70 research outputs found
The Role of External Auditors and International Accounting Bodies in Financial Regulation and Supervision
The emergence of powerful financial conglomerates operating at a global level has led to unified
supervision of financial services in the UK and Germany. These changes in regulatory structures have a
higher potential of better utilisation through the involvement of external auditors. The crucial role played by
external auditors in banking regulation and supervision has been highlighted in bank collapses like BCCI
and Barings. According to the Basel Core Principles for effective Banking Supervision 1997, an effective
banking supervisory system should consist of both âon-siteâ and âoff-siteâ supervision. Off-site supervision
involves the regulator making use of external auditors. On-site work is usually done by the examination staff
of the bank supervisory agency or commissioned by supervisors but may be undertaken by external auditors.
Following Enron's collapse, debates focussed around why the UK had avoided its Enron. Many argued that
it was because the US approach to accounting regulation was rules-based in comparison to the principles based
system of the UK . In addition to adopting an independent standard setting, the International
Accounting Standards Board's second principle is aimed at principles as opposed to rules based standards.
All public trading companies in the European Union would have to apply new international standards from
2005 in consolidated financial statements ( EC Regulation 1606/2002) and huge efforts are now being made
towards global convergenc
Avoiding another Enron:The Role of the External Auditor in Financial Regulation and Supervision
Following the collapse of Enron, many questions have been raised as to why the UK has avoided its Enron.ii
Many commentators have considered whether this is due to the fact that the UK's system of financial
regulation relies more on a principles based system, which promotes more fairness in its application as
opposed to a rules based system.iii However, the crucial roles played by auditors in financial reporting and
the system of financial regulation and supervision have been overlooked to an extent. In view of a spate of
financial scandals such as those of Enron, Worldcom, Tyco etc, the US Congress acted swiftly by enacting
the Sarbanes Oxley Act on July 30 2002 with the aim of protecting investors and restoring their confidence
in the financial system.iv Amongst the provisions within the Sarbanes Oxley Act, the prohibition of non-audit
services by auditors providing audits at that particular time, is a main feature of the Act.v This provision not
only highlights the importance of the role of the external auditor, but also emphasizes the fact that
safeguards are essential in order to prevent that role from being abused. Much as there are lessons which
could be learned from the supervisory approaches adopted by various jurisdictions, there are also
considerations on whether these jurisdictions could benefit from the measures implemented by US regulators
and accounting bodies in the aftermath of Enron
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 âFinancial Directorâ 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 âlow ballingâ
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 â with particular regards to the impediment imposed by
the Dodd Frank Wall Street Reform and Consumer Protection Act
The Role of Central Banks and Competition Policies in the Rescue and Recapitalisation of Financial Institutions During (and in the Aftermath of) the Financial Crisis
Recent years have witnessed a change in focus from considerations of factors which could impede competition, for example over-regulation, to the need to strike a balance between over-regulation and insufficient regulation â in order to provide the right level of safety for consumers (such that they are protected from risky investments). A driving force behind the need for deregulation over the past two decades has been the objective and desire to foster competition. Re-regulation thereafter assumed centre stage in some jurisdictions in response to the need to manage cross sector services' risks more efficiently. Rescue cases involving guarantees (contrasted with restructuring cases) during the recent Financial Crisis, have illustrated the prominent position which the goal of promoting financial stability has assumed over that of the prevention or limitation of possible distortions of competition which may arise when granting State aid.
The importance attached to maintaining and promoting financial stability - as well as the need to facilitate rescue and restructuring measures aimed at preventing systemically relevant financial institutions from failure, demonstrate how far authorities are willing to overlook certain competition policies. However increased government and central bank intervention also simultaneously trigger the usual concerns â which include moral hazard and the danger of serving as long term substitutes for market discipline.
An interesting observation derives from the relationship between State aid grants, competition, and the potential to induce higher risk taking levels. Whilst the need to promote and maintain financial stability is paramount, safeguards need to be implemented and enforced to ensure that measures geared towards the aim of sustaining system stability (measures such as lender of last resort arrangements and State rescues) do not unduly distort competition as well as induce higher risk taking levels. This paper will draw attention to safeguards which have been provided by the Commission where approval is considered for the grant of State aid to financial institutions whose problems are attributable to inefficiencies, poor asset liability management or risky strategies.
Whether the distinction drawn by the Commission â with regards to the preferential grant of recapitalisation packages to fundamentally sound banks (which require less restructuring measures)is justified, will also be considered.
How far central banks and governments should intervene and how far distortions of competition should be permitted ultimately depends on how systemically relevant a financial institution is
Pluralism and Deformalisation as Mechanisms in the Achievement of More Equitable and Just Outcomes â the Move from âClassical Formalismâ to Deformalisation.
By tracing the development and evolvement of certain legal theories over the centuries, as well as
consequences emanating from such developments, this paper highlights how and why a shift from
the model of âclassical formalismâ towards more deformalised models has arisen.
The paper also illustrates how deformalisation and âa corresponding loss of certaintyâ could be
harnessed in order to provide for greater ârealismâ and externalities, whilst still attaining a
respectable level of consistency. Developments and efforts aimed at exploring the applicability of
classical formalism and deformalised models should be regarded as âan endeavour to establish a
consistency of terms, as well as a probing into how far principles, notions, and rules for decision
making can be generalised, and rectification when generalisations have gone too far.â
Unity, as well as âa common law of mankindâ are goals which are still capable of being achieved
even where fragmentation, diversification and pluralisation of the law occur. Such processes of
specialisation, where correspondingly countered by the appropriate level of generality as well as the
ability to apply rules â such that they are consistently applied in similar situations, are capable of
achieving more equitable, just and unifying goals as opposed to a model which merely strives for
the achievement of legal certainty. Looking beyond the borders of legal theory may indeed provide
the much needed redress in situations where generalisations exceed the required limits
Preparing for Basel IV â Why Liquidity Risks Still Present a Challenge to Regulators in Prudential Supervision.
This paper considers and assesses various explanations attributed as principal factors of the recent
Financial Crisis. In particular, it focuses on two principal regulatory tools which constitute the basis
of the framework promulgated by recent Basel Committee's initiatives, that is, Basel III. These two
regulatory tools being capital and liquidity requirements.
Various conclusions have been put forward to explain what triggered the recent Financial Crisis.
This paper aims to explain why the Basel Committee's liquidity requirements and present proposals
aimed at addressing liquidity risks, still represent a very modest milestone in efforts aimed at
addressing challenges in prudential regulation and supervision. Even though problems attributed to
capital adequacy requirements are considered by many authorities to have triggered the recent
Crisis, the paper will highlight how runs on banks are triggered by liquidity crises and that liquidity
risks cannot be isolated from systemic risks. In so doing, it will incorporate the roles assumed by
information asymmetries and market based regulation â hence elaborate on how market based
regulation could serve to address problems which trigger liquidity risks. Imperfect knowledge being
a factor which is contributory to liquidity crises and bank runs, and market based regulation being
essential in facilitating disclosure - since the Basel Committee's focus on banks and prudential
supervision cannot on its own, address the challenges encountered in the present regulatory
environment.
Furthermore, it will address measures and proposals which could serve as bases for future
regulatory reforms - as well as criticisms and challenges still encountered by recent Basel
Committee initiatives
The Basel Capital Adequacy and Regulatory Framework: Balancing Risk Sensitivity, Simplicity and Comparability
As well as highlighting the importance of cost benefit analyses in decision- making processes where
(expected) outcomes are very difficult to predict â given the degree of prevailing and potential risks
and uncertainties, as well as the unquantifiable nature of such risks and uncertainties, this paper also
illustrates the importance of complementary measures in the current Basel risk based capital
adequacy framework.
As technological advances and societal changes contribute towards the generation of certain levels
of risks â some of which were previously not in existence, it is increasingly becoming evident that
risks certainly have a dual nature. Institutional risks comprise of risks which are not only
attributable to the firm or organisation where models (such as internal controls) or techniques are
operated, namely internal control risks, but also the risks involved in managing those risks.
In view of such uncertainties, and the continual evolution of risks, it becomes immediately apparent
that certain outcomes cannot be predicted with high accuracy and certainty â hence the need to
weigh the investment of high expenditure in such unpredictable outcomes. Is the desire to achieve
comparability, as well as simplicity, greater than the need to attain accurate, reliable and more
relevant results through investment in more complex techniques? Such techniques involving not
only initially high outlays but also costs (as well as risks) involved in managing such techniques?
These constitute some of the questions which this paper attempts to address
Successfully Implementing Major Financial Stability Regulatory Reforms: The Risk Weighting Based Controversy (Basel v Dodd Frank) and the Role of National Supervisors.
As well as a consideration of the role contributed by national supervisors in the successful
implementation and enforcement of standards, recommendations and regulations, the significance
of clear and unambiguous mandates in enhancing communication between micro prudential
supervisors (usually national financial supervisors and central banks) and macro prudential bodies
which are responsible for writing the laws that are enforced by micro prudential supervisors, will be
highlighted in this paper. This will incorporate a discussion on the advantages and disadvantages
inherent in clear, explicit mandates â such a discussion necessitating a distinction between financial
stability and monetary policy objectives.
Furthermore, the role of credit ratings and their significance in influencing investor choices and
judgments, will be considered as a means of highlighting how they contribute to the neglect of
risks, exposures attributed to certain financial instruments, and ultimately, systemic risks which de
stabilize the financial system
A Tale of Three Countries, Dispersed Ownership and Greater Risk Taking Levels by Management: Risk Monitoring Tools in Bank Regulation and Supervision â Developments Since the Collapse of Barings Plc (Re â Visited)
This paper is aimed at explaining why higher concentrations of the ownership of large firms do not
necessarily and automatically facilitate lower risk taking levels â where there is scope for the abuse
of powers. As well as illustrating why effective corporate governance systems are essential in
facilitating high levels of monitoring, accountability and disclosure, the paper also highlights why a
consideration of the costs of ownership concentration and its benefits, is required in determining
whether corporate governance systems will be effective or not
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