External quality assurance reviewOur audit practice and its registered external auditors are subject to inspection by the AFM. As part of its inspections, the AFM evaluates quality control systems and reviews selected engagements.
The AFM also performs topic-related investigations (thema-onderzoeken) and case-specific investigations following incidents such as the bankruptcy of an audit client. We are also subject to other inspections from our Dutch professional association NBA and from the US PCAOB (Public Company Accounting Oversight Board).
Public companies, whether located in the US or elsewhere, access US capital markets by complying with certain US legal requirements, including the requirement to periodically file audited financial statements with the US Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act, the auditor of those financial statements – whether a US or a non-US auditor – must be registered with the PCAOB, and the PCAOB must regularly inspect the firm to assess its compliance with US law and professional standards in connection with those audits. Our firm is registered with the PCAOB.
The PCAOB and the AFM performed their second joint inspection at our firm in the first half of 2016. The PCAOB inspected three files of which two 2014 audit files jointly with the AFM.
We benefit from the inspections by the PCAOB and the AFM. We thoroughly evaluate points raised during the inspection in order to identify areas where we can improve audit quality. Together with our AQR process, external inspections help us ensure the highest quality for our audits and related control processes, in the interest of investors and other stakeholders.
Information on the PCAOB and the AFM can be found on their respective websites www.pcaobus.org and www.afm.nl.
PCAOB - Report on the joint inspection
When this Transparency Report was written, the PCAOB had not yet sent us its final report on the inspections of the first half of 2016. They did provide us with their initial findings through their comment forms relating to the files inspected and the system of quality control. We have provided our responses to these findings, including the (remedial) actions we have taken, and will take going forward, to learn from the findings and to enhance the quality of our work.
AFM - Regular quality assurance inspection
In November 2015 the AFM started their inspection of our quality control system, which is part of their total 2014/2015 audit file inspection cycle. In the first half of 2016 the AFM inspected four 2014 audit files, two of which jointly with the PCAOB. The AFM has recently provided us with their initial findings on two of the four inspected files, which we will comment on in due course. We have not yet received the written initial findings on the other two inspected files. The AFM planned inspections on four 2015 audit files in the second half of 2016.
AFM – Enforcement process 2013/2014 inspection
In March 2016, the AFM imposed a substantial fine, of € 2,230,000 on us for three 2012 audit files that were found to be substandard. The AFM concluded that we as a firm had violated its duty of care. In our view, we as a firm (and the profession in general) are in need of more guidance as to how exactly to interpret the laws and regulations governing this duty of care. Therefore, we felt obliged to pursue this further and to file an objection against the AFM’s decision. In July we submitted a written objection to the AFM. We are now awaiting their decision.
Other theme-specific inspections by the AFM
Follow-up of corruption theme investigation
During 2015/2016 the AFM continued their theme-specific investigation into the audit risks at clients who face a relatively high risk of corruption and into the audit approach taken at such clients.
More specifically, the AFM started a focused review of the consultation process and in that regard inspected two consultations related to corruption. We received feedback from the AFM following this inspection which we followed-up in our quality system. We did not yet receive a written feedback from the AFM.
Change and improvement measures
In April 2015, the AFM started another theme-specific investigation at the Dutch PIE audit firms, including ours. The AFM’s main goal with this investigation is to monitor the design of the implementation of measures we have taken in response to the findings and conclusions of the latest regular AFM inspection in 2013/2014, and to monitor the implementation of the NBA’s measures mentioned in the September 2014 report “In the public interest” of the NBA working group “Future of the auditing profession”.
We were pleased with the outcome of the first final report, dated 7 October 2015. We received an overall result of 4.1 (on a scale from 1 to 5), which made us realize that we were on track, but had not fully finalized the first “design” phase. This did not come as a surprise, as we have chosen a fundamental approach for improvement, focused on delivering the right conditions in the organization to enable a quality driven culture for the auditor of the future.
According to the AFM, the way in which we flesh out the learning organization through activity-based learning, as well as our issue and target group oriented approach to cultural research and behavioral change, are “good practice” in the sector.
In 2015/2016 we focused on the topics that needed follow-up: a structured root cause analysis approach, in control, our sanctioning policy and the translation of the quality-oriented vision into the business processes and procedures and actual desired behavior by employees.
We adjusted our sanctioning policy towards stimulating and valuing our people in a balanced way. When quality findings occur we perform a root cause analysis to focus on the “why” of the error instead of “what” or “who”. We also recognize, and aim to learn from, positive events.
In October 2016 the AFM will visit Ernst & Young Accountants LLP to perform the second phase of their monitoring inspection. They will have interviews with executive and Supervisory Board members and have two focus sessions with our employees. In this way the AFM reviews our quality driven culture and in control aspects.
Other case specific inspections by the AFM
Following a case specific inspection in 2012 a disciplinary meeting with the AFM was held. Currently no case-specific inspections by the AFM are open. In those cases where we file an incident report with the AFM we investigate the relevant facts and circumstances and the root causes of such cases. We regularly inform the AFM on the progress and outcome of such internal investigations. The AFM will continue to share with us their observations on the internal investigations which we incorporate as part of our ongoing improvement initiatives.
NBA measures “In the public interest”
Based on the report entitled “In the Public Interest” (In het Publiek Belang) published in September 2014 by an NBA working group, the NBA adopted its “53 measures”. These measures, which are intended to ensure the pre-eminence of the public interest in the audit profession and to foster audit quality, are fully aligned with our own priorities. Many of the measures require action by audit firms, especially those with a PIE-license (OOB-vergunning), which includes our firm.
We report regularly on our progress in the implementation of these measures, on our website and in the NBA monitor. What follows is a brief summary, per subject area, of the current status of implementation. We refer to our website and NBA monitor for more detailed information.
The NBA exhorts audit firms to foster the right culture in their organizations and to measure this culture periodically (measure 1.4). At our firm, we periodically measure our culture at different levels and elements. Our method for measuring elements of our culture aligned with the status of our change journey was rated “good practice” by the AFM in October 2015. In September 2016 we performed a specific survey aligned with our strategic focus points for the coming two years. The outcome will be embedded in the implementation of this strategy.
Audit firms are required to have a Supervisory Board at the holding level of their organization in the Netherlands, which board should have various specifically mentioned attributes and competencies. Our Supervisory Board started its work on 1 July 2015. In 2015/2016 the Supervisory Board invested significant time in onboarding. We comply with the measures in this area and will focus in FY17 on further embedding the Supervisory Board in our processes. We embrace the Supervisory Board as an important stakeholder to monitor the quality of our organization.
Performance review and remuneration
These measures deal with the right conditions and incentives in policy areas such as performance reviews, promotions and remunerations of our partners and employees. We have re-evaluated our sanction policy together with the upgrading of our root cause-analysis and learning organization. A clawback regulation was adopted and came into effect from the financial year 2015/2016. Of the profit share to be distributed to individual members who are subject to the clawback regulation, an average of one-sixth will be withheld unless the member concerned has opted to allot alternative financial means to the clawback fund, all in accordance with the terms of the clawback regulation.
The measures in this area relate mainly to the use of the new auditor’s report and auditors’ presentations in shareholders’ meetings. We fully comply with these measures.
These measures mainly relate to the definition of, and reporting on, quality indicators, as well as to Engagement Quality Reviews (EQRs) and to remediation actions in response to Audit Quality Reviews (AQRs). We have re-evaluated our current remediation process and fine-tuned it from the learning organization’s perspective.
The Supervisory Board is required to monitor the progress of implementation of the “53 measures” and audit firms are required to report on this progress in their Transparency Report. We comply with these measures. During fiscal year 2015/2016, we discussed the progress of implementation of the NBA measures with our Supervisory Board.
Dutch municipalities and provinces are subject to so-called SISA (Single Information, Single Audit) reporting requirements to the Dutch Ministry of the Interior and Kingdom Relations regarding specific contributions they receive from central government.
SISA includes the attachment of a detailed annex to municipalities’ financial statements, which is subject to external audit. In July 2015, the internal audit department of the Dutch Ministry of Finance inspected the 2014 Financial Statements SISA annexes of a number of municipalities and provinces, including six audited by our firm. The inspection concluded that for all these six files, the audit had been performed in an adequate way regarding both the financial statements and the funding information.
Quality Review by the Dutch Educational Inspectorate (Onderwijsinspectie)
The financial information of Dutch publicly-funded educational institutions – both financial and funding information – is subject to audits. The audit work required is described in detail in the “Education Audit Protocol”. The Dutch Educational Inspectorate performs annual reviews of some of our audit files in order to determine if we performed our audits adequately and in compliance with the Education Audit Protocol. In November 2015, the Educational Inspectorate finalized 15 reviews of eight educational institutions from the year 2014 and concluded that the informational reviews were sufficient.
The Dutch Educational Inspectorate also performed a re-performance inspection on compliance with the Dutch Executives Pay (Standards) Act (Wet Normering Topinkomens, WNT). The inspection yielded several findings, which were discussed with the Inspectorate. Due to the complexity of the regulations concerned we implemented a WNT expert panel and several other improvement measures.
The Educational Inspectorate also performed a specific inspection of an institution additional to their inspection of the institution itself. This inspection resulted in comments that have been remediated by the institution.
Quality reviews by Dutch Healthcare Authority (NZa)
The NZa performs yearly reviews of the implementation of the Healthcare Insurance Act (Zorgverzekeringswet, ZVW) and the Exceptional Medical Expenses (Compensation) Act (Algemene Wet Bijzondere Ziektekosten, AWBZ). In 2015/2016 they reviewed four audit files of health insurance companies on the ZVW and four audit files of Health Offices (zorgkantoren) on the AWBZ. No findings were noted.
Quality reviews by National Government Audit Service (ADR)
The ADR is part of the Dutch Ministry of Finance and can perform quality reviews at Ministry’s request. In 2015/2016 the ADR reviewed a DBBC audit report and noted no issues.
In 2015/2016 the Dutch Ministry of the Interior and Kingdom Relations announced a WNT review, to be performed by the ADR. The review will be performed on a selection of audit firms and institutions. The ADR will perform a limited file review in autumn 2016.