The role of the external auditor in bank regulation and supervision: A comparative analysis

Ojo, Marianne (2008): The role of the external auditor in bank regulation and supervision: A comparative analysis. Published in: Verlag DM (VDM) (September 2008)

Abstract

This comparative analysis discusses the differences between the structure and systems of bank regulation operating in the UK, Germany, Italy and the US. The importance of harmonisation in achieving stated supervisory objectives is also emphasised. The main objective of this chapter is to illustrate how the external auditor's role could be harnessed more efficiently in the UK banking regulatory and supervisory process. This is of particular importance given the reduced supervisory role which the Bank of England has assumed since banking regulatory and supervisory powers and functions were transferred to the Financial Services Authority. External audits and in particular external auditors, have a greater role to play in bank regulation and supervision than was the case over 20 years ago. This is so mainly as a result of globalisation. The need for a single regulator which regulates not just the banking sector, but also the insurance and securities sectors, has arisen principally because of the rise of conglomerate firms. Single regulators are able to manage more effectively cross sector services' risks. Correspondingly, the functional overlaps between banking, insurance and securities business and their universal scope make it more difficult for a regulator to observe and comprehend such businesses. The difficulty of measuring and assessing risk within such institutions along with the speed with which assets can be adjusted in derivatives markets has led to more emphasis being placed on internal managerial control. Consideration is also being given to the structures that can be put in place to re inforce the incentives of all parties involved – not just to management but all parties including auditors and regulators. Because banking has evolved to a stage where conglomerates now have a significant presence and provide a range of services (and not just banking services), and because of the growing presence of international firms, the role of the external auditor has become so important.

• Item Type: MPRA Paper
• Language: English
• Keywords: comparative;analysis;external;auditor;US;UK;Germany;Italy;bank;regulation
• Subjects: K - Law and Economics > K2 - Regulation and Business Law; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M42 - Auditing

References

Anderson B, Maletta M and Wright (1998) A 'Perceptions of Auditor Responsibility: Views of the Judiciary and the Profession' International Journal of Auditing

Angermueller NO, Eichhorn Mand Ramke T (2005) 'New Standards of Banking Supervision – A Look at the German Implementation Approach for the Second Pillar of Basel II' Journal of International Banking Law and Regulation

BaFin Annual Report for 2004

Bank of Italy, Circolare n. 229 of 21 April 1999, last amended on the 10 April 2007 (13th amendment), Titolo IV, Capitolo 2, Sezione II, n. 2.4 and „Nuove disposizioni di vigilanza prudenziale per le banche“, Circolare n. 263 of 27.12.2006 issued by the Bank of Italy in order to implement „Basel II“ (Nuovo accordo del Comitato di Basilea sul capitale e direttive comunitarie 2006/48/CE e 2006/49/CE), Titolo II, Capitolo II, Parte I, Sezione III, Sottosezione II, point n. 5.2. Both documents are available at: www.bancaditalia.it/vigilanza/banche/normativa/disposizioni/vigprud

Basel Committee's Core Principles for Effective Banking Supervision and the Relationship between Banking Supervisors and Banks' External Auditors (2001), International Auditing Practices Committee

Cairns D (1997) 'The Future Shape of Harmonisation: A Reply' European Accounting Review Cameran M (2005) 'Audit Fees and the Large Auditor Premium in the Italian Market' International Journal of Auditing

Carnevali F (1997) British and Italian Banks and Small Firms : A Study of the Midlands and Piedmont 1945 – 1973 (PhD Thesis London School of Economics and Political Science

Carosio G (2002) 'Italy,Europe and Financial Regulation' Oxford Gazette

Deutsche Bundesbank (1974) Geschaeftsbericht

Deutsche Bundesbank (January 1993) 'The Fourth Act Amending the Banking Act – A Further Step Towards the European Banking Market' Monthly Report

Deutsche Bundesbank (November 1994) 'The Fifth Act Amending the Banking Act' Deutsche Bundesbank Monthly Report

Deutsche Bundesbank (January 1998) 'The Sixth Act Amending the Banking Act' Monthly Report

Deutsche Bundesbank (October 2002) 'Amendments to the Banking Act caused by the Fourth Financial Market Promotion Act 2002' Monthly Report

Deutsche Bundesbank (June 2002) 'The Evolution of Accounting Standards for Credit Institutions, Deutsche Bundesbank Monthly Report

Deutsche Bank (2004) 'Italy's Savings Banks: First Reforms Create Big Universal Banks with Untapped Potential' EU Monitor Financial Market Special Deutsche Bank Research November 25 2004

Deutsche Bundesbank (April 2005) Monthly Report

Deutsche Bundesbank (April 2005)‘Supervision of Financial Conglomerates in Germany’ Monthly Report

Deutsche Bundesbank (October 2005) 'New Transparency Rules for Credit Institutions' Deutsche Bundesbank Monthly Report

Evans L and Nobes C (1998) 'Harmonisation of the Structure of Audit Firms: Incorporation in the UK and Germany' The European Accounting Review

Ethical Statement 1 Integrity, objectivity and independence paragraph 28

Fazio A (2002) 'The Reorganisation of the Italian Bank System' (Joint Session of the Sixth Committees of the Italian Senate and Chamber of Deputies 10 October 2002)

Fearnley S and Beattie V (2004) 'The Reform of the UK's Auditor Independence Framework after the Enron Collapse: An Example of Evidence-based Policy Making' International Journal of Auditing

Federation des Experts Comptables (2001) Europeens Enforcement Mechanisms in Europe: A Preliminary Investigation of Oversight Systems

Filipova T (2003) ‘ Concept of Integrated Financial Supervision and Regulation of Financial Conglomerates: The Case of Germany and the UK’

Filipova T (2006) ‘ Concept of Integrated Financial Supervision and Regulation of Financial Conglomerates: The Case of Germany and the UK’ Nomos

Goglio A (2001) 'Sectoral Regulatory Reforms in Italy: Framework and Implications' OECD Economics Department Working Papers 294, OECD

Goodhart CAE (1998) (ed) 'The Emerging Framework of Financial Regulation ( Central Banking Publications Ltd London 1998)

Gray SJ (1988) 'Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally Abacus, Vol. 24 No.1, pp.1-15

Gray J and Hamilton J (2006) Implementing Financial Regulation: Theory and Practice Second Edition , John Wiley and Sons

Hitchins J Hogg M and Mallett D (2001) Banking: A Regulatory Accounting and Auditing Guide (The Institute of Chartered Accountants)

House of Lords Select Committee on the Accountability of the Financial Services Authority in general, and of the Accountability of the Government and of the Parliamentary Ombudsman Regarding the Equitable Debacle

Huepkes E 'The External Auditor and the Bank Supervisor: Sherlock Holmes and Doctor Watson?' (2005) 7 No1/2 Journal of Banking Regulation

ISA No 240 ( International Federation of Accountants 1996a)

ISA No 570 (International Federation of Accountants 1996d)

Llewellyn D (2001) 'The Creation of a Single Financial Regulatory Agency in Estonia: The Global Context' Paper Presented at Conference Organised by the World Bank and the Ministry of Finance of Estonia, 2001

Moriconi M (2005)' Italy: Changes to the Legislative and Regulatory Framework post-Parmalat – Some Faster than Others!' Hill and Knowlton's Financial Services Newsletter Number 5 May 2005

Moscadelli M (2004) 'The Modelling of Operational Risk : Experience with the Analysis of Data collected by the Basel Committee' Banca D'Italia Temi di Discussione del Servizio Studi Bank of Italy, Banking Supervision Department Number 517, July 2004

Mwenda K and Fleming A (2001) 'International Developments in the Organizational Structure of Financial Services Supervision'

Mwenda K and Mvula J (2003) 'A Framework for Unified Financial Services Supervision: Lessons from Germany and Other European Countries'

Nobes C 'The Future Shape of Harmonisation: Some Responses' (1998) European Accounting Review

Nobes C and Parker R (2006) Comparative International Accounting (Prentice Hall London , Ninth edition)

Paul T (2004) 'The New German Investment Act' Journal of International Banking Law and Regulation

Pecchioli RM (1983) 'Trends in Banking Structure and Regulation in OECD Countries, The Internationalisation of Banking: The Policy Issues

Polizatto V (1990) 'Prudential Regulation and Banking Supervision: Building an Institutional Framework for Banks' (January 1990) World Bank Working Paper

SAS No 59 (American Institute of Certified Public Accountants, 1988d)

SAS No 82 (American Institute of Certified Public Accountants 1997)

Scherer P (2002) 'Regulatory Changes Proposed in Germany' Journal of International Banking Law

Skaife HA and Gassen J (2006) 'Can Audit Reforms Change the Monitoring Role of Audits? August 2006

Singh D (2007) Banking Regulation of UK and US Financial Markets 'Legal Aspects of Prudential Supervision'

Sridharan U, Royce W Caines, McMillan and Summers S (2002) 'Financial Statement Transparency and Auditor Responsibility: Enron and Andersen International Journal of Auditing

Steck A and Loosen C (2002) 'New Legislation to Reform and Enhance Germany's Status as a Financial Centre' Journal of International Banking Law

Stevenson J (2002) 'Auditor Independence: A Comparative Descriptive Study of the UK, France and Italy' International Journal of Auditing

'Trends in Banking Structure and Regulation in OECD Countries' (1987)

<http://www.asb.co.uk/apb/publications/index.cfm>

http://www.bafin.de/bafin/aufgabenundziele_en.htm#n1

http://www.bancaditalia.it/vigilanza_tutela/vig_ban/pubblicazioni/rela/2001/Supervision.pdf>

http://www.bis.org/publ/bcbs78.htm

http://www.bundesbank.de/bankenaufsicht/bankenaufsicht_bafin.en.php

http://www.federalreserve.gov/boarddocs/enforcement/

http://www.fdic.gov/bank/historical/history/vol2/panel2.pdf>

The Federal Reserve System, Purposes and Functions (Board of Governors of the Federal Reserve System July 2005)

The Washington Post

Tonello M (2006) 'Have Governance Reforms Spurred on by Parmalat's Collapse Given Investors a False Sense of Security?', The Conference Board

Trequattrini G 'The Role of the Bank of Italy as Antitrust Authority in the Banking Sector' Banca d'Italia

Vieten H (1995) 'Auditing in Britain and Germany Compared: Professions, Knowledge and the State' European Accounting Review

Vieten HR (1996) ‘Banking Regulation in Britain and Germany Compared: Capital Ratios, External Audit and Internal Controls