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AFM explores vulnerabilities in the structure of the audit sector

The Dutch Authority for the Financial Markets (AFM) has conducted a preliminary study into the vulnerabilities in the structure of the audit sector. In this manner, the AFM, in its role as supervisor, wishes to contribute to the debate on the sustainable and consistent audit quality, which is also being conducted internationally. Also based on this report, the Minister of Finance has appointed an advisory committee on the future of the audit sector. This committee will advise on the desired changes to secure the sustainable audit quality in addition to the existing improvement programmes.

Vulnerabilities in the structure of the audit sector can arise due to: an imperfect functioning of supply and demand in the market and harmful incentives arising from revenue, partner and business models of audit firms. The report ‘Vulnerabilities in the structure of the audit sector’, that the AFM is publishing today, concludes that especially the demand side of the market, the revenue and the business model of audit firms contain aspects that could have a negative effect on audit quality.

Exploration of changes

The report explores a number of possible structural changes in the organization of the sector, in order to contribute to a consistent good audit quality. The report does not yet discuss whether the structural strengthening of the audit sector can be incorporated in the current structure of the sector or whether this would require a more fundamental change. The report was compiled based on an extensive study of academic literature and interviews with national and international stakeholders.

Advisory committee appointed

The Minister of Finance will appoint an advisory committee to carry out the discussion about the possible future structure of the audit sector. The objective is to arrive at a substantiated and broadly shared vision about the desirability and feasibility of improvement measures and alternative structural models. The committee on the Future of the Audit Sector advises on the changes that are desirable, amongst others in the structure, to secure audit quality in a sustainable manner.

Root causes

In this context, AFM board member Gerben Everts observes: ‘The audit sector has implemented a number of necessary reforms and improvement measures in recent years. However, in order to really become future proof, further research into the underlying vulnerabilities in the structure of the sector is necessary. It is important to be able to conduct the debate on this matter in a constructive and well-substantiated manner. We wish to contribute to this with our report’.

Research carried out by the AFM in 2017 shows that the implementation of changes at PIE audit firms in order to improve audit quality is too slow. There are differences in the rate of progress, however. The report ‘Doorpakken!’ of the committee in Accountancy Monitoring (MCA) also calls on the sector to accelerate the changes and to pay more attention to the root causes. That this is also the case internationally is clear from the study conducted by IFIAR, the global umbrella organisation for independent audit regulators. This leads to the question whether there could be more root causes which form an obstacle to secure sustainable and consistent audit quality.

Sustainable improvement of audit quality

Based on its role as supervisor, the AFM promotes the sustainable improvement of audit quality by the audit sector. It is important for, for example, investors, banks and suppliers that information about a company's financial performance is correct, comprehensive and gives a true and fair view. Unreliable figures and insufficient audit quality can lead to wrong investment decisions that could ultimately jeopardise jobs, savings and pensions.

Journalists can contact Daniëlle de Jong, AFM Press Officer, on 020 797 2129 or danielle.de.jong@afm.nl.

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