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

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.