Basel ii is very different from Basel i. The new risk-sensitive framework is linking capital allocation to risks, and banks quantify them using internal models and advanced mathematics. To make matters worse, there are complex new accounting rules, innovative and confusing financial instruments, and the need to make adjustments to the market and work to obtain fair value estimates.

Supervisors around the world are in serious trouble as they are more responsible but less able to understand internal models. Today, bank supervisors rely much more on internal and (mainly) external auditors.

Auditors should express an opinion on the internal control framework and the financial statements. They should follow principles-based accounting standards, to question assumptions related to estimates, and to exercise professional judgment.

Principle-based standards (in an unprincipled society) and not detailed rules lead to difficult and subjective interpretations, and create the need for expert, qualified auditors to investigate and understand complex legal, accounting, and scientific issues.

In the European Union they went one step further. A person can be authorized to carry out audits only after they have gained access to university, have completed theoretical instruction, have received extensive practical training and have passed an examination organized or recognized by the Member State.

According to the Eighth Company Law Directive of the European Union (also called European Sarbanes Oxley), the The theoretical knowledge test covers in particular:

Accounting theory;

Accounting and principles;

Legal requirements and standards;

International Accounting Standards;

International auditing standards;

Risk management;

Internal controls;

Auditing;

Professional skills;

Standards of professional ethics and independence;

It will also cover to some extent:

Company law;

Corporate governance;

Bankruptcy law;

Tax Law;

Civil law;

Commercial law;

Social security law

Employment Law;

Information technology;

Economic Sciences;

Math;

Statistics;

Financial management of companies;

There is a minimum of three years of practical training, as well as in auditing annual and consolidated accounts. More than two thirds of the practical training will be completed with an auditing company authorized in a Member State.

Yes, auditors with prior theoretical and practical training have the ability (and hopefully the will) to exercise their professional judgment. But supervisors outsource their evaluation to qualified professionals and this can be a risk.

External auditors (regardless of their knowledge and experience) are not supervisors and should not become supervisors.