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The Role of External Auditors in Bank Supervision: A Supervisory Gatekeeper?

A recent response to the financial crisis has been to reinvigorate the use of external auditors in financial regulation. The U.K. Prudential Regulation Authority and Financial Conduct Authority are to use external auditors in a more systematic way than was the case with the Financial Services Authority. The use of external auditors is not new. This paper evaluates the U.K. experience and international use of external auditors in bank supervision. It suggests the current U.K. approach does not go far enough in explaining how external auditors in bank supervision will be used, and this could lead to a possible expectations gap in banking supervision. This is suggested to be the case in light of the limited levels of accountability and oversight over the auditing profession. To overcome the expectations gap, the paper proposes some further ideas from the international experience of using external auditors in order to improve the way we use external auditors and manage the different roles and interests such auditors have in a twin private and public role. It is suggested those ideas and proposals would go some way to improve how external auditors are used in bank supervision: to better coordinate intense judgment-based supervision between the regulator-bloodhound and the auditor-watchdog. The paper argues that the level of reliance on third parties, such as external auditors, to undertake regulatory and supervisory tasks needs to be worked out in advance to efficiently allocate regulatory resources rather than leaving it in an ad hoc manner.