The Dutch accountancy sector: time for change

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“These are turbulent times within the accounting sector.” This is one of the headlines that have been published around the Dutch accountancy field in the past few years. Last year, the Minister of Finance appointed two quartermasters to guide the sector through these “turbulent” times. What was the reason for their appointment? And what is the task and progress of the quartermasters? In this article, we will update you on these developments within accountancy!

Concerns about the quality of statutory audits

Let’s start at the beginning: November 21, 2018. On that day, the Dutch Authority for the Financial Markets (AFM) published a report in which they exposed vulnerabilities in the structure of the accountancy sector for public-interest entities [1]. In the report, the AFM concludes that there are several sources of market failure lurking within the current structure of the accountancy sector. We speak of a market failure when market forces in the sector lead to insufficient audit firms serving the public interest. 

The AFM identifies five structural features that trigger market failure. The first three features have to do with the fact that the current earning, partner, and business model of the accountancy organizations can give the accountant wrong incentives. The AFM indicates that audit firms may be less critical in their statutory audits because they are appointed and paid by the organizations they audit. The AFM also sees a risk in the decreasing degree of independence of audit firms due to long contract terms, connectedness, and the provision of non-audit services to companies to be audited. Moreover, the AFM considers the partner model as a potential source of market failure. An accountant who is also a partner will want to serve the public interest as well as commercial interests. The partner thus takes on different roles, due to which the audit quality can be harmed. 

In addition to these three structural features, the AFM mentions the supply and demand side of the accountancy sector. On the one hand, a statutory audit is so-called credence good, a good whose quality is difficult to observe. This creates a potential market failure on the demand side of the accountancy sector. On the other hand, the AFM argues that market failures on the supply side can halt competition on audit quality.

All in all, the AFM states that the current structure of the accountancy sector leaves room for market failures, which can negatively affect the quality of statutory audits.

On the same day as the publication of the AFM report, the Minister of Finance, Wopke Hoekstra, sent a letter to the House of Representatives [2]. In response to the report by the AFM and a previously published report by the Monitoring Committee Accountancy (MCA), a committee set up by the NBA [3], Hoekstra wants to set up an independent committee. This committee will conduct further research and publish advice on increasing the audit quality and how possible legislative changes could bring this about.

The two quartermasters and their tasks

In January 2020, the Future Accountancy Committee (CTA) reported on their findings in the report “Vertrouwen op controle” [4]. Furthermore, the committee makes 22 recommendations to raise the level of statutory audits on three points: the individual audit process, quality control within audit firms, and other factors (such as culture and remuneration). Based on the report, the Ministry of Finance comes up with a package of measures. Some examples of measures are shifting supervision to the AFM, drafting criteria for measuring quality, and improving internal supervision within audit firms. In addition, it is also intended to appoint a quartermaster to keep an eye on the progress of the measures.

“In the report, the AFM concludes that there are several sources of market failure lurking within the current structure of the accountancy sector.”

In April 2020, Hoekstra announced the names of the two quartermasters: Marlies de Vries (assistant professor Accounting, Auditing, and Control at Nyenrode Business University) and Chris Fonteijn (former chairman of the Dutch Authority for Consumers and Markets board) [5]. Together they have three and a half years to fulfill their task as quartermasters. This task is twofold. On the one hand, the quartermasters will use their terms to carry out some of the steps in the package of measures of the Ministry of Finance. This includes developing audit quality indicators (AQIs), conducting research into audit-only and joint audit models, and experimenting with the intermediate model. You can read more about these different models below. On the other hand, the quartermasters are also expected to monitor the progress of the overall package of measures and inform the minister about it. 

The first results

We are now more than one year later; a good time to consider the progress of the quartermasters. In September 2020, de Vries and Fonteijn shared their action plan [6]. They divided their task into five themes: monitoring progress, developing AQIs, researching various structural models, safeguarding culture change, and improving audit quality. Developing AQIs is a high priority. Consequently, four working groups were immediately launched in September 2020, each focusing on a different issue. In the meantime, another working group is setting up an experiment with the intermediate model. This is a model in which an expert third party is involved in the appointment and management of the auditor, to promote independence and improve the quality of the audit. Furthermore, preparations were made for the research on the joint audit model and the audit-only model. The audit-only model means that audit firms are no longer allowed to offer non-audit services to the organizations to be audited. In a joint audit, two audit firms become responsible for the audit report of one company or organization. The idea behind this is that the two audit firms keep a close eye on each other, which increases the quality of the audit.

The quartermasters also tell about their progress in the field of cultural change in their first progress report [7]. De Vries and Fonteijn indicate that they want to focus in the coming period on aspects that could hinder acting in the public interest. Examples include limited planning and budget, strongly controlling audit clients, the fear of internal and external reviews, and the dislike of additional investigations that hinder a smooth audit process. In their progress report, de Vries and Fonteijn also pay extra attention to the expected increasing workload due to the corona pandemic, with the intention to keep a close eye on this.

Finally, the quartermasters share their first result: the NBA obliges the accountant to provide more insight into what has been done and seen during the process in the auditor’s report. The results of the investigations into the joint audit and audit-only models are expected in the autumn of 2021. The intermediate model experiment still requires some time.

Over the next two-and-a-half years, quartermasters De Vries and Fonteijn will continue to focus on the necessary changes in the accountancy sector. Do you want to be kept informed of their progress? Follow their LinkedIn page! [8]