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Is there an audit gap in EU banking supervision?

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Abstract

Since 2015 European and national audit offices have been expressing discontent with their audit powers regarding banking supervision. Key to this discontent is the European Court of Auditor’s limited mandate vis-à-vis the ECB’s supervisory activities, which in practice means that the former does not have towards the ECB’s Single Supervisory Mechanism the same full audit powers it has vis-à-vis all other EU institutions and agencies. This limitation is ultimately based on the principle of central bank independence as enshrined in Article 130 of the Treaty on the Functioning of the European Union. In addition to the above, national auditors have recently criticized their alleged difficulty to access all relevant information concerning supervision of less significant banks, since some documents may be considered by the ECB to be not accessible to national audit offices. These two aspects limiting the power of European and national audit offices (also identified as the first and second audit gap) seem to be related since the latter gap arises in part from the restricted mandate regarding the supervision of the ECB’s supervisory function. This article explores the conditions for the existence of an audit gap and its real significance, mainly by assessing whether national audit offices had a mandate to audit their banking supervisor in the first place. It also addresses the formula of a memorandum of understanding agreed between the ECA and the ECB with the purpose of enhancing the cooperation between both institutions in the context of an audit to the ECB’s supervisor function, and the role of the L-bank judgement in the understanding of the relations between the European Court of Auditors, the ECB, the national audit offices and national banking supervisors.

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Notes

  1. Less significant banks do not fulfil any of the significance criteria specified in Article 6(4) SSM Regulation [6]. Significant banks, in contrast, fulfil at least one of them. The significance criteria relate to the bank’s size or its importance to the economy of its home country or the EU as a whole. In practice, most of the less significant banks are smaller banks whose assets do not exceed EUR 30 billion. See, https://www.bankingsupervision.europa.eu/banking/lsi/html/index.en.html#:~:text=Less%20significant%20institutions%20(LSIs)%20are,at%20least%20one%20of%20them.&text=In%20practice%2C%20the%20bulk%20of,not%20exceed%20%E2%82%AC30%20billion.

  2. The ECA pre-SSM audits to the ECB were far from addressing policy aspects. For instance, in 2005 the ECA audited the management of the New ECB Premises (NEP) project; in 2006 it audited the ECB’s budgetary management system; and, in 2007 it examined the ECB’s governance framework for IT projects.

  3. See [20, p. 8].

  4. In this particular case, the second audit gap seems to be independent from the first audit gap since the lack of mandate by some national SAIs to audit LSI supervision existed prior to the attribution of supervisory tasks to the ECB through the SSM Regulation. Indeed, and paradoxically, this lack of mandate undermines the claim on the existence of a first audit gap since the idea of an original audit gap loses its force if, previously, an important number of national SAIs were not equipped with the necessary mandate to audit national banking supervisors.

  5. This exercise refers to the relevant legal provisions in application before the entry into force of the SSM Regulation in November 2013.

    In Austria (AT), the Financial Market Authority (Finanzmarktaufsicht) falls within the general scope of the competences of the Court of Audit (Rechnungshof), according to Article 1 of the Federal Act on the Court of Auditors. Article 2 of this same act establishes that “[t]he Court of Auditors must determine whether the management complies with the existing laws and the ordinances […], and whether they are economic, economical and appropriate (“sparsam, wirtschaftlich und zweckmäßig”)”. In 2007, the Financial Market Authority was subject to an audit on the part of the Court of Auditors on its cooperation with the Oesterreichischen Nationalbank and the Minister of Finance in the core areas of banking supervision. A follow-up audit took place in 2011. Their scope could be considered as equivalent to an audit of the operational efficiency of the management.

    In Belgium (BE), the Law Establishing the Organic Statute of the National Bank of Belgium does not attribute competences to the national SAI (Cour des Comptes–Rekenhof) to audit the National Bank of Belgium’s SSM-related activities. In addition Article 22 of this same Law excludes banking supervision from the areas in which the Minister of Finance has “the right to supervise the Bank's transactions and to oppose the implementation of any measure which is contrary to the law, the Statutes or the interests of the State”.

    In Cyprus (CY), Article 60(1)(b) of the Central Bank of Cyprus Laws of 2002 to 2007 states that “the Auditor General of the Republic may carry out financial and management audit of the activities of the Bank that are not related to its tasks and competences emanating from the European System of Central Banks, and under the condition that his reports and audit activities do not touch upon the Bank’s independence […] For the purposes of this paragraph “management audit” shall mean the audit of the operational efficiency of the activities of the Bank that are not related to its tasks and competences emanating from the European System of Central Banks and which does not touch upon its independence”. Therefore, according to the Central Bank of Cyprus Laws, the Audit Office may only carry out financial audits and audits on the operational efficiency of the Bank’s supervisory functions. In Germany (DE), Sect. 88 of the Federal Budget Code states that the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin) is under the jurisdiction of the German SAI (Bundesrechnungshof). According to Sect. 111 of this same Code “[t]he Federal Court of Auditors shall audit the budgetary and financial management of public-law entities established and controlled directly under federal law”. Article 90 also notes that “[t]he audit shall cover whether the regulations and principles applicable to budgetary and financial management have been observed”. Accordingly, the Bundesrechnungshof despite being able to audit BaFin, cannot extend its audit activity towards the examination of the entity’s performance. In 2009 the Bundesrechnungshof audited BaFin’s procurement and contract procedures.

    In Finland (FI), the Financial Supervisory Authority (Finanssivalvonta) operates in connection to the Bank of Finland, and the provisions of the Act on the Bank of Finland apply to the former unless otherwise provided in the Act on Finanssivalvonta. Pursuant Article 1 of the Act on the State Audit Office (Valtiontalouden tarkastusvirasto) the task of the Audit Office is to audit the legality and appropriateness of the state's financial management and compliance with the state budget, however the tasks of the Audit Office do not include auditing the financial management of the Bank of Finland.

    In France (FR), the national supervisor (Autorité de contrôle prudentiel et de resolution or ACPR) despite having functional autonomy is dependent of the Banque de France. Due to the lack of legal autonomy of the ACPR, the capacity of the national SAI (Cour des Comptes) to audit the latter is determined, absent any specific reference to the ACPR, by its competences vis-à-vis Banque de France. The Monetary and Financial Code, in its Chapter on Banque de France, does not establish any limitation to the role of the Cour des Comptes. The latter, in accordance to article L133-1 of the Code on Financial Jurisdictions, seems to have jurisdictions to carry out audits on the verification of the accounts and management (“la vérification des comptes et de la gestion”) vis-à-vis the entities of the public sector, and thus Banque de France. The wording of this provision seems to exclude performance audits from the Cour des Comptes’ audit tools. In addition, Article 58(2) of the Organic Law 2001–692 on the laws on finances establishes that the Cour des Comptes may carry out any inquiry requested by the committees of the National Assembly and the Senate in charge of the financial management of the services or bodies that are under their control. On this basis, the Cour des Comptes audited in 2011 the setting of the ACPR. The assessment on the quality of the prudential supervision was explicitly excluded from the scope of the audit. In Greece (GR), the Statute of the Bank of Greece and the Law 4129/2013 on the Court of Auditors do not foresee any role for the national SAI vis-à-vis Bank of Greece.

    In Italy (IT), the Statute of Bank of Italy of 2006 and the Law 20 of 14 January on the national SAI do not establish a role for the national SAI (Corte dei Conti) vis-à-vis Banca d’Italia.

    In Slovakia (SK), the Law on the National Bank of Slovakia (Národná banka Slovenska or NBS) only refers to the financial audits to be performed by external auditors. In addition, the Law on the Supreme Audit Office does not contain any reference to whether the Supreme Audit Office is allowed to perform audits to the central bank. Article 2 of this same law only indicates that the Audit Office shall perform audits on the management of budgetary funds approved under the law adopted by the government.

    In Luxembourg (LU), Article 23(5) of the Law on the national supervisor (the “Commission de Surveillance du Secteur Financier”or “CSSF”), states that “[t]he CSSF shall be subject to the control of the Cour des comptes for the compliant use of the public financial participation it receives”. Indeed, Article 391) of the Law on the Organisation of the Cour des comptes states that [t]he Court des comptes examines the legality and regularity of revenue and expenditure as well as the sound financial management of public funds, excluding performance audits. Therefore, the Cour des comptes despite being able to audit the CSSF, it cannot carry out performance audits.

  6. In Estonia (EE), the Financial supervision Authority (Finantsinspektsioon) despite having budgetary autonomy operates within the Estonian Central Bank (Eesti Pank) and does not have a separated legal personality. The Financial Supervision Authority Act currently in force and the version in force prior to the establishment of the SSM, as well as the Eesti Pank Act, do not contain limitations to the role of the National Audit Office (Riigikontroll) vis-à-vis the activity of the national supervisor. Accordingly, it should be concluded that Finantsinspektsioon’s activities fall under the National Audit Office’s control, including the possibility for the latter to carry out performance audits.

    In Spain (ES), Article 4 of the Law of the Autonomy of Banco de España refers to the power of the national SAI (the “Tribunal de Cuentas”) to become the external financial auditor of Banco de España, under the terms of Organic Law 2/1982 and without prejudice of the role of the independent external auditors foreseen in Article 27.1 of the ESCB/ECB Statute. This article may be regarded as complementing the general power of auditing the accounts of the public sector granted to the Tribunal de Cuentas by the Article 136 of the Spanish Constitution. It is not fully clear from these two provisions whether the Tribunal de Cuentas has a competence to perform audits that go beyond the examination of Banco de España’s annual financial statements. This, however, seems to be the case in relation to Banco de España’s supervisory tasks as the Tribunal de Cuentas audited Banco de España in 2017 in relation to the compliance with the legal provisions and the systems and procedures of its supervisory function. This audit seems to fall within the category of the operational efficiency category. Nevertheless, the above-referred provisions do not seem to prevent the Tribunal de Cuentas from carrying out performance audits.

    In Ireland (IE), Sect. 77 of the Central Bank Act of 1997 provides for the possibility for the Comptroller and Auditor General to carry out audits on “the systems, procedures and practices employed by the Bank or any subsidiary of the Bank to evaluate the effectiveness of its operations”. In virtue of this same Article the Comptroller and Auditor General may also carry out examinations “for the purposes of ascertaining whether and to what extent the resources of the Bank […] have been so acquired or disposed of, economically and efficiently. Accordingly, the Comptroller and Auditor General may carry out performance audits on CBI, including its supervisory tasks.

    In Latvia (LV), according to the Law on the Financial and Capital Market Commission (“FCMC”), the FCMC is an autonomous public institution with legal personality that supervises the financial and capital market and the activities of its participants. Pursuant Article 2 of the State Audit Office Act in force prior to the establishment of the SSM, the State Audit Office may carry out “financial, legality and efficiency audits” in the entities of the public sector with the purpose of ascertain whether “the action with the means […] is legal, correct, economical and effective, as well as to provide recommendations for the elimination of the revealed deficiencies”. Based on this Act the State Audit office has carried out performance audits in relation to some entities, but not vis-à-vis the FCMC.

    In Lithuania (LT), Articles 49 and 50 on the Law on the Bank of Lithuania only refer to the audit of the annual financial statements. However, Article 14(4) of the Law on the National Audit Office states that “[t]he National Audit Office may carry out a performance audit of the Bank of Lithuania, with the exception of the fulfilment of the tasks of the European System of Central Banks and the Eurosystem, without violating the activities of the independent external auditors of the Bank of Lithuania. The National Audit Office shall take into account the independence of the Bank of Lithuania and shall not give instructions to the Bank of Lithuania, the Board of the Bank of Lithuania, its members in their performance of the functions related to the fulfilment of the tasks of the European System of Central Banks and the Eurosystem”. The version in force before Lithuania joined the euro and the SSM was very similar only referring to “the audit firm chosen by the Bank of Lithuania”, instead of “independent external auditors”.

    In Malta (MT), the Malta Financial Services Authority (the “MFSA”) Act states that the MFSA has distinct legal personality. Neither this Act nor the National Audit Office Act refer to any limitations on the examinations that the National Audit Office may undertake on its activity vis-vis the MFSA. Paragraph 3 of the First Schedule of the National Audit Office Act establishes that the Auditor General may examine whether the audited office has used “the funds and resources available to it effectively, efficiently, and economically without incurring expenditure which is unnecessary”. The possibility for the National Audit Office to carry out performance audits is also stressed in Paragraph 8 of the First Schedule of the National Audit Office Act, which states that “the Auditor General may make special reports to the House of Representatives dealing with value for money audit relating to efficiency and effectiveness of any department, office or body”.

    In the Netherlands (NL), the Bank Act of De Nederlandsche Bank does not refer to the audit powers of The Netherlands Court of Audit (Algemene Rekenkamer). The 2001 version of the Government Accounts Act, in force prior to the establishment of the SSM, states in Article 91(4) that “[t]he General Audit Chamber may also investigate the legal entities and companies concerned, except […] De Nederlandsche Bank NV, insofar as it carries out tasks for the implementation of the Treaty on the operation of the European Union”, allowing the possibility for the Algemene Rekekamer of carrying out performance audits on De Nederlandsche Bank’s in what relates to its supervisory tasks. Precisely the Algemene Rekenkamer audited De Nederlandsche Bank’s supervision of medium-sized and small banks in the Netherlands in 2016 and 2017. The audit report “Banking Supervision in the Netherlands” established recommendations going beyond the operational efficiency of the management of De Nederlandsche Bank such as the need for the latter to explain to the medium-sized and small banks why the requirements set for them are higher than those set for significant banks.

    In Slovenia (SL), the Act on Bank of Slovenia in force prior to the establishment of the SSM does not contain references to the audit powers of the Court of Audit beyond the allocation of the competences to audit the financial statements of the bank to independent external auditors. Article 20(1) of the Act on the Court of Audit only states that “[t]he Court of Audit shall audit the business operation of users of public funds”, and that for these purposes “it may carry out regularity and performance audits”. On the basis of a 2017 amendment of the Act on Bank of Slovenia, the Court of Auditors is now entitled to “assess the correctness and efficiency of supervisory practices carried out by the Bank of Slovenia until 4 November 2014 and which led to the use of funds from the budget of the Republic of Slovenia”. The Court of Auditors is currently carrying out an audit on Bank of Slovenia on this precise object.

    In Portugal (PT), Article 54(6) of the Organic Law on Banco de Portugal “establishes that Banco de Portugal shall not be subject to the prior control of the Court of Auditors, nor to its successive control in the issues relating to its participation in the performance of the tasks entrusted to the ESCB”. Since the Law on the Organisation and Process of the Court of Auditors (“Tribunal de Contas”) on its 2012 version in force prior to the establishment of the SSM, entrusts the latter with the competence to carry out performance audits to public law entities, it should be concluded that the Tribunal de Contas was able to perform this type of examination to Banco de Portugal when exercising its supervisory tasks.

  7. The list of significant entities supervised by the SSM (as 1 of January 2020) is available at https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.listofsupervisedentities202002.en.pdf.

  8. This is for instance the case in the following jurisdictions: BE, FR, GR, IT, DE, FI and DE.

  9. In relation to Bulgaria (BU), pursuant Article 5(1) of the National Audit Office Act, the National Audit office may carry out performance audits which seem to also apply to the Bulgarian National Bank (BNB). There is no specific limitation in the Bulgarian National Bank Act or in the National Audit Office Act in relation to the role of the national SAI vis-vis BNB. Indeed, pursuant Article 6 of the latter Act, the National Audit Office has the additional role of “also” auditing the budget expenditures of the Bulgarian National Bank and their management. Concerning Croatia (HR), Section IV of the Act on the State Audit Office establishes the relationship between the State Audit Office and the Croatian National Bank (CNB). According to this Section, the role of the State Audit Office seems to be limited to the examination and assessment on the use of funds by CNB which do not directly relate to the pursuit of the aims and execution of its operations or the execution of ESCB-related tasks. Other provisions within the same Act establish additional safeguards for CNB vis-à-vis the State Audit Office, for instance, by not allowing the latter to examine nor assess the fulfilment of the operationally relevant and ESCB-related objectives and tasks of CNB.

  10. For instance, the German supervisor “BaFin” or the Luxemburgish supervisor “CSSF”.

  11. Such as the French supervisor “ACPR” or the Finnish supervisor “Finanssivalvonta”.

  12. This seems to be what the Contact Committee implies [3]. Indeed, instead of considering the protection of banking supervisors from performance audits as an unintended legacy of central bank independence, this may rather be an intentional policy choice of the legislator justified on the importance given to the idea of supervisory independence.

  13. For a short summary of the ECA’s main functions see Vogiatzis [22, p. 668].

  14. According to van den Berg “during a meeting of the EMU Working Group on 27 November 1991, the UK delegate felt unhappy with the fact that the EMI would only be audited by external accountants [it should be noted that the draft Treaty also included the protocol for the European Monetary Institute (EMI) which included an article similar to Article 27 of the ESCB/ECB Statute]: they only look at the reliability of the accounts and the legality of the transactions, while the ‘man in the street’ also wants to know whether the EMI spends its budget efficiently. To this end the European Court of Auditors should be asked to look into the ‘operational efficiency of the management of the EMI’. The Court of Auditors would not be allowed though to assess monetary policy. This found broad support, including from German delegation. With everybody’s approval the ESCB Statute was adapted along the same line”.

  15. Reports by the European Court of Auditors on the audit of the operational efficiency of the management of the European Central Bank for the financial years 1998 (OJ C 133, 12.5.2000), 1999 (OJ C 47, 13.2.2001), 2000 (OJ C 341, 4.12.2001), 2001 (OJ C 259, 25.10.2002), 2002 (OJ C 45, 20.2.2004), 2003 (OJ C 286, 23.11.2004), 2004 (OJ C 119, 19.5.2006), 2005 (OJ C 313, 21.12.2007), 2006 (OJ C 210, 4.9.2009), 2007 (OJ C 32, 9.2.2010), 2008 (OJ C 159, 18.6.2010), 2009 (OJ C 31, 29.1.2011), 2010 (OJ C 173, 16.6.2012), 2013 (OJ C 158, 24.5.2014).

  16. Economy, efficiency and effectiveness are constitutive principles of the overall principle of sound financial management. See in this respect, Article 33 of the Financial Regulation [15].

  17. It should also be noted that in the Opinion CON/2012/96 on a proposal for a Council regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, the ECB referred to the need for accountability mechanisms to respect the ECB’s independence.

  18. “We examined whether, in its supervisory role, the ECB had managed the establishment of an operationally efficient framework for crisis management procedures. In particular we focused on: (a) whether the ECB’s supervisory methodologies and related procedures efficiently identify and respond to a material deterioration in the financial condition of a bank; and (b) whether the operational procedures and arrangements for coordination and cooperation both within the ECB and with other relevant actors allow for efficient crisis management”, European Court of Auditors [13, p. 15].

  19. See Memorandum of understanding between the ECA and the ECB regarding audits on the ECB's supervisory tasks, para. 4. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELLAR:b44fbfa0-95f6-11ea-aac4-01aa75ed71a1&from=EN.

  20. This Article was not part of the proposal from the Commission and was introduced by the Cypriot.

    Presidency in its compromise text of 3 December 2012. See, Allemand [1, p. 64].

  21. See also Article 21(4) of the SSM Regulation [6] which establishes that “[t]his Regulation is without prejudice to the accountability of national competent authorities to national parliaments in accordance with national law for the performance of tasks not conferred on the ECB by this Regulation and for the performance of activities carried out by them in accordance with Article 6”. In this respect Allemand opines that “the audit performed by SAIs with regard to local supervisory authorities remains applicable, as long as it does not affected the independence, the attribution of responsibilities or the accountability of the ECB and of national authorities in the application of SSM Regulation” [1, p. 65].

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  1. Senior Legal Counsel, European Central Bank, Frankfurt am Main, Germany

    David Baez

  2. Visiting Lecturer, Catholic University of Lille, Lille, France

    David Baez

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Baez, D. Is there an audit gap in EU banking supervision?. J Bank Regul 23, 66–78 (2022). https://doi.org/10.1057/s41261-021-00171-3

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