The Global Risk Regime – New Roles for Auditors

18 Pages Posted: 13 Oct 2014 Last revised: 22 Dec 2015

See all articles by Allan D. Grody

Allan D. Grody

Financial InterGroup; New York University (NYU) - Leonard N. Stern School of Business

Peter J. Hughes

Durham Business School - Centre for Banking, Institutions & Development

Date Written: December 21, 2015

Abstract

In the aftermath of the financial crisis the G20’s Financial Stability Board (FSB) invited auditors to play a more prominent role in assisting the FSB in its mandate to stabilize the global economy. The Basel Committee on Banking Supervision (BCBS) in its response to the financial crisis introduced new requirements aimed at achieving closer alignment between banks’ risk reporting and accounting systems. In the summer of 2015 the Institute of Chartered Accountants in England and Wales (ICAEW) published a consultation paper at the request of the UK’s Prudential Regulation Authority on providing assurance services for calculating banks’ risk weighted assets (RWAs) and capital ratios. Also in the summer of 2015 the Regulatory Oversight Committee (ROC) of the FSB published a consultation paper on establishing relationship data to create an authoritative record of control and ownership structures of legal entities aligned to the accounting principles applied in the preparation of consolidated financial statements.

These and other initiatives provide the foundation on which the role of auditors and accountants in global regulatory regimes are being extended to support post-crisis initiatives aimed at restoring reliability and stakeholder confidence in banks’ risk reporting.

This paper reports on the role of auditors in regulatory oversight and offers perspectives on further involvement. The authors explore existing mandates and potential expanded roles to include: the BCBS’s independent validation of compliance with its risk and data aggregation principles including that risk controls be as robust as financial accounting controls; the use of auditors third party assurance services applied to banks’ risk weighted asset (RWA) and capital ratio calculations; for accommodating the FSB’s newly designated privacy agent for masking derivatives counterparties; for assuring adherence to criteria for new securitizations and derivatives regulations; to validate legal identities and their ownership structures within the ROC’s new global legal entity identification system (GLEIS); and to extend auditors financial reporting taxonomies to prospectuses, articles of incorporations, contracts and other source documents.

The authors draw comparisons with these regulatory developments and the US’s Sarbanes Oxley (SOX) legislation, and similar legislation in other jurisdictions that were enacted with the aim of reducing the risk of material misstatements in financial reporting. They consider whether the role and responsibilities of auditors framed in SOX legislation should be extended to risk reporting.

Finally, the authors see an expanding role for accountants and auditors to adapt financial metrics and reporting to achieve more comprehensive and precise disclosure of accepted risks in audited financial statements. Risk Accounting, Confidence Accounting and Sustainability Accounting have already entered the accountants’ lexicon. These represent both a risk quantification and an accounting challenge as regulators seek to more fully engage accountants and auditors in achieving greater financial stability while risk adjusting the financial system.

Keywords: Financial Stability Board, Auditing, Accountants, Risk Accounting, Basel, Risk Management, Derivatives, LEI

JEL Classification: C8, C15, C18, D81, E1, E10, F02, F22, F23, G2, G38, L1, L2, L8, M4, O3

Suggested Citation

Grody, Allan D. and Hughes, Peter J., The Global Risk Regime – New Roles for Auditors (December 21, 2015). Available at SSRN: https://ssrn.com/abstract=2508399 or http://dx.doi.org/10.2139/ssrn.2508399

Allan D. Grody (Contact Author)

Financial InterGroup ( email )

169 East 69th Street
New York, NY 10012
United States
9174143608 (Phone)
212-585-4397 (Fax)

New York University (NYU) - Leonard N. Stern School of Business ( email )

Suite 9-160
New York, NY
United States

Peter J. Hughes

Durham Business School - Centre for Banking, Institutions & Development ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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