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Decision CBb: audit firms not legally accountable for quality of statutory audits

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Current legislation does not provide scope for holding audit firms legally accountable in case of serious deficiencies in the audit of financial statements. This follows from a decision of the highest administrative court in appeal proceedings that were initiated by the Dutch Authority for the Financial Markets (AFM) in order to obtain more clarity concerning the interpretation of the duty of care of audit firms. The AFM urges the Ministry of Finance to amend legislation.

in short - bullets - •	AFM's appeal regarding the interpretation of the duty of care unfoundedAFM's appeal regarding the interpretation of the duty of care unfounded

In essence the case concerns the interpretation of the duty of care. This is a matter of principle. The AFM is not allowed to determine a breach of the duty of care of an audit firm solely on the basis of serious shortcomings in the statutory audit. The AFM has to demonstrate specifically where the audit firm's quality policy fails. The Trade and Industry Appeals Tribunal (College van Beroep voor het bedrijfsleven (CBb)) thus follows the approach of the Rotterdam District Court. This means that the AFM's appeal is unfounded. As a result, the fines imposed on EY and PwC have been cancelled.

The decision has an impact on the effectiveness of supervision

The decision has an impact on the effectiveness of supervision, as this means that the AFM will continue to supervise the quality of statutory audits, but no longer has adequate enforcement possibilities to hold audit firms specifically legally accountable regarding the quality of their statutory audits. It is precisely this quality that concerns the public interest. After all, users of the financial statements, such as investors and creditors, benefit from high-quality audits.

Amendment of legislation necessary

It is good that there is now clarity regarding the interpretation of the law. The AFM is in discussion with the Ministry of Finance concerning the consequences of the CBb’s decision and how this interpretation of the law relates to the legislator's objectives at the time of the introduction of the duty of care in 2006. The AFM continues to hold audit firms accountable regarding the quality control system. However, the fact that audit firms can no longer be held directly legally accountable specifically regarding the quality of their statutory audits is a problem. This is possible in the United States and the United Kingdom, among other places. It is estimated on the basis of this decision that it will be difficult in practice to establish a direct and demonstrable connection between shortcomings in the audits and specific omissions in the quality policy that caused these. The AFM therefore urges the Ministry of Finance to amend the legislation.

Background to the legal proceedings

The AFM imposed fines on Deloitte, EY, KPMG and PwC on 16 March 2016. The AFM took the view that these audit firms had not complied with their duty of care due to serious shortcomings in multiple statutory audits. EY and PwC appealed against the fine and their appeal was upheld by the administrative court on 20 December 2017. The AFM appealed at the CBb against this on 31 January 2018.

Public interest of statutory audits

Audit firms are authorised by law to carry out statutory audits. A statutory audit is a mandatory audit of the financial reporting of an enterprise or institution by an audit firm. The purpose of statutory audits is for society to be able to rely on financial statements provide a true and fair view of the financial situation of an undertaking or institution.

For further information, journalists may contact Daniëlle de Jong, press officer of the AFM, on +31 20-797 2129 or danielle.de.jong@afm.nl.

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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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