REPORT SUPERVISION

IKO: A Sharp Instrument Yields a Sharp Image

In Brief - The AFM investigated how the Internal Quality Assessment (IKO) is structured at six externally audited accounting organizations (OOB-AOs). The IKO provides insight into the quality of completed statutory audits and is an important monitoring instrument within SQMS1. We observe that unpredictability and representativeness are still lacking. Fixed selection routines, early communication, a focus on large or risky files, and a very limited IKO assessment scope limit the view of daily practice. At the same time, OOB-AOs demonstrate that it is possible by, for example, applying randomness and an element of unpredictability in the selection. The AFM expects the sector to strengthen the IKO as a monitoring instrument and thereby use it as a learning instrument.

JULY | 2026

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Table of Contents

Summary 3

1. Introduction 5
2. The IKO – part of the monitoring activities 7 2.1 IKO provides insight into the quality of statutory audits 7 2.2 The objectives of the IKO 7 2.3 Design and execution of the IKO 9
3. Unpredictability in the IKO 11 3.1 Importance of unpredictability within the IKO 11 3.2 Role of selection criteria within the IKO 11
4. Representativeness in the IKO 14 4.1 Importance of representativeness within the IKO 14 4.2 Size of the IKO selection 14 4.3 Representativeness based on completion date 15 4.4 Representativeness based on risk classification 16

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Summary

The Internal Quality Assessment (IKO) is a relevant instrument for accounting organizations for steering quality improvement and ensuring compliance with the new Standard for Quality Management (SQMS 1). The IKO is a mandatory component of the quality management system under SQMS 1. It fulfills an important function within this standard, particularly for monitoring and remediation. The IKO is an important instrument because it provides insight into the quality of completed statutory audits and supports the timely identification of deficiencies. It also contributes to (structurally) improving the quality level within the organization.

By providing a realistic picture of the quality of completed statutory audits and by signaling deficiencies in a timely manner, the IKO supports accounting organizations in achieving the quality level expected by society. Analysis of transparency reports by the AFM and data provided by OOB accounting organizations reveals, however, that the IKO only relates to a limited part of the statutory audits performed. Furthermore, our earlier research from 2021 showed that for three of the eighteen statutory audits investigated (17%), the accounting organizations reached a different IKO opinion than the AFM. Internationally, regulators have also expressed concerns about the IKO, because the outcomes of external regulators with 35% of findings in listed OOB audits clearly deviate from the internal quality assessments conducted by accounting organizations, which show findings of 11%.

Therefore, we conducted further research into the effectiveness and sharpness of the IKO as an instrument to gain insight into the quality of completed statutory audits and to identify deficiencies in audit quality in a timely and complete manner. We investigated at six accounting organizations which quality objectives are linked to the IKO, what choices are made regarding the selection of engagement partners, statutory audits, and focus areas, and how these choices impact the elements of unpredictability and representativeness. The element of unpredictability in the IKO is essential to guarantee an objective and representative assessment of the engagement partner and the statutory audits performed. A representative selection is important because this prevents the IKO outcomes from only providing insight into a part of the engagement portfolio. It is also important that the IKO selection includes a sufficient share of statutory audits. We did not investigate the execution of the IKO and the determination of the IKO opinion in this context. The outcomes of our research are presented in this report. To help the sector further, we provide some good practices we observed in our research.

We see at all investigated accounting organizations that the core of the IKO policy is determining whether completed statutory audits were performed in accordance with relevant legislation, professional standards, and internal guidelines. Additionally, the IKO is broadly used to identify deficiencies and risks in the execution of statutory audits. Another objective that recurs at all investigated accounting organizations is that the IKO must contribute to the evaluation of the quality management system as a whole. For most, the IKO has a learning and development objective.

Our research on the element of unpredictability shows that several accounting organizations use a cyclical selection of engagement partners, for example, a three- or four-year cycle in which every engagement partner is tested at least once. We also observed that engagement partners can anticipate testing due to this predictability. For the selection of statutory audits, we observed that at several accounting organizations, the selection is largely risk-based and based on fixed, annually recurring criteria. This increases the chance that engagement partners can predict which statutory audits are eligible. Furthermore, we observed that communication regarding the engagement partners and audits to be selected took place too early.

The IKO population often consists of statutory audits with a high risk profile, large engagements, or high-profile clients, while small or less complex engagements are often only poorly represented. At the six investigated accounting organizations, the IKO selection results in an average assessment scope of 1.5% of the total portfolio of statutory audits. The research shows that the selection for the IKO is only representative to a limited extent. Although the policy at some accounting organizations states that an even selection is the starting point.

AFM Insights: Better IKO Selection for More Visibility on Quality. Based on the research, the AFM establishes that improvement of the IKO at accounting organizations is necessary. The IKO must be used more targeted and effectively for the purpose for which it is intended: obtaining in-depth insights into the quality of completed statutory audits as a monitoring activity to thereby establish with certainty that the internal quality system is working well. It is essential that the IKO selection is unpredictable and provides a representative picture of the statutory audits performed. This contributes to deficiencies not remaining predictable or structurally out of view. The AFM encourages the sector to consciously use the IKO as a learning instrument. By paying attention to an even, less predictable, and representative selection and by thoroughly analyzing the outcomes and involving them in monitoring and improvement measures, more value can be derived from the IKO. This helps organizations identify deficiencies in a timely manner and work targeted on quality improvement.

At the same time, the AFM observed at some accounting organizations that the IKO is used effectively. At these organizations, the IKO leads to demonstrable relevant insights and improvement actions. These good examples show that the IKO, if carefully designed and utilized, can be a powerful instrument for strengthening quality control.

The AFM will follow up on outcomes and adjustments per accounting organization. We will discuss the follow-up by the accounting organizations of the outcomes of this research, and we will include the adjustments made in our ongoing supervision. A strong IKO is, after all, a prerequisite for the AFM to be able to make more use in the future of the good functioning of the internal quality system of the accounting organizations.

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1. Introduction

Implementation of SQMS 1 requires a systematic and risk-oriented design of quality management. The accountant fulfills an important public function. Because he serves the public interest and fulfills a role in ensuring trust in the reliability of financial information. This brings with it an important responsibility for the accounting organization; the quality of its work must be structurally secured, risks recognized in time, and deficiencies adequately remedied. From this responsibility, it is expected of accounting organizations that they design their quality control in a suitable and coherent manner.

With the entry into force of the new Standard for Quality Management (SQMS 1), this responsibility is further concretized. SQMS 1 requires accounting organizations to adopt a more risk-oriented and systematic approach to quality control. SQMS 1 obliges accounting organizations to set up, implement, and maintain a quality management system that aligns with the nature, size, and complexity of the office and the engagements performed. The standard applies from 2025 for OOB accounting organizations and from 2026 for other accounting organizations.

An essential part of SQMS 1 is that the quality management system is evaluated at least annually. Accounting organizations must assess whether the system offers a reasonable level of assurance that the quality objectives are achieved. Within this system, monitoring and remediation form a structural pillar. Monitoring and remediation must provide insight into the functioning of the quality management system, enable timely signaling of deficiencies, and ensure that appropriate remedial measures are taken.

The Internal Quality Assessment is a relevant instrument for steering quality improvement and ensuring compliance with SQMS 1. The Internal Quality Assessment (IKO) fulfills an important function within SQMS 1, particularly in the component monitoring and remediation. The IKO provides insight into the quality of completed statutory audits, supports the timely identification of deficiencies, and contributes to (structurally) improving the quality level within the organization.

The IKO is a mandatory component of the quality management system under SQMS 1; an effective IKO is therefore not only necessary for compliance with the standard but also an essential precondition for sustainable quality improvement and strengthening the quality culture.

By providing a realistic picture of the quality of completed statutory audits and by signaling deficiencies in a timely manner, the IKO supports accounting organizations in achieving the quality level expected by society.

However, analysis of transparency reports by the AFM and data provided by OOB accounting organizations reveals that the IKO only relates to a limited part of the completed statutory audits. On average, an IKO covers about 1.5% of the total statutory audit portfolio. This raises questions about the extent to which the outcomes of the IKO are representative of the overall quality of statutory audits.

Dutch OOB accounting organizations also show more positive IKO outcomes compared to international inspection results as published in the IFIAR Inspection Findings Survey and the earlier AFM IKO research from 2021. This 2021 research looked at the functioning and outcomes of internal quality assessments. Eighteen statutory audits were involved in this research. For three of these audits (17%), it appeared that the qualification resulting from the IKO differed from the AFM's opinion following its own quality assessment. Data from Dutch OOB accounting organizations for the period 2020-2025 shows an average percentage of 11% of IKOs with significant findings on OOB audits. However, the annual IFIAR Inspection Findings Survey 2025 shows that external regulators established significant findings in 35% of the inspections performed on listed OOB engagements.

The above signals give rise to doubt about the effectiveness and sharpness of the IKO as an instrument to gain insight into the quality of completed statutory audits and to identify deficiencies in audit quality in a timely and complete manner. For this reason, the AFM investigated at the OOB accounting organizations which quality objectives are linked to the IKO, what choices are made regarding the selection of engagement partners, statutory audits, and focus areas, and how these choices impact the elements of unpredictability and representativeness. This report describes how the OOB accounting organizations have designed the IKO and to what extent this aligns with the monitoring objective under SQMS 1.

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2. The IKO – part of the monitoring activities

2.1 IKO provides insight into the quality of statutory audits

The IKO forms an important foundation for the monitoring and remediation processes as intended in SQMS 1. The IKO obtains insight into the quality level of completed statutory audits to signal deficiencies in time and support the quality management system. The IKO is not used by accounting organizations as a standalone instrument to gain insight into the quality of statutory audits, but rather that the IKO together with other instruments must provide a reasonable level of assurance in the functioning of the quality management system.

2.2 The objectives of the IKO

The objectives of the IKO largely determine the effectiveness of the IKO. In the context of this research, the AFM considers it important to explicitly address the objectives of the IKO. These objectives form the starting point for the design and execution of the IKO and largely determine the extent to which the IKO contributes to obtaining a reliable and representative picture of the quality of completed statutory audits. By assessing the extent to which the objectives of the IKO are realized in practice, the AFM can gain insight into the effectiveness of the IKO as an instrument within the quality control system and the extent to which the IKO supports supervision of the quality of statutory audits.

The accounting organizations have formulated different objectives for the IKO. The IKO has a function in monitoring and improving the quality of statutory audits at all investigated accounting organizations. The primary objective of the IKO is to determine whether completed statutory audits were performed in accordance with relevant legislation, professional standards, and internal guidelines. This objective is explicitly formulated in all investigated accounting organizations and forms the core of the IKO policy.

Additionally, the IKO is broadly used to identify deficiencies and risks in the execution of statutory audits. In all investigated accounting organizations, the IKO is designated as an instrument that makes deficiencies visible and provides insight into themes or patterns that require attention within the audit practice. This aligns with the requirements of SQMS 1, which stipulates that monitoring activities must provide a reliable basis for identifying deficiencies within the quality management system.

Another objective that recurs at all investigated accounting organizations is that the IKO must contribute to the evaluation of the quality management system as a whole. This concerns determining whether the system has been properly designed, implemented, and functions effectively. Some accounting organizations explicitly formulate this objective in their policy; others make this derivable by explicitly positioning the IKO within the broader monitoring and remediation cycle.

In the majority of the investigated accounting organizations, the IKO has a learning and development objective. The IKO is used there to provide insight into judgment formation, documentation, risk assessments, and application of standards, so that audit teams and the accounting organization can learn from this.

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Good Practice Assessment of broader impact of identified deficiencies. The accounting organization applies a working method in accordance with the IKO policy where non-compliant scores from the IKO are evaluated. There is specific attention paid to the possible need to test other involved professionals (such as other partners, managers, or OKB’er) on these non-compliant engagements. The goal is to take actions to identify and address possible similar problems in other audit engagements of these partners, managers, or OKB’er.

A part of the investigated accounting organizations has additional objectives for the IKO. The outcomes of the IKO are thereby used, among other things, for:

• Performance and development assessment of engagement partners or directors, including the remediation trajectory in case of an insufficient IKO outcome for an engagement partner.
• Accreditation and appointment decisions, including OOB appointments or promotions.

At one accounting organization, it was consciously chosen not to test the engagement partner with an insufficient IKO outcome again in the IKO in the following year. Instead, the remediation trajectory is designed via other quality measures, such as a thematic review where not the entire audit file is assessed, but a specific theme within a statutory audit is investigated.

The AFM observes that the current selection methods in practice limit the unpredictability of the IKO selection. This creates the risk that engagement partners (indirectly) can exert influence on the selection, thereby reducing the effectiveness of the IKO.

The AFM expects accounting organizations to design the IKO selection such that unpredictability is secured and (indirect) influence is prevented.

Figure 1. Objectives

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2.3 Design and execution of the IKO

The AFM established during its research that all investigated accounting organizations have prescribed specific policy for the IKO. The policy includes various matters, among others the objectives of the IKO, the selection criteria of the IKO, and the execution of the IKO. We share some concrete points for improvement and encourage the sector to utilize these for (further) improvement of the policy:

Systematically record which considerations underlie the final selection choice, to provide better insight into the application of the selection criteria and the considerations made.

Record not only the final selection choice for both the selected engagement partners and the selected statutory audits, but also the underlying considerations that underlie these selection choices. This helps to demonstrably align the selection process with the established policy and supports consistent application thereof.

The AFM observed that at the majority of the investigated organizations, these underlying considerations that underlie these selection choices were missing. By recording these considerations, it becomes clear that relevant criteria – such as an even distribution – were actually included in the selection process. This increases transparency, makes choices better explainable, and strengthens the substantiation of the IKO process.

Good Practice Recording key judgment formations and considerations in the selection of statutory audits in the IKO. An accounting organization has designed the process of selecting statutory audits and selecting the focus area transparently and structured. The key judgment formations and associated considerations are clearly and clearly documented. The document contains important parameters for both current and previous years, such as description of the client, reason for selection, use of a quality measure (such as OKB), input from the IKO responsible parties, when and which external assessments took place, outcomes of previous internal quality assessments, and other important aspects regarding the statutory audits. This contributes to compliance with the policy in which it is established how selections must be executed and makes it clear that distribution is considered.

Secure the independence of the IKO selection in formal policy

Formulate clear policy for situations where IKO assessors are also engagement partners. This prevents (the appearance of) conflicts of interest and contributes to transparency and consistency in execution. Furthermore, this ensures better securing of independence and more clarity regarding roles and responsibilities. The AFM observed that at four of the six investigated accounting organizations, such formal policy was missing, despite the fact that in practice various safeguards were established to secure the independence of the IKO selection. An example of this is the involvement of the international network in the selection and execution of the IKO.

Support the IKO process with suitable and manageable tools

Limit the error-proneness of the IKO overview by using suitable tools. The AFM observed that at some investigated accounting organizations, the IKO overview (such as the list of engagement partners) is maintained in Excel. This method is error-prone and offers insufficient safeguards for the completeness and accuracy of the data. By using a more advanced tool, controls and authorizations can be built in that better secure the quality of the IKO process.

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Good Practice Use of Power BI for the selection of statutory audits. At one accounting organization, the selection of statutory audits for the IKO takes place using a Power BI dashboard. This dashboard provides an overview of all engagements under