An Effective Dialogue between Supervisors and Auditors – How Can its Implementation Be Monitored?

17-03-2016

Weak banks and their auditors have incentives to overstate bank asset values. In its dialogue with the auditor, the supervisor should stress the need for unbiased accounting data. However, only a supervisor that does not need to apply regulatory forbearance to distressed banks can credibly insist on receiving unbiased accounting data. The introduction of bail-in as the main avenue to resolve failed banks offers the prospect of ending the need for regulatory forbearance, and of improving the quality of accounting data.

Weak banks and their auditors have incentives to overstate bank asset values. In its dialogue with the auditor, the supervisor should stress the need for unbiased accounting data. However, only a supervisor that does not need to apply regulatory forbearance to distressed banks can credibly insist on receiving unbiased accounting data. The introduction of bail-in as the main avenue to resolve failed banks offers the prospect of ending the need for regulatory forbearance, and of improving the quality of accounting data.