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Dutch regulator praises largest firms for push in cultural change

The Dutch financial sector regulator, The Netherlands Authority for the Financial Markets (AFM) published a review praising the largest firms with a license to audit PIEs for progress made in changing their culture, organisation and processes to enhance the quality of statutory audits.

AFM's review looked at various topics such as governance of the audit firm (management and internal supervision) and whether the public interest is a decisive factor in the culture, behaviours and processes. The review also looked at the transparency of audit firms relating to their stakeholders and the extent to which the network of these organisations affects the quality.

The regulator awarded a score from one to five to each firm. A score of five means the audit firm fully meets the expectations for 2015 on all relevant issues, while a score of 1 was assigned when the audit firm does not meet the expectations.

The result shows that the five largest firms (the Big Four plus BDO) lead the implementation with BDO scoring 3.5, Deloitte and PwC 4.0, EY 4.1 and KPMG 4.6.

Interestingly KPMG who leads the score table was the firm most criticised in recent years for the quality of its audits. In 2014, AFM inspected 10 audit files from each of the Big Four firms and found 70% of KPMG's files inadequate.

Mazars, Baker Tilly Berk and Grant Thornton trail behind in terms with score ranging from 2.8 to 3. The last firm reviewed is Accon avm who is "seriously behind" in the implementation with a score of 1.7.

However AFM warned that there is still work to be done and in particular that "most PIE audit firms have yet to make a further elaboration or deepening when it comes to behaviour and culture. For instance, they must form a more concrete idea of the quality-oriented culture that they pursue."

53 measures to improve audit
Since September 2014 and in the wake of a series of accounting scandals involving the largest firms in the Netherlands, audit firms pressed by politicians took the matter at hand and are now implementing a set of 53 measures to improve the quality and independence of their audit.

AFM also reviewed the implementation process of 25 of these measures and concluded: "the PIE audit firms are seriously working on it. Similar to the scores [...] the five largest audit firms are ahead and the other PIE audit firms follow at some distance."

AFM executive board member Gerben Everts said: "This report inspires confidence. After our critical report last year on the quality of audits, these audit firms and the sector as a whole have pledged improvement publicly. Audit firms have in fact subsequently started to strengthen the preconditions for better quality."

A year later we see, especially among the five largest audit firms, the positive result, he continued. "Although there are points of interest, we expect that a healthy organizational structure and culture will also improve quality. For smaller firms, the results are still varied. They need to make more progress."

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