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Clear picture required of quality of audits by non-PIE audit firms

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In January 2013, The Netherlands Authority for the Financial Markets (AFM) started a new review: the thematic review of non-PIE audit firms. Through this review, the AFM tries to obtain a clear picture of the quality of the statutory audits that are performed by audit firms with a non-PIE licence.

Since the introduction of the Audit Firms Supervision Act (Wta) in 2006, only those audit firms that possess a licence from the AFM are permitted to perform statutory audits. When granting the licence, the AFM examines whether the firm meets the requirements of the Wta. After the licence has been granted, licence holders are then constantly under the supervision of the AFM. This applies not only to audit firms that are permitted to conduct statutory audits of public interest entities (PIE firms), but also to audit firms that are only permitted to conduct other statutory audits (non-PIE firms).

During the past period, the AFM has mainly performed supervisory reviews at PIE firms. The AFM has a good picture of these firms, both the Big 4 firms and the nine other PIE firms. It is important to have a good picture of the entire market, and therefore in 2013 we are turning our attention to the non-PIE firms. The review of the non-PIE firms is part of a broader supervisory theme of the AFM: the improvement of the quality of governance, reporting, and auditing. This is one of the nine supervisory themes of the AFM in 2013.

Design of thematic review

The thematic review of the quality of the statutory audits of non-PIE firms commenced in January 2013 and will take about a year to complete. A cross section of all the 450 non-PIE firms will be selected for the thematic review. We will assess the quality of a number of audits performed by each selected firm, and we will examine whether the financial statements comply with the reporting requirements. This way we try to obtain a general picture of the non-PIE firms.

In the first half of 2013, 30 NBA firms will be selected for the review. Later in the year, we will review 20 SRA firms. After evaluating the results, we will publish the results of both these reviews. The publications will contain not only the findings from the reviews, but also our generic conclusions and recommendations for the entire sector. How we will subsequently proceed depends on the results of the reviews. If certain shortcomings in the quality of the audits seem to be common occurrences, then the sector must produce an action plan to solve the quality problems. This will include an important role for the NBA and the SRA.

Reflecting

Various parties rely on the auditor's opinion concerning the financial statements of non-PIE audit clients. This applies not only to the management of these clients themselves, but also to external parties such as suppliers, creditors, shareholders, banks, the Tax authority, and de Nederlandsche Bank (DNB - the Dutch central bank). They must have confidence that the auditor's opinion concerning the financial statements is reliable, and that the auditor has been professionally critical in conducting the audit. It is essential for all these parties that the current state of the quality of the audits is identified.

Firms that participate in the thematic review will know, after its completion, where the AFM sets the level for quality, and how their own firm relates to this level. Firms that do not participate in the review can reflect on the results of the thematic review and ask themselves how they would have done in the review. Should it appear that certain elements of the audits lead to problems at several firms, the AFM will then cooperate with the sector on improving the quality of the whole sector. 

Supervision of audit firms in 2013

In addition to the review of the non-PIE firms in 2013, the AFM is continuing the supervision of the Big 4 firms and the nine other PIE firms. Currently this includes completion of reviews that we commenced at the end of 2011 at the other PIE firms. We will publish the results of these reviews in March 2013. In addition, this year the AFM will once again conduct reviews at the Big 4 firms. We are doing this partly in cooperation with the US supervisory authority for audit firms, the PCAOB.

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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