The external auditor and the bank supervisor: 'Sherlock Holmes and Doctor Watson?'

The involvement of external auditors in the supervisory process differs significantly across countries. Under the dualistic (or indirect) supervisory system implemented in Switzerland, which dates back to the first banking act of 1934, the external auditors play a pivotal role. Their mandate includes not only a financial audit, which consists of the review of accounts and financial statements, but also a regulatory audit, which entails the assessment of compliance with all relevant licensing and operating requirements as well as other relevant prudential rules and standards. The Swiss Federal Banking Commission, as the supervisory authority of Swiss banks, relies heavily on external auditors for the conduct of on-site examinations, though there are exceptions in some critical areas. Reliance on audit firms mandated and compensated by the banks can give rise to conflicts of interest and incentive incompatibilities. These are addressed by a robust licensing and oversight regime and a well-articulated quality assurance programme. With the increasing reliance on risk-based supervision and growing role of the supervision in the validation of techni-ques used by banks to measure, manage and mitigate their risks, the Swiss supervisory system faces a number of new challenges. These arise from the increasingly blurred distinction between oversight of the audit process and its implementation and the respective roles and responsibilities of the external auditor on the one hand and the supervisor on the other.