9,141 research outputs found
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 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 âif markets are generally better at allocating resources than governments are, then the differences or distinctions which exist between âmoneyâand 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 ruleâ], 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 â as well as capital adequacy regulation, capital regulation should also be extended to the securities markets for many reasons â 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 IIIâs efforts to address capital and liquidity requirements, will the risks linked to
regulatory arbitrage increase as a result of Basel IIIâs 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 â 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 âinternational standard
setters and authorities responsible for the translation of G20 commitments into standards.â
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 â 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 â as well as between
micro and macro prudential supervision could be enhanced
âVolcker/Vickers Hybridâ?: The Liikanen Report and Justifications For Ring Fencing and Separate Legal Entities
Whilst some valid and justified arguments have been put forward in favour of ring fencing, that is,
constructing a fire-wall between consumer and investment banks, and that such activities can be
achieved without re structuring banks into separate legal entities, the Liikanen Report highlights
why there is need for such re structuring. As well as considering the merits of ringfencing and the
establishment of separate legal activities and entities, this paper aims to highlight why a suitable
model aimed at mitigating risks of contagion can to a large extent, be justified on a cost-benefit
analysis basis.
Furthermore, the paper ultimately concludes that even though a greater degree of separation of legal
entities and activities persist with the model which is referred to as âtotal separationâ, a certain
degree of independence between bank activities would also be necessary under ring fencing if its
purposes and objectives are to be fulfilled
The Need for Revised Resolution Regimes and Supervisory Arrangements
In October 2010, having drawn crucial lessons fom the Financial Crisis which was triggered in
2007, and whose impact was still evident at the time, the Financial Stability Board
Recommendations on systemically important financial institutions âcalled for an assessment, on the
basis of the BCBS Recommendations and the draft FSB Key Attributes of Effective Resolution
Regimes (FSB Key Attributes), of national authoritiesâ capacity to resolve SIFIs under existing
resolution regimes and of the legislative and other changes to national resolution regimes and
policies needed to accomplish effective resolution.â
As well as attempting to highlight why much greater initiatives and efforts are required in relation
to exit mechanisms for failing banks â that is, greater initiatives and efforts than prudential aspects
of regulation which embrace capital adequacy procedures, this paper also draws attention to vital
steps that could be taken at international level to make cross-border resolutions more effective
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
Basel II and the Capital Requirements Directive: Responding to the 2008/09 Financial Crisis
This paper addresses factors which have prompted the need for further revision of banking regulation, with particular reference to the Capital Requirements Directive. The Capital Requirements Directive (CRD), which comprises the 2006/48/EC Directive on the taking up and pursuit of the business of credit institutions and the 2006/49/EC Directive on the capital adequacy of investment firms and credit institutions, implemented the revised framework for the International Convergence of Capital Measurement and Capital Standards (Basel II) within EU member states.
Pro cyclicality has attracted a lot of attention â particularly with regards to the recent financial crisis, owing to concerns arising from increased sensitivity to credit risk under Basel II. This paper not only considers whether such concerns are well-founded, but also the beneficial and not so beneficial consequences emanating from Basel IIâs increased sensitivity to credit risk (as illustrated by the Internal Ratings Based approaches). In so doing it considers the effects of Pillar 2 of Basel II, namely, supervisory review, with particular reference to buffer levels, and whether banksâ actual capital ratios can be expected to correspond with Basel capital requirements given the fact that they are expected to hold certain capital buffers under Pillar 2. Furthermore, it considers how regulators can respond to prevent systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. In deciding to cut back on lending activities, are the decisions of such firms justified in situations where such firmsâ credit risk models are extremely and unduly sensitive - hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements
Restoring the Credibility of the Legal and Economic Foundations of Financial Stability: The Need for Incorporation of Economic Theories?
To what extent can monetary and financial crises and cycles be explained through economic
theories? This paper is aimed at highlighting why a reliance on economic theories may be necessary
given certain flaws which have been revealed from the recent Financial Crisis. Namely, that
economic and legal foundations of financial stability cannot always be considered to be credible.
Further, the paper aims to accentuate on why despite the valid argument (that a reference to
economic theories may be required to explain causalities of financial and monetary crises),
causalities could also be explained from other perspectives â even though these perspectives may
sometimes, not be as accurate
Regulatory Strategies
Over the years, there has been a shift from a wide command-and-control style of supervision whereby
the regulator imposes detailed rules with which regulators supervise to one which consists of risk
based regulatory strategies. âEnforced Self Regulationâ, a regulatory strategy whereby negotiation
takes places between the State and the individual firms, lies between the command-and-control style of
supervision and meta risk regulation in that firms are still required to regulate but according to their
own models. It differs from the traditional command-and-control style of bank supervision in that
firms and not the regulator, are required to regulate. It is similar to meta-risk regulation in that the
individual firmâs model is taken into consideration in regulating such firms.
Whilst the merits and disadvantages of the individual regulatory strategies are considered, this paper
concludes that all regulatory strategies should take into consideration the importance of management
responsibilities â both on individual and corporate levels
- âŠ