The definition of ‘public-interest entity’ will be expanded. The definition of a public-interest entity (organisatie van openbaar belang) finds its origin in European legislation and includes entities established in the European Union (EU) whose securities are admitted to trading on an EU regulated market, as well as licensed credit institutions and insurance companies having their registered office in the EU and entities designated by a member state as such. Dutch law provides that companies, institutions or public bodies may be designated as public-interest entities if due to their size or function in society an improper statutory audit of the annual accounts may have a considerable impact on the public function of the auditor’s statement.
In a decree published in October 2018 (as amended), the following categories of institutions and companies will be designated as public-interest entities:
- network administrators as referred to in section 1 paragraph 1 sub k of the Electricity Act 1998 (Elektriciteitswet 1998) or section 1 paragraph 1 sub e of the Gas Act (Gaswet);
- large housing corporations (>5,000 rental units on two consecutive balance sheet dates, without interruption afterwards on two consecutive balance sheet dates) authorised pursuant to section 1 of the Housing Act (Woningwet);
- large organisations for scientific research, mentioned in section 1.16 of the Act on the higher education and scientific research (Wet op het hoger onderwijs en wetenschappelijk onderzoek) and the Dutch organisation for scientific research, mentioned in section 2, paragraph 1 of the Law on the Dutch organisation for scientific research (Wet op de Nederlandse organisatie voor wetenschappelijk onderzoek)1; and
- large pension funds as referred to in section 35a, paragraph 5, sub b, of the Pensions Act Implementing Decree and the Compulsory Occupational Pension Scheme Act (Besluit uitvoering Pensioenwet en de Wet verplichte beroepspensioenregeling).
Consequences of a designation as public-interest entity
After the designation, the above mentioned institutions and companies will be subject to the regulations for public-interest entities to be found in Regulation 537/2014 (on specific requirements regarding statutory audit of public-interest entities), Directive 2014/56/EU (on statutory audits of annual accounts and consolidated accounts) which is implemented in the Dutch Audit Firms Supervision Act (Wet toezicht accountantsorganisaties), the Decree on the establishment of an audit committee (Besluit instelling auditcommissie) and Directive 2014/95/EU (relating to the disclosure of non-financial information and diversity information by certain large undertakings and groups) which is implemented in Title 9 Book 2 of the Dutch Civil Code.
The main consequences of such designation are:
- audit review only by audit firms with a licence to perform statutory audits of annual accounts of public-interest entities;
- notification to the AFM of the accountant or audit firm to be engaged as statutory auditor;
- mandatory rotation of the audit firm every 10 years;
- mandatory rotation of the responsible audit partner every 5 years;
- prohibition for audit firms to carry out other work for the public-interest entity in addition to the audit services; and
- obligation to install an audit committee (as further discussed hereafter).
The audit committee should consist of members of the supervisory board or non-executive directors in a one-tier board. The majority of the members, including the chairman, must be independent. The members of the audit committee should jointly have the expertise which is relevant for the sector in which the public-interest entity operates. At least one member must be an expert in the area of financial reporting or the auditing of annual accounts. The audit committee is responsible for (i) monitoring the financial reporting process, (ii) monitoring the statutory audit of the annual accounts, (iii) assessing and monitoring the independence of the external auditor, (iv) informing the management board (in case of a one-tier board) or the supervisory board of the outcome of a statutory audit and (v) making recommendations to safeguard the integrity of the reporting process. Furthermore, the audit committee has the responsibly for the selection procedure of the auditor and for its nomination.2
Pension funds are exempted from the obligation to install an audit committee. The three large organisations for scientific research are given the opportunity to outsource the tasks of the audit committee to another body, provided that this body as a whole is competent and consists of at least one independent member.
In addition, large public-interest entities need to disclose certain diversity information in their management board report. Large public-interest entities which employ at least 500 employees in their group need to disclose certain non-financial information in their management board report as well.
The decree will enter into force on a date determined by Royal Decree (effective date) and will apply to statutory audits commencing after the effective date. The term for mandatory audit firm rotation will start to run as of the effective date. A transition period of 2 years applies to the mandatory rotation of the responsible audit partner. A transition period of 1 year applies to the prohibition for audit firms to carry out audit and non-audit services for the same public-interest entity.
For a detailed overview of the rules and regulations applicable to public-interest entities, we kindly refer to our Quoted on this subject of February 2017.