, and technical assistance. National governments are the shareholders—referred to as members—of the Bank Group. These members include developing countries that borrow from the Bank Group as well as industrialized member countries. All members, including borrowing members, contribute to the capital of the Bank Group and participate in oversight and in setting operating policies through their participation on the boards of governors and executive boards. See figure 1 for a summary of the components of the Bank Group and their functions.

The lending activities of the Bank Group can be grouped primarily into the following two types: market-based lending primarily done by IBRD and concessional lending primarily done by IDA. IBRD provides loans with market-based rates that are financed primarily through borrowings from world capital markets, members’ paid-in capital, and retained earnings. Members also provide support through subscriptions of callable capital. Because of the significant proportion of callable capital that is subscribed by members with strong credit ratings, including the United States, IBRD is able to use callable capital as backing to obtain more favorable financing terms when borrowing from world capital markets than would otherwise be available. To date, IBRD has never made a call on this capital.

IDA provides concessional loans to the poorest of the developing countries—those meeting certain eligibility requirements—and is financed through contributions from member countries and borrower repayments of outstanding loans. These loans are called “concessional” because they are provided with below-market interest rates and extended repayment terms.

Due to the nature of concessional lending and the credit risks of borrower countries, the concessional lending arms do not have callable capital subscriptions and do not borrow from world capital markets to finance their operations. Unlike IBRD, which borrows from world capital markets to fund lending, IDA relies on capital replenishments or periodic contributions by members in addition to repayments from loans and transfers of net income from IBRD. As of June 30, 2002, the Bank Group had outstanding loans of about $230 billion, and concessional loans constituted 42 percent, or about $96 billion, of that total.

In 2002, the Bank Group entities approved about $24.4 billion of development assistance consisting of loans, loan guarantees, and equity investments for 466 new economic and social development operations and projects. Loans with market-based interest rates, equity investments, and loan guarantees accounted for about $16.3 billion of the total financial support provided by the Bank Group during 2002, while concessional lending amounted to about $8.1 billion. See table 1 for a summary of development assistance in 2002 and number of new projects, by Bank Group entity.

The Bank Group entities’ activities are overseen through a board of governors, with a governor from each member country. In general, a board of governors is responsible for admitting new members, authorizing agreements for cooperation with other international organizations, deciding about the board of executive directors, approving the Bank Group entities’ financial statements, determining the reserves and the distribution of profits, and deciding the scope of operations. Each Bank Group entity also has a board of executive directors, which is responsible for, among other things, overseeing the banks’ daily operations, ensuring the implementation of the decisions of the board of governors, and approving the budgets of the banks. The Bank Group entities’ own management and staff of international civil servants carry out the daily operations.

The United States is a member in all the Bank Group entities discussed in this report, contributing significant amounts to support their missions and subscribing to a significant amount of their callable capital. The Congress appropriates funds for U.S. contributions and capital subscriptions to the Bank Group. In fiscal year 2002, the Congress appropriated about $800 million in U.S. contributions and approved about $20 million of new subscriptions to callable capital for the Bank Group. The Department of the Treasury oversees U.S. interests in the Bank Group. See table 2 for a summary of U.S. support of about $58.7 billion provided to the components of the Bank Group entities from their inception through June 30, 2002.

The Bank Group entities prepare their financial statements to comply with different bases of accounting. They present their financial statements using U.S. generally accepted accounting principles (U.S. GAAP), international accounting standards (IAS), and special purpose basis of accounting, as shown in table 3. According to the Bank Group, due to the special nature and organization of the IDA, the concessional lending arm of the Bank Group, it prepares special purpose financial statements that are meant to show the sources and uses of resources to comply with its articles of agreement.

The Bank Group’s external auditor has audited the annual financial statements of all the entities of the Bank Group. Each entity has received an unqualified or “clean” audit opinion on its financial statements for the 3 most recent years. The Bank Group’s external financial statement audits, performed by an international accounting firm, provide assurance over its reported financial position at a particular time and the financial results of its operations and cash flows for a given fiscal year. However, the Bank Group’s external financial statement audits do not, and are not intended to, provide specific assurance about the internal control over the Bank Group’s operations and whether the funds are spent for their intended purposes. Figure 2 shows the relationship between the Bank Group’s flow of government funding and its external audit and reporting.

The Bank Group’s external auditor performs its audits based on U.S. GAAS and ISA. These standards require the independent auditor to obtain a sufficient understanding of internal control to plan the audit and determine the nature, timing, and extent of tests to be performed. As part of the audits of the Bank Group entities, the auditor communicates to the audit committee any internal control material weaknesses and reportable conditions that were noted during the course of the audit. As is common practice, the auditor issues a written document known as a management letter to communicate these weaknesses. The management letter addresses issues detected as part of the financial statement audit work and it is not meant to be a comprehensive examination of the sufficiency of the Bank Group’s internal control.

Bank Group Has Taken Important Steps on Internal Control but Reporting Could Be Expanded

Management of the Bank Group entities has acknowledged the importance of internal control and has (1) implemented a structured internal control framework, (2) conducted the internal control assessments necessary to provide its external auditor with a formal assertion on the effectiveness of the Bank Group’s internal control over external financial reporting, and (3) contracted with its external auditor to provide an opinion, in conjunction with the financial statement audits, on whether managements’ assertions on internal control over external financial reporting are fairly stated.

For fiscal year 2002, the four Bank Group entities included in their annual reports both management’s assertion that it met the Committee of Sponsoring Organizations of the Treadway Commission (COSO) criteria on internal control over external financial reporting as of June 30, 2002, and the external auditor’s opinion that management’s assertion on internal control over external financial reporting was fairly stated. However, Bank Group management does not include in its assertion internal control over operations and compliance with key provisions of bank charters and policies, and it has not asked the external auditor to give opinions on those internal controls.

Although the banks’ charters do not specifically call for a management assertion or an external auditor opinion on internal control over operations and compliance, they do state that the banks are to take the necessary measures to ensure that the proceeds of any loan made, guaranteed, or participated in by them are used only for the purposes for which the loan was granted. Given the inherent risks in the banks’ activities, further assurance on these additional categories of internal control—operations and compliance—would provide an added level of assurance to the Bank Group and its member countries that funds were used for their intended purposes.

Bank Group Has Engaged an External Auditor to Provide Opinions on Internal Control over Financial Reporting

The Bank Group entities have acknowledged the importance of internal control and have taken an important step in obtaining audit assurance over internal control: They have engaged their external auditor to provide an opinion on management’s assertions on internal control over external financial reporting and have included those results in their 2002 annual reports. This public reporting of the external auditor’s opinions on management’s assertions provides a level of assurance on the Bank Group’s ability to record, process, summarize and report financial data consistent with the assertions in the financial statements as well as a level of transparency to member countries and others outside the Bank Group.

The Bank Group—specifically through the controllers’ departments—has also taken steps internally to strengthen internal control. The World Bank, beginning in 1995, adopted the internal control standards of COSO. The Bank Group adopted the COSO framework to establish a common definition of internal control and provide a standard that managers and auditors can use to assess and measure progress in improving internal control. Entities and their internal control needs differ dramatically by line of business and size, and by culture and management philosophy. COSO provides a framework for implementing a system of internal control, but the specific internal controls put in place and monitored by management depend on the type of operations to be managed and the associated risks. See appendix I for a description of the five components of internal control under the COSO framework.

Under the COSO framework, the effectiveness of internal control is measured by an organization’s capacity to provide reasonable assurance in the following three categories.

Reliability of financial reporting: Financial reporting controls relate to an entity’s ability to prepare reliable financial statements.

Effectiveness and efficiency of operations: Operations controls address the entity’s basic business objectives, including performance goals and the safeguarding of resources.

Compliance with applicable laws and regulations: Compliance controls deal with the entity complying with those laws and regulations to which the entity is subject.

As shown in figure 3, under COSO, an organization is responsible for the effectiveness of three categories of internal control.

Internal controls often serve to accomplish more than one objective. Frequently, internal controls established primarily for operations or compliance objectives may also accomplish financial reporting objectives. Internal controls directed at operations and compliance also may deal with events, transactions, or other occurrences that must be reported in the financial statements. Internal control is not one event, but a series of actions and activities occurring throughout an entity’s operations and on an ongoing basis. As entities strive to improve operational processes, management should continually assess and evaluate its internal control. Monitoring—a process that assesses the quality of an internal control system’s performance over time—is an essential element of internal control and is particularly relevant for carrying out the fiduciary responsibilities that are integral to the Bank Group’s operations.

Although current financial statement auditing standards established in the private sector do not require the auditor to report on internal control and compliance when performing a financial statement audit, the auditor can be engaged to provide a level of assurance—called an attestation—on internal control over operations and compliance. The Bank Group also has other options for providing assurance over internal control over operations and compliance. For example, the Bank Group could request a comprehensive evaluation of its internal controls over these functions, which could be conducted by its internal auditor, its external auditor, an outside consultant, or by another unit within the Bank Group.

World Bank Units’ Responsibilities for Internal Control and Oversight of Operations

In its anticorruption progress report and operations evaluation report, the World Bank states that many units provide internal control and oversight over the use of World Bank funds in lending operations, including those shown in table 4.

The World Bank states that the above units have taken on new and broadened functions for quality assurance and evaluation over the past several years and have strengthened its ability to supervise the fiduciary aspects of its loans and help borrowers—some perceived to have the worst corruption problems in the world as shown in appendix II—strengthen their own capacities. The above units are an important part of the World Bank’s internal control over operations and compliance. Although it was not part of our scope to evaluate the effectiveness of these units, or any similar units in IFC and MIGA, they have the potential of providing the basis for the Bank Group to offer further assurance and transparency on its internal controls. For example, the Bank Group’s internal or external auditor, or other group or entity, internal or external to the Bank Group, could provide a comprehensive evaluation of the Bank Group’s control over operations and compliance to determine whether they are working as designed to ensure that funds are spent as intended. In 1995, the World Bank established a 5-year timeline to ensure that, by the end of fiscal year 2000, management would be able to express assurance that adequate controls were in place, not only for financial reporting purposes, but also for efficiency and effectiveness of operations. The World Bank has not yet met that goal. During our review, we were told that the Bank Group does not yet have plans to have a comprehensive assessment of these controls.

Bank Group Could Benefit from Additional Assurance on Internal Control over Operations and Compliance

Because the Bank Group entities operate in a difficult and risky control environment, the member countries could benefit from additional assurance over the Bank Group entities’ internal control over operations and compliance with key provisions of their charters. The Bank Group operates in countries where transparency and accountability are often lacking, and corruption—broadly defined as the abuse of public office for private gain—sometimes flourishes. The Bank Group must satisfy its dual mandate of providing development assistance in these environments and exercising its fiduciary responsibility, including ensuring that corruption is minimized in the projects it finances.

The World Bank acknowledged in an anticorruption progress report that corruption undermines public support for development assistance by creating an erroneous perception that all assistance is affected by corruption. In this report, the World Bank stated that it would make every effort to prevent corruption in the projects and programs it finances in borrower countries. The report also showed the control and oversight units the World Bank established to improve the operational effectiveness of its procurement and financial management practices. However, the Bank Group has not taken steps to provide additional assurance and transparency that its funds are being used as intended by requiring a comprehensive assessment of controls over operations and compliance.

In addition, the World Bank in its report Clean Government and Public Financial Accountability acknowledged that borrower countries’ government and external auditors are unable to give the World Bank sufficient assurance that World Bank funds were exclusively used for intended purposes. Risks that Bank Group funds are used for purposes other than those for which loans were granted—whether for concessional or market-based loans—could be mitigated through effective implementation and evaluation of internal controls over operations and compliance.

The Bank Group’s system of internal control, adopted under the COSO framework, could facilitate a comprehensive assessment of internal controls over operations and compliance designed to uncover any material internal control weaknesses in operations and compliance that need to be corrected. A comprehensive evaluation of these controls could also provide additional credibility to the Bank Group’s (1) internal evaluation reporting system and (2) commitment to provide funds only to those who use the funds for intended purposes. Such an assessment would provide additional assurance to both the Bank Group and its member countries over the use of funds and could be accomplished in one of several ways: (1) through the Bank Group’s internal audit function, (2) by the external auditor, in conjunction with its financial statement audit, giving an opinion on whether management’s assertions on internal controls over operations and compliance are fairly stated, (3) by another entity within the Bank Group, or (4) by another external entity, such as a consultant.

Such an assessment would include identifying the specific elements of the COSO criteria that are objective, measurable, and relevant to use in assessing the reasonableness of internal control over operations and key charter provisions to be included in a review of compliance controls and to define what would constitute compliance with those key provisions of bank charters. After these significant issues are addressed, Bank Group management would be able to comprehensively document and assess the key controls identified and subsequently provide its assertions on the effectiveness of those controls.

Bank Group Has Established an Audit Committee That Provides Oversight of Financial Reporting and Internal Control

The Bank Group’s board of executive directors has appointed an audit committee to provide, on its behalf, oversight on matters such as the effectiveness of financial policies and reporting; various aspects of financial, business, operating, and reputational risks; and internal control in the Bank Group entities. The Bank Group’s audit committee has a purpose, scope, and operating principles congruent with those customarily established for audit committees. A major function of the Bank Group’s audit committee is to nominate an external auditor to conduct audits of the Bank Group’s financial statements and determine the scope of the auditors’ work and the reports to be submitted by the auditors.

The information provided by the Bank Group on the functions of its audit committee indicated that the audit committee’s terms of reference included responsibilities such as those listed in table 5.

Information provided to us by the Bank Group indicates that the Bank Group entities’ audit committee was actively involved with the external auditor during its financial statement audits. Audit committee activities with the external auditor included communications about internal control recommendations, discussions on management’s COSO assertion on internal control over external financial reporting, the external auditor’s opinion on management’s assertion, and considerations on the external auditor’s conclusions on the appropriateness of accounting principles. The information also showed that the audit committee kept current with the work of the internal auditor.

The audit committee has a particularly important role to play in assuring fair presentation and appropriate accountability in connection with financial reporting, internal control, compliance and related matters. An effective audit committee facilitates the successful performance of the board of executive directors’ oversight responsibilities for financial operations and is an independent safeguard on corporate management with respect to its responsibilities for preparing financial statements and implementing an internal control framework.

The Bank Group’s audit committee currently has the external auditor provide an opinion on management’s assertion on the Bank Group’s internal control over external financial reporting. The audit committee has not asked the Bank Group entities’ external auditor to provide assurance on internal control over operations or compliance. The audit committee has the authority, as part of determining the scope of the auditor’s work, to expand and strengthen the Bank Group entities’ internal control reporting processes by requesting the external auditor to give an opinion on internal control over operations and compliance matters once management decides such reporting is appropriate. A key step in this process is for management to first apply the scope of COSO to its controls over operations and compliance and to develop the appropriate criteria to assert on internal control over operations and compliance matters. The audit committee could then have the external auditor to provide an opinion on management’s assertions over those controls using the criteria specified by management.

Alternatively, the audit committee could work with the internal and external auditors, other entities within the Bank Group, or an external party to conduct a comprehensive evaluation of internal controls over operations and compliance to determine whether such controls are in place and are functioning properly to prevent misuse of funds and to ensure compliance with key provisions of bank charters and policies.

Conclusions

The Bank Group has taken important steps in strengthening its assessment and reporting on internal control by performing the internal control assessments necessary to provide an assertion on internal control over external financial reporting and having its external auditor give an opinion on that assertion. At the same time, Bank Group management does not include in its assertion internal control over operations and compliance with key charter provisions, and it has not asked the external auditor or any other organization, internal or external, to provide a comprehensive evaluation of its controls over these areas. The assurance that such an assessment can provide through reporting on internal control over operations and compliance is especially important given the operating risks inherent in the Bank Group’s activities. The audit committee is well- positioned to assign an internal party or provide an external entity the task of providing a thorough assessment of such controls. This additional assurance would strengthen the Bank Group’s accountability and enhance member country assurance that funds are spent as intended.

Recommendations for Executive Action

We recommend that the Secretary of the Treasury instruct the U.S. Executive Director of the Bank Group to take the lead in working with the other executive directors in developing a policy requiring the Bank Group entities to enhance the audit function and reporting of their financial operations. This would entail (1) conducting a comprehensive evaluation of internal controls over operations and compliance to determine whether such controls are in place and are functioning properly to prevent misuse of funds and to ensure compliance with key provisions of bank charters and policies and (2) reporting annually to the board of executive directors through the audit committee on the progress made. This evaluation could be carried out in any of several ways, including through the internal audit function; by the external auditor, in conjunction with the financial statement audit; by another entity within the Bank Group; or by an external party, such as a consultant. These Bank Group entities should also provide the results of the assessment to member countries annually.

Agency Comments and Our Evaluation

We received written comments from the Office of the President of the World Bank, which represented the official response of the World Bank Group. We also received written comments from the Deputy Assistant Secretary for Multilateral Development Banks and Specialized Development Institutions at the Department of the Treasury, the agency that represents the United States at the World Bank Group. These comments are reprinted in their entirety in appendixes III and IV.

In its comments, the World Bank Group welcomed our recommendation for a comprehensive assessment of internal controls over operations and compliance with bank charters and policies but did not comment on our recommendation that such evaluations be conducted annually. The Bank Group stated that given the many reforms it has underway to strengthen its control framework, an assessment of internal control over operations and compliance would be most useful if undertaken once the range of changes over those controls is substantially in place. We agree that effective timing for implementing our recommendation would coincide with the Bank Group’s implementation of reforms. It added that such changes are expected to be complete in about 18 to 24 months.

While Treasury also agreed with our recommendation for a comprehensive evaluation of internal controls over operations and compliance, it did not agree that the Bank Group should follow this initial assessment with annual evaluations. It acknowledged that periodic updates would be reasonable but characterized annual evaluations as excessive and unnecessary based on its view that the overall structure of internal controls changes infrequently and usually only marginally.

Given the inherent risks in the Bank Group entities’ lending activities, we remain convinced that the Bank Group should report annually on all three categories of internal control—financial reporting, operations, and compliance. Under the COSO framework, effective internal control is an essential aspect of managing shifting environments and evolving demands and priorities. Internal control is not one event, but a series of actions and activities occurring throughout an entity’s operations and on an ongoing basis. As entities strive to improve operational processes, management should continually assess and evaluate its internal control. Monitoring—a process that assesses the quality of an internal control system’s performance over time—is an essential element of internal control and is particularly relevant for carrying out the fiduciary responsibilities that are integral to the Bank Group’s operations. Annual reporting on internal control is now common practice both in the public and private sector and is often performed in conjunction with annual financial statement audits.

Treasury pointed out that our draft report documents the sufficiency of the Bank Group’s current external audits. Although our report provides information about the results of the external financial statement audits at the Bank Group, our report also makes it clear that, by design, the objective of a financial statement audit is not to provide assurance on internal control. The current financial statement audits cover only the banks’ financial position at a point in time and the financial results of operations and cash flows for a given fiscal year. Given that the Bank Group’s external auditor’s opinion on internal control extends only to management’s assertions on the effectiveness of internal control over external financial reporting, many facets of internal control would not be covered. The scope of the financial statement audits of the Bank Group entities and the separate assessment of controls over external financial reporting are not intended to and do not provide specific assurance about the effectiveness of the internal control over operations and compliance with bank charters and key policies.

Considering the Bank Group’s reforms to strengthen internal control over operations and compliance, we emphasize the need for annual assessments of those controls. As acknowledged in comments from the Bank Group, internal control is a “dynamic process,” and reforms are under way in the Bank Group to strengthen its control framework. As the Bank Group develops and institutes these reforms, monitoring is needed to help ensure that controls are functioning as intended in preventing misuse of funds and ensuring compliance with key provisions of bank charters and policies. Annual reporting to provide accountability and transparency over lending, equity investment, and guarantee operations carries additional importance for the Bank Group because the international organization’s mission requires it, as stated in its comments, “to be active in countries where controls are weak.” As acknowledged by the Bank Group, “monitoring exposure against defined benchmarks” is one of several changes that will provide the banks with “significantly improved controls over lending, equity investment, and guarantee operations.” As stated in our recommendations, the evaluation and reporting on internal control over operations and compliance could be carried out in several ways, including through the internal audit function; by the external auditor, in conjunction with the financial statement audit; by another entity within the Bank Group; or by an external party, such as a consultant.

We are sending copies of this report to the Secretary of the Treasury, the president of the World Bank Group, and other interested parties. Copies will be made available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

Please contact me at (202) 512-9406 or by email at franzelj@gao.gov if you or your staffs have any questions concerning this report. Key contributors to this report were Charles Norfleet, Meg Mills, and Maxine Hattery.

Components of Internal Control under COSO

The World Bank, beginning in 1995, adopted the Committee of Sponsoring Organizations of the Treadway Commission (COSO) internal control framework. Under the COSO framework, there are five interrelated components of internal control that define the minimum level of quality acceptable for internal control in an organization and provide the basis against which internal control is to be evaluated. The five components are used as the criteria to evaluate the strengths and weaknesses of the internal controls and to identify actions that can be taken to improve controls. All five components must be present and effective in order for management to have reasonable assurance that risks are managed to ensure the achievement of the organization’s objectives. At the Bank Group, management is responsible for developing the detailed policies, procedures, and practices to fit its organization’s operations and to ensure that they are built into and are an integral part of its operations. The five internal control components, which apply to all aspects of an organization’s operations, including programmatic, financial, and compliance, include the following: Control environment. The control environment reflects management’s commitment and attitude to the implementation and maintenance of an effective internal control structure. The control environment which management promulgates through the organization will strongly influence the design and operation of control policies and procedures. It will also determine how effective they are in mitigating risks and achieving objectives.

Risk assessment. All organizations, regardless of size or nature, encounter some form of risk that can adversely impact the achievement of its objectives. Assessing risk is a major component of an effective control structure. It involves the identification, analysis, assessment, and prioritization of risks that need to be treated by control activities.

Control activities. Control activities are the tailored policies and procedures that ensure (1) the mitigation of risks, (2) irregularities are prevented or detected and corrected, (3) assets are safeguarded from unauthorized use or disposal, and (4) financial records and other relevant databases are complete and accurately reflect the entire operational activities of the organization, and assist in timely preparation of accurate financial statements.

Information and communication. Information and communication are critical for performance reporting, decision making, both within the organization and externally, and the achievement of strategic objectives.

Monitoring. Monitoring is the final component of an effective internal control structure and is closely linked to information and communication. In addition to performance monitoring, the effectiveness of the control structure itself also needs to be monitored and reviewed. Control monitoring can be undertaken in two ways, by ongoing monitoring and by separate reviews and evaluations.

Transparency International’s 2002 Corruption Perception Index

Transparency International is an organization dedicated to curbing both international and national corruption. Transparency International launched its Corruption Perception Index (CPI) in 1995. The CPI is a collection of polls, drawing on 15 surveys from 9 independent sources for its 2002 results. The goal of the CPI is to provide data on extensive perceptions of corruption within countries. The 2002 CPI shows that the Bank Group entities function in environments that are perceived to have high levels of corruption, underscoring the importance of internal control over operations and compliance within the Bank Group entities that are providing loans to those countries.

The CPI serves as an important indicator of the image a country conveys to investors and potential business partners. Because the CPI is derived from 15 different surveys that garner the perceptions of both residents and expatriates, both business people and risk analysts, the index provides a snapshot of the views of the people who make key decisions on investment and trade. The CPI builds public awareness of the corruption issue, and it adds to pressure on governments to directly address the issue and the damaged image of their nation that low rankings in the CPI reflect.

The CPI is a composite index that consists of credible sources using diverse sampling frames and different methodologies, including one used by the World Bank. The methodology is reviewed by a steering committee consisting of leading international experts in the fields of corruption, econometrics, and statistics. Members of the steering committee make suggestions to improve the CPI, but the management of Transparency International makes the final decisions on the methodology used. For the 2002 CPI, data was included from the following organizations’ surveys and documents: World Bank, World Business Environment Survey; World Economic Forum, Africa Competitiveness and Global Institute for Management Development, World Competitiveness PricewaterhouseCoopers, Opacity Index; Political & Economic Risk Consultancy, Asian Intelligence Issue; Economist Intelligence Unit, Country Risk Service and Country Freedom House, Nations in Transit; Gallup International on behalf of Transparency International, Bribe Columbia University, State Capacity Survey.

No country was included in the CPI without results from a minimum of three surveys undertaken over the past 3 years. For this reason, not all countries with high levels of corruption may have been added. Figure 4 includes the borrower countries by region.

Comments from the World Bank Group

Comments from the Department of the Treasury

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