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Fundamental improvements have been set in motion at nine medium-sized accounting firms following an AFM investigation

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Nine medium-sized accounting firms with a PIE licence have, in the meantime, initiated fundamental improvements, following the critical outcome of investigations performed by the Netherlands Authority for the Financial Markets (AFM). This result concerns organisations that, in addition to the four largest accounting firms, hold a licence for auditing so-called public interest entities (listed companies, banks and insurers, PIE).

The AFM performed an investigation into the quality of audits performed by these organisations for the first time after granting the licence. The investigation concerned – in particular - audits of financial years 2010 and 2011. This investigation has demonstrated many shortcomings in the audits.

The AFM has observed that the audits of all investigated accounting firms contained serious shortcomings in important parts of the audit, which means that the quality of the audit as a whole was insufficient. These shortcomings occur among the audits in all of the investigated sectors. The AFM focused in particular on the financial sector and the property and construction sectors.

The shortcomings in the quality of the audits are comparable to the shortcomings found previously by the AFM at the four largest accounting firms, in respect of which the AFM informed the public in 2009 and 2010. The firms involved in the investigation have take measures during the past years to improve quality, but it has become clear that these measures have not yet been sufficient.

Social role

An accounting firm has to ensure that its accountants are able to perform high-quality audits, inter alia by implementing various measures in the field of quality control and quality management. The AFM supervises the organisation and can demand improvements where necessary.
In view of the important social role of accountants, as independent experts, in performing audits for users of financial statements, it is very important that these audits comply with the applicable standards, and that they are performed by accountants with a well-developed professional-critical attitude.

Serious shortcomings

During its investigation into the quality of audits, the AFM assessed a total of 47 files as regards the quality of the financial statements of both PIE's and non-PIE's. Serious shortcomings were identified during 35 of these investigations (74 percent). The AFM found serious shortcomings in 58 percent of the investigated PIE audits. At four of the nine organisations, serious shortcomings were indentified in all of the investigated audits.

The AFM concludes, on the basis of its investigation, that the differences in the tone at the top between the nine PIE licence holders are expressed in the manner in which and the intensity with which the management promotes quality-based thinking and action within their organisation. The external accountants who are responsible for the audits in respect of which the AFM had serious reservations, had all displayed an insufficiently professional-critical attitude when performing the audits.

In general, the nine investigated accounting firms have, in principle, a sufficient quality control and management system, but the system does not operate adequately. And finally, the AFM considers that the system of quality control should ensure –to a greater extent than at present – that the external accountants will, if necessary, engage experts such as IFRS experts, measurement experts and IT experts to aid them in their audits.

Analysis

The AFM has asked the firms to perform a sound and thorough analysis of the causes of the shortcomings. The accounting firms were asked to devote extra attention to quality-improving factors such as the tone at the top, including corporate culture, the system of quality control and management, and the quality of the external accountant. The PIE licence holders have, in the meantime, started implementing far-reaching quality measures within their organisations.

Improvement plans

The AFM has conducted constructive consultations on compliance with standards with the policy-makers of the nine PIE licence holders. In 2013, the supervisor will closely monitor the elaboration of the improvement plans that have been drawn up by the nine accounting firms. In 2014-2015, the AFM will once again perform an investigation into the quality of audits at these firms. It cannot be excluded that the AFM will take formal enforcements measures if it again discovers serious shortcomings.

The fact that the external accountants did not obtain sufficient and suitable audit information in approximately 74 percent of the audits assessed by the AFM, means that these audits were not sufficiently substantiated, and that it cannot be excluded that the financial statements of the audit clients involved contain material errors.

Remedial action

The AFM has asked the nine PIE licence holders to take appropriate remedial action as regards the audits with findings, and to implement improvement measures that will prevent future recurrence of such findings. It is up to the accountants to decide whether the previously issued audit opinions in respect of financial statements have to be adjusted.

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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