Quality must be leading principle in remuneration policy of audit firms

AFM’s objective: more insight into performance incentives to ensure the quality of statutory audits

The AFM aimed to gain greater insight into how the six PIE audit firms give effect to an appropriate remuneration policy that safeguards the quality of statutory audits. For this reason, we examined the implementation of the NBA measures from the 2014 report In the public interest in the remuneration policies of these firms. These measures prescribe that the quality of statutory audits must play a significant role in the appointment, assessment, remuneration and sanctioning of external auditors.

We also examined how these remuneration policies are applied by assessing and substantiating maturity levels. Most PIE audit firms have implemented the NBA measures in their remuneration policies. We also encountered good examples of monitoring and evaluating these policies. At the same time, the AFM sees opportunities for further strengthening. Based on this review, the AFM presents the following three recommendations.

Recommendation 1: take further steps in the monitoring and evaluation of remuneration policies

It is not only important that an appropriate remuneration policy exists – it must also be monitored and evaluated. This can reveal vulnerabilities in the policy, enabling firms to address these and increase the focus on the quality of statutory audits. We observe a variation in maturity levels across audit firms. Some firms, for example, have a well‑established monitoring process, but could further deepen their evaluations. Management boards generally pay more attention to monitoring and evaluating remuneration policies than supervisory boards. However, the supervisory board can play an important role in stimulating the further development of an appropriate remuneration policy.

Recommendation 2: increase transparency regarding the role of quality in the remuneration policy

Audit firms use different systems to distribute profits among equity partners. Some firms apply an egalitarian profit‑sharing model, while others use differentiated profit rights based on role and responsibility. Certain firms apply a hybrid model combining both approaches. Increasing transparency regarding the classification of equity partners into groups can help promote a quality‑oriented culture. A good practice, for example, is linking the criteria for such classifications to the organisation’s long‑term strategic objectives, of which quality is a key component.

Recommendation 3: make quality a demonstrable determinant in variable remuneration

The quality of statutory audits is an important performance indicator within an appropriate remuneration policy. Monitoring quality enables firms to encourage a learning mindset among external auditors. However, in the assessment and remuneration of external auditors, the quality of statutory audits is not always a demonstrable determinant. Our review shows that this can be achieved in practice.

The AFM expects audit firms to work proactively in the coming period to strengthen their remuneration policies based on these recommendations. In doing so, the sector can continue to build, step by step, a quality‑oriented culture.

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