An important aspect of the new EU accountancy rules (April 2014) are the tightened rules for audit committees. For detailed information on this, see our previous newsletter. After a start was made with the implementation of the new EU framework in the Netherlands early this year, the consultation ver-sion of the new rules for audit committees was published only recently. Below, we briefly discuss the most interesting changes.
Corporate Governance Code
The reference to the rules for audit committees in the Corporate Governance Code will be removed from the existing scheme. This means that the Code rules no longer apply to non-listed Public Interest Entities (PIEs), but are replaced by a statutory scheme that is overall broader, and stricter. However, it is still possible to instruct the supervisory board as a whole to be responsible for the duties of the audit committee. For listed PIEs the Code regime continues to apply, in addition to the new statutory framework. Where there is an overlap between the two, the new statutory framework takes precedence. Logically, the possibility to deviate will thereby lapse (unless the possibility to do so is offered).
The Code also remains relevant for interpreting concepts that have not yet been specified, such as “independence”, according to the explanation to the draft decree. We understand this to mean that this applies irrespective of the formal applicability of the Code, i.e. also to non-listed PIEs.
Duties of the audit committee
The audit committee will be charged with an extra set of statutory duties, which have been taken over from the EU framework on a one-to-one basis:
- advising the management board or supervisory board of the result of the statutory audit and explaining how the statutory audit has contributed to the integrity of the reporting, and the role of the committee in that process;
- making recommendations or proposals to safeguard the integrity of the reporting process;
- monitoring the execution of the statutory audit with due observance of the quality assessment of the AFM;
- carrying responsibility for the accountant selection procedure and for nominating the accountant to be appointed (based on Regulation 537/2014 the committee must moreover make a recommendation for the appointment of the accountant, whereby it shall nominate at least two accountants, substantiating which is the preferred one).
The composition of the audit committee has also been aligned with the EU framework. The desired expertise of the members needs to be taken into account with regard to the nature of the company and its activities. The concerns expressed by the AFM earlier this year with regard to the expertise within audit committees have apparently not given cause to tighten this requirement.
In the future the majority of the audit committee must be independent, including at any rate the chairman; currently at least one member must be independent. For the moment, listed PIEs continue to be subject to the stricter regime of the Code; that one member at most is allowed not to be independent. It is interesting to see whether this will stand up to scrutiny in the Code review that has been announced.
A new rule is that the chairman of the audit committee is appointed by the members of this committee or by the supervisory board/non-executive directors in a one-tier board. The member state option to provide that the chairman of the audit committee is elected annually by the general meeting, has not been made use of. We consider this correct, but the reasons given (the “Dutch system” and the supervisory board’s collective responsibility) are not very strong. Whatever the case may be, it is to be expected that shareholders will continue to insist on shorter lines to the audit committee chairman.
Audit committees are operating in a changing playing field that sets increasingly higher demands, primarily to the quality of reporting, but increasingly also to the governance of the process along the way. These proposed changes are, again, an illustration of this.