Australia and the IMF

SURVEY What do you think of Reports on the Observance of Standards and Codes?

April 15, 1999

(The Australian report, Making Transparency Transparent: An Australian Assessment can be accessed at http://www.treasury.gov.au/)

Contents

The Review Panel Discussions

Staff's Assessment of the Australian Report

1.  In December 1998 a joint public/private Task Force on International Financial Reform established by the Australian Prime Minister endorsed the recommendations of the G-22 and G-7 that the IMF prepare a transparency report for each country. The Task Force also recommended that individual countries publish their own reports on the extent to which they meet internationally recognized disclosure standards. Following that recommendation, the Australian authorities decided to prepare a self-assessment transparency report, both for their own use but also in order to provide an example of the process and possible reporting vehicles for other countries, with the intention of making it available for discussion by participants in the Manila Framework Group meeting in Melbourne on March 26-27.

2.  The authorities' objective was to assess the extent to which Australia observed internationally recognized standards and codes of good practice that have been developed for those areas deemed important to the effective operation of financial markets. Recognizing the expertise of IMF staff on some of the issues intended to be addressed by the transparency report, the inherent difficulty of a pure self-assessment exercise in achieving an adequate degree of objectivity and credibility, and in light of the G-22 recommendation that the IMF take on the task of preparing transparency reports on member countries, the authorities invited staff to be part of a Review Panel. Staff saw the opportunity to participate in the preparation of the Australian report as consistent with the experimental nature of the case studies undertaken for Argentina and the United Kingdom, and about to commence for Hong Kong. It was agreed at the outset that the final report would be the product of the authorities and that staff involvement on the Review Panel would not constitute an IMF imprimatur of the document. In that context, it was also agreed that staff would report to the IMF's Executive Board on whether the final report accurately reflected the issues raised by the Review Panel.

3.  The Panel's role was to consider whether claims made in the draft transparency report about the extent to which standards were observed could be substantiated and, flowing from that, to propose issues that needed fuller consideration and discussion in the report. The Panel was Chaired by the Executive Director, Economic Group, of the Australian Treasury. A second member of the panel, the Treasury's Chief Adviser, International, had represented Australia on the G-22 Working Group on Transparency and Accountability. Two IMF staff participated on the Panel¹, with headquarters support from Fiscal Affairs, Monetary and Exchange Affairs and Statistics Departments. The Panel performed its work in Canberra during February 15-19, 1999. Following the conclusion of the Panel's work, the authorities redrafted the report, aided by additional technical comments provided by the staff representatives and by several departments in the Fund.

4.  This report provides the staff representatives' perspective on both the process and substance of the exercise.

5.  The Review Panel performed the following tasks during the February 15-19 period:

• It considered an initial draft of the report which had been prepared with input from the Australian Bureau of Statistics, the Australian National Audit Office, the Australian Prudential Regulation Authority, the Australian Taxation Office, the Australian Securities and Investment Commission, the Department of Finance and Administration, the Reserve Bank of Australia, and various functional areas within the Treasury.

• It met with representatives from these agencies to discuss the extent to which claims of adherence to standards could be substantiated (and to ascertain whether non- observance in particular areas was of a material or minor nature), and proposed areas where further substantiation was deemed necessary.

• It received advice from academics on Australia's accounting and auditing standards, practices and institutional arrangements.

• It received redrafts from the relevant agencies, and from areas within the Treasury, which were again discussed. Where necessary, the Panel sought further elaboration and substantiation of claims.

6.  After returning to Washington the staff representatives, assisted by Headquarters staff, provided a final round of comments on 7 March. Final drafting of the document was undertaken by the Australian authorities.

7.  As noted, notwithstanding staff involvement, the Australian report is an exercise in self-assessment. As a result it should not be interpreted as necessarily reflecting the view of the staff representatives on the Review Panel or of staff more generally. Indeed, the Australian report states:

8.  The IMF staff has expertise in many of the areas covered by the report and the staff representatives, supported by headquarters staff, were able to utilize this in discussing Australia's practices in the areas of transparency of fiscal, monetary and financial policies, data dissemination and, to some degree, financial supervision policies.² In these areas the staff representatives' view is that the Australian report provides a generally fair assessment and description of transparency practices.

9.  The staff representatives also believe the presentation of non-core areas in the report is consistent with the discussions held with the various regulatory and supervisory authorities. However, they do not believe that they have sufficient expertise in the areas of corporate governance, bankruptcy, accounting and auditing standards, and foreign investment policy, to be able to conclude that this material accurately reflects Australia's observance of standards in these areas.

• The staff representatives were able to engage the relevant authorities in a dialogue on the policy framework and practices in non-core areas and believe that they gained some appreciation of the approach of the authorities in these areas. However, in order to adequately assess the extent to which actual practice was consistent with the authorities' description of policy would require both much more time and specialist expertise than was available to the staff.

The Process of Producing the Report

10.  The Australian exercise highlights the issue of whether it is possible for a self-assessment to be sufficiently objective as to provide an accurate assessment of observance of standards, and to be recognized as such by potential users of the report.

11.  The objectivity of a self-assessment is a necessary (but not sufficient) condition for the results to be seen as credible. The staff representatives noted that the Chair of the Panel continually emphasized to agencies the need for balanced assessments and that the Treasury representatives on the panel were vigorous in their questioning of the authors of material provided to the panel. The staff representatives have no grounds to doubt the objectivity the Treasury officials brought to the exercise.

12.  For the results of any self-assessment to be seen publicly as credible, the authorities appear likely to also require a high degree of pre-existing credibility and/or to have adopted a process for preparing the self-assessment that brings independent views to the issues. IMF staff involvement in the preparation of a self-assessment report is one way to bring credibility to the process. Staff believe that the IMF should be prepared to provide that additional credibility if (i) it believes the authorities already have sufficient credibility for the report to be seen as an accurate portrayal of actual practices³; or if (ii) it is agreed, ex ante, by the authorities that IMF staff views, to the extent they differ from those of the authorities, are to be explicitly included in the report or in some other document associated with the report. The provision of additional credibility was neither an issue nor a concern in the preparation of the Australian report. However, if the Australian exercise were to be repeated more widely, it should be agreed at the outset that independent staff views will be made public where deemed appropriate. For this to be effective, the Fund would need to devote sufficient resources - both in terms of staff involvement and access to relevant expertise on non-core areas - to allow independent judgements to be formed.

13.  In the Australian exercise, staff were able to appreciate the intent of policy in non-core areas, although they were at a disadvantage relative to the authorities in knowing whether the legislative/regulatory arrangements in areas beyond the Fund's core expertise were consistent with the stated objective of policy, and whether actual practice was consistent with stated practice.

• It is possible that this relative disadvantage could be overcome in time as other institutions with expertise in these areas are brought into the process and as handbooks and manuals to guide assessments in both core and non-core areas become more readily available. The staff representatives found both the draft manual for the Code of Good Practices on Fiscal Transparency and the draft handbook to assessing implementation of the Basle Core Principles to be helpful in guiding their discussions with the authorities. They would encourage the preparation of a similar compendium of good practices to complement the final version of the monetary and financial code. It would also be valuable if standard-setting bodies in non-core areas developed equivalent guides to implementation.