Exploration of the Approach to (Dis)continuity in Statutory Audits — AFM — NL

REPORT ANALYSIS
Exploration of the Approach to
(Dis)continuity in Statutory Audits
In brief - External auditors generally give serious attention to the approach to (dis)continuity in statutory audits, as appears from our exploration. Our data analysis indicates an upward trend in the number of material uncertainty paragraphs included in audit reports for audit clients that later went bankrupt. The AFM would like to see this upward trend continue.
It remains important that external auditors continue to pay sufficient attention to the subject and continue to work on strengthening their professional-critical attitude. We therefore provide a number of expectations for auditors (organizations).
OCTOBER | 2025

© AFM 2025 | Exploration of the Approach to (Dis)continuity in Statutory Audits 2 Summary Bankruptcies can have a major impact on all stakeholders in a company. The number of bankruptcies continued to rise in 2024 and is expected to increase rather than decrease, due to increasingly rapid technological and societal developments. It is therefore of social importance that external auditors, in the statutory audit of an annual report, obtain sufficient and appropriate audit information to be able to evaluate whether the going concern assumption used by the management is suitable. In the past, this has not always happened. This has led to extra social attention for (dis)continuity in statutory audits. Discontinuity is an important subject; increasing awareness of discontinuity is a priority for the AFM. This is the reason for the AFM to conduct an exploration in 2025 into the manner in which external auditors take responsibility regarding the audit of (dis)continuity, as we also announced in the AFM Agenda 2025. For this exploration, we conducted a literature and data analysis, and held 25 interviews with various stakeholders. We did not conduct file research. Based on the interviews held, our impression is that external auditors in statutory audits generally give serious attention to the challenges involved in evaluating the suitability of the going concern assumption used. These challenges, also widely recognized by the sector, are complex. Interviewees mention, for example, the forward-looking nature of the audit information; this forward-looking nature makes testing this information more difficult. Another example is the rapid and sometimes unforeseeable developments in the outside world. Analysis of data we receive from audit firms indicates an increase in the number of cases where a material uncertainty paragraph has been included in audit reports for audit clients that later went bankrupt. The AFM would like to see this upward trend continue. This does not mean that there are cases where external auditors have not sufficiently taken up their responsibility regarding (dis)continuity in statutory audits. According to interviewees, there are several important causes for this. Such as insufficient distance from the audit client, but also the lack of a broad and coherent (holistic) understanding of the audit client and its environment, causing clear red flags to be missed. Other causes mentioned are confirmation bias (searching for audit evidence that confirms assumptions rather than contradicting them) and not or too late engaging experts. The AFM therefore finds it important that auditors (organizations) continue to pay sufficient attention to the theme of (dis)continuity and that they continue to work on strengthening their professional-critical attitude. The AFM therefore formulates a number of expectations for auditors (organizations) regarding the approach to (dis)continuity in statutory audits. This includes, among other things, the
necessity of having a good and coherent understanding of the audit client and their environment, and of maintaining a professional-critical attitude at all times. This helps external auditors fulfill their responsibility (continue to fulfill it) and ensures that users of the annual report are warned more often in good time about impending bankruptcies. We are moderately positive about the results of our exploration. The results do not give reason to conduct an in-depth thematic investigation at this time. However, we expect that auditors (organizations) will continue to pay attention to the theme of (dis)continuity and that they will adhere to the expectations we have drawn up. The AFM will continue to pay attention to this theme through analysis of internal and external data and by continuing to follow up on signals and incidents.

Introduction 4
The reporting ecosystem and relevant legislation and regulations 6
2.1 External auditors have an important responsibility 6
2.2 Relevant audit standards are being adjusted 8
Research design and results 9
3.1 Literature research and interviews 9
3.2 Results 9
Expectations and role of AFM 13
4.1 AFM expectations regarding auditors (organizations) 13
4.2 The AFM continues to pay attention to (dis)continuity 14
Appendix: Research method and other findings 15

Introduction
The survival of a company is less self-evident than in the past. The lifespan of companies and their business models is decreasing further. This is due, among other things, to increasingly rapid societal, geopolitical and technological developments, climate risks, and the increasing internationalization of business. The number of bankruptcies of companies is therefore expected to increase rather than decrease.
1
Bankruptcies can have a major impact on all stakeholders in a company, such as trade partners, investors, and other lenders. It is therefore of great social importance that external auditors take responsibility when it comes to evaluating the suitability of the going concern assumption used by the management when preparing the company's annual report. The management of the company usually prepares the annual report on the assumption that the company can continue its activities in the near future (the going concern assumption). The external auditor must obtain sufficient and appropriate audit information to evaluate whether this going concern assumption is suitable. If the external auditor has reasonable doubt about this, additional audit procedures must be performed. If the external auditor concludes based on this that there is a material uncertainty regarding continuity, then the external auditor must include a separate section in the audit report titled 'Material Uncertainty Related to Going Concern' (the material uncertainty paragraph). 2 The external auditor must also determine whether the management has provided adequate disclosure in the annual report regarding the material uncertainty, and regarding the plans the management has to address this material uncertainty. If this is not the case, the external auditor must weigh the implications thereof and, based on that, possibly adjust the (nature of the) audit report. In the past, external auditors have not always carried out these audit procedures well, such as in the audit of the annual reports of DSB, Eurocommerce, and Imtech. This has led to extra social attention for the manner in which external auditors deal with (dis)continuity in statutory audits. Discontinuity is an important subject and increasing awareness of discontinuity is a priority for the AFM. This has been the reason for the AFM to conduct an exploration in 2025 into the activities of external auditors regarding (dis)continuity in statutory audits. This exploration was previously announced in the AFM Agenda 2025. We conducted a literature research and a data analysis and held 25 interviews with various stakeholders. This was to gain an impression of the manner in which external auditors take responsibility regarding (dis)continuity in statutory audits. We did not conduct file research. Based on the interviews held, our impression is that external auditors in statutory audits generally give serious attention to the challenges involved in evaluating the suitability of the going concern assumption used. External auditors face a number of specific and complex challenges in statutory audits when evaluating the suitability of the going concern assumption: audit information is forward-looking, making that information complex to test; the outside world develops rapidly and sometimes in a way that cannot be foreseen; management has incentives to present the future of the company more rosyly; and during the audit it may emerge that the
survival of the company depends on financiers.

1 Also more specific reasons can influence the expected number of bankruptcies; Rabobank, 2025.
2 NV COS 570.22

© AFM 2025 | Exploration of the Approach to (Dis)continuity in Statutory Audits 5 Analysis of data we receive from audit firms indicates an increase in the number of cases where a material uncertainty paragraph has been included in audit reports for audit clients that later went bankrupt. The AFM would like to see this upward trend continue. This does not mean that there are cases where external auditors have not sufficiently taken up their responsibility regarding (dis)continuity in statutory audits. According to interviewees, there are several important causes for this:

Insufficient distance from the audit client;
The lack of a broad and coherent (holistic) understanding of the audit client and their environment, causing clear red flags to be missed;
Confirmation bias (searching for audit evidence that confirms assumptions rather than contradicting them);
Not or too late engaging experts.
Based on our exploration, we provide the sector with a number of expectations regarding the approach to (dis)continuity in statutory audits. With the aim that attention to the theme of (dis)continuity remains undiminished and that the sector continues to work on strengthening the professional-critical attitude. This includes, among other things, the necessity of having a good and coherent understanding of the audit client and their environment, and of maintaining a professional-critical attitude at all times. The AFM's expectations help auditors (organizations) identify events and circumstances that may give rise to reasonable doubt about the continuity of the company and to follow up on this in statutory audits. This may lead to more cases where the external auditor includes a material uncertainty paragraph about (dis)continuity in the audit report. The material uncertainty paragraph contains a reference to management's disclosure regarding the material uncertainties. Users of the annual report receive timely information through the inclusion of this paragraph that a company may cease to exist in the near future and may not be able to meet its obligations. Users can take this into account in their decision-making. With due regard to these AFM expectations, the quality of statutory audits can be further increased.

© AFM 2025 | Exploration of the Approach to (Dis)continuity in Statutory Audits 6
2. The reporting ecosystem and
relevant legislation and regulations
2.1 External auditors have an important
responsibility
Within the reporting ecosystem, we distinguish the responsibilities of the management, the internal supervisory body, and the external auditor (Figure 1). In general terms, the reporting ecosystem describes the responsibilities of the various parties involved in the preparation of the annual report and ensuring its quality. This chapter zooms in on (dis)continuity.
The management of a company is primarily responsible for assessing the going concern assumption for the purpose of preparing the annual report (NV COS 570.3-5; IAS 1). Management usually adopts the assumption that the company can continue its activities in the near future when preparing the annual report (art. 2:384 paragraph 3 BW). This is also known as the going concern assumption. The management must assess the going concern assumption. If there is doubt about continuity, it can be expected that the management will draw up and weigh various scenarios to be able to assess whether the going concern assumption is suitable. These scenarios (provided with any mitigating plans) are also presented to the external auditor. It is important that the management includes a transparent and clear disclosure in the annual report regarding any material continuity risks they recognize. 3 This disclosure is also of added value for society. 4 The internal supervisory body of the company (such as the supervisory board or audit committee) ensures good reporting. It does this by supervising the management. In this way, it also ensures that the management's use of the going concern assumption is appropriate. The internal supervisory body is responsible for advising and assisting the management when there are doubts about the continuity of the company. It must also critically question the management if it doubts the suitability of the going concern assumption, but the management has no such doubts. It can be expected of the internal supervisory body that it critically assesses the scenarios drawn up by the management and weighs the proposed possible alternatives. It consults - as often as it deems necessary - with the external auditor. 3 Also if there are concerns about continuity, but no material uncertainty, the management must include a disclosure on the adopted going concern assumption in the annual report if that is necessary for the required insight (RJ 110.129 and 135.203). For listed companies, the management must include a statement with clear substantiation in the management report that (a) it is justified based on the current state of affairs that the annual report has been prepared on a going concern basis and (b) that the material risks and uncertainties relevant to the continuity of the company for a period of twelve months after the preparation of the report are mentioned in the management report (BP 1.4.3 CGC). 4 See, for example, Myers, Schmidt & Wilkins, 2014; Wang, 2022. Management External Auditor Internal Supervisory Body
Figure 1: The reporting ecosystem

© AFM 2025 | Exploration of the Approach to (Dis)continuity in Statutory Audits 7 The external auditor must perform audit procedures that are appropriate in the given circumstances to obtain sufficient and appropriate audit information to be able to make a statement about the suitability of the going concern assumption. By performing statutory audits of company annual reports and giving an opinion on them, the external auditor fulfills a trust function towards society. It is the responsibility of the external auditor to - as part of the audit procedures - evaluate the management's going concern assumption. For this, the external auditor must perform audit procedures that are appropriate in the given circumstances to obtain sufficient and appropriate audit information (NV COS 570.6). Here, the external auditor must have an active attitude and a professional-critical stance. 5 If the external auditor has reasonable doubts about the continuity of the company, additional audit procedures must be performed (NV COS 570.16). First, the external auditor must request the management to assess the company's ability to maintain its continuity (insofar as the management has not already done so). Second, the external auditor must evaluate the management's plans; these are plans to enable the company to maintain its continuity. The external auditor must evaluate whether the plans can improve the situation and also whether the plans are feasible in the given circumstances. Finally, the external auditor must evaluate the cash flow forecasts drawn up by the management. For this, the external auditor must, among other things, assess whether the data used for this is reliable and whether management can provide adequate substantiation for the assumptions underlying the forecasts. 6 If the external auditor concludes based on the obtained audit information that there is a material uncertainty that the company can maintain its continuity, then the external auditor must include a separate section in the audit report to emphasize this (the material uncertainty paragraph; NV COS 570.22). The external auditor's material uncertainty paragraph has an important signaling function towards society. In this way, the external auditor draws attention to the fact that the company is in financial difficulties and may cease to exist in the near future. 7 The external auditor also shares these findings with the internal supervisory body (art. 2:393 paragraph 4 BW; NV COS 570.25). Additionally, the external auditor must determine whether the management has adequately disclosed the material uncertainty - and also the plans they have to address this material uncertainty - in the annual report (NV COS 570.19). 8 If the external auditor - contrary to the management - concludes that discontinuity is inevitable, then the external auditor must formulate a qualified opinion. If the management in such a situation does not abandon the going concern assumption and does not value the assets and
liabilities of the company on liquidation bases, and does not describe the effect thereof in the disclosure (art. 2:384 paragraph 3 BW; RJ 170), then the external auditor must issue a qualified audit report with the annual report (NV COS 570.21). In the past, external auditors have not always taken up their responsibility regarding (dis)continuity in statutory audits well. External auditors in those cases, for example (a) did not have sufficient eye for the continuity risks of the company's business activities (DSB) 9 , (b) did not obtain sufficient and appropriate audit information to be able to evaluate the going concern assumption (Eurocommerce) 10 or (c) failed to establish that the disclosure on the going concern assumption by the management in the 2012 annual report was not adequate (Imtech)
11. As a result of these shortcomings, the external auditors concerned may have incorrectly failed to recognize that they should have included a material uncertainty paragraph in the audit report (DSB and Eurocommerce), or may have incorrectly allowed the management to state incorrectly and misleadingly in the disclosure on the annual report that it had sufficiently certain plans with which the company could maintain its continuity if the expected performance and cash flow developments were to disappoint (Imtech). All these companies were declared bankrupt. It also appears in other countries that external auditors were not sufficiently critical during the audit of annual reports of companies that were declared bankrupt shortly thereafter.
12 The trust of society in external auditors has thereby come under pressure. Various commissions have been established both within and outside the Netherlands to investigate why statutory audits by external auditors are not always effective. Examples of these commissions are the Commission for the Future of the Accounting Sector (NL), the Quarter Makers (NL), and Sir Brydon (UK).
From these investigations, it emerged, among other things, that more attention is needed for the manner in which external auditors deal with (dis)continuity in statutory audits.
13
2.2 Relevant audit standards are being adjusted
The audit standards for (dis)continuity have been tightened. This contributes to better informing stakeholders about the continuity of companies. Internationally, audit standard 570 (ISA 570 Going Concern) applies to activities regarding (dis)continuity. Recently, the International Auditing and Assurance Standards Board (IAASB) has reviewed and adjusted this standard.
14 Among other things, the requirements have been tightened and clarified regarding activities for risk analysis and for the assessment of the management's assumptions about continuity.
15 For assessing continuity, the external auditor must focus on a period of 12 months from the date of the audit report. The new audit standard applies to audits of annual reports for financial years beginning on or after 15 December 2026. These adjustments are expected to also be implemented in the Dutch standards 570 and 700 (NV COS 570 and 700).
9 CBb 18 November 2015, ECLI:NL:CBB:2015:362, para. 2.10.3.
10 AK 30 November 2015, ECLI:NL:TACAKN:2015:147, para. 4.17-4.18.
11 CBb 26 September 2023, ECLI:NL:CBB:2023:534, para. 10.1.4.11.
12 Audit Reform Lab, 2024.
13 Commission for the Future of the Accounting Sector, 2020; Quarter Makers for the Future of Accounting, 2023; Brydon, 2019 14 IAASB, 2025 15 For the audit of the annual report of a listed entity, the revised standard includes additional requirements if the management, based on significant judgment, concludes that there is no material uncertainty regarding continuity. For example, a reference must be included to the relevant disclosure i