Abolishment, at least partly, of the audit obligation

I see the Audit as an important hygiene factor in the economic traffic. Especially when Accountants perform their job well and keep the public interest adequately in mind. Reality is that this is not always the case. Time and time again, regulators in the Netherlands, the United Kingdom and the United States show that there is something wrong with the quality of the Audit practice. Multiple cases often show that the customer’s interest or self-interest for accountants prevail at the expense of the public interest.

Within this context it is not surprising that there is a discussion about the question how to increase the quality of audits. The fact that a raise of quality is necessary, is beyond dispute. That is why the supervisor of the accounting profession, the ‘Autoriteit Financiële Markten’ (AFM), made many proposals in recent years. Laws have also ensured quality impulses, but also to confirm the relevance of the accounts function. The new Code Corporate Governance, in which both the internal and the external auditor occupies a prominent place, is a proof of one of these impulses. In September 2014 ‘Werkgroep Toekomst Accountantsberoep’, from the industry itself, has separated a readable report. It proposes 53 measures designed to improve the quality of the Audit. Measures which the Monitoring Committee Accountancy recently reflected.

Scientifically, the quality of auditing is an important area of research where many theses and articles have been published. There, the level of quality is measured to the need to and the size of restatements. That is a completely different standard than the one supervisors handle, namely: is there compliance with laws? The National traffic sets quality sets other quality requirements, for example, does the Accountant know how to fulfill his signaling- and warning function, prevent this loss and whether there is other Value added by him or her.

“They then choose an additional hygiene factor which can differentiate them from competitors.”

Professor Bouwens also added insight recently trough a column in ‘het Financieele Dagblad (27 december 2016). In his opinion, abolishing the the statutory audit requirement will increase the quality of audits. Bouwens refers to the work of Shyam Sunder (Yale). Sunder has already warned in 2003 about the fact that the obligation of the audit lead to a decrease in the prices of audits and the controlled companies still can barely distinguish themselves on their quality by choosing the best accountant or totally forgo of the audit by the accountant.

Bouwens continued by stating that the quality of the external accountant is already difficult to detect and that the quality is further clouded by the obligation of the audit. Because companies, thus still Bouwens, cannot distinguish themselves with obligated controlling, they would rather not be controlled anymore and push the price down to bring the size of the audits to an as low as possible level. For the waning audit quality Bouwens has the following solution: “It is much better if companies can signal their quality to the outside world (banks, shareholders, customers, etc.) by choosing the best accountant for the audit of their financial statements, rather that they have to choose from an offer that is more or less if equivalent quality. Thus, we have to let companies choose freely whether they do or do not want to be controlled.”

Within the Dutch context – which Bouwens in his contribution (consciously or not) disregarded – the plea of Bouwens is not new. Both Brenda Westra and me have previously called for the abolition of the audit. I have thereby however placed a nuance, namely at the top of the market – by which I mean at least in the category of listed companies – the legal requirement to audit and the supervision should be retained by the AFM and could be even stricter. But with Bouwens I believe that you could void the statutory audit requirement for a large part of the (SME) market. Which does not affect the fact organizations may opt for a voluntary audit. They then choose an additional hygiene factor which can differentiate them from competitors.

“Legal obligations operate prohibitive and will be bypassed.”

Bouwens’ vision seems to have a liberal and economically driven basis. My starting point is different. I am of the opinion that it is a fiction to suppose the accountant in SME segment can serve the society and public interest in situations where his client does not see or want to have that social interaction and public interest. Such a client wants an accountant that serves his interests and provide him or her added value.

If this is the reality of the market, then that reality also determines the structure of the market of Audit. Legal obligations operate prohibitive and will be bypassed. By clients and their – failing – accountants.