Sector in Beeld 2024 — AFM — NL

Sector in Beeld 2024
ANALYSIS SECTOR IN BEELD
28 NOVEMBER 2024
Sector in Beeld Accountancy and Reporting

In short
Through data analyses, the AFM returns insights from its data requests to the accountancy sector. These insights cover developments in market structure, sustainability, fraud, discontinuity, and technology. We see a doubling in the market share of private equity among Regular Statutory Audit (RV) accounting firms. A wide majority of RV accounting firms have a CSRD-mandated company as an audit client. The number of identified fraud risks is too low in part of the statutory audits, but we see a positive trend among RV accounting firms. Finally, we note that accounting firms register few cyber incidents.

Introduction 2
1.1 Sector in Beeld 2024 2
1.2 Data-driven supervision and data quality 2
1.3 Guide 3
Market Structure 4
2.1 Number of accounting firms 4
2.2 Market share 4
2.3 Private equity 5
2.4 Offshoring 6
Sustainability 8
3.1 Transparency and expectation gap 8
3.2 Supervision of the CSRD 8
3.3 RV accounting firms and CSRD-mandated clients 9
Fraud and Discontinuity 11
4.1 Fraud risks 11
4.2 Discontinuity 12
Technology 14
5.1 Cyber resilience of accounting firms 14
5.2 Use of technology in statutory audits 14
5.3 Data-driven versus system-oriented audit approach 15
Appendix: Explanation of analyses 17

Sector in Beeld 2024 2
ANALYSIS SECTOR IN BEELD

Introduction
1.1 Sector in Beeld 2024
In this publication, the AFM describes a number of important developments in the accountancy sector regarding market structure, sustainability, fraud, discontinuity, and technology. Hereby, we return insights from data reports of accounting firms and issuers to the sector. Our analyses show that the market share of private equity parties in accounting firms with a regular license (hereinafter: RV accounting firms) increases from 11% in 2023 to 21% in 2024. Regarding sustainability, it appears that RV accounting firms perform the statutory audit for 57% of CSRD-mandated companies. Regarding fraud, we see that the number of statutory audits by RV accounting firms with a maximum of one fraud risk decreases from 13% in 2022 to 7% in 2024. Finally, there is an increase in the use of advanced data analysis in statutory audits by RV accounting firms from 4% in 2022 to 8% in 2024.

The topics in this publication align with the AFM Strategy 2023-2026 and focus on the sector level (meso-level).
This focus means that other relevant topics are missing, such as ongoing investigations into exam fraud and the outcomes of the AFM's supervisory investigations. Furthermore, this is an important supplement to the annual AFM publication Trendzicht, where we share insights at the macro level. Sector in Beeld is not a year-in-review and does not claim to be comprehensive.

Many analyses in this publication are limited to RV accounting firms. The data for accounting firms with a license for auditing entities of public interest (hereinafter: OOB accounting firms) are useful for supervision, but are not yet comparable to the data of RV accounting firms due to the later start of data submission for statutory audits in this segment. Therefore, the emphasis of this report lies on RV accounting firms.

1.2 Data-driven supervision and data quality
Supervision of accounting firms requires a risk-based and data-driven approach. Until 2022, the AFM supervised OOB accounting firms. From 2022 onwards, the AFM also exercises de facto supervision over the approximately 200 RV accounting firms. This expansion of the supervisory mandate has led to the development of a more risk-based and data-driven supervisory approach due to the large number of supervised institutions. For this purpose, the AFM, in consultation with representatives of accounting firms, selected data points per statutory audit. All accounting firms share this data with the AFM to see, understand, and address risks in supervision.

Both the number of completed questionnaires and the quality of data points regarding statutory audits are increasing. In the course of 2023, RV accounting firms started filling out questionnaires per statutory audit. By mid-September 2024, the AFM possessed data points from over 17,000 statutory audits in this segment (over a period of approximately two years). The AFM checks the quality of the received data. Figure 1.1 shows that data quality is improving, as the number of completed questionnaires without flagged deviations in data quality has risen from 59% in the second quarter of 2023 to 96% in the third quarter of 2024.

Sector in Beeld 2024 3
ANALYSIS SECTOR IN BEELD
Figure 1.1. Percentage of questionnaires from RV accounting firms without flagged deviations in data quality
0%
20%
40%
60%
80%
100%
Q2 '23 Q3 '23 Q4 '23 Q1 '24 Q2 '24 Q3 '24

Share of questionnaires without flagged deviations in data quality
Share of questionnaires with one or more flagged deviations in data quality
59% 70% 78% 84% 96% 96%
41% 30% 22% 16% 4% 4%
Source: Data statutory audits RV accounting firms.

1.3 Guide
Chapter 2 of this publication describes developments in market structure, including the number of accounting firms, market share, private equity, and offshoring. Chapter 3 addresses societal attention for sustainability, the AFM's supervision of the CSRD, and the involvement of RV accounting firms in CSRD-mandated clients. Chapter 4 provides insight into fraud risks and discontinuity. In Chapter 5, technology is central, based on the topics of cyber resilience of accounting firms, the use of technology in statutory audits, and data-driven versus system-oriented audit approach. The appendix contains an explanation of the analyses in this publication.

Sector in Beeld 2024 4
ANALYSIS SECTOR IN BEELD
1 The guidelines are available at: Audit firms from other Member States, under 'business model and cooperation with external auditors'.
2 Regular statutory audits are statutory audits at organizations not designated as OOB.

2.1 Number of accounting firms
The number of accounting firms with a license to perform statutory audits continues to decline. In 2013, 428 accounting firms had a license to perform statutory audits. Figure 2.1 shows that this number has nearly halved to 223 in the 2023 financial year. From 2019 to 2020, this decline seemed to stagnate, but since then, the number of accounting firms continues to decrease. The decline in the past year is mainly the result of mergers and acquisitions (with or without the help of private equity) in the segment of RV accounting firms. In the segment of OOB accounting firms, there have been no changes in recent years. However, two audit firms from other Member States have recently registered with the AFM to perform statutory audits in the Netherlands. The AFM has published several guidelines for accounting firms and external auditors performing work for an audit assignment by an audit firm from another Member State.1 The goal is to clarify the requirements under Dutch law and the AFM's expectations for audit firms from other Member States applying for registration in the Netherlands.

Figure 2.1. The number of accounting firms per year
0
50
100
150
200
250
300
350
400
450
'13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23

RV accounting firms (AO's-RV)
OOB accounting firms (AO's-OOB)
428
382
340
307 291 274 265 262 251 237 223
Source: Market Monitor 2013-2021; Data RV and OOB accounting firms 2022-2024.
Note: In Sector in Beeld 2023, the 'monitor year' was used for this graph. This year was chosen to distribute the data per financial year. Additionally, a correction was made in the financial year of several accounting firms. This results in small differences in the number of accounting firms in some years.

2.2 Market share
The market share of RV accounting firms is increasing slightly, both in terms of revenue and the number of statutory audits performed. Of the total approximately 20,000 regular statutory audits, 36% were performed by RV accounting firms in the 2013 financial year.2 Figure 2.2 shows that this percentage rises annually to a market share of 65% in the 2023 financial year. A nuance here is that in 2018-2019, several accounting firms lost their OOB license, causing part of the statutory audits to shift to RV accounting firms. Nevertheless, a further increase in the market share of RV accounting firms is visible. Figure 2.3 shows that OOB accounting firms have the largest market share based on revenue from regular statutory audits. Similar to the number of regular statutory audits, a shift is also visible in the revenue from regular statutory audits towards RV accounting firms: from 18% in the 2013 financial year to 37% in the 2023 financial year.

Figure 2.2. The market share of RV versus OOB accounting firms based on the number of performed regular statutory audits
0%
20%
40%
60%
80%
100%
'13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23

AO's-RV ■ AO's-OOB
62% 60% 58%
48%
38% 35% 43% 41%
36% 36% 38% 38% 40% 42%
52% 57% 59% 62% 65%
64% 64% 62%
Source: Market Monitor 2013-2022; Data RV accounting firms 2022-2024; Data OOB accounting firms 2023-2024. Note: Only regular statutory audits are included, OOB audits are not.

3 ING (17 July 2023). Investment wave in accountancy and consultancy continues.
4 This trend is visible both nationally and internationally. For the situation in the United Kingdom, see: Accountant.nl (9 January 2024). British accountancy consolidates faster due to private equity. For the situation in America, see: Accountancy Vanmorgen (13 June 2024). Private equity floods top American accountancy.

Figure 2.3. The market share of RV versus OOB accounting firms based on revenue from regular statutory audits
0%
20%
40%
60%
80%
100%
'13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23

AO's-RV ■ AO's-OOB
83% 81% 79%
72% 67% 66% 65% 63%
18% 18% 18% 17% 19% 21%
28% 33% 34% 35% 37%
82% 82% 82%
Source: Market Monitor 2013-2022; Data RV accounting firms 2022-2024; Data OOB accounting firms 2023-2024. Note: Only regular statutory audits are included, OOB audits are not.

2.3 Private equity
The accountancy sector has characteristics that attract the attention of private equity parties. Stable revenue figures, attractive profitability, and deferred investments in innovation make the accountancy sector desirable for acquisitions by private equity parties.3 Where the revenue of consultants is cyclical, the repetitive nature of the statutory audit obligation ensures a good and stable revenue stream in the accountancy sector.

The market share of private equity parties in RV accounting firms increases from 11% to 21%.4 Figure 4.1 shows that the share of statutory audits by RV accounting firms with private equity rises from 11% in 2023 to 21% in 2024. This market share applies to both the number of statutory audits and the revenue from statutory audits. This involves 7 private equity parties and 24 RV accounting firms.5 It is expected that consolidation in the accountancy sector will continue, with private equity parties playing an important role.6

Figure 2.4. Share of statutory audits of RV accounting firms with private equity
0%
20%
40%
60%
80%
100%
2023 2024

Share of AO's-RV with private equity ■ Share of other AO's-RV
79%
21%
89%
11%
Source: Data RV accounting firms. Note: The share relates to the acquisitions of 24 RV accounting firms by 7 private equity parties known to the AFM and announced in the media (situation as of 11 September 2024). The share is calculated based on the number of statutory audits by RV accounting firms over calendar years 2022 and 2023.

The AFM's risk assessment regarding private equity remains unchanged. In Sector in Beeld 2023, we weighed the risks of private equity heavier than the opportunities.7 The reason for this is commercial pressure resulting from the focus of private equity parties on return and growth, which can come at the expense of the quality of statutory audits. This commercial pressure is reinforced by the relatively short-term focus of private equity parties of about five to seven years. The English regulator also recognizes the risk of private equity in the accountancy sector.8 Through intensified supervision and data analysis, the AFM will continue to monitor the risks and developments of private equity.

5 Situation as of 11 September 2024.
6 Schutte & Dirkx (2024). Mergers and acquisitions. Lack of people drives consolidation.
7 AFM (2023). Sector in Beeld 2023.
8 FRC (2024). Annual review of audit quality.
9 PCAOB (2024, p. 48). 2024-002-Firm and Engagement Metrics (pcaobus.org).

2.4 Offshoring
When outsourcing audit work abroad (offshoring), it is important that accounting firms continue to take responsibility for ensuring quality. Offshoring is often defined as outsourcing audit work to Shared Service Centers (SSCs). According to the PCAOB, an SSC is 'an affiliated entity, established by a network of accounting firms, which, along with other organizations, provides personnel to these accounting firms to help perform audits without this affiliated entity itself being an accounting firm'.9 This primarily involves outsourcing non-complex and routine work to an affiliated party that is not an accounting firm, in contrast to using specialists for, for example, complex estimation items. Because audit work is performed by parties that are not part of the accounting firm itself, there is a risk that these parties are insufficiently familiar with the system of quality control. Offshoring can therefore pose a risk to the quality of the audit.

Scientific research indicates that the use of offshoring is increasing. Due to increasing globalization, it is expected that the use of offshoring will increase, and this seems to be the case in practice. US research based on PCAOB data shows that all Big-4 firms are increasingly using SSCs in audits. The use of SSCs rises from 91% on all statutory audits of the Big-4 in 2013 to 98% in 2018, with the percentage of SSC hours relative to total audit hours rising from 4% to 9%. A major reason for the increase in the use of offshoring is that outsourcing is sometimes more profitable than performing work internally.10

RV accounting firms outsource work for a small part of statutory audits. AFM data does not show whether the work is outsourced within the Netherlands or abroad. For 2% of statutory audits, RV accounting firms outsource hours. Outsourcing occurs in both large and small accounting firms, and there is great variation in the number of outsourced hours by accounting firms. Of the statutory audits with outsourced hours, an average of 47 hours are outsourced. This amounts to 8% of the total hours spent. Figure 2.5 shows that this is 8% for large, 7% for medium, and 11% for small RV accounting firms. The percentage of statutory audits where hours are outsourced is significantly lower than the use of offshoring by Big-4 firms in the US research, but for statutory audits with outsourced hours, the percentage of outsourced hours is comparable.

10 Sherwood (2024). Offshore Shared Services Center usage by U.S. Big 4 audit engagement teams.

Figure 2.5. Average number of hours spent per statutory audit and the share of outsourced hours
0
100
200
300
400
500
600
700
Large AO's-RV Medium AO's-RV Small AO's-RV

Outsourced hours ■ Other hours
8% 7% 11%
Source: Data statutory audits RV accounting firms.

Sector in Beeld 2024 8
ANALYSIS SECTOR IN BEELD
11 This estimate is made based on AFM data for supervision of reporting and a research report by KPMG (KPMG, 2024. Research on the implementation of the six steps of due diligence).
12 AFM (2024). 10 navigation points for CSRD – double materiality.

Sustainability
3.1 Transparency and expectation gap
The Corporate Sustainability Reporting Directive (CSRD) leads to more transparency regarding sustainability for large companies. The goal is to enable users to make informed decisions. Additionally, it helps companies gain insight into their own impact, opportunities, and risks, and to determine their course regarding sustainability. The CSRD applies per financial year 2024 to large issuers and will be rolled out further to a broader target group thereafter. Company executives are responsible for adequately setting up processes and information systems to enable sustainability reporting. Accounting firms are called upon to provide assurance on these reports, which broadens their scope of tasks. Societal organizations regularly draw attention to achieving environmental goals and ensuring human rights. These developments require clarity in the law regarding the responsibilities of companies, for example in the form of the Corporate Sustainability Due Diligence Directive (CSDDD).

Sustainability reporting by large companies may lead to a new expectation gap. This expectation gap can manifest in multiple ways. On the one hand, societal organizations and/or citizens may have higher expectations of the sustainability transition of reporting companies than what is expressed in the reporting. For example, because companies lower their objectives or appear less sustainable than expected. On the other hand, the public may have higher expectations of accounting firms than what is expressed through a conclusion with limited assurance. For example, because accountants have performed fewer (in-depth) procedures than users of sustainability reporting expect. A continuous dialogue on sustainability information is necessary to prevent society from expecting more regarding sustainability than what companies and accountants can deliver. Furthermore, it is important that companies and accountants remain critical of their performance regarding sustainability reporting.

3.2 Supervision of the CSRD
The group of companies that must comply with the CSRD will increase in the coming years from approximately 95 in the 2024 financial year to over 3,000 in the 2025 financial year.11 The first group consists of large issuers that must comply from the 2024 financial year onwards. The AFM sees in the reporting over 2023 that many issuers have started reporting according to the CSRD and sees various good practices. 12 This target group still has steps to take to report fully and transparently according to the CSRD over 2024. From the 2025 financial year, the regulation also applies to large companies, of which over 50% fall under the supervision of RV accounting firms. Paragraph 3.3 of this publication specifically addresses these RV accounting firms, as it is important that they prepare well for providing assurance on sustainability reporting due to the large number of CSRD-mandated companies in their client portfolio.

Sector in Beeld 2024 9
ANALYSIS SECTOR IN BEELD
Sustainability reporting is an important spearhead for supervision by the AFM. Supervision of reporting on sustainability by issuers and the provision of assurance on sustainability reports by accounting firms will form an important expansion of the AFM's supervisory mandate in the coming years. Through publications, the AFM will share insights gained in sustainability reporting and assurance provision with the sector.

3.3 RV accounting firms and CSRD-mandated clients
A wide majority of RV accounting firms audit the annual accounts of CSRD-mandated companies. Figure 3.1 shows that the share of RV accounting firms that audit at least one large (i.e., CSRD-mandated) company varies from 70% in the 'small' category to 100% in the 'large' category.13 From the 2025 financial year, accounting firms must provide assurance on the sustainability report of these companies. If accounting firms choose to offer this service, they must prepare in time with a system of quality control for providing assurance on sustainability reporting. It is important that they have sufficient capacity and expertise to perform these assignments.

13 This estimate is made using AFM data on statutory audits at RV accounting firms based on these three criteria: more than €50 million revenue, more than €25 million total assets, and more than 250 FTE. A caveat to this estimate is that the data on statutory audits is not yet complete due to ramp-up periods and that the requirement for companies to meet these criteria for two consecutive years is not taken into account.

Figure 3.1. Percentage of RV accounting firms with at least one CSRD-mandated company as an audit client (2023)
0%
20%
40%
60%
80%
100%
Large AO's-RV Medium AO's-RV Small AO's-RV

AO's with >=1 large company as audit client
AO's without large companies as audit client
97%
70%
100%
Source: Data statutory audits RV accounting firms. Note: This estimate is based on data with submission date of audit report in 2023.

For part of the CSRD-mandated companies, small RV accounting firms perform the statutory audit.
Companies are CSRD-mandated if they meet two of the three criteria for large companies. According to AFM data on statutory audits performed by RV accounting firms in 2023, over 1,900 companies are CSRD-mandated. Assuming a total of over 3,000 CSRD-mandated companies, this means that RV-ac...