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Abstract
This paper investigates the long-standing Swiss dualistic approach to banking supervision, whereby banks' external auditors report not only to shareholders under company legislation but also report to, and undertake work for, the banking regulator under banking legislation. The dual role raises the issue of whether auditors are sufficiently independent of management to act fairly with respect to both shareholders and supervisors. In contrast, recent literature and policy-making on regulation advocates the need to close the distance between regulators and those regulated, and the Basel Committee on Banking Supervision has advocated a closer relationship between banking supervisors and banks' external auditors. The paper investigates the dual role by providing empirical evidence from interviews undertaken with Swiss audit partners, and analysis of documentary material from the Swiss banking regulator and IMF. The paper concludes inter alia that the Swiss dualistic system ‘works’ because it is supported by a layered regulatory approach at audit firm, national and international levels to ensure and safeguard auditor independence and competence. Whether such a system would work elsewhere depends on national factors such as conceptions of the nature of corporate governance and of the state, and prevailing views on private actors undertaking public roles.
Acknowledgements
Funding to support the gathering of empirical evidence was kindly provided by the Scottish Accountancy Trust for Education of the Institute of Chartered Accountants of Scotland. An earlier version of the paper was presented at the 2008 European Accounting Association conference in Rotterdam. We wish to thank Professor Christine Helliar, Dr Eva Hüpkes, Professor Salvador Carmona, and the two anonymous referees for their helpful comments and suggestions on previous drafts of the paper.
Notes
On 1 January 2009 a new body, the Financial Market Supervisory Authority (FINMA) took up its duties. It incorporates the SFBC and two other regulatory bodies, the Federal Office of Private Insurance and the Money Laundering Control Authority. FINMA has retained the dualistic system for banking supervision, including the current adoption in full of the SFBC audit circulars. The paper generally refers to the SFBC as this was the extant body during the conduct of the research.
Specific arrangements apply to the supervision of the two large Swiss banks, Credit Suisse and UBS, where the SFBC also undertakes direct supervision including supervisory visits and on-site examinations. Hüpkes (Citation2006, p. 8) notes, however, that such direct supervision ‘is not a substitute for but rather a complement to the work of the external auditor’.
The Relationship between Banking Supervisors and Banks' External Auditors was first issued by the International Auditing Practices Committee (IAPC) Citation(1989).
The three Lamfalussy Committees are the Committee of European Banking Supervisors, the Committee of European Insurance and Occupational Pensions, and the Committee of European Securities Regulators. These Committees would be replaced by the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities Authority.
The Federal Government and Swiss National Bank may also have been concerned about attempting to mitigate reputational damage, for instance following a bank failure. External auditors of course can purchase professional indemnity insurance to protect against liability claims but they too may be subject to reputational damage in such a circumstance.
Reforms to authorisation and appointment of auditors were dealt with by the issuance of a circular Audit Companies (SFBC, Citation2005c); reforms to audit and reporting were dealt with by the issuance of circulars Audit and Audit Reports (SFBC, Citation2005a and 2005b, respectively).
FINMA has currently adopted these Circulars in full and unchanged from the SFBC. It is not possible to report the detailed and complex audit and reporting requirements in this paper. Readers are advised to consult the respective circulars, English language versions of which are available at: http://www.finma.ch/archiv/ebk/e/regulier/rundsch/index.html (see also Hüpkes, Citation2006).
In addition to the annual financial statements and supervisory reporting, the SFBC require the auditor to express an opinion on:
• ‘the adequacy of the organisation and internal controls in preparing the annual and interim financial statements (account closing process);
• the valuation policy for assets and off-balance sheet exposures as well as the policies on value adjustments and provisions;
• the adequacy of the institution's instruments for financial planning and control, budgeting and achieving its financial targets (gap analysis).’ (SFBC, Citation2005a, para. 18)
As part of the regulatory audit, the SFBC (Citation2005b, para. 26) requires auditors to undertake ‘mandatory’ audits (for example, covering the adequacy of corporate governance arrangements); ‘risk-based audits’ covering key audit risks identified by the auditor; ‘in-depth audits’ of areas on a rotational basis or as specified by the SFBC; or any other additional audit areas specified by the SFBC (these may take the form of thematic reviews).
For further details of the oversight role, see Swiss Federal Audit Oversight Authority (2008, Citation2009).
Since 2001 the SFBC has provided a summary in English of the annual report, which is published as ‘Annual Report: Key Themes’.
The 1997 version of the Basel Core Principles is principally referred to in the paper as this was in effect during the period of the IMF's Financial Sector Assessment Programme of Switzerland (IMF, Citation2002), and the reforms initiated by the SFBC from 2000 onwards.
We are indebted to an anonymous reviewer for this suggestion.