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Drastic measures needed to bring the quality of audits by ‘NBA firms’ up to standard

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A large number of NBA firms with a so called non-PIE licence will have to take drastic measures in order to bring the quality of their statutory audits up to the required standard.

The AFM has performed file reviews of thirty audit firms that fall under the quality assessment system of the Netherlands Institute of Chartered Accountants (Nederlandse Beroepsorganisatie van Accountants, or ‘NBA’). For clarity reasons, these firms are referred to as ‘NBA firms’.

Based on these reviews, the AFM has formed an impression of the quality of the statutory audits conducted by these NBA firms. In 79 per cent of cases, the quality of the statutory audit conducted at audit clients was inadequate. On the basis of this review, the AFM expects this quality problem to apply to the entire group of around 180 NBA firms with a non-PIE licence.

The NBA firms conduct five per cent of all statutory audits performed in the Netherlands, and generate two per cent of the total revenue from statutory audits. The NBA plays an important part in supporting the NBA firms and their external auditors in implementing the required quality improvements. The AFM considers that sector-wide measures are needed to encourage a radical improvement in quality at NBA firms. The AFM will initiate a dialogue with the NBA on this issue.

Thematic review of non-PIE audit firms

The category ‘non-PIE’ includes all statutory audits other than the audits of listed companies, banks and insurers. These audits are also important, as interested parties (such as banks, the Tax & Customs Administration and creditors) must be able to rely on the accuracy of the audited financial data. A professional and critical audit by an independent auditor should provide a strong contribution to the above.

In recent years, the AFM has focused its reviews mainly on audit firms with a PIE licence. It has thus formed an impression of the quality of the statutory audits performed by these PIE audit firms. PIE audit firms perform audits of public interest entities (PIEs), which are listed companies, banks and insurers, and also of the majority of all non-PIE clients in the Netherlands.

To complete its understanding of the quality of the performance of statutory audits in the Netherlands, the AFM is conducting a thematic review in 2013 of the quality of the statutory audits performed by non-PIE audit firms. In the first phase of this thematic review, the AFM assesses the quality of the statutory audits conducted by NBA firms, and in the second phase it will assess those firms affiliated to the Association of Chartered Accountants [Samenwerkende Registeraccountants en Accountants-Administratieconsulenten, or ‘SRA’). The AFM expects to publish its report on the second phase of the review at the end of 2013.

Quality of statutory audits by NBA firms is inadequate

The AFM qualified 50 of the 63 statutory audits by 30 NBA firms with a non-PIE licence it has assessed as ‘inadequate’. The AFM furthermore concludes that the financial reporting was not of sufficient quality in 58 of the 78 financial statements it assessed.

The AFM notes that the quality of the statutory audits conducted by the 30 NBA firms assessed is lower than that of the statutory audits conducted by PIE licensees. The shortcomings at the PIE audit firms mostly concerned specific elements of the statutory audit. However, with respect to the statutory audits conducted by NBA firms, in more than half of the cases basic audit techniques were not used or applied incorrectly, or few or no audit procedures were conducted at all. The AFM, moreover, observes that the quality of the person acting as the external auditor is the main determining factor for the quality of the statutory audit.

The AFM expects NBA firms to take action

The AFM has requested the 28 NBA firms for which at least one statutory audit was qualified as ‘inadequate’ to repair the shortcomings identified in these statutory audits. This means that the external auditor must as yet obtain sufficient and appropriate audit information, and must evaluate their original opinion regarding the financial statements as a whole and possibly revise this. At 24 of the 30 NBA firms reviewed, the number of statutory audits qualified by the AFM as ‘inadequate’ is so great and the shortcomings identified are so serious that the AFM has requested these firms to carry out a thorough root cause analysis and formulate an action plan. The action plan will contain measures to be taken by the audit firm that firstly will rectify the shortcomings in the statutory audits identified by the AFM, and secondly prevent shortcomings from occurring (or reoccurring) in the statutory audits the firm conducts in future.

The AFM appeals to all NBA firms to review the quality of their statutory audits and to take appropriate action. We expect a number of NBA firms to be able to make the necessary efforts to bring the quality of their statutory audits to the required level. For the majority of the NBA firms, however, the AFM is aware that quality-improving measures will not be sufficient to bring the quality of the statutory audits up to standard. More drastic measures will be needed in these cases.

For audit firms with only one or a limited number of external auditors – which applies to the majority of the NBA firms – this means that they would be well advised to consider ceasing to perform statutory audits and requesting the AFM to withdraw their licence. They could then concentrate fully on their other services, which already account for approximately 90 per cent of their revenue.

Assessment and follow-up of action plans and improvement measures

The AFM will assess the action plans it will shortly receive in the third quarter of 2013, Depending on the quality of the action plan, the AFM will enter into discussion with the firm in question regarding retention of the licence, or it will conduct further investigations which may lead to the imposition of enforcement measures. In cooperation with the NBA, the AFM will conduct further case reviews at NBA firms in 2014 to assess whether the action plans and the sector-wide improvement measures have had the desired effect on quality.

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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