Cooperation in the execution of statutory audits requires safeguards

1 Research into ways of collaboration by accountancy organizations with a regular license

1. Development in cooperation among regular license holders gives rise to exploratory research The Authority for the Financial Markets (AFM) observes a development among accountancy organizations with a regular Wta license that they are orienting themselves towards or have already entered into collaborations with other accountancy organizations or offices.1 They aim thereby, among other things, to strengthen the quality of their statutory audits. 1 In this report, accountancy organizations refers to offices with a regular Wta license. With The AFM has been directly supervising accountancy organizations with a regular license since January 1, 2022. To gain more insight into how the collaboration is structured and what the opportunities and risks are of it, the AFM conducted an exploratory research among regular license holders. accountancy offices refers to offices without Wta license. Report Cooperation in the execution of statutory audits requires safeguards September 2022

Report - September 2022 2 1.1 Insights into forms, opportunities and risks of collaboration The AFM conducted an exploratory research among 16 accountancy organizations. The AFM did not test the research against (legal) standards. She has thereby gained insight into the opportunities of collaboration, the different ways in which they design the collaboration, the quality risks that play a role in this and the safeguards that accountancy organizations put in place for this. These insights can be used by (future) collaborating accountancy organizations to properly design a collaboration and thus ensure the quality of statutory audits (further). 1.2 Guide In this report, the AFM presents the obtained insights based on the red threads from the research. In the yellow boxes, the AFM has included practical examples. The practical examples describe a concrete application by the investigated accountancy organizations of the requirements from the Act on supervision of accountancy organizations (Wta), the Decision on supervision of accountancy organizations (Bta) and the Regulation on independence of accountants in assurance engagements (ViO). Chapter 2 describes the opportunities of cooperation and the way in which the cooperation is designed by regular license holders. Chapter 3 describes the quality risks and quality safeguards in extensive cooperation. In Chapter 4, the AFM's view on cooperation by accountancy organizations is included. Finally Chapter 5 describes the research justification. 2. Regular license holders see opportunities to strengthen the quality of statutory audits through cooperation and work in different forms of cooperation The exploratory research shows that accountancy organizations seek cooperation to ensure the quality of statutory audits (continue) to guarantee. 2 As a result of the increasing complexity of audit clients and their environment, the increasing complexity of laws and regulations and, for example, the 2.1 Three important opportunities to strengthen the quality of statutory audits Regular license holders see three important opportunities in cooperation.

1. Economies of scale. With sufficient scale, the accountancy organization is able to make investments that promote the quality of the execution of statutory audits. Think here of quality investments in audit software, audit methodology, audit tooling, standardization and training. In 2021, the AFM concluded based on data analysis that among accountancy organizations that perform less than 15 statutory audits per year the chance that the quality of statutory audits falls short is significantly higher. For accountancy organizations that perform less than 15 statutory audits per year, cooperation to achieve sufficient scale could be a possible solution to ensure the quality of statutory audits (further).
2. Building up sufficient expertise, experience and specialization. Small accountancy organizations are not always able to be, in the event of increasing complexity of the field in which the accountant operates2 expert, experienced and specialized in all parts of the annual audit. For these accountancy organizations, cooperation can provide a solution. The accountancy organization can then use the expertise, experience and specialization present within the collaboration and does not need to build it up solely within its own accountancy organization.
3. Reducing independence risks. Due to the broad range of services that accountancy organizations can provide to a audit client, independence risks can arise, such as the threat of self-review in the convergence of audit and other services. Through cooperation where the regular license holder performs statutory audits and the other accountancy office provides other services, assurance activities are separated from other services. Cooperation can then be an opportunity to reduce these independence risks. increase or changing (IT) risks.

Report - September 2022 3 Figure 1: Accountancy organizations differ in the extent to which they lend staff and the extent to which audit clients are referred 2.2 Regular license holders give the collaboration in different ways The research shows that accountancy organizations collaborate in different ways. These forms of cooperation fall roughly into two main forms:

1. In 10 of the 16 investigated accountancy organizations, cooperation is with a variant in a less extensive form. In this form, the cooperation primarily focuses on the referral of a statutory audit to the regular license holder. The regular license holder then performs statutory audits independently.
2. In 6 accountancy organizations, there is a variant where cooperation is extensive. In this form, use is made to a greater or lesser extent of partner offices3 or independent professionals 4 for the execution of statutory audits. Less extensive form of cooperation In the less extensive form of cooperation, a (strategic) office refers a statutory audit to the regular license holder. The regular license holder then generally performs statutory audits independently and agrees with the referring office that the license holder does not offer other services to the relevant audit client. These agreements are mostly agreed verbally and are based on trust. 3 Also referred to as participating offices or member offices. 4 A registered accountant or accountant-administration consultant with certification authority. Figure 2: Less extensive form of cooperation In a few cases, these agreements between the regular license holder and the referring office are recorded contractually. This is mainly a formal confirmation of the regular license holder that it will not provide other services to the relevant audit client(s). Based on the exploration, there does not seem to be any payment of fees or the provision of counter-services by the accountancy organization for the introduction of audit clients. Advantages of less extensive form The hard separation between statutory audits and other services forms in this variant an important safeguard for reducing independence risks as a result of convergence of services. In this variant, the execution of statutory audits is indeed placed under the regular license holder and the other services under the referring office. Figure 1: Accountancy organizations differ in the extent to which they lend staff and the extent to which audit clients are referred

Report - September 2022 4 Regular license holders experience a good quality of the provided audit information through the involvement of the referring office from other services. For example, when the referring office supports the audit client in preparing the annual accounts, the provision of audit information or the answering of questions from the external accountant. As a result, less adjustment is needed during the annual audit by the regular license holder and statutory audits can be performed more efficiently and effectively. Disadvantages of less extensive form Regular license holders also recognize disadvantages. The license holders experience, for example, sometimes pressure from referring offices. For example, regular license holders experience that referring offices 'sit in the client's chair' and that they are critical of the amount of work performed by the external accountant. This leads to, for example, sometimes discussions about sampling, audit differences or over the processing time of statutory audits. In practice, this less extensive form of working together is also called 'audit only'. Here it may be that the relevant regular license holder only provides assurance services or that the regular license holder as part of her full-service portfolio offers audit-only services. In the latter case, the relevant regular license holder has the possibility to offer other services, but does not do so due to the agreements made with the referring office. The regular license holder can also have been established as an audit-only label of a full-service accountancy organization. These regular license holders have little to no own staff employed from the audit-only label and make use of staff from the full-service accountancy organization for the execution of statutory audits. Extensive form of cooperation In the extensive form of cooperation, the regular license holder lends in more or less extent external accountants and staff from partner offices for the execution of statutory audits. Figure 3: Extensive form of cooperation Here it happens that the regular license holder has no employees and lends external accountants and staff from partner offices. It can also be that the audit team of the regular license holder is supported with staff from partner offices. The 6 accountancy organizations with an extensive form of cooperation perform approximately 500 statutory audits annually, whereby the number of statutory audits per regular license holder varies from 8 to 180. The number of participating offices or independent professionals varies from 2 to 22. The distribution of costs and revenues of statutory audits differs. For example, there are accountancy organizations that receive a fixed percentage of the turnover of the executed statutory audits from the participating offices. In other cases accountancy organizations receive from partner offices an annual fixed fee and calculate the costs and revenues through to the relevant partner office. In addition, partner offices receive as a shareholder a part of the result of the accountancy organization. Advantages of extensive form In this extensive form of cooperation, the partner office can (continue) to perform statutory audits, whereby these are supported by the central organization of the regular license holder with quality-promoting measures. These quality-promoting measures consist, for example, of facilitating an electronic audit file, including standardized and office-specific work programs and templates, audit tooling, the facilitation of training and technical meetings or the support of a task-oriented quality reviewer. In this form, the partner office thus enjoys the benefits of the scale of the collaboration. In addition, the partner office can make use of the possibly present expertise, experience and specialization at partner offices within the collaboration. Disadvantages of extensive form This extensive form of cooperation where external accountants and other staff are lent in more or less extent, also carries risks. How does the regular license holder, for example, keep grip on the lent staff or how is the independence of lent staff guaranteed? For these risks, quality safeguards are needed. 3. Extensive form of cooperation requires quality safeguards The research shows that the extensive form of cooperation entails quality risks that can be mitigated with safeguards. The way in which and the depth of the various safeguards differs between the investigated accountancy organizations. Below follows a description of the (non-exhaustive) risks and the safeguards put in place for them by the accountancy organizations with an extensive form of cooperation. The mentioned safeguards do not form an exhaustive list and serve primarily as examples and handles for possible safeguards in (future) forms of collaboration. 3.1 Cooperation also brings risks with it The AFM notes that cooperating with other accountancy offices, where external accountants and other staff are lent, besides opportunities also carries risks in the area of insufficient expertise, independence and uniform application of the system of quality management. These risks can have impact on the quality of statutory audits. Risk of insufficient expertise Participating offices usually do not have a Wta license and mostly perform other services (compilation, advice) for a client. This creates an increased risk that fewer measures are taken to ensure the expertise of the accountants and other staff for the execution of statutory audits, that staff have less experience with the execution of statutory audits and that the audit mindset is missing. Risk of 'apparent' independence In this extensive form of cooperation, statutory audits are performed by the regular license holder and other services by the participating office. If the regular license holder lends external accountants and staff from the participating office for the execution of statutory audits or if there is a network within the meaning of the Wta and the ViO, there may be a convergence of services. This convergence of services may not be visible to the user of the annual accounts, because it appears that the regular license holder only performs statutory audits. Risk of insufficient uniform application of the system of quality management Various participating offices participate in the cooperation. This creates the risk that the accountants and staff of these offices (partially) follow their own working methods and do not (fully) follow the quality management system of the Wta license holder. The AFM draws attention to this from accountancy organizations that have or intend to enter into a form of collaboration. Safeguards put in place To mitigate the quality risks, the investigated accountancy organizations have put in place various safeguards. The following safeguards are predominantly applicable to this form of collaboration: • Safeguards in entering into the cooperation that relate to expertise • Safeguards in lending staff that relate to independence • Safeguards for a uniform application of the system of quality management

Report - September 2022 6 3.2 Safeguards in entering into the collaboration that relate to expertise Requirements for admission and expertise The accountancy organizations with an extensive form of cooperation set requirements for participation of the accountancy office or independent professional in the cooperation. They require, for example, screening of candidate offices or independent professionals based on expertise (diplomas, continuing education, technical qualities, CV), references and motivation. They also include completed files and budgets in the assessment, or there is a probation period for admission. In addition, they may require membership in a professional association (such as the SRA). A participating office may also be required to join the general management of the accountancy organization. This results in a joint management by the participating offices which promotes a sustainable relationship. Agreements recorded on the cooperation and the separation of services The accountancy organizations with an extensive form of cooperation record made agreements in a (cooperation) agreement. Also some accountancy organizations conduct a 5 With external accountants working for an accountancy organization, salaried accountants are meant. With external accountants associated with an accountancy organization, accountants are meant a structured periodic evaluation of the collaboration. Two of the six accountancy organizations have with the participating offices agreed that the accountancy organization performing the audit does not run commercial risk. That lies with the referring party. Reducing commercial incentives can contribute to the focus on quality. Every accountancy organization with an extensive form of cooperation creates a separation between assurance and other services. The accountancy organizations provide assurance services and other services are performed by the partner offices. These agreements are mostly recorded in the cooperation agreement. 3.3 Safeguards in lending staff that relate to independence Lending of external accountants and staff requires additional safeguards for the independence The accountancy organizations lend in more or less extent staff from the participating offices for the execution of statutory audits. Mostly the external accountant works for one of the participating offices and is associated5 with the umbrella entity with Wta license. As staff is lent, this requires safeguards because statutory audits are then performed by staff of participating accountancy offices (which usually do not have a Wta license). The accountancy organizations record independence declarations at organization, employee and file level. In statutory audits within the network, there may be a strengthened procedure with a separate memorandum. In a few cases, the compliance officer performs annual assessments for all statutory audit files regarding integrity and independence. Also, some accountancy organizations plan to conduct internal quality investigations in the area of independence. In addition, an annual statement of other services of the participating office is drawn up. meant those who perform controls based on another agreement than an employment contract with the accountancy organization. Practical example: An accountancy organization follows a standardized admission process An accountancy organization follows for the admission process a standardized work program: • Consulting public registers • Conducting an introductory interview focused on motivation, reputation and risk profile • Taking note of additional documentation, such as internal and external assessments and incidents • Conducting file reviews The board receives advice on this. For admission, a unanimous decision is then required.

Report - September 2022 7 3.4 Safeguards for a uniform application of the system of quality management Cooperation requires involvement of the board and an in-depth evaluation of the system of quality management The accountancy organizations require permission from the board for the acceptance of statutory audits. The board then appoints an external accountant for the execution of the assignment. The investigated accountancy organizations use various safeguards to monitor the quality of statutory audits. Mostly use is made of a task-oriented quality assessment (OKB). At some accountancy organizations, an OKB is assigned to every new audit client. On average, an OKB is used on a quarter of the executed statutory audits. In some cases, the accountancy organizations also use file coaching. It is striking that the OKBs are predominantly performed by external parties. An OKB performed by an external party can provide a fresh perspective and lead to new insights. Accountancy organizations also facilitate training and technical meetings to further develop the knowledge of the accountants. Conduct an in-depth evaluation of the system of quality management All accountancy organizations perform the mandatory annual evaluation of the system of quality management (art. 9a Bta). Here differences are visible in the depth of the evaluation of the system of quality management. For example, the majority of accountancy organizations evaluate the outcomes and points for improvement from the internal quality investigation (IKO). Accountancy organizations can benefit from the good practices identified by the AFM in the IKOs at OOB accountancy organizations. A single accountancy organization also pays attention in its evaluation to the quality and the independence of the participating offices and deployed staff. Practical example: The audit team structurally assesses the team composition and the OKB tester tests the actual team composition The accountancy organization has a standardized form for the assessment of the independence and competence of the team members. She assesses the CVs of the involved team members and a copy of the continuing education. This form is fixed in the audit file. In the event of changes in the audit team, the audit team must report this to the compliance officer. The task-oriented quality reviewer (OKB) also tests the adequacy of the recording and whether the assessment corresponds to the actual team composition. Practical example: An accountancy organization evaluates the cooperation structurally An accountancy organization evaluates annually the system of quality management based on an evaluation plan. This is a structured work program m