Do Accounting and Audit Quality Affect World Bank Lending?

Abstract

We 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. We find that development aid loans are higher for countries with stronger accounting quality, where IFRS use is mandated, and where the audit environment is stronger. However, we also find that United States geo-political interests influence these results. Specifically, it seems as though the World Bank “overlooks” accounting and audit quality in countries where geo-political interests are relatively aligned with those of the U.S. Finally, we find that accounting and auditing matter only in countries with relatively high corruption levels, indicating that the World Bank trusts, to some extent, that accounting and auditing are of relatively high quality in low corruption countries.