The four largest audit firms have paid increased attention to the quality of the audit of the financial statements of housing corporations. Two of the four largest firms had already taken measures to improve and safeguard the quality of their audits, in their audits for financial year 2010, therefore in the period before the public concerns regarding Vestia. One of the other two firms has taken additional measures, however only at a relatively late stage, after the extensive attention to housing corporations had occurred. One of the audit firms has introduced quality measures, but the AFM will conduct a further inspection into the quality of the internal file reviews.
These are the main conclusions from the AFM’s inspection of the audit of housing corporations by the four largest audit firms. These four firms audit more than 90 percent of the corporations, measured by numbers of homes leased. The AFM announced the implementation of this inspection early 2012 after the public concern that arose when it became known that Vestia was suffering an acute shortage of liquidity as a result of high-risk transactions in derivatives.
Review by the audit firms themselves and by the AFM
In February 2012, the AFM requested the audit firms concerned to conduct an internal review of the audits performed on the financial statements of housing corporations for previous years, to the extent that such internal reviews had not already been initiated by the firms themselves. On the basis of these internal reviews, the supervisor then conducted its own assessment as to whether adequate quality measures had been implemented to ensure a proper audit. The audit firms are responsible for the measures that individual auditors must support in the conduct of good quality audits on the basis of a professionally critical attitude and in the preparation of findings, the drawing of conclusions and the transparency that is provided in this regard to the public.
Since the 2009 financial year, the audit of the financial statements of housing corporations has had the status of a statutory audit, meaning that these audits are subject to supervision by the AFM. The AFM’s inspection reveals that all the audit firms concerned have introduced additional measures to a greater or lesser extent. These include correct estimation of the risks, the degree of specialisation of the auditors involved, the resources provided for the conduct of the audit and the audit firm’s own review of how the audits are conducted.
The quality measures introduced by the Big 4 audit firms vary in terms of the nature, intensity and point in time at which the measures were introduced. The measures may vary for each firm, since the standards for quality control and monitoring are relatively open and the way in which they are applied in practice is not prescribed in detail. The application of quality measures depends on the individual circumstances, the quality of the external auditors and the extent to which the organisational culture encourages quality. The AFM expects the audit firms to also apply these quality measures to other statutory audits in both the private and public sectors. The AFM moreover calls for attention to application of these measures in audits involving other public and semi-public sectors, such as the audits of educational and health-care institutions.
Several audit firms have found shortcomings in their case files in relation to the audit of positions in derivative instruments, in one case partly because the derivatives had no value in the balance sheet and therefore were not considered by the auditor to be materially significant. The AFM wishes to draw attention to the fact that the use of cost-price hedge accounting provides insufficient transparency for users of the financial statements, meaning that risks that should be disclosed remain hidden.
No judgement regarding accuracy of the audit opinion
The AFM has no general judgement on the accuracy of the audit opinions expressed by the auditors concerned on the basis of its findings in the context of this inspection. It is the responsibility of the audit firm to carry out additional work on certain elements in the event that doubts arise regarding the quality of the audit, and to attach any conclusions in this regard to the audit opinion. Housing corporations moreover are not subject to supervision by the AFM in the context of the supervision of financial reporting. This element of the AFM’s supervision is limited to listed companies and financial institutions.
The AFM concludes that the conduct of the inspection has had a positive effect, in view of the further changes made by the audit firms in their audits of housing corporations. There is currently no reason to impose sanctions on the audit firms involved on the basis of this inspection.
Other AFM inspections of auditors
As a result of the publicity surrounding Vestia, at the beginning of February 2012 the AFM immediately started a specific incident investigation into the audit of Vestia’s financial statements for the financial years 2009 and 2010. In an incident investigation, the AFM performs its own detailed investigation of the conduct of a specific statutory audit. The focus of the incident investigations into the audits of Vestia is on the audit of the positions in derivative instruments.
In October 2012 the AFM filed a disciplinary law complaint with the Disciplinary Court for Auditors against the auditor who conducted the audit of Vestia’s financial statements for 2010. The incident investigation regarding the audit of the 2009 financial statements is not yet complete.
The AFM is committed to promoting fair and transparent financial markets.
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