The Role of the External Auditor in the Regulation and Supervision of the UK Banking System

Abstract:     
This paper focuses on how the external auditor can assist the FSA through two of its principal regulatory tools in the FSA's response to risk, namely supervision and enforcement. The external auditor has a vital role as a supervisory tool in reporting certain matters as obliged by the Financial Services and Markets Act 2000 (FSMA) and also in reporting specific matters through annual reports. As an enforcement tool, external auditors play a key role in their functions as skilled persons. Under section 166 of the FSMA, power is conferred on the FSA to mandate a firm of solicitors or accountants/auditors to report to the FSA matters requiring provision of information under section 165 of the FSMA. The reports produced by external auditors as a result of this process are known as skilled person reports. As well as the FSA's use of external auditors to assist it in obtaining information, performing risk analysis, sampling and other tasks during enforcement procedures, the effectiveness of the FSA's use of external auditors in its off-site and on-site systems of supervision can be efficiently assessed through a holistic examination of the way in which the audit profession is regulated. The FSA's enforcement procedures highlight the immense contribution made by external auditors to the supervisory process as demonstrated in the Legal and General Case.

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