Chapter

VII Central Bank Accounting and Internal Audit

Author(s):
Malcolm Knight
Published Date:
February 1998
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Recent Developments and Country Rankings

The implementation of central bank accounting reforms that reflect internationally accepted accounting principles and standards has been a feature of reform efforts in many of the 15 countries in recent years. All countries except Russia, Tajikistan, and Turkmenistan have now reached or passed the core implementation stage associated with developing a new chart of accounts for their central banks and associated accounting arrangements that reflect international practice and standards. At least four countries (the three Baltic countries and Armenia) can now be regarded as having attained internationally accepted standards and procedures. Table 7 provides an overall ranking of progress by individual countries in their implementation of central bank accounting reforms, and Table A10 contains further detail on specific aspects.

Table 7.Country Rankings in Central Bank Accounting and Internal Audit
I

Limited

Progress
II

Moderate

Progress
III

Substantial

Progress
TajikistanAzerbaijanArmenia
TurkmenistanBelarusEstonia
Kyrgyz RepublicGeorgia
RussiaKazakhstan
UkraineLatvia
UzbekistanLithuania
Moldova

Substantial progress in implementing central bank accounting reforms, albeit to slightly differing degrees, is now evident in 8 of the 15 countries. The countries that are the most advanced in the reform process are Armenia, the Baltics, and Kazakhstan. These countries have introduced reforms that largely satisfy all three of the criteria used for ranking progress: (1) use of new accounting systems as the information source for policymakers, (2) adoption of a new chart of accounts as a basis for preparation of financial statements according to international accounting standards (IAS), and (3) regular external audits based on these standards.

A second group of countries that has displayed relatively substantial progress includes Georgia, Moldova, and Ukraine. Each country has developed or implemented a new chart of accounts and has prepared financial statements according to the IAS format. However, further work is needed to improve the quality and availability of information for policymakers in all three countries, and Moldova has yet to have an external audit based on IAS.

Azerbaijan, Belarus, the Kyrgyz Republic, Russia, Ukraine, and Uzbekistan have all shown moderate progress. Each has developed a new central bank chart of accounts, but has not yet compiled and published IAS financial statements. In this group, only Azerbaijan and the Kyrgyz Republic have been exposed to an external audit based on IAS, although Uzbekistan is close to selecting an external auditor to conduct such an audit. Technical and legal factors have impeded progress in this group. The Kyrgyz Republic, for example, found during testing of accounting software for a new general ledger that the version installed in the central bank did not meet information and operating requirements. In Moldova, recent work has focused on deriving monetary survey data from the new system so that existing “dual” account classifications could be removed. In Azerbaijan and Uzbekistan, legal questions have slowed down the adoption of accrual-based accounting. Azerbaijan, however, has now completed parallel testing of a new chart of accounts and is ready for “live” operations.

Russia completes the list of countries in this group. The central bank has developed a new chart of accounts, but does not yet accept the accrual concept as the basis for accounting and does not prepare IAS financial statements. A satisfactory external audit based on IAS is not expected for as long as the central bank maintains accounting on a cash basis.38 Only Tajikistan and Turkmenistan are still showing limited progress in implementing central bank accounting reforms.

Internal audit reforms continue to lag behind accounting reform in all 15 countries. While all have taken some initial steps, only a few (for example, Belarus and Latvia) have shown clear progress in introducing internal audit reforms of relevance for central banks operating with market-based monetary and exchange policies.

Priorities for Reforms

The direction of future reforms in central bank accounting falls into two broad categories. The first covers those countries that have made substantial or moderate progress, but that still need to pursue integration of accounting systems to meet policy-makers’ information needs and that must prepare financial statements that can withstand an external audit based on IAS.39 Some relevant topics include formalization and documentation of IAS principles and practices; installation of new accounting software and integration of subsidiary systems; development of accounting practices and controls in foreign exchange and market operations; refinement of financial statement formats for use in both internal and external reporting; and development of staff training programs covering IAS practices and principles.

The second category relates to countries that require a broader program of reforms (Russia, Tajikistan, and Turkmenistan). In Tajikistan and Turkmenistan, reform issues commence with the development and implementation of a new chart of accounts. The main issue in Russia continues to be the acceptance of the accrual basis for accounting and related methodologies.

Nearly all countries (perhaps with the exception of Belarus and to a lesser extent Latvia) must still address internal audit reform issues, including development of a modern internal audit capability that focuses on assessing the adequacy of internal controls and managing risks facing a central bank, rather than a mechanical checking process. Although all countries have taken the initial step of creating a separate internal audit department, future issues include identifying the main elements of internal control and audit systems for central banks operating with market-based monetary and exchange policies, development of internal audit programs for major risk areas, and techniques for assessing the adequacy of internal controls.

The Central Bank of Russia has generally placed a higher priority on commercial bank accounting reform, with, for example, promulgation of regulations for loan loss provisioning and planned implementation of a new chart of accounts (again, excluding the accrual concept) by 1998.

Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Ukraine, and Uzbekistan. This group excludes Armenia, Estonia, Latvia, and Lithuania.

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