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    Do Accounting and Audit Quality Affect World Bank Lending?
    research summary posted July 23, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 15.0 International Matters 
    Do Accounting and Audit Quality Affect World Bank Lending?
    Practical Implications:

    The authors investigate the effects of accounting and audit quality on the World Bank, a global stakeholder that has not been previously considered. They analyze the role played by accounting and audit quality in the development of countries’ infrastructures through development assistance provided by the World Bank. The authors contribute to the economics and public policy literatures that investigate various determinants, including political influence, of international development aid by showing that accounting and audit quality are differentially considered based on whether a recipient country’s geo-political interests are aligned with those of the U.S.


    Lamoreaux, P. T., Michas, P. N., & Schultz, W. L. 2015. Do Accounting and Audit Quality Affect World Bank Lending? Accounting Review 90 (2): 703-738.

    audit quality, audit profession development, accounting quality, corruption, financial reporting quality, geo-political interest, World Bank, International Financial Reporting Standards, international development aid
    Purpose of the Study:

    The authors investigate the role of accounting and audit quality in the allocation of international development aid loans provided by the World Bank. This aid is crucial to improve governance functions, infrastructure, and capital markets, and the accounting and audit environments in a country can provide the World Bank with confidence that aid is being used as intended rather than being diverted for personal or political gain. The purpose of World Bank aid is to support the economic, environmental, and social development of recipient countries. The U.S. is the World Bank’s largest shareholder and, thus, possesses the incentive and ability to influence lending for geopolitical reasons.

    The dollar amount of aid loans is large, with loans from the World Bank totaling more than $160 billion in 2010. This amount is larger in magnitude than the total year 2010 gross domestic product (GDP) for 143 out of 191 countries for which the World Bank provides GDP data. Further, the $160 billion represents 0.27 percent of total world GDP, 1.1 percent of combined GDP for the countries that received World Bank loans in 2010, and 1.6 percent of combined GDP for countries the World Bank classifies as middle income”. World Bank development aid lending is clearly substantial, both in total dollar amount and as a percentage of GDP, and is especially important for the recipient countries.

    Design/Method/ Approach:

    A final sample of 258 country-year observations over the years 1999 through 2008 representing 42 different countries, which forms the base sample. All these countries received Bank lending. The authors use the base sample to test mandated IFRS adoption because the data are available for all country-year observations in the base sample. For the rest of the tests the authors exclude observations not found in Compustat, IFRS data or ROSC reports, depending on the test.


    The World Bank lends more to countries with stronger accounting and audit quality. More specifically, loans are higher to countries where earnings are of higher quality, where there are fewer differences between International Accounting Standards (IAS) and a country’s domestic accounting standards, and for countries that mandate the use of International Financial Reporting Standards (IFRS). Loan amounts are higher in countries with a more developed audit profession, suggesting that the audit environment in a country also plays an important role in World Bank lending.

    U.S. geo-political interests influence aid allocation, because in countries that are more closely aligned with U.S. geo-political interests, accounting and audit quality do not influence loan amounts. However, in countries where these interests diverge, accounting and audit quality do play a role. Therefore, it does not appear that the World Bank considers accounting and audit quality when lending to countries that are relatively aligned with U.S. geo-political interests, which is consistent with the World Bank circumventing the evaluation of accounting and audit quality in the lending process when political interests are at play.

    Accounting quality is associated with World Bank lending only in countries with relatively high overall corruption, suggesting that the World Bank has greater trust in the level of accounting quality in countries where there is a relatively lower risk of corruption and/or diversion in the accounting and auditing of World Bank-funded projects.

    Audit Quality & Quality Control, International Matters