AFM imposes a fine on Ernst & Young Accountants LLP for not exercising its duty of care


Update: 2 October 2012: the decision of the AFM has become irreversible by law. There is no possibility of filing an objection or appeal against the decision.

On 9 November 2011, the Netherlands Authority for the Financial Markets (AFM) imposed a €54,450 administrative fine on Ernst & Young Accountants LLP following its inspection of ten audit files as part of its 2009 inspection cycle. The administrative fine has been imposed because the AFM is of the view that, in the conduct of the reviewed statutory audits for the financial years ending in 2007 and 2008, Ernst & Young did not ensure, or insufficiently ensured, compliance of its external auditors with the Further Regulations Audit and other Standards (Nadere voorschriften controle- en overige standaarden, NV COS) and the Dutch Code of Conduct Regulation (Verordening gedragscode, VGC). These are statutory regulations that an external auditor must comply with during the entire audit. Ernst & Young has therefore breached section 14 of the Audit Firms Supervision Act. 

Audit firms are required to ensure that their external auditors comply with the aforementioned statutory regulations. An audit firm has breached its duty of care if, during a statutory audit, several infringements of these regulations occurred.

Ernst & Young provided the AFM with an overview of 2,842 statutory audits completed by Ernst & Young. The AFM’s selection of audit files was limited to sectors that have or may have been affected by the financial crisis. The AFM selected ten audit files of companies operating in these sectors. The AFM’s selection was risk-based, also taking into account Ernst & Young’s own risk assessment of the audit prior to the AFM inspection.

The AFM inspection of the audit files focused on those parts of the audit file where it had identified specific audit risks. The fine imposed by the AFM only relates to the audit file sections inspected by the AFM. Our inspection does not allow generic conclusions to be drawn relating to audit files or parts thereof that were not inspected.

Regarding six of the ten files inspected, the AFM holds the view that the external auditors obtained insufficient audit evidence. For example, because insufficient audit procedures had been performed on audit work carried out by another auditor within the Ernst & Young network (two audit files) or on audit work carried out by the audit client’s internal audit department (two audit files). Other examples of insufficient audit procedures related to certain balance sheet items (three audit files). In its inspection, the AFM concluded that audit procedures had not been performed, if certain audit evidence was not included in the audit file and, in the view of the AFM, Ernst & Young was unable to provide other evidence that the relevant audit procedures had been performed.

In one of the inspected audit files ¬– concerning a relatively small audit client – the AFM established that the assembly of the final audit file had not been timely completed and further audit documentation had been prepared after the issuance of the audit report. In that audit file, it was also established that an audit document had been edited a few months after the issuance of the audit report in order to reconcile it with the financial statements. However, this audit document was initialed with a date prior to the date of issuance of the audit report.

Partly based on the AFM’s findings Ernst & Young has taken measures to prevent these shortcomings in the future.

Parties concerned can request a judicial review of the AFM decision.

If you have any questions or complaints, please contact the AFM's Financial Markets Information Line: 0800-5400 540 (free of charge).

This is an English translation of the original Dutch text, furnished for convenience only. In case of any conflict between this translation and the original Dutch text, the latter shall prevail.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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