Today, the Dutch Upper House adopted the Bill on the accountancy profession (Wet op het accountantsberoep) (the Bill). Initially, this Bill aimed to merge the Royal Netherlands Institute of Registered Accountants (Nederlands Instituut van Registeraccountants, the NIVRA) and the Netherlands Organisation of Accounting Consultants (Nederlandse Orde van Accountants-Administratieconsulenten, the NOvAA) into one professional organisation: the Netherlands Institute of Chartered Accountants (Nederlandse Beroepsorganisatie van Accountants, the NBA).
However, during the parliamentary debate on this Bill in the Dutch Lower House, various amendments were adopted that significantly impact firms auditing public interest organisations, which include at this point in time listed companies as well as non-listed banks and insurers (the so-called "PIOs"), but also companies of which the financial reporting is subject to the supervision of the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, the AFM).
In this Corporate Alert we will not touch upon the formation of the NBA, but we will focus on the key changes for companies. The key changes are:
- the compulsory rotation of accountancy firms;
- the prohibition for accountancy firms auditing the financial statements of PIOs to perform certain other advisory services for the benefit of these PIOs;
- the compulsory notification to the AFM regarding the intended appointment of an accountancy firm; and
- certain important changes to the Act on the Supervision of Financial Reporting (Wet toezicht financiële verslaggeving, the Wtfv).
The abovementioned changes do not have consequences for companies that do not qualify as PIOs and which do not otherwise fall within the scope of the Wtfv.
2. Entry into force
Although the date of entry into force has not yet been published, it may be assumed that the Bill will enter into force on 1 January 2013. During the parliamentary debate on this Bill in the Dutch Upper House, it was concluded that the compulsory rotation of accountancy firms for PIOs will not enter into force prior to 1 January 2016. The Dutch Minister of Finance confirmed the same in a letter that was sent to the chairman of the Dutch Upper House on 7 December 2012.
3. Key changes
Compulsory Rotation of Accountancy Firms
Starting 1 January 2016, PIOs are required to rotate their accountancy firm every eight years. The same firm may perform the statutory audits again only after the expiry of a two-year cooling-off period. The objective of this regulation is to increase the independency of auditors. Please note that the obligation to rotate the accountancy firm every eight years should be separated from the rule that the same auditor cannot ultimately be responsible for performing the statutory audits for a period longer than seven years.
Also in the European context proposals have been made in relation to the issue of the compulsory rotation of accountancy firms. During a parliamentary debate the Dutch Minister of Finance informed the Dutch Upper House that the extent to which European rules and regulations have been defined will be assessed in the second half of 2015. The Dutch Minister of Finance confirmed the same in the letter that was sent to the chairman of the Dutch Upper House on 7 December 2012. If there are conflicts between the Dutch- and the European rules and regulations on this issue, then entry into force as per 1 January 2016 might be reconsidered.
If the requirement to rotate from accountancy firm enters into force on 1 January 2016, then each PIO whose statutory audits were performed by the same accountancy firm for a period of eight years or longer, should, with immediate effect, entrust a different accountancy firm with such PIOs' statutory audits. On the basis of the Bill, this will also apply to the statutory audit of financial years ending on 31 December 2015. Despite the possibility of it being decided in 2015 that the rule will not enter into force on 1 January 2016, the period until 1 January 2016 must be regarded as a transitional period allowing both accountancy firms and PIOs to anticipate for the new regulation.
Separation Audit Services and Advisory Services
Accountancy firms performing audits for PIOs may no longer also perform other services for such organizations. As with the compulsory rotation rule, this regulation is aimed at increasing the independency of auditors towards the PIOs they are auditing.
Please note that only the following services qualify as audit services: (i) performing the statutory audit of the financial statements; (ii) auditing the semi-annual and quarterly reports; (iii) certifying the monthly statements for regulatory authorities; and (iv) providing assurance in relation to the report of the management board, the report on corporate governance, the report on risk management and the report on corporate social responsibility. The term 'assurance' is taken to mean audit services aimed at providing certainty about the information provided by the audited client for the benefit of external users of this information and the supervisory board, as referred to in the aforementioned reports.
This regulation comes into effect immediately after its entry into force, i.e. 1 January 2013. The performance of advisory services on the basis of engagements that were entered into prior to the effective date of the Bill, and in relation to which a contractual obligation exists for the accountancy firm, may be performed until the second anniversary of the effective date of the Bill (i.e. until 1 January 2015). The entering into of new engagements on the basis of which accountancy firms are entrusted with advisory services other than the services mentioned above, are no longer allowed with effect from the date on which the Bill enters into force. This prohibition applies to accountancy firms as this term is defined in the Act on the Supervision of Accountancy Firms (Wet toezicht accountantsorganisaties). As a result, the prohibition does not apply to any other organizations, such as organizations that might closely cooperate with accountancy firms performing the statutory audits.
Compulsory Notification to the AFM
For the sake of completeness it should be noted that a PIO is required to inform the AFM in advance of its intention to appoint an accountancy firm for the purpose of auditing its financial statements. This notification must be made prior to the appointment of the respective auditor. In practice, this means that the notification will have to be made prior to the appointment of the auditor by the PIOs' general meeting. The manner in which this notification must be made is yet to be determined.
Changes to the Act on the Supervision of Financial Reporting
According to the Wtfv the AFM is entrusted with the supervision on the financial reporting of issuers. The following issuers fall within the scope of the Wtfv: (i) Dutch issuers whose securities are traded on a regulated market; (ii) Dutch issuers whose securities are traded on a stock exchange outside the European Economic Area comparable to a regulated market; and (iii) foreign issuers whose securities are traded on Euronext Amsterdam.
One of the distinctive features of the Wtfv is that it cannot be enforced under administrative law, but rather that the AFM, should it wish to enforce the Wtfv, has to submit a request to that effect to the Enterprise Chamber (Ondernemingskamer) of the Amsterdam Court of Appeal (the Enterprise Chamber) on the basis of the Dutch Civil Code.
In the context of the parliamentary debate on the Bill an amendment was adopted by the Dutch Lower House as a result of which certain changes will be made to the Wtfv. Contrary to the issue of compulsory rotation and the issue of separation between audit services and other advisory services, no consideration was given to the changes to the Wtfv in the parliamentary debate in the Dutch Upper House.
The key changes to the Wtfv are as follows:
- Pursuant to the Wtfv there cannot be an exchange of information between the department of the AFM that is responsible for the supervision of financial reporting of issuers and other departments within the AFM. These so-called Chinese walls within the AFM will be abolished with effect from 1 January 2013.
- Under the current Wtfv the AFM only has the authority to ask an issuer for further clarification if the AFM has, on the basis of publicly available facts and circumstances, reasons to believe that the financial reporting of an issuer does not meet the statutory requirements. The amended Wtfv does no longer require the AFM to have doubts about the correctness of the relevant issuer's financial statements in order to ask the issuer for further clarification.
- In the context of the legislative change, two provisions of the General Administrative Law Act (Algemene wet bestuursrecht, the Awb) are also declared applicable to the Wtfv. This includes Section 5:20 Awb on the basis of which an obligation exists to - as may reasonably be requested by the AFM in connection with the performance of its duties and within the period as may reasonably be stated by the AFM for that purpose - give one's full cooperation to the AFM.
Although it is not clear what the exact consequences of these changes will be in practice, there are a couple of points of attention worth mentioning at this stage.
When the amendment was introduced in the Bill the issue of enforcement was left unspoken and furthermore the relevant provisions of the Dutch Civil Code were not changed. It is therefore possible that the AFM, without there being any doubts about the correctness of the financial reporting, requests an issuer to provide further clarification. In the absence of such issuer providing further clarification, the AFM may decide to take the issue to the Enterprise Chamber eliciting an order for further clarification from such court. In this case it is possible that the Enterprise Chamber will reject the AFM's request for information because there are no reasons to question the correctness of the financial reporting.
The reference to the Awb does not seem to add much. Even if the issuer does not comply with the relevant provisions, the AFM will have to take the matter to the Enterprise Chamber in order to enforce the relevant provisions. According to the explanation to the amendment its objective is to extend the power of the AFM in the investigation stage. Interestingly, other provisions of the Awb have not been declared applicable to the Wtfv and, as a result, the AFM is most likely not allowed to require delivery or inspection of specific documents. It is therefore not clear whether the pursued extension did in fact materialize. In the absence of such clarity, issuers may be exposed to the difficult consideration of complying with a request for further clarification issued by the AFM - even though such request might not be enforceable - or accepting the risk of the AFM submitting a request with the Enterprise Chamber eliciting an order regarding the same. Even if the Enterprise Chamber rejects the request submitted by the AFM, the mere fact that the AFM has taken action may be damaging for the issuer.