In its report ‘Sector in View’, the Netherlands Authority for the Financial Markets (AFM) presents a factual analysis of the market for audit firms over the period from 2010 to 2014. The AFM observes five notable developments in the market:
- The number of licensed audit firms has declined by 13 per cent
- Quality monitoring at PIE audit firms relatively less frequent than at non-PIE firms
- Number of audit firms finding suspicions of fraud at audit clients has doubled
- Market share of statutory audits performed by non-PIE audit firms rises six per cent
- Price pressure visible for statutory PIE audits by Big 4 audit firms after period of rising prices
This analysis uses the findings of the AFM Audit Firms Monitor (Monitor), for which licensed audit firms provide information on themselves and their statutory audits.
The AFM observes the following five notable trends:
- The number of licensed audit firms has declined by 13 per cent: from 475 in 2010 to 413 in 2014. The decline is partly due to the higher number of requests for cancellation of licences by audit firms that do not perform statutory audits. The AFM has been given the power to cancel a licence if a firm has not carried out a statutory audit in the preceding three years. The AFM expects the number of audit firms that do not carry out statutory audits to decline further in the near future.
- Quality monitoring at PIE firms relatively less frequent than at non-PIE firms: the percentage of statutory audits at non-PIE audit clients subject to an EQCR in 2014 was 15.8 per cent for the PIE audit firms and 27.5 per cent for the non-PIE audit firms. Since the working group set up by the Netherlands Institute of Chartered Accountants (NBA) on the future of the accountancy profession in September 2014 proposed an increase in the number of EQCRs, the AFM expects to see an increase in the percentage of statutory audits subjected to an EQCR.
The AFM notes that while non-PIE firms conducted an internal quality monitoring of 13.5 per cent of their statutory audits in 2014, for the PIE firms this figure was 1.9 per cent. The AFM expects audit firms to carry out more internal quality monitoring as a result of increased pressure on the quality of statutory audits.
- The number of audit firms finding suspicions of fraud at audit clients has doubled: from 16 audit firms in 2010 to 31 in 2014. Under new European regulation, from mid-2016 PIE audit firms will be obliged not only to report cases of fraud that have not been adequately followed up, they must also report other irregularities that have not been adequately followed up by a PIE audit client. The AFM accordingly expects to see an increase in the number of reports of such irregularities at PIE audit clients in future.
- Market share of statutory audits performed by non-PIE audit firms rises six per cent: from 28 per cent in 2010 to 34 per cent in 2014. This increase is mainly at the expense of the market share of the four largest audit firms, known as the Big 4 (from 56 per cent in 2010 to 52 per cent in 2014). The PIE audit firms state that they are resigning from more risky audit clients, for example in cases where the internal control environment is limited in scope or where the fee agreed is not sufficient for a decent quality audit to be carried out. These audit clients are also approaching non-PIE firms. The AFM sees conducting these statutory audits with adequate quality as a challenge for the non-PIE firms.
- Price pressure visible for statutory PIE audits by Big 4 audit firms after period of rising prices: the average fee for a PIE audit performed by the Big 4 audit firms has risen from € 106,000 to € 161,000 between 2010 and 2013, with revenue remaining stable. In the Monitor for the period 2013-2014, the AFM sees a decline in the average fee for a statutory PIE audit to € 139,000. There has also been extensive coverage in various media reporting the decline in the average fee for a statutory PIE audit in 2014-2015. The potential reasons for this include more aggressive quotations by audit firms as a result of more intense competition. In some cases, the review of the scope of the audit has also played a role. Many PIE audit clients changed their audit firm last year, in anticipation of the mandatory rotation of audit firms that will apply in the Netherlands from 1 January 2016. We may indeed be seeing the first effects of this rotation. The more intensive competition is to be welcomed. At the same time, this must not threaten the investment in audit quality that the audit firms need to make. The AFM will continue to monitor the development of average PIE audit fees over the coming years.
The Monitor is one of the supervisory instruments used by the AFM to carry out its continuous supervision of audit firms. Through the Monitor, audit firms provide information to the AFM on an annual basis. The AFM uses this information for its supervision of the audit firms. Under European legislation, with effect from 2016 the AFM will have to produce a report on developments in the accountancy market at least every three years. For this reason, the supervisor will continue to request audit firms to provide information through the Monitor in the years to come.
Dashboard 2015 Changes and improvements
The AFM expects to publish a report on 15 October with a dashboard on the progress of the changes and improvements introduced by PIE audit firms, with reference to the NBA report ‘In the public interest’ and the AFM report on the quality of statutory audits by the Big 4 audit firms of late September 2014.
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.