The role of external bank auditors in banking supervision

The financial crisis may be 10 years in the past but many of the issues it raised have yet to be resolved, not least in the field of banking supervision.
How much capital should banks have to hold? Has regulation become too strict – or is it still too lax? 

One issue that has attracted rather less attention than might have been expected is the extent, if any, to which bank auditors should play a part in bank supervision.

To some, the answer is clear-cut. Auditors share, in part, a public interest role with regulators, with duties that go beyond that owed to their client banks. They observe and provide assurance on many of the same numbers used by regulators.  Moreover, they do so, in many cases, from a better-resourced position than the regulators, with expert knowledge that may be too costly for banking supervisors to acquire.

At a time when public-sector budgets are under constant pressure, it makes no sense to shun the involvement of auditors. Indeed, there may be a case for mandating auditors to collaborate with regulators to a greater extent.

The case against auditor involvement in supervision

Others are equally adamant that auditors should have little or no role in banking supervision, for a number of reasons.

One: auditors have objectives that are different from those of regulators. While one aspect of the auditor’s job is to judge the health of the particular bank they are auditing, regulators are concerned about the health of the banking system as a whole.

Two: the effectiveness of auditors can be questionable in a regulatory context, given that they are not banking supervisors, a role requiring a very different skillset?

Three: an audit firm is a commercial enterprise, often with friendly, even cosy, links with the senior management of the bank it is auditing. It is one thing to allow such an enterprise to examine the books on behalf of the bank’s shareholders (although even this arrangement has been criticised). It is quite another to have an auditor do so on behalf of the public at large.

There is no agreement on this issue in principle, nor is there anything approaching uniformity across the EU in terms of requirements of auditors to collaborate with bank regulators.

Until now, the auditor-regulator relationship has been an under-researched area. We have sought to remedy this, at least in part, and have made contact with banking supervisors in all 28 EU member-states, all of whom have supplied answers to our key questions. We have been in contact also with the European Central Bank.