The proposal of the Netherlands Institute of Chartered Accountants (NBA) for new rules of professional conduct and practice for accountants demonstrates that it is clearly on the right course with regard to improving the quality of audits. Clear and verifiable standards and rules of conduct, in particular as regards the independence of accountants, contribute towards regaining the trust of the public in the accountancy profession.
"We welcome the initiative of the NBA to strengthen the current rules of professional conduct and practice for accountants and the independence of accountants. And there is no room for lack of clarity, for relations that are too close, or for the appearance of a conflict of interests. We therefore support the proposals presented by the NBA, provided they are tightened or improved in several areas. The strengthened rules of professional conduct and practice and the clear and verifiable standards mean that the Netherlands will stand out in a positive way in the international arena. That is the role that suits the Netherlands in the field of accountancy. This is an important step that contributes to raising the quality of the professional practice of accountants and the attractiveness of doing business and investing in the Netherlands", according to Gerben Everts, board member of the Netherlands Authority for the Financial Markets (AFM).
The NBA last month published the Draft Regulation Code of Conduct and Professional Practice Accountants (´Verordening gedrags/ en beroepscode accountants´ or VGBA) and the Draft Regulation regarding the Independence of Accountants in the case of Assurance Engagements (´Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten’ or ViO). These proposals suggest standards for a proper performance of the profession of accountant and standards for the independence of accountants.
In 2011, the AFM had already asked that attention be directed to the creation of additional safeguards for the independence of accountants. In its report entitled 'Incentives for Audit Quality', the AFM observed that, in situations in which explicit orders and prohibitions are present, the external auditors and audit firms generally comply with them. In the many situations in which current regulations hardly provide any orders and prohibitions, external auditors and audit firms themselves have to assess whether the situations threaten their independence. The conclusion was at the time that this assessment could differ significantly per auditor and firm. The AFM has expressed its concerns about this undesirable situation.
Important points for attention
In the run-up to the publication of the proposals, the NBA conducted several meetings with the AFM. These meetings were conducted from the vision that the new rules of professional conduct and practice, including rules for independence, should contain clear and enforceable standards. This is expressed in the proposals. At the same time, the proposals should be further tightened or improved in various areas.
In the opinion of the AFM, the following three comments and recommendations are most important in this context:
- The AFM proposes that it be emphasised in the VGBA and the ViO that as regards some threats: 1) the complete removal of the threat is the only acceptable level, and 2) no measure, other than the refusal of a professional service or the termination of a client relation, will be able to remove or limit the threat.
The subclause included in the proposed texts that reads "as a result of a threat that cannot be removed by a measure" should be removed. After all, it could be deduced from this subclause that there is still room for alternative interpretations and solutions, and that would seriously harm the enforceability of the regulation. Breaches of independence must be removed immediately by means of specific measures, and this does not allow for tolerance or 'comply or explain' considerations.
- The AFM emphasises that compliance with the rules for independence have to be in accordance with the social responsibility of accountants. The manner in which external auditors implement the assessment framework that applies in that connection depends, inter alia, on the size and social relevance of the audited companies. For this purpose, legislation distinguishes between PIE's (listed companies, banks and insurers) and non-PIE's.
Considerations should not end with this distinction. The AFM considers it important to point out that there are major differences within the group of non-PIE's as well as regards social relevance. This means that auditors have to take more far-reaching measures for large non-PIE's (for example, municipalities, housing corporations or large unlisted companies) in order to guarantee their independence, and will sooner have to align with the regime that applies to PIE's. The AFM recommends that this be clarified in the explanation.
- The AFM furthermore recommends that it be explicitly prohibited that, under the direct guidance of the external auditor, a person who is active within the internal audit department (or who performs similar activities) of the institution that is being audited, performs audit activities that should normally be performed by assurance team members of the external auditor (so-called direct assistance). Direct assistance goes against the independence that should apply for an external auditor.
Respond until 2 September
The NBA's proposal will be open to responses from all interested parties until 2 September 2013. The final proposals will ultimately have to be approved by the Minister of Finance. The AFM considers it important that as many interested parties as possible contribute to these new rules, and calls on parties that have not yet responded to do so as yet.
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.