https://orcid.org/0000-0003-2960-1224
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Abstract
As of 2014, the extended auditor’s report has been introduced for all Dutch PIEs, including but not limited to listed entities. With this explorative study, we provide early insights into how reporting on key audit matters and materiality are applied in practice and whether this differs per category of Dutch PIEs. It appears that the Dutch PIE market is a rather heterogeneous market, including a large number of finance and holding companies, which also results in considerable differences regarding the numbers and subjects of key audit matters and the levels and bases of materiality, which could affect the informative value of auditor’s reporting. Therefore, the question arises whether reporting on key audit matters and materiality has the same relevance for all PIEs, while the results may also give reason to make these elements mandatory for companies that are not yet covered by the PIE-definition.
Disclosure Statement
No potential conflict of interest was reported by the author(s).
Notes
1 Including only listed entities is sometimes motivated by the use of stock prices as a research variable. Often, however, a clear motivation why only listed entities are included instead of, for example, the whole PIE market is lacking.
2 Clacher et al. (Citation2019) state that failing to classify the right companies as PIEs could have a negative impact on the effectiveness of specific rules for PIEs. Although, considering the nature of this study, we will not conclude whether the right companies have been classified as PIEs, we will provide insight into the composition of the Dutch PIE market based on the EU-definition and how the extended auditor’s report is applied in practice for different categories of entities included in this market.
3 The Netherlands Scientific Council for Government Policy (Citation2001) identifies four safeguarding mechanisms to promote the public interest: rules, competition, hierarchy and strengthening of institutional values.
4 According to article 2 point 13 of Directive 2014/56/EU, PIEs include:
(a) entities governed by the Law of a Member State whose transferable securities are admitted to trading on a regulated market of any Member State within the meaning of point 14 of Article 4(1) of Directive 2004/39/EC;
(b) credit institutions as defined in point 1 of Article 3(1) of Directive 2013/36/EU of the European Parliament and of the Council, other than those referred to in Article 2 of that Directive;
(c) insurance undertakings within the meaning of Article 2(1) of Directive 91/674/EEC; or
(d) entities designated by Member States as public-interest entities, for instance undertakings that are of significant public relevance because of the nature of their business, their size or the number of their employees.
5 Both surveys are mainly limited to reporting the type of entities designated as PIEs at a national level, like pension funds, UCITS/investment companies, entities based on size criterion, state owned companies, government, asset management companies, electronic money institutions and other.
6 Including only listed entities is sometimes motivated by the use of stock prices as a research variable. Often, however, a clear motivation why only listed entities are included instead of considering the whole PIE market is lacking.
7 In Dutch: ‘Wet toezicht accountantsorganisaties’.
8 In Dutch: ‘Burgerlijk Wetboek’.
9 During the years in scope of this study (2012 till 2017), no entities were designated as Dutch PIEs at a national level. As of 1 January 2020, in the Netherlands network operators, large housing corporations, large pension funds and three institutions for science policy have been designated as PIEs. In deciding whether or not to designate entities as Dutch PIEs, it is taken into account from the perspective of proportionality that entities in some sectors are already supervised by other public regulators.
10 In Dutch: ‘Commissie Toekomst Accountancysector’.
11 Additional requirements are also set in the audit of a PIE regarding, for example, mandatory auditor rotation, prohibition of provisioning of other services, the quality control system and more intensive supervision.
12 We discuss two elements that could be applicable to all Dutch PIEs. Another interesting element is the explanation of the scope of the group audit. As a group structure does not apply to a large part of the population of Dutch PIEs, we will not discuss this element any further. We also do not discuss the expanded, but substantively standardized, description of management’s and auditor’s responsibilities. Nor do we discuss, for example, more design-oriented elements, such as including the opinion at the start of the auditor’s report.
13 This element is included in both temporary Dutch standard 702N and its successor in the form of the Dutch version of ISA 700 (Dutch-specific paragraph 700.29A). Reporting on the applied materiality was part of the measures proposed in the Dutch report ‘In the public interest’ (Nederlandse Beroepsorganisatie van Accountants, Future Accountancy Profession Working Group, Citation2014), meant to improve audit quality and independence and to restore public confidence in the audit profession. Reporting on the materiality as applied in the audit is also introduced in the United Kingdom (e.g. Christensen et al., Citation2020).
14 Analysing developments in auditor’s reporting on materiality (levels and bases) for a population of 56 Dutch listed companies, without for example making a distinction according to size or sector, Eijkelenboom (Citation2019) reports signs of uniformity in determining materiality. The part of the study of the NBA (Citation2015) that is focused on materiality is primarily limited to providing some descriptives and a few practical examples of how auditors of Dutch listed companies report on materiality.
15 Data-gathering started in October 2017, the last check regarding missing data took place in December 2019.
16 Those additional searches increased data availability on average with 5.5%.
17 Financial year-end of Dutch PIE in calendar year as mentioned.
18 For 50.8% of the initially 758 (partly) missing financial statements and auditor’s reports (: 261 + 496 = 757, and 1 additional complete set as stated hereafter), we found a plausible reason based on e.g. termination date, establishment date, changed reporting period, filing of statement of consent instead of financial statements. For the other cases, based on a statistical record sample we requested 10% of these PIEs to provide us with the missing documents, resulting in just one additional complete set.
19 Deloitte, EY, KPMG and PwC.
20 This number has been determined taking into account, for example, mergers and name changes.
21 In addition, we have noticed that a significant part of Dutch PIEs is located at the address of a trust office. Using the last known addresses of Dutch PIEs, analysis shows that at the three most frequently mentioned addresses belonging to trust offices, no less than 38.86% (476 out of 1225) of Dutch PIEs are located.
22 Financial institutions representing 65.80%, insurance and pension funds (no compulsory social security) representing 19.02%. It should be noted that ‘financial institutions’ in the population of Dutch PIEs cover a wide range of companies, most of them being finance and holding companies and only a limited number of banks.
23 Considering almost all entities with code 65 (insurance and pension funds) are engaged in the insurance business, in line with the EU-definition we will use the term ‘insurance undertakings’.
24 Results (not tabulated) also show limited variation in classification of Dutch PIEs (at an aggregated level) based on size criteria over the six years in scope of this study.
25 Some financial statements are prepared in another currency than Euro. In that case, conversion to Euro has taken place at the rate at the end of the financial year.
26 Classification based on criteria as included in article 2:397 of the Dutch Civil Code (applied on the figures of one year). An entity has been classified as ‘large’ if it classifies as ‘large’ on two or three of the individual size criteria. E.g. an entity having assets of Euro 12,000,000 (non-large), revenues of Euro 50,000,000 (large) and 300 employees (large). An entity has been classified as ‘non-large’ if it classifies as ‘large’ on one or zero of the individual size criteria. E.g. an entity having assets of Euro 12,000,000 (non-large), revenues of Euro 50,000,000 (large) and 150 employees (non-large).
27 Some financial statements only mention the number of employees employed by a PIE, some others also mention a number of employees working for but not employed by a PIE. We have tabulated the results regarding employees both employed by a PIE and by other entities. Using only employees employed by a PIE (not tabulated) results in even slightly lower percentages of entities classified as ‘large’ compared to the results tabulated in .
28 For Dutch PIEs located at the three most frequently mentioned addresses belonging to trust offices (1464 out of 4359 complete sets of financial statements and auditor’s reports), this amounts to 79.03% and even 93.92% when using an equity range between Euro 0 and Euro 100,000.
29 For Dutch PIEs located at the three most frequently mentioned addresses belonging to trust offices, this amounts to 90.44%.
30 Over 90% of Dutch PIEs with equity and/or net result between Euro 0 and Euro 25,000 are located at the three most frequently mentioned addresses belonging to trust offices.
31 As we wonder whether the auditor primarily reports key audit matters related to the balance sheet and profit and loss account or related to other subjects, we have made three major clusters regarding assets, liabilities and revenues and several more detailed clusters regarding other subjects. This does not imply, however, that one cluster would be more important compared to another cluster.
32 As a result, 7.19% (428 out of 5949) of the key audit matters have not been clustered.
33 Because some key audit matters are covered by multiple clusters of key audit matters and some other key audit matters are not covered by the clusters as included in , the total number of 6127 differs from the total number of key audit matters as included in the database (5949).
34 The largest differences seem to be caused by an increase of reporting on Solvency (II)/SCR in the years 2016 and 2017.
35 The (not tabulated) results show that in all years in scope of this study, no adverse opinions have been issued and disclaimers of opinion (varying from 0.70% to 1.46%) and qualified opinions (varying from 0.00% to 0.56%) were exceptional. As a consequence, the percentage of unmodified opinions (including those with emphasis of matter / other matter paragraphs) remains almost unchanged (varying from 98.54% to 99.07%).
36 contains a total number of 2671. The difference with the number of auditor’s reports (2629) is caused by 42 auditors reporting two bases applied in determining one monetary materiality level.
37 Compared to EY (24.25%), KPMG (25.23%) and PwC (22.67%), the average market share of Deloitte (13.99%) is clearly smaller, but still larger than the average combined market share of all non-BIG4 audit firms (13.86%).