activities or lack of current financial statements from
borrowers.”127
In implementing the regulatory standards and mon-
itoring tools which are highlighted by the Basel
Committee in its consultative document,128 a supervi-
sory approach which not incorporates the expertise of
external auditors, but which is also more inclined to an
on site system based approach is recommended. In sup-
porting this view, reference is made to lessons learned
from the collapse of Barings where it was noted by the
Treasury Committee that “it was due to the discretion-
ary basis of the supervisors approach to supervision that
there was limited ability to detect events at Barings.”129
The regulatory standards and monitoring tools set
out in the BIS Consultative Document130 are there-
fore supported on the basis of their ability to facilitate
a more formal approach to supervision which would
reduce the scope for flexibility (scope for creative
accounting practices and “window dressing” of balance
sheet figures) where an on—site approach to supervi-
sion is implemented.
F. On site and Off-site Supervision
Principle 21 of the Basel Core Principles for
Effective Supervision, Supervisory Reporting states that
“Supervisors must have a means of collecting, review-
ing and analysing prudential reports and statistical
returns from banks on both a solo and a consolidated
basis, and a means of independent verification of these
reports, through either on-site examinations or use of
external experts.”
According to Vieten131 bank regulation has followed
two trends, namely: supervision has become increas-
ingly formalized and dependent on quantitative tools,
and secondly, regulatory duties are being pushed down
a regulatory pyramid to include external auditors and
to enlist the resources of regulatees.
External auditors, even though they do not constitute
by definition, part of a banking organisation, immensely
impact the quality of internal controls “through their
audit activities—which also includes discussions with
management and recommendations for improvement
to internal controls.”132 “External auditors provide an
important feedback on the effectiveness of the internal
control system.”133
Off site supervision is synonymous with monitoring
and involves the regulators use of external auditors’
expertise. It also involves the receipt and analysis of
financial statements and statistical returns submitted
to the supervisors. Off site monitoring often has the
benefits of being able to identify potential problems,
particularly during intervals between on- site inspec-
tions, thereby providing early detection and acting as
trigger for corrective action before problems become
more serious.134
On site work is usually done by the examination
staff of the bank supervisory agency or Conunissioned
by supervisors but may be undertaken by external
auditors. Furthermore, it is contended that on-site
examinations are frequently implemented by banking
supervisory authorities which posses the legal basis or
other arrangements to direct the scope of the work car-
ried out by external auditors.135
Ongoing monitoring is contrasted with separate
evaluations. Ic is highlighted that whilst ongoing
monitoring activities not only provide the advantage
of “quickly detecting and correcting deficiencies in the
system”, but are also most effective “when the system
of internal control is integrated into the operating envi-
ronment and produces regular reports for review,” that
separate evaluations usually detect problems “only after
the fact.”136 However separate evaluations also offer the
advantage of providing an organisation with “fresh and
comprehensive” insight into the effectiveness of moni-
toring activities—such activities being undertaken by
staff from different departments which include the busi-
ness function, financial control and internal audit.137
G. Monitoring Compliance and Enforcement
Principles Based Regulation
A discretionary based approach to regulation, whilst
encouraging greater possibilities for regulatory capture,
appears to be more congruent with principles based
regulation. However it is possible to implement a sys-
tem of regulation which combines increased formalised
procedures and/or detailed rules—whilst giving due
consideration to the substance of transactions.
“Principles provide the framework in which firms
can organize their own processes to achieve the out-
comes the regulator seeks—the regulator in turn,
Volume 30 ∙ Number 9 ∙ September 2011
Banking & Financial Services Policy Report ∙ 39