The current management form of audit firms will have to be changed. This is necessary to satisfy the quality requirements of audits and regain the trust of users of those audits. This was said by Gerben Everts, board member of the Netherlands Authority for the Financial Market (AFM), in an interview with het Financieele Dagblad on Monday 7 April.
Recommendations for improved management
The AFM makes three recommendations for guaranteeing better management of the firms. The management board of an audit firm will have to be largely released from other duties so that it can focus on management and internal control. Currently, board members of audit firms still have clients for whom they also perform activities. The supervisory boards should consist of more independent members that are not affiliated with the firm.
The appointment and dismissal of board members should become the responsibility of the supervisory boards. Current practice is that the partners jointly appoint their board members. This may become a barrier to the implementation of necessary changes by the management board, because board members can simply be replaced if the partners do not agree with their policy.
The quality of audits must be improved
The quality of audits is insufficient in many respects; this is evident from AFM investigations and various incidents at listed companies that occurred in recent years. Various changes are necessary in order to realise structural quality improvements and to guarantee these in the future. For example, auditors must assume a professional-critical attitude, firms must focus more on internal control and the independence of auditors must become more explicit. This requires, among other things, a statutory obligation for companies to change auditors after a maximum number of years and a clear division between audit and consultancy services.
Essential step for quality improvement
In that connection, improving and strengthening management is an essential additional and necessary step to accelerate the quality improvement process that has been initiated, Everts says. 'How can it be the case that the management board still has to be notified by the supervisor that there are defects in the quality? This shows that internal controls are still inadequate.' It is of more than average importance that audit firms bring and maintain their internal control in order, precisely because audit firms have an important duty as auditors on behalf of society.
Consultation with audit firms
The AFM will place this item on the agenda of its regular consultations with the audit firms and the NBA, the Netherlands Institute of Chartered Accountants. The NBA has announced that it will include these recommendations in the public debate that it will organise concerning the necessary changes in this sector.
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.