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. 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.