The Netherlands Authority for the Financial Markets (AFM) has now completed its so-called ‘baseline measurement’ of licensed audit firms with its review of the SRA firms (firms with a non-PIE licence affiliated to the Association of Chartered Accountants (Samenwerkende Registeraccountants en Accountants-Administratieconsulenten).
In the last four years, the AFM carried out reviews of the various groups of licensees: the Big 4 audit firms, the other PIE audit firms and the non-PIE audit firms (divided between the NBA and the SRA firms).
Earlier this year, the AFM called on the group of non-PIE firms that are not affiliated to the SRA, known as the ‘NBA firms’, to take drastic measures to bring the quality of their statutory audits up to standard. It has now emerged from the review of the last group of audit firms, the SRA firms, that the quality of their statutory audits is not adequate and that they too must take drastic measures in order to bring the quality of their statutory audits up to standard.
Statutory audits by SRA firms and audited financial statements are of insufficient quality
The AFM conducted file reviews at 20 SRA firms. The AFM identified serious shortcomings in 38 of the 47 statutory audits (81%) by 20 SRA firms with a non-PIE licence it has assessed. The quality of these statutory audits is qualified as ‘inadequate’. The external auditors who were responsible for the adequate conduct of these statutory audits failed to obtain sufficient and appropriate audit evidence with respect to items of material significance for the financial statements and in relation to the financial statements as a whole in order to be able to substantiate their audit opinion.
In one third of the statutory audits assessed, basic audit techniques were either not applied or applied incorrectly, and in some audits there was little or no performance of any audit procedures. On the basis of this review, the AFM expects this quality problem to apply to the entire group of approximately 265 SRA firms with a non-PIE licence.
Furthermore, the AFM has established that in addition to the statutory audits performed, the quality of the audited financial statements is not up to standard. The AFM concludes that the financial reporting was not of sufficient quality in 49 of the 61 financial statements it assessed (80%).
Efforts by SRA firms to raise quality are still inadequate
Most SRA firms have made efforts to improve the quality of their statutory audits in recent years, mainly through becoming familiar with the professional and other information provided by the SRA and the use of specific tools for the audit. The AFM notes that these efforts have not been sufficiently effective. The quality of the statutory audits performed is not up to standard.
The AFM expects SRA firms to take action
The AFM has requested the 18 SRA firms (90%) for which at least one statutory audit has been qualified as ‘inadequate’ to rectify the shortcomings identified in these statutory audits. This means that the external auditor must as yet obtain sufficient and appropriate audit evidence, and must evaluate his original opinion regarding the financial statements as a whole and possibly revise it.
Secondly, the AFM has requested these firms to carry out a root cause analysis and to formulate an action plan. The AFM will perform further file reviews in 2014 in cooperation with the SRA and will take enforcement action where necessary.
The AFM moreover appeals to all SRA firms to review the quality of their statutory audits and to take appropriate action. The AFM assumes that most SRA firms will be able to bring the quality of their statutory audits up to the required level. They will most likely take the right measures to rectify the shortcomings and prevent further shortcomings occurring in future.
We expect these measures to focus mainly on improving the audit skills and the professional scepticism of the external auditors. The external auditors can subsequently be kept ‘sharp’ by conducting independent and critical engagement quality control reviews of statutory audits. Moreover, external auditors need to bring and keep their professional expertise up to standard by means of permanent education.
Thematic review of non-PIE audit firms
The review of the SRA firms is the second part of the AFM’s thematic review of the quality of the statutory audits performed by non-PIE audit firms. In this thematic review, the AFM assessed the quality of the statutory audits performed by NBA firms and SRA firms.
Based on the thematic review as a whole, the AFM concludes that the quality of 80% of the statutory audits it assessed is inadequate, and that drastic measures are needed across the entire sector of non-PIE audit firms. The AFM is accordingly engaged in a dialogue with the SRA and the NBA.
First follow-up measurement
Now that the baseline measurement is complete, the AFM’s supervision of audit firms will initially focus on the monitoring of the (sector-wide) improvement measures that have been announced. Secondly, in its new reviews the AFM will assess for all groups of licensees whether these 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.