Auditor Independence-Its Importance to the External Auditor's Role in Banking Regulation and Supervision

The role of the external auditor in the supervisory process requires standards such as independence,objectivity and integrity to be achieved. Even though the regulator and external auditor perform similar functions, namely the verification of financial statements, they serve particular interests. The regulator works towards safeguarding financial stability and investor interests. On the other hand, the external auditor serves the private interests of the shareholders of a company. The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company2. The external auditor may however, have a commercial interest too. The debate surrounding the role of external auditors focusses in particular on auditor independence. A survey by the magazine “Financial Director” shows that the fees derived from audit clients in terms of non-audit services are significant in comparison with fees generated through auditing.3 Accounting firms sometimes engage in a practice called “low balling” whereby they set audit fees at less than the market rate and make up for the deficit by providing non audit services. As a result, some audit firms have commercial interests to protect too. There is concern that the auditor's interests to protect shareholders of a company and his commercial interests do not conflict with each other. Sufficient measures need to be in place to ensure that the external auditor's independence is not affected. Brussels proposed a new directive for auditors to try to prevent further scandals such as those of Enron and Parmalat.4 The new directive states that all firms listed on the stock market must have independent audit committees which will recommend an auditor for shareholder approval.5 It also states that auditors or audit partners must be rotated but does not mention the separation of auditors from consultancy work despite protests that there is a link to compromising the independence of auditors.6 However this may be because Brussels also shares the view that there is no evidence confirming correlation between levels of non-audit fees and audit failures and that as a result, sufficient safeguards are in place.7 This paper aims to consider the importance of auditor independence in the external auditor's role in banking regulation and supervision. In doing so, it also considers factors which may threaten independence and efforts which have been introduced to act as safeguards to the auditor's independence. It will also support the claim that auditor independence is indeed central to the auditor's role in banking regulation and supervision

Harmonising Basel III and the Dodd Frank Act

This paper aims to highlight why the harmonization of two major legislative frameworks, namely, Basel III and the Dodd Frank Act, will contribute immensely to resolving future global as well as regional financial crises. More specifically, the paper also aims to highlight the significance and importance of addressing the main transmission channels of financial instability and systemic risks at micro and macro prudential level as well as the need for consideration and redress of the obstacles confronted by Basel III – with particular regards to the impediment imposed by the Dodd Frank Wall Street Reform and Consumer Protection Act

The Role of the IASB and Auditing Standards in the Aftermath of the 2008/20092 Financial Crisis.

The primary argument of this paper is, namely, that the International Accounting Standards Board (IASB), is in need of an enforcement mechanism. In drawing attention to this argument, the paper not only proposes considerations which are to be taken into account if such a mechanism is to be implemented, but also considers areas in which the regulation of accounting standards, and auditing standards in particular, have contributed to the recent global financial crisis. The impact of such standards on pro cyclicality1, the level of success achieved by the IASB and other international standard setters such as the Basel Committee on Banking Supervision, relates to how effectively the accounting and audit standard setting is implemented. As well as identifying the importance of convergence in contributing towards high quality audits and the consistent application of auditing and accounting standards, this paper also acknowledges the difficulties and challenges encountered in attempting to achieve a convergent framework. Furthermore, through a discussion of recommendations aimed at consolidating transparency and accounting, as proposed by the G20, ways in which accounting standards, and consequently the IASB, could contribute further to the improvement of transparency and accountability of the framework for fair value measurements and evaluation, are considered. The absence of enforcement mechanisms, the fact that enforcement actions are carried out at national level in various EU member states, present sources of obstacles to attempts to realise the proposals put forward by the G20. This paper not only attempts to address such factors, but also to suggest ways in which the IASB, to an extent, could realise its goals. Through a consideration of two enforcement regimes in Europe, namely, Germany and the UK, two related standards which govern enforcement in Europe, principles on which harmonisation of the institutional oversight systems in Europe may be achieved , and the vital contribution made by CESR and EFRAG (the European Financial Reporting Advisory Group), this paper will consider how enforcement could be implemented by the IASB at European level

The Liquidity Coverage Ratio: The Need for Further Complementary Ratios?

This paper considers components of the Liquidity Coverage Ratio – as well as certain prevailing gaps which may necessitate the introduction of a complementary liquidity ratio. The definitions and objectives accorded to the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) highlight the focus which is accorded to time horizons for funding bank operations. A ratio which would focus on the rate of liquidity transformations and which could also serve as a complementary metric, given certain gaps which currently prevail with the Liquidity Coverage Ratio, as well as existing gaps with other complementary liquidity monitoring tools, is propose

Why the Transfer of Bank Supervisory Powers Back to The Bank of England is A Step in the Right Direction: Revisiting the Role of External Auditors in Bank and Financial Services Supervision

The need for effective supervision of capital markets is becoming all the more evident in the aftermath of the recent LIBOR and rate rigging scandals. Financial regulators or indeed bank regulators cannot perform such a function effectively without the involvement of auditors in the supervisory process. A challenging task awaits the incoming Bank of England Governor, Mark Carney – particularly given the reduced involvement of auditors in the bank supervisory process since the time of assumption of the Financial Services Authority's bank supervisory functions. However, he (as well as other recent financial reforms) may prove to be the much needed boost required in the bank and indeed, financial supervisory process. This paper is aimed at highlighting why the transfer of bank supervision back to the Bank of England is required if further progress is to be made in the effective regulation and supervision of the financial services sector. It also highlights shortcomings which exist and need to be addressed if the Bank of England is to perform its tasks efficiently as well as regain the momentum and advantages it had acquired before its supervisory powers were transferred to the Financial Services Authorit

Forensic Accounting and the Law: The Forensic Accountant in the Capacity of an Expert Witness

This paper focuses on what constitutes “an attitude that includes a questioning mind and a critical assessment of audit evidence”, namely professional scepticism. It also briefly considers factors and reasons contributory to the ever increasing use of (and the need for) professionals who exercise professional scepticism – that is an attitude that includes a questioning mind and a critical assessment of audit evidence

Financial Regulation and Risk Management:Addressing Risk Challenges in a Changing Financial Environment

Amongst other goals, this paper aims to address complexities and challenges faced by regulators in identifying and assessing risk, problems arising from different perceptions of risk, and solutions aimed at countering problems of risk regulation. It will approach these issues through an assessment of explanations put forward to justify the growing importance of risks, well known risk theories such as cultural theory, risk society theory and governmentality theory. In addressing the problems posed as a result of the difficulty in quantifying risks, it will consider means whereby risks can be quantified reasonably without the consequential effects which result from the dual nature of risk, that is, risks emanating from the management of institutional risks. “Socio cultural” explanations which relate to how risk is increasingly becoming embedded in organisations and institutions will also be considered as part of those factors attributable to why the financial environment has become transformed to the state in which it currently exists. A consideration of regulatory developments which have contributed to a change in the way financial regulation is carried out, an illustration of how the financial industry and the approach to financial regulation have been transformed by the rapid growth of the hedge funds industry, will also constitute focal points of the paper

Development of Auditing in Malaysia:Legal,Political and Historical Influences

This work investigates the role and contribution of external auditing as practised in the Malaysian society during the forty year period from independence in 1957 to just before the onset of the Asian Financial Crisis in 1997. It applies the political economic theory introduced by Tinker (1980) and refined by Cooper & Sherer (1984), which emphasises the social relations aspects of professional activity rather than economic forces alone. In a case study format where qualitative data was gathered mainly from primary and secondary source materials, the study found that the function of auditing in the Malaysian society in most cases is devoid of any essence of mission; instead it is created, shaped and changed by the pressures which give rise to its development over time. The largely insignificant role that it serves is intertwined within the contexts in which it operates

The Need for Government and Central Bank Intervention in Financial Regulation: Free Banking and the Challenges of Information Uncertainty.

Through a focus on the ever increasing need to address information asymmetries, as well as reference to the uniqueness of the degree to which systemic risks are triggered in banking, this paper aims primarily to highlight reasons why government and central bank intervention are essential and required in financial regulation. The role presently assumed by regulation is not the same as it was thirty years ago. Deregulation and conglomeration have significantly altered the landscape in which regulation previously existed and to an extent, defined the role which it presently assumes. For this reason, arguments which were (and have been) directed against government, central bank intervention, as well as the role of regulation, require re-evaluation. Deposit insurance and lender of last resort arrangements serve to instil confidence in depositors hence contributing towards safeguarding system stability and preventing unnecessary runs where panics occur. Such benefits are not only considered against those arguments advanced by antagonists of deposit insurance and lender of last resort arrangements, but also against those views which do not favour government and central bank intervention. In evaluating whether free banking is equipped with as many mechanisms and safeguards required in safeguarding the stability of the financial system, the urgency for such safety net instruments, which is attributed to the peculiar and unique nature of banking, will be considered. Contrary to the argument [that “if markets are generally better at allocating resources than governments are, then the differences or distinctions which exist between “money”and the industry that provides it (the banking industry) should not serve as bases for an assumption that money and banking are exceptions to the general rule”], it has to be highlighted (for several reasons) that the banking industry could not be equated to other areas of the financial sector. One of such reasons relates to the extent to which the impact of systemic runs differ within the banking sector when compared to other areas such as the securities markets. The differences in the nature of risks which exist in banking and those which exist within the securities markets, constitutes another reason why the need for government and central bank intervention is advocated. Furthermore, even though the nature of banking risks warrants government and central bank intervention – as well as capital adequacy regulation, capital regulation should also be extended to the securities markets for many reasons – one of which is the ability to securitise assets. If there was no longer a role for regulation, then re- regulation should not have occurred in certain jurisdictions which have adopted and successfully implemented consolidated supervision

Financial Stability, New Macro Prudential Arrangements and Shadow Banking: Regulatory Arbitrage and Stringent Basel I I I Regulations

Despite Basel III’s efforts to address capital and liquidity requirements, will the risks linked to regulatory arbitrage increase as a result of Basel III’s more stringent capital and liquidity rules? As well as Basel III reforms which are geared towards greater facilitation of financial stability on a macro prudential basis, further efforts and initiatives aimed at mitigating systemic risks – hence fostering financial stability, have been promulgated through the establishment of the De Larosiere Group, the European Systemic Risk Board, and a working group comprising of “international standard setters and authorities responsible for the translation of G20 commitments into standards.” This paper aims to investigate the impact of Basel III on shadow banking and its facilitation of regulatory arbitrage as well as consider the response of various jurisdictions and standard setting bodies to aims and initiatives aimed at improving their macro prudential frameworks. Furthermore, it will also aim to illustrate why immense work is still required at European level – as regards efforts to address systemic risks on a macro prudential basis. This being the case even though significant efforts and steps have been taken to address the macro prudential framework. In so doing, the paper will also attempt to address how coordination within the macro prudential framework – as well as between micro and macro prudential supervision could be enhanced