On 28 April 2015, the Dutch Minister of Finance published a legislative proposal for the Implementation Act of the Directive and Regulation on statutory audits of annual accounts (the Implementation Act). This proposed legislation would amend the Audit Firms Supervision Act in order to implement the Directive 2014/56/EU1 (the Directive) and bring it line with the EU Regulation No 537/20142 (the Regulation).
The proposed legislation is open for public comment until 26 May 2015. It is not yet clear when the Implementation Act will go into force but it will presumably be before the 17 June 2016 deadline set by the EU Directive.
The Implementation Act includes the following measures in accordance with the EU directive
The EU directive strives to strengthen the investor’s trust in the correctness of published financial statements and consolidated financial statements by improving the quality of statutory audits. Thus the Implementation Act includes the following:
- Additional requirements to enhance the independence of accountants, such as
- provisions preventing an accountant from being involved in decision-making of his or her audit client
- provisions prohibiting an accountant from entering into a transaction in financial instruments which are issued, guaranteed, or otherwise supported by an audit client unless the clients offer diversified collective investments; and
- provisions preventing an accountant from taking on a leadership role with an audit client within a year of completing an audit.
- Requirements to enhance the professional-critical attitude of accountants: the Directive defines a ‘professional-critical attitude’ as an attitude which holds an investigating mind, alertness to circumstances which can indicate possible deviations as a result of mistakes or fraud, and a critical assessment of the audit information. According to the Implementation Act, a new article in the Audit Firms Supervision Act will reference certain standards for professional-critical attitude set out in a governmental decree but this decree is not yet available.
- Requirements that statutory audits be performed in accordance with international audit standards. To date, the European Commission has not adopted international audit standards. Until international standards have been adopted, Member States are allowed to comply with national audit standards. When international audit standards have been adopted, the national standards will be amended accordingly.
- Uniform requirements for the content of the accountant’s audit opinion, such as
- the accountant’s obligation to provide a description about the scope of the statutory audit, specifying which directives have been complied within the audit; and
- the accountant’s obligation to explicitly declare material uncertainties which relate to events or circumstances which might cause obvious misgivings (gerede twijfel) about the capacity of the audited client to continue its business.
- New powers for the Netherlands Authority for the Financial Markets
- taking enforcement measures in instances where an accountant does not perform its audit in accordance with the legal requirements prescribed in article 2:393 paragraph 5 of the Dutch Civil Code;
- imposing a prohibition on certain persons to hold a position at an audit firm or OPI; and
- instructing an audit firm/accountant to end the performance of an audit assignment with immediate effect in case of specific circumstances.
The Implementation Act includes the following measures in accordance with the EU Regulation
The Regulation contains specific requirements for statutory audits of Organizations of Public Interest3 (OPI) and aims to improve the integrity, independence, objectivity, responsibility, transparency, and reliability of accountants and audit firms conducting the statutory audits for OPI’s. Because of the direct effect of the Regulation, rules following from the Regulation do not need to be transposed into national law.
Pursuant to the Regulation there are a few topics on which the Member States are free to decide to maintain stricter national rules than prescribed by the Regulation. From the explanatory memorandum on the draft Implementation Act, it follows that The Netherlands wishes to maintain its (stricter) national rules on the following topics:
- Separation of auditing and other services in respect of OPI’s: the Regulation provides for a non-exhaustive list of services that may not be provided to an OPI by audit firms/accountants that perform statutory audit services to such OPI (in order to protect the independency of the accountant performing the statutory audit), The Netherlands choose to maintain a general prohibition to perform other activities with an OPI when it is assigned to perform statutory audit services with that respective OPI.
- Maximum assignment period of five years for external accountants auditing OPI’s: pursuant to article 17 of the Regulation an accountancy firm may be assigned to perform statutory audits at a respective OPI for a maximum period of ten years. The Netherlands will adopt this rule. However, pursuant to article 17 paragraph 7 of the Regulation, an external accountant (within the assigned accountancy firm) may be involved
- in the statutory audit of a respective OPI for a maximum period of seven years, but Member States may decide to apply a shorter maximum period. The Netherlands choose to apply a maximum period of five instead of seven years, thus applying a stricter regime.
Letter of the Dutch Minister of Finance to clarify the scope of accountants’ obligations to report suspected fraud
In our February and March Updates, we reported on the 23 January 2015 decision4 of the Accountancy Division addressing an accountant’s confidentiality obligation. In that decision, the Accountancy Division ruled that the accountant in question should have reported its client’s tax fraud to the tax authorities thereby breaching its confidentiality obligation. Considering the substantial amount of the fraud (in this case €2.2 million), the court concluded that the public’s interest in discovering the fraud promptly justifies a breach of confidentiality.
As mentioned in our March Update, this decision resulted in a public debate on the scope of the accountant’s obligation to report suspected fraud. Prior to this decision, accountants believed they only had an obligation to report unusual transactions and suspected fraud to the Dutch Financial Intelligence Unit (the FIU) and not also to the tax authorities. The Accountancy Division’s decision requires, however, a report to the tax authorities when there is ‘substantial’ fraud. Since the lower limit of this reporting obligation is not clear, some interested parties called for legislation clarifying the parameters of this ‘new’ reporting obligation.
On 7 April 2015, the Dutch Minister of Finance wrote a letter to the parliament asserting that new legislation clarifying the parameters of this reporting obligation is not necessary. The Minister outlined the current framework of legislation and regulations and explained that ‘any’ fraud has to be reported to the identifiable ‘users’ of the information provided by accountants. In case of the Accountancy Division’s decision, the tax authorities were users of the accountant’s information, as the accountant had filed for tax refunds on behalf of the farmer who committed fraud.
The Minister further explained that pursuant to article 16 of the Accountants Code of Conduct and Practice, an accountant has the obligation to maintain confidentiality, unless there is a legal or professional right or obligation to disclose such information to third parties. An obligation to disclose exists when an accountant must avoid being connected with substantive incorrect information, such as fraud. Accountants must distance themselves from such information through an oral announcement to the identifiable ‘users’ of its information and a written note in the respective files.
The Minister’s letter did not tie this disclosure obligation to the size of the fraud, but stated that any substantive incorrect information, such as fraud, must be disclosed. The obligation to report is thus not limited to ‘substantial’ fraud, as stated in the Accountancy Division’s decision.