## _070110a ## Source details **Canonical URL:** [_070110a](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_070110a.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_070110a.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_070110a.pdf.json) --- ### Executive Summary — Purpose, Approach, and Scope - Objective: mitigate potential risks of misuse of Fund resources and misreporting of monetary program data. - Safeguards focus: review central banks’ integrity of operations, identify risks, and recommend and follow through on corrective actions. - ELRIC framework examines five elements: (i) external audit, (ii) legal structure and independence, (iii) financial reporting, (iv) internal audit, and (v) internal controls. - External panel of experts: Mr. Lynn E. Turner (Chair), Dr. Ranee Jayamaha, and Dr. Len Konar. - Panel work included: - Advising the Executive Board on ELRIC’s continued appropriateness. - Assessing the risk-based monitoring framework during arrangements and while Fund credit is outstanding. - Considering safeguards in the context of direct budgetary support and dissemination of safeguards findings. - Methods: review of safeguards assessment reports and other materials; consultations with central banks, IMF Executive Directors’ offices, Fund and World Bank staff, and KPMG; review of international reference materials. ### Effectiveness and Recent Outcomes - Aggregate Fund commitments and outstanding credit: - SDR 224,674 million committed through 185 new and augmented arrangements. - SDR 51,920 million outstanding as of 31 May 2010. - Safeguards assessments and outcomes: - 165 assessments conducted since 2001. - Misreporting identified in only six cases (three since the 2005 policy review). - Governance abuse identified in three cases. - In response to safeguards recommendations, 43 central banks have, for the first time, reconciled key program data with accounting records. - Monitoring framework: - Risk-based monitoring framework introduced in 2006; sets monitoring intensity based on ELRIC elements, exposure to the Fund, corruption index, past history with Fund arrangements, status of safeguards recommendations, audit quality, governance, and legal changes. - Framework found broadly effective and efficient; able to identify when measures are not sustained (e.g., external audits ceasing to meet international standards). - Panel view: continue monitoring borrowers as long as Fund credit remains outstanding; note central bank failure to provide monitoring information in country staff reports; monitoring intensity after disbursements end and prior to repayment should reflect identified risk levels. - Stakeholder and staff views: - Broad approval of the safeguards policy and ELRIC from central banks, ED offices, and Fund staff. - ELRIC adequate to identify weaknesses that could lead to misreporting and misuse. - Safeguards staff judged well qualified, skilled, experienced, and professional. ### Key Findings and Strategic Context - Overall effectiveness: safeguards policy effective in mitigating misuse and misreporting risks and strengthening central bank practices. - Role in corrective action: safeguards measures instrumental in detection or correction in misreporting and governance abuse cases. - Contribution to standards adoption: progress toward international standards and best practices—establishment of audit committees, adoption of international financial and accounting standards, enhanced independence, improved internal controls and auditing. - Crisis context and budgetary support: - Nearly 30 percent of the value of the current Stand-by Arrangements (SBAs) as of May 2010 is allocated for budgetary support, totaling SDR 17,554 million. - Emphasis: safeguard Fund resources and Fund reputation in the high-stakes environment of the global economic crisis beginning in late 2008. ### Recommendations for Continuous Improvement (Overview) - General approach: gradual enhancement of safeguards policy through continuous improvement, adapting ELRIC over time. - Priority areas for enhancement: - Governance - Risk Management - Transparency in the Safeguards Program - Transparency in Financial Reporting - Fraud Detection - External Audit - External and Internal Communication - Information Technology - Specific extension recommendation: - Expand safeguards assessments to include state treasuries when Fund resources are provided for budgetary support. - Leverage existing IMF and World Bank assessments where possible, provided an independent safeguards team conducts due diligence on data quality. - Maintain independence: staff conducting assessments should not assess their own work or have vested interest in implementation plans. - Communication: - Urges improved communication with central bank authorities and Fund staff in other departments to ensure stakeholder engagement and understanding. ### Governance — Sharpening ELRIC’s Focus - Current ELRIC measures (legal structure, independence, existence of independent audit committees) can fall short in ensuring good governance. - Panel recommends explicit evaluation of a central bank’s corporate governance against principles: independence, responsibility, accountability, fairness, transparency, discipline, and social responsibility. - Good corporate governance expectations: - Board commitment to high standards and ethical leadership. - Compliance with relevant local laws and international standards. - Periodic review of code of conduct and dissemination of values to employees. - Governance underpins ability to deliver core objectives. ### Risk Management — Integrated, Bank-wide Risk Culture - Global consensus post-crisis: all financial institutions must improve risk management; G20 and Basel Committee emphasize failures in regulation, supervision, and liquidity risk management. - Observations and recommendations: - Financial and business risks proliferating; risk is a board-level responsibility. - Central banks should establish an integrated risk management framework (IRMF); “The existence of an IRMF is absolutely essential for central banking.” - IRMF provides mechanisms, processes, and procedures to take prompt action, fill gaps, and enhance accountability and transparency. - Safeguards assessments should explicitly evaluate central banks’ risk management because it affects Fund exposure. - Organizational expectations: - Presence of a Chief Risk Officer (CRO) or risk management committee (RMC) with clear and independent reporting to the board. - Safeguards assessments should focus on critical success factors and risk performance indicators tied to mission and strategic goals. - Assessment benchmarks: - Possible frameworks/guidelines: ISO 31000, CEBS high-level principles, COSO Enterprise Risk Management components. - Assessment should judge effectiveness by whether all components are present and functioning. ### Transparency in the Safeguards Program and Financial Reporting - Gradual move toward publication recommended “over the next decade.” - Rationale: confidentiality helped build trust initially; transparency now more expected and beneficial. - Phased transparency measures: - Publish a bulleted list at the beginning of safeguards assessment reports identifying top safeguards-related risk factors; publish that list in the country staff report. Updates during monitoring published in program review staff reports. - Publish safeguards findings in aggregate, anonymous form periodically, but no less than every other year, revealing issues and corrective actions taken. - Encourage central banks to voluntarily publish their own safeguards action plans and accomplishments. - Financial reporting standards: - Endorsement of full compliance with IFRS and ISA as urged by ELRIC. - Observed movement of central banks toward these standards; some fully compliant, others partially. - Benefits: improved transparency, accountability, public credibility, and Fund’s reputation. ### Fraud Detection and Whistle-blower Programs - Verification of accurate financial reports: audit committee, external audit, and internal audit remain important. - Evidence: - Association of Certified Fraud Examiners: tips are the most common detection method. - Transparency International: increasing recognition of whistleblowing value. - Panel recommendations: - Consider recommending a whistle-blower program where none exists; assess existing programs for independence and issue resolution via internal auditor, audit committee, and external auditor. - Assessments or recommendations can be done by Fund staff or by requesting reports from the audit committee/internal/external auditors. - Cultural considerations: implementation may be sensitive; Fund should work with central bank officials on feasible approaches or alternatives. ### External Audit — Assessing Audit Quality and Engagement - Reliance on external auditors is a vulnerability when audit quality does not meet international assurance standards. - Panel notes variability in auditor expertise on central bank/Fund-specific issues, including net international reserves. - Staff practice recommendations: - Examine auditors’ peer review reports or regulators’ reports to assess audit quality. - Consider oversight structures for auditing firms in the country. - Attempt annual meetings with senior partners of the big four firms to discuss concerns and compliance with ISA and quality controls. - Explore educational materials for external auditors on Fund-specific competencies such as international reserves. - KPMG indicated willingness to have discussions; staff encouraged to reach out to PricewaterhouseCoopers, Deloitte, and Ernst & Young. ### Communication, Outreach, and Follow-up - Implementation rates: - Central banks implement committed safeguards recommendations at a 90 – 95 percent rate over the last three years. - Implementation at a 70 – 79 percent rate for other recommendations. - Staff activities: - Semi-annual safeguards seminars rated highly by central banks. - Safeguards fact sheets and annual reports posted on the external website. - Central bank preferences: - Interest in more frequent and personal contact (tele- or videoconferences) and in technical assistance following assessments (not within safeguards mandate). - Some banks urged staff to perform testing during assessments to substantiate interview-based findings. - Panel recommendations: - Develop self-assessment templates based on the safeguards framework to encourage ownership, expand capacity, and reduce ongoing staff demand. - Support voluntary safeguards assessments by staff for members not seeking arrangements. ### Information Technology and Integrated Risk Management - Ideal: seamless electronic mapping from central bank accounting systems to data reports provided to the Fund. - Current problems: many central banks lack automated accounting/reporting systems; manual entry and ad hoc mapping increase risk of misreporting. - Safeguards assessments should consider: - Effectiveness of new systems and staff ability to use them. - IT as a core IRMF component; end-to-end transaction examination is critical. - Automation of the general ledger is important to identify and mitigate risks. ### Safeguards in the Context of Budgetary Support and State Treasuries - Shift in lending toward budgetary support: - Based on SBAs as of May 2010, resources for budgetary support accounted for an average of nearly 30 percent (including 100 percent for Iraq and Latvia), and totaled SDR 17,554 million. - Concern: absence of a counterpart safeguards framework for state treasuries could dilute safeguards success at central banks and create reputational risk. - Panel recommendation: develop a credible mechanism for safeguarding resources used for budgetary support, circumscribed to align with original safeguards objectives and the Fund’s mandate. - Objective for treasury-level approach: provide reasonable (not absolute) assurance against misuse and misreporting, including: - Ensuring expenditures are properly authorized. - Ensuring reporting is accurate and timely. - Ensuring internal and independent audits are done properly. ### Seven-point Framework for Safeguards Assessments of State Treasuries - Establish a single state treasury account in the central bank through which all government transactions are processed. - Proper authorization of budgetary expenditures: clear procedures for timely budget execution, monitoring, and reporting; include comparisons of actual expenditures with approved budgets. - Regular reconciliation of all government expenditure accounts in the state treasury in a timely manner. - Proper accounting of all government transactions according to international standards: timely, accurate, transparent accounting and financial reporting; reliable accounting information systems and internal accounting controls. - Independent audit, according to international standards, of final accounts; independent and transparent internal audit function; public finances externally scrutinized by an independent national body. - Systematic implementation of auditors’ observations to improve financial management processes and internal controls. - Internal procedures at the state treasury to safeguard public resources, with explicit legal basis, segregation of duties, and controls preventing unauthorized access or use. ### Use of Existing Assessments and Due Diligence - Possible data sources: Fiscal ROSC, Country Financial Accountability Assessments (CFAA), and PEFA. - Seven criteria based on Fiscal ROSC indicators; much data could be obtained from Fiscal ROSCs. - Staff must develop guidelines to homogenize ROSC data use and perform due diligence to verify data quality; where quality cannot be verified, independent data collection required before producing a treasury safeguards report. - Independence: treasury safeguards assessments should be conducted independently from IMF operations with such entities; assessment teams must combine external auditing/internal controls focus, fiscal sector expertise, and independence from implementation solutions. ### Conclusions and Panel Recommendations (Summary) - ELRIC remains relevant, useful, and beneficial; staff applies it effectively to achieve safeguards objectives. - Continuous improvement priorities for the next decade: - Greater attention to board oversight and principles of good governance (independence, transparency, responsibility, accountability, fairness, discipline, social responsibility). - Stronger emphasis on risk management and adoption of IRMFs. - Increased transparency of safeguards results, including publication of country safeguards assessment reports over time and dissemination of common issues at seminars. - Fraud identification and compliance: recommend development of independent whistle-blower policies where feasible. - Treasury safeguards: endorse seven-point framework for state treasuries when loans provide budgetary support; leverage existing data if due diligence verifies quality. - Staffing and capacity: treasury assessments require independence, ELRIC elements, and governance/risk management expertise; may require coordination with other departments. - Other program improvements: - Outreach to external auditors and education on Fund-specific accounting issues. - Improved internal and external communication linking safeguards to program design and review. - Inclusion of information technology considerations in assessments. - Support for voluntary safeguards assessments for members not currently seeking Fund resources to facilitate implementation and future lending. ### Attachment — SDR Value of Fund Arrangements (2001–2010, Table excerpt) - Financial Year / Number of New and Augmented Arrangements / Amount committed (in millions of SDRs) - 2001 / 26 / 14,333 - 2002 / 18 / 41,287 - 2003 / 22 / 30,571 - 2004 / 15 / 15,486 - 2005 / 14 / 1,713 - 2006 / 13 / 8,474 - 2007 / 12 / 600 - 2008 / 8 / 1,333 - 2009 / 28 / 66,736 - 2010* / 29 / 44,141 - TOTAL / 185 / 224,674 - * 2010 figures represent a 9-month period ending 1/31/10. *External Panel of Experts report on the IMF safeguards policy (third review) — Executive Summary and selected excerpts.* ### Executive Summary ...................................................................................................... ### Executive Summary ### I. Introduction and Background - Objective of the safeguards policy: mitigate potential risks of misuse of Fund resources and misreporting of monetary program data. - Safeguards focus: review central banks’ integrity of operations, identify risks, and recommend and follow through on corrective actions. - ELRIC framework examines five elements: (i) external audit, (ii) legal structure and independence, (iii) financial reporting, (iv) internal audit, and (v) internal controls. - The external panel of experts comprises Mr. Lynn E. Turner (Chair), Dr. Ranee Jayamaha, and Dr. Len Konar. - Panel’s defined work included: - Advising the Executive Board on the continued appropriateness of ELRIC. - Assessing the operation of the risk-based monitoring framework during an arrangement and thereafter while Fund credit is outstanding. - Sharing views on safeguards in the context of direct budgetary support and on dissemination of safeguards findings. - Panel’s inquiry methods: review of safeguards assessment reports and other materials; consultations with central banks, IMF Executive Directors’ offices, Fund and World Bank staff, and KPMG; and review of international reference materials. ### II. Effectiveness of the Current Framework - Aggregate Fund commitments and outstanding credit: - SDR 224,674 million committed through 185 new and augmented arrangements. - SDR 51,920 million outstanding as of 31 May 2010. - Safeguards assessments and outcomes: - 165 assessments conducted since 2001. - Misreporting identified in only six cases (three since the 2005 policy review). - Governance abuse identified in three cases. - In response to safeguards recommendations, 43 central banks have, for the first time, reconciled key program data with accounting records. - Monitoring framework: - Risk-based monitoring framework introduced in 2006 to set monitoring intensity based on risk factors including ELRIC elements, level of exposure to the Fund, the country’s corruption index, past history with Fund arrangements, status of safeguards recommendations, audit quality, governance, and legal changes. - Framework found broadly effective and efficient in monitoring implementation of safeguards measures and identifying when measures are not sustained (e.g., external audits ceasing to meet international standards). - Panel view: continue monitoring borrowers as long as Fund credit remains outstanding; central bank failure to provide monitoring information should be noted in country staff reports; monitoring intensity after disbursements end and prior to repayment should reflect identified risk levels. - Stakeholder views and staff capabilities: - Broad approval of the safeguards policy and ELRIC from central banks, ED offices, and Fund staff. - ELRIC framework viewed by the panel as adequate to identify weaknesses that could lead to misreporting and misuse. - Safeguards staff judged to be well qualified, skilled, experienced, and professional. ### III. Key Findings and Strategic Context - The safeguards policy has been effective overall in mitigating misuse and misreporting risks and in strengthening central bank practices. - Safeguards measures have been instrumental in detection or correction in the misreporting and governance abuse cases encountered. - The policy has contributed to progress in central banks toward adopting international standards and best practices, including establishment of audit committees, adoption of international financial and accounting standards, enhanced independence, and improved internal controls and auditing. - Crisis context and budgetary support: - Against the global economic crisis beginning in late 2008, the safeguards policy faces increased stress as IMF member countries seek unprecedented Fund resources. - Nearly 30 percent of the value of the current Stand-by Arrangements (SBAs) as of May 2010 is allocated for budgetary support, totaling SDR 17,554 million. - It is paramount to safeguard Fund resources and the Fund’s reputation in this high-stakes environment. ### IV. Recommendations for Continuous Improvement (Overview) - General approach: gradual enhancement of the safeguards policy through a continuous improvement process, adapting ELRIC over time to meet new or heightened expectations. - Priority areas for enhancement (detailed recommendations provided in the report): - Governance - Risk Management - Transparency in the Safeguards Program - Transparency in Financial Reporting - Fraud Detection - External Audit - External and Internal Communication - Information Technology - Specific recommendation highlighted: - Expand the safeguards policy, currently limited to central banks, to include safeguards assessments targeting state treasuries when Fund resources are provided for budgetary support. - Leverage existing IMF and World Bank assessments where possible, provided an independent safeguards team conducts due diligence on the quality of the data. - Maintain the cornerstone principle of an independent perspective: staff conducting the assessment should not assess their own work or have a vested interest in any implementation plan. - Communication: - Urges staff to continue improving communication with central bank authorities and Fund staff in other departments to ensure all stakeholders understand issues and are engaged in the process. ### V. Governance Emphasis - Global developments underscore the need for good governance with an ethical tone at the top and effective board oversight. - Citations of international governance concerns: - OECD Principles of Corporate Governance emphasize strategic guidance, effective monitoring by the board, and board accountability. - Observed failures in the financial crisis often stemmed from governance shortcomings (e.g., inadequate board oversight of risk management, insufficient disclosures, remuneration misaligned with strategy and risk appetite). - Group of 30 calls for strengthened institutional policies and standards, with emphasis on governance, risk management, capital, and liquidity. *Executive Summary — External Panel of Experts report on the IMF safeguards policy (third review).* ### 13. For the safeguards policy to adapt to the changed financial global climate and ### _070110a - 13. For the safeguards policy to adapt to the changed financial global climate and ### Governance: sharpening ELRIC’s focus on governance - The ELRIC framework currently includes measures such as legal structure and independence and the existence of independent audit committees, but “these measures alone have proven to fall short in ensuring good governance.” - The panel argues staff should explicitly evaluate a central bank’s approach to corporate governance against the following principles: independence, responsibility, accountability, fairness, transparency, discipline, and social responsibility. - Good corporate governance is described as “essentially about effective, responsible leadership.” Key expectations: - The central bank’s board must commit to high standards of governance as its ethical approach to business. - The central bank should be seen as conducting its business with integrity, building from compliance with relevant local laws and regulations, and international standards. - Continuous improvement through periodic review of the code of conduct and dissemination of values to all employees. - Adherence to high standards of corporate governance underpins the central bank’s ability to deliver on its core objectives. *Source: IMF panel discussion and referenced OECD and Group of 30 commentary.* ### Risk Management: need for an integrated, bank-wide risk culture - Global consensus after the crisis: all financial institutions must improve risk management. The G20: “Major failures of regulation and supervision, plus reckless and irresponsible risk taking by banks and other financial institutions, created dangerous financial fragilities that contributed significantly to the current crisis. A return to the excessive risk taking prevalent in some countries before the crisis is not an option.” - Basel Committee: “A key characteristic of the financial crisis was the inaccurate and ineffective management of liquidity risk.” - Observations and recommendations: - Financial and business risks are proliferating: continuity, sustainability, stability, and reputation are threatened. - Risk is now considered a board-level responsibility at central banks. - A risk management culture must be embedded at a bank-wide level even when risk management is centralized and overseen by the board. - Central banks should establish an integrated risk management framework (IRMF); “The existence of an IRMF is absolutely essential for central banking.” - An IRMF provides mechanisms, processes, and procedures to take prompt action, fill gaps, and enhance accountability and transparency. - Transparency about how central banks manage risk, success rates, and the processes used should be provided to the public with an adequate level of transparency. - Safeguards assessments should explicitly evaluate how central banks manage their own risks because “the effectiveness of central banks in managing their own risks ultimately affects the degree of risk exposure for the Fund.” - IRMFs help identify, detect, and mitigate risk events that contribute to misuse, misreporting, or fraud regarding Fund resources. - Organizational expectations within central banks: - Risk factors require attention from the board of governors and appropriate levels of management, including a Chief Risk Officer (CRO) or risk management committee (RMC) or equivalent. - A safeguards assessment should determine whether the CRO/RMC “operates with clear and independent lines of reporting to the board,” and focuses on high priority items: critical success factors and risk performance indicators in the context of the bank’s mission, strategic goals, and operational objectives. - Assessment benchmarks and standards: - Risk management assessments should be based on a reasonable framework or benchmark. - Possible frameworks/guidelines include ISO 31000, CEBS high-level principles for risk management, and COSO’s Enterprise Risk Management components. - CEBS high-level principles include: (i) governance and risk culture, (ii) risk appetite and risk tolerance, (iii) the role of the Chief Risk Officer and risk management function, and (iv) risk models and integration of risk management areas and a new product approval policy and process. - COSO components: (i) internal environment, (ii) objective setting, (iii) event identification, (iv) risk assessment, (v) risk response, (vi) control activities, (vii) information and communication, and (viii) monitoring. - The safeguards assessment should judge effectiveness based on whether all components of risk management are present and functioning effectively. ### Transparency in the Safeguards Program: a gradual move toward publication - The panel recommends a gradual move toward increased transparency in the safeguards program “over the next decade.” - Rationale: - Confidentiality in safeguards reports during the first decade helped build trust and allowed candid reporting. - Transparency in governments and the public sector has proven useful and beneficial and is now more expected. - Transparency aligns with the mission of Transparency International: “to create change towards a world free of corruption.” - Challenges: - Some central banks are not ready, and staff believe transparency may strain Fund–member relations. - Precedents exist: country reports, portions of FSAP reports, ROSC, and PEFA reports are published. - Recommended phased transparency measures: - Publish a bulleted list at the beginning of the safeguards assessment report identifying the top few safeguards-related risk factors for lending; publish that bulleted list in the country staff report. Updates during safeguards monitoring would be published in program review staff reports. - Publish safeguards findings in aggregate, anonymous form “periodically, but no less than every other year,” revealing issues (not central banks) and indicating corrective actions taken. Such aggregate reports would serve as an educational tool and indicate effectiveness of governance practices and risk mitigation methods in exemplary countries. - Encourage central banks to voluntarily publish their own safeguards action plans and accomplishments to strengthen credibility and potentially foster a “race to the top.” ### Transparency in Financial Reporting: endorsement of IFRS and ISA - The panel endorses full compliance with both International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA), which ELRIC urges central banks to adopt. - Observations: - Central banks assessed under safeguards are moving toward these standards; some have fully complied with IFRS while others have complied only partially. - Improvements have enabled improved transparency and accountability in managing and reporting on Fund resources. - Fund lending members gain reasonable assurance of oversight; borrowing members gain credibility with the public; the Fund’s reputation as a prudent lender is strengthened. ### Fraud Detection: role of whistle-blower programs and detection channels - Verification of accurate financial reports is a key ELRIC component; audit committee, external audit, and internal audit remain important. - Evidence on fraud detection: - Association of Certified Fraud Examiners: “Occupational frauds are much more likely to be detected by tip than by any other means. This finding has been consistent since 2002 when we began tracking data on fraud detection methods.” - Transparency International: “The value and importance of whistleblowing in the fight against corruption is becoming increasingly recognised.” - Panel recommendations on whistle-blowing: - Staff should consider recommending a whistle-blower program if one does not exist, and assess existing programs for independence and issue resolution through internal auditors, audit committee, and external auditor. - Assessment or recommendation could be accomplished by Fund staff directly or by requesting a report on the program from the audit committee, internal auditor, or external auditor. - Cultural and implementation considerations: - In some countries cultural considerations mean such programs may not exist; cultural practices may take time to change but can be shortened through awareness and success stories. - The Fund should work with central bank officials to consider implementation methods or alternative structures achieving similar results. ### External Audit: assessing audit quality and engaging audit firms - The staff’s reliance on external auditors is a vulnerability when audit quality does not meet international assurance standards. - Panel notes reasons for skepticism about the big four audit firms and variability in auditor quality globally, including lack of expertise in central bank and Fund-specific issues such as reporting of net international reserves. - Recommendations for staff practice: - Go beyond identifying external auditors’ processes and attempt to assess audit quality by examining auditors’ peer review reports or regulators’ reports. - Examine reports on audit quality in a particular country if available from peer review processes or regulators. - Consider the oversight structure for auditing firms in the respective country and how that impacts audit quality. - Attempt annual meetings with senior partners of the international institutions of the big four auditing firms to discuss areas of concern, significant risks, and suggested improvements, including compliance with ISA, standards on quality controls, and understanding of high risk audit areas such as reserves. - Explore feasibility of developing and providing educational materials aimed at external auditors covering Fund-specific areas of competency such as international reserves. - Practical note: The panel tested the proposal with a senior KPMG partner and learned KPMG is “very willing to have discussions with the Fund”; the panel encourages staff to reach out to PricewaterhouseCoopers, Deloitte, and Ernst & Young similarly. *Italic: IMF panel recommendations and analysis as presented in the supplied content.* ### 30. The data show that communication with central banks beyond the on-site ### 30. The data show that communication with central banks beyond the on-site mission for a safeguards assessment is successful in achieving its goals ### Communication, outreach, and follow-up - Central banks implement committed safeguards recommendations at a 90 – 95 percent rate over the last three years, and at a 70 – 79 percent rate for other recommendations. - Staff delivers semi-annual safeguards seminars; central banks rate these seminars highly, consistent with seminar evaluation results. - Safeguards fact sheets and annual reports are posted on the external website. - Some central banks expressed interest in more frequent and personal contact with staff (e.g., tele- or videoconferences) to maintain the one-to-one relationship from missions and enhance ongoing dialogue. - Central banks showed interest in technical assistance following an assessment, which the panel notes is beyond the mandate of the safeguards policy. - The panel disagrees with a suggestion that the safeguards process be merely collaborative between Fund staff and the bank; some banks urged staff to perform testing during assessments to substantiate interview-based findings. - The panel notes that better and more frequent communication between the IMF and central banks on safeguards issues was also recommended in the 2005 external panel. ### Self-assessment templates and voluntary preemptive assessments - The panel recommends developing a set of self-assessment templates based on the safeguards framework to encourage authorities to take ownership of ELRIC components and expand safeguards capacity without additional ongoing staff demand. - Expected benefits of self-assessment templates: - Central banks could proactively conduct initial safeguards assessments. - Central banks could conduct update assessments during the safeguards monitoring phase. - Transparent self-assessments could facilitate lending if an arrangement is requested in the future, easing safeguards staff workload and potentially reducing safeguards reforms needed in program design. - The panel backs the current offering of voluntary safeguards assessments by staff to any member country when no arrangement with the Fund is involved. - Rationale for preemptive (voluntary) staff assessments: - A country not under strain from seeking a Fund arrangement would have more capacity—financially, operationally, and in terms of management attention—to implement recommendations efficiently and effectively. - Preemptive assessments would bring more central banks in line with best practices and could facilitate future Fund arrangements, program design, and reviews. ### Information technology and integrated risk management - Ideal state: seamless electronic mapping of data from central bank accounting systems to data reports provided to the Fund. - Current problem: Many central banks do not have automated systems for accounting and data reporting; manual data entry and ad hoc mapping are inherently risky for inadvertent or deliberate misreporting. - Safeguards assessments should consider: - Effectiveness of any new systems implemented. - Ability of central bank staff to use the systems properly. - Information technology is an important component of an integrated risk management framework (IRMF). - End-to-end transaction examination is critical to identify and mitigate risks. - The general ledger, containing all domestic and international transactions of a central bank, should be automated; otherwise identifying and mitigating risks amid decentralized accounting and reporting systems may be unattainable. ### Safeguards in the context of budgetary support and state treasuries - Recent shift: Fund lending has shifted toward more budgetary support; based on data from countries with SBAs as of May 2010, resources for budgetary support accounted for an average of nearly 30 percent (including 100 percent for Iraq and Latvia), and totaled SDR 17,554 million. - Concern: Without a counterpart safeguards framework applied to state treasuries receiving budgetary support, safeguards policy success at central banks may be diluted and the Fund may face reputational risk. - Panel recommendation: The Fund should take steps toward developing a credible mechanism for safeguarding resources used for budgetary support to avoid partial and potentially misleading assurances. - Staff should carefully circumscribe an approach toward safeguarding Fund resources at the treasury level, keeping alignment with the original safeguards policy objective and the Fund’s mandate. - Objective of treasury-level approach: provide a reasonable, but not absolute, level of assurance against misuse of Fund resources and misreporting of data, including: - Ensuring expenditures are properly authorized. - Ensuring reporting of financial information and data is accurate and timely. - Ensuring internal and independent audits are done properly. ### Seven-point framework for safeguards assessments of state treasuries (endorsed with elaboration) - A single state treasury account should be established in the central bank through which all government transactions are processed. - Proper authorization of budgetary expenditures: establish clear procedures for timely budget execution, monitoring, and reporting; include comparisons of actual expenditures with approved budgets for public accountability. - Regular reconciliation of all government expenditure accounts in the state treasury should occur in a timely manner. - Proper accounting of all government transactions in the state treasury according to international standards: timely, accurate, and transparent accounting and financial reporting; accounting information systems and internal accounting controls should provide a reliable basis for tracking finances with necessary supplemental detail; financial information should facilitate policy analysis and promote accountability. - Independent audit, according to international standards, of final accounts; establish independent and transparent internal audit function; public finances should be externally scrutinized by an independent national body. - Observations of auditors to improve financial management processes should be taken on board systematically; implement a process for improving financial management processes and internal controls. - Internal procedures at the state treasury to safeguard public resources, complying with applicable laws and regulations; explicit legal basis for the treasury’s right to use public and IMF funds and for how those funds are used; internal policies, procedures, and internal controls should prevent unauthorized access or use; include segregation of duties between those who hold or expend assets and those who have authority to approve such expenditures. ### Use of existing assessments and due diligence - The Fund and the World Bank have programs whose data may be leveraged for treasury safeguards assessments: Fiscal ROSC, Country Financial Accountability Assessments (CFAA), and PEFA. - The seven criteria are based on Fiscal ROSC indicators; much data could be obtained from Fiscal ROSCs. - Staff would need to develop guidelines to homogenize use of ROSC data; existing CFAA and PEFA reports could provide supplementary contextual information. - The panel stresses that staff must perform due diligence to ascertain the quality of existing ROSC, CFAA, and PEFA data; where data quality cannot be verified, staff must conduct independent data collection before producing a safeguards report on a state treasury. - Safeguards assessments of state treasuries should be performed independently from IMF operations with such entities. - Independence of oversight is the cornerstone of a valid safeguards assessment. - Staff conducting treasury assessments must have independent perspective and specialist experience; assembling teams for fiscal assessments should combine external auditing/internal controls focus, fiscal sector expertise, and independence from specific implementation solutions. ### Conclusions and panel recommendations (summary) - The existing ELRIC framework remains relevant, useful, and beneficial; staff applies it effectively to achieve the safeguards objective. - ELRIC should be continuously improved to reflect central bank, market, and global economic evolution. - Improvements to emphasize in the next decade: - Increased attention to oversight conducted by the board of the central bank, considering principles of good governance including independence, transparency, responsibility, accountability, fairness, discipline, and social responsibility. - Increased attention to risk management, urging central banks to adopt an integrated risk management framework (IRMF). - Increased transparency of safeguards results, promoting accountability and encouraging corrective actions; includes publication of country safeguard assessment reports over time and dissemination of common issues at seminars. - Safeguard assessments should consider policies and procedures that facilitate fraud identification and compliance with laws, regulations, and contracts; development of an independent whistle-blower policy is highlighted as effective when properly done. - The panel recommends conducting safeguards assessments that target state treasuries when loans provide budgetary support, endorsing the seven-point framework and noting that existing data can be leveraged if due diligence verifies quality. - Staff conducting treasury assessments must combine independence, ELRIC elements, and expertise in governance and risk management; assembling this capacity may require coordination with and assistance from other departments outside the current safeguards team. - Other recommendations to improve the safeguards program: - Outreach to external auditors, providing education in Fund-specific accounting issues, including international reserves accounting. - Improved communication internally (better relating safeguards to program design and review) and externally (fostering closer relationships with central banks during monitoring). - Inclusion of information technology considerations, examining how central banks use or move toward automated accounting and reporting systems. - The panel supports voluntary safeguards assessments for member countries not currently seeking Fund resources; timing is beneficial because central banks can implement recommendations more easily when not under stress from seeking Fund resources, and prior implementation facilitates future Fund lending. *Source: IMF external panel report excerpt (Safeguards Assessments review).* ### 1. The panel held conferences with the following central banks. ### 1. The panel held conferences with the following central banks. ### Central Bank Authorities in Attendance - Central Bank of The Gambia (teleconference, April 1, 2010) - Mr. Saho, Governor - Bank of Ghana (teleconference, March 22, 2010) - Mr. Arthur, Governor - Mr. Wampah, Deputy Governor - Mr. Adu, Internal Auditor - Mr. Sai, Head of Banking Supervision Department - Bank of Latvia (teleconference, March 24, 2010) - Mr. Kalis, Chairman of the Board - Mr. Caune, Chief Accountant - Mr. Asmanis, Head of Internal Audit - State Bank of Pakistan (videoconference, March 24, 2010) - Mr. Azeemi, Assistant Director - Mr. Riazuddin, Chief Economic Advisor - Mr. Qureshi, Executive Director of Internal Audit & Compliance Department - Mr. Rasheed, Comptroller of Finance - Ms. Bakhtiar, General Counsel - Mr. Khan, Director of Finance Department - Mr. Bakhsh, Head of Financial Accounts Division, Finance Department ### Staff Consulted and Meetings - The panel met in person with Fund staff from area and functional departments on March 25 and 26, 2010. - Departments represented were AFR, APD, EUR, FAD, FIN, LEG, MCD, SPR, WHD. - Mr. Turner, panel chair, held an additional follow-up meeting in person with FAD on April 12, 2010. - The panel also met in person with World Bank staff members Mr. James Brumby and Mr. A. Hega on March 26, 2010 to discuss the Public Expenditure and Financial Accountability (PEFA) partnership. - Three separate assemblies of personnel from the offices of executive directors met with the panel. Offices were represented variously by executive directors, alternates, or advisors. ### Topics Discussed with Central Banks - Clarity of the purpose of the safeguards policy - Effectiveness of safeguards assessments and monitoring in achieving the policy objectives - Usefulness of the safeguards activities to the central bank’s operations and its management - Value of the safeguards seminars - Adequacy of the ELRIC framework to assess issues related to governance and risk management - The authorities’ views on transparency - Appropriateness of safeguards recommendations, priorities, and deadlines - Sufficiency of communication with the safeguards staff - The authorities’ views on extending safeguards assessments beyond their current association with Fund arrangements, to be conducted proactively with all Fund members - Practicality of having central banks employ a safeguards template for self-assessments ### Views from Central Banks (findings) - Central banks are approving of the safeguards policy and acknowledge its benefits. - They appreciate that the safeguards exercise has better aligned them with best practices. - They recommend the process to other central banks, even outside the context of a pending financial arrangement with the Fund. - All agreed that risk management (RM) and governance require and warrant focused attention. - Opinions varied on whether RM and governance are adequately covered by ELRIC. - Tendency to see the current safeguards framework as addressing risk management in a silo fashion. - A few equated risk management with audit controls. - One recognized the need for an integrated risk management framework that applies to the whole organization. - Another identified key risk concerns as more strategic: the financial risks of managing reserves on behalf of the state and conducting investment activities, and the operational risks of money transfers and the types of transactions being undertaken in financial markets. - Views on transparency of safeguards information varied widely. - Some central banks are concerned about reputational risk if information is irresponsibly represented in the press. - Conversely, one stated that publication of safeguards results would begin a dialog in the public arena and, if handled well, this dialog would be a healthy development. - One bank stated that independent auditors do not always appear to be knowledgeable of the operations of the banks, particularly with respect to reserves (this opinion was also voiced by staff members). ### Views from Offices of Executive Directors (findings and concerns) - The panel queried offices of the EDs on: - Appraisal of the value and effectiveness of the current safeguards policy and its possible extensions to the ELRIC framework to include governance and risk management - Judgment about expanding safeguards to treasuries when resources for budgetary support are at stake - Views on transparency for safeguards information - Offices expressed general satisfaction with the safeguards policy, seeing it as helpful in reducing risk to the Fund and protecting its reputation. - Concerns mentioned: - Cost/benefit ratio for the policy and any proposed extensions - Need to continually fine-tune the policy to adapt to newly emerging risks - Strong agreement that a focus on governance is essential to help guard against fraud at the top. - Risk management seen as heavily influenced by country-specific context, such as political stability, external audit quality, and the ethics of central bank authorities. - Many expressed that it is not acceptable to neglect safeguards assessments of treasuries, though acknowledging logistical difficulties. - Views on transparency varied widely, with discussion about specifics of what would be published, by whom, the intended purpose, and possible reactions of member countries. ### Views from Staff (findings, feasibility, and recommendations) - Discussion topics for staff included the same questions posed to offices of EDs plus: - Practicality of safeguards recommendations for particular member countries - Feasibility of whistle-blowing policies - Staff are generally supportive of the safeguards policy and believe it is worthwhile. - Most member countries respond well and see inherent benefit. - Concerns: - Safeguards assessments can identify procedures that, if properly followed, would safeguard resources, but assessments do not always ascertain whether procedures are properly followed. - Some economists view the safeguards policy as a bureaucratic hurdle whose findings are tangential to countries’ economic problems and solutions. - Staff emphasized importance of assessing governance to guard against fraud, but noted difficulty in assessing the “tone at the top” because of subjectivity and sensitivity. - Suggestions included having the safeguards framework specify fit and proper requirements for a central bank governor. - A thorough examination of rules and procedures of operation should reveal the tone at the top. - Functional departments showed keen interest in developing a practical methodology for safeguarding Fund resources used for budgetary support. - Acknowledged complexity of the fiscal sector and a serious gap in safeguards for state treasuries. - Staff views on increased transparency were positive but cautious. - Donor countries sometimes want such information; countries with significant improvement want to publish information. - Concern that too much transparency too soon in the safeguards cycle could be political and counterproductive. - Questioned usefulness of publishing entire safeguards reports as too technical; published summaries and results by country could be useful. - Focus should be whether publication advances the purpose of the safeguards policy and benefits the Fund and its member countries. - Area departments urged more sensitivity toward country differences and flexibility in applying the safeguards policy. - Factors to consider: size and sophistication of the country, size and type of arrangement being sought, whether the bank needs improved credibility, the political climate, special cultural conditions, and effects of recommendations on multiple member countries in a regional bank. - The cost of implementing safeguards recommendations, which rests with central banks, can be a formidable burden to some countries (Liberia was cited). - Safeguards policy needs to balance pushing for progress and understanding country limitations. - Area departments cautioned that some cultures would not be receptive to a whistle-blowing policy. - In meeting with the Safeguards Assessments Division, the panel learned: - How safeguards data are tracked in a database application - Nature of feedback and pushback staff receives on draft safeguards reports - Staff perspectives on ELRIC, governance, and risk management - Feasibility of creating a safeguards template for self-assessment purposes - Problems with some external auditors arising from auditors’ lack of knowledge in macroeconomics and central bank accounting - In meetings with senior staff of FIN, the panel and FIN exchanged perspectives on key issues for this year’s policy review, and the panel briefed FIN on results of discussions with central banks, Fund executive directors and advisors, and Fund staff. ### Attachment excerpt: SDR Value of Fund Arrangements (Table 1, Number and SDR Value of Fund Arrangements, 2001-2010) - Financial Year / Number of New and Augmented Arrangements / Amount committed (in millions of SDRs) - 2001 / 26 / 14,333 - 2002 / 18 / 41,287 - 2003 / 22 / 30,571 - 2004 / 15 / 15,486 - 2005 / 14 / 1,713 - 2006 / 13 / 8,474 - 2007 / 12 / 600 - 2008 / 8 / 1,333 - 2009 / 28 / 66,736 - 2010* / 29 / 44,141 - TOTAL / 185 / 224,674 - * 2010 figures represent a 9-month period ending 1/31/10. *Source: _070110a - 1. The panel held conferences with the following central banks.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_070110a.pdf_