NEW REGULATIONS FOR DUTCH PUBLIC INTEREST ENTITIES How will they affect your company? Because people matter.
New regulations for Dutch public interest entities 3 Introduction of new regulations On 11 December 2012, the Dutch Senate approved two amendments to the Audit Firms Supervision Act (Dutch acronym: WTA). These amendments affect the services audit firms are allowed to provide to Dutch public interest entities (hereafter: PIEs). The amendments relate to: a mandatory audit firm rotation as of 1 January 2016; and b segregation of audit and non-audit services as of 1 January 2013. As the new legislation may be relevant to your company, in this publication BDO takes a closer look at these stricter rules and offers you further information about their impact. What is the background? Independence is one of the cornerstones of the audit profession, yet also one of the most difficult aspects to judge objectively. For this reason, the government decided there was a need to legislate this aspect, although at present only for PIEs. Some legislation was in fact already in force, but it has now been supplemented with strict rules for mandatory audit firm rotation and segregation of audit and non-audit (e.g. consultancy) services. The legislator s intent by introducing mandatory audit firm rotation is to prevent the independent external auditor from developing excessive involvement in, and familiarity with, the audit client. At the same time, the second amendment - the segregation of audit and non-audit services - ensures that an auditor will not have to mark his own paper.
4 New regulations for Dutch public interest entities The amendments are in line with developments in Europe, although the Netherlands is leading in this field. The Dutch Minister for Finance, Mr. Dijsselbloem, has promised that, in mid-2015, he will examine whether the European independence regulations on mandatory audit firm rotation and segregation of audit and nonaudit services warrant new changes to be made to Dutch legislation. What is a PIE? The new legislation only affects Dutch PIEs. The definition of a PIE is set out in the WTA. It essentially refers to organisations that are of significant public relevance because of their size or the nature of their business, such as: entities whose transferable securities are admitted to trading on an EU-regulated market (listed companies) that are: established in the Netherlands; and established in accordance with Dutch law. banks, life and non-life insurers and reinsurers that are: entities that are incorporated having their registered office in the Netherlands and are licensed under the Financial Supervision Act (Dutch acronym: WFT); or entities that are not incorporated whose principal place of business (head office) is located in the Netherlands and which are licensed under the WFT.
New regulations for Dutch public interest entities 5 If your company is a PIE, the changes in the law will affect you. They will also affect you if your business is affiliated with a PIE, for instance if your business is a sister company or subsidiary of a PIE or if there is a controlling interest. Your organisation will then qualify as a related entity. You may assume that if changes are required at the PIE, the same applies to any related entity. Consequences of the amendments Mandatory audit firm rotation The introduction of mandatory audit firm rotation means that a PIE cannot be audited by the same audit firm for more than eight consecutive years. This is followed by a cooling-off period of no less than two years. Mandatory audit firm rotation will come into force on 1 January 2016, i.e. you will need to change audit firms no later than in 2016. Audit years up to and including 2015 (ending no later than 31 December 2015) can be audited by the current auditor. This relatively long transitional period is designed to facilitate phased rotation, thereby avoiding a big bang. Changing audit firms is no easy task for PIEs. It is important to map out the consequences for your company and to discuss the matter with the supervisory board or the audit committee well in advance. An important point to consider is the seven-year maximum term of appointment for the individual audit partner. This term is also stipulated by law. It may therefore be practical to consider audit firm rotation earlier.
6 New regulations for Dutch public interest entities For the sake of completeness, we would note that - strictly speaking - audit firm rotation applies only to the audit firm of the PIE itself and not to the audit firm of its subsidiaries or group entities. However, any required change in audit firm at group level will undoubtedly also affect the group entities. Segregation of audit and non-audit services The second amendment of the law will also have a considerable impact on PIEs, because the audit firm that carries out the statutory audit of a PIE will be banned from providing any non-audit services to that entity. This amendment came into effect on 1 January 2013, with a transitional period of two years. This means that non-audit services contractually agreed before 1 January 2013 can still be provided in the next two years. Based on the history of the Act, the Netherlands Professional Organisation of Accountants (Dutch acronym: NBA) has issued guidance on which services still can be provided in combination with the statutory audit and which are banned. The most important factor is whether or not the auditor s report is intended for external users or for the supervisory board (or governance bodies). The idea is that the supervisory board has a role in overseeing the management of a PIE and should therefore have access to reliable, audited information.
New regulations for Dutch public interest entities 7 Services still allowed to be provided in combination with the statutory audit of PIEs: (additional) statutory and non-statutory audit, review and assurance services for third parties; assurance on management reports and corporate governance, risk management and sustainability reports; and assurance and fact-finding for external users (e.g. external regulators and the tax authorities) or the supervisory board (including on internal controls, fraud, and mergers and acquisitions). Services no longer allowed to be provided in combination with the statutory audit of PIEs: fact-finding where the results are for for internal use only; compilation of financial statements and accounting services; tax compliance services, including corporate tax returns, calculating the tax position, transfer pricing and tax planning; and consultancy services, including tax advisory services, strategic and management consulting, services relating to internal controls and mergers and acquisitions (including due diligence reviews), legal services, HR services and IT services.
8 New regulations for Dutch public interest entities Clearly, the segregation of audit and non-audit services applies to the entire Dutch network to which the audit firm belongs. So not just to the services provided by its auditors, but also to the services of tax consultants and other consultants and advisers affiliated with the firm. For the Dutch legislator this was in fact the heart of the matter. Extraterritorial effect The Dutch legislator does not have the authority to give the amendments any extraterritorial effect. However, it is not the intention that the banned services should then be provided by an international affiliate in the network. This is also the position taken by the NBA.
New regulations for Dutch public interest entities 9 Our views BDO is keenly following the debate on the implications of the new legislation and is discussing them with clients, supervisory boards, audit committees and other stakeholders. In the services we provide to PIEs, the new rules will be introduced with a focus on a smooth transitional period, the public interest and the interests of our clients. BDO has a long tradition of providing services to PIEs and wants to continue offering these entities high-quality audits or specialist consultancy services. For this reason, we will keep on investing in the quality of our people, our approach and the transparency of our service provision. We advocate a strict segregation of audit and nonaudit services to PIEs. This protects the independent position of the auditor and ensures that the audit function carries the right weight when interacting with stakeholders and the public at large. We believe that mandatory audit firm rotation should come with the least possible disruption for your company. In our view, timely action is important for a smooth transition. Because the debate about changes to the regulations is still ongoing in Europe, we will continue to monitor the developments in this field closely.
10 New regulations for Dutch public interest entities About BDO BDO has more than 2,100 professionals in the Netherlands who provide accountancy, tax and consultancy services. They are supported in their work for large, transnational clients including PIEs and large businesses - as well as small and medium-sized businesses by BDO s Department of Professional Practice and by the various industry groups. BDO is one of the leading accountancy firms, both in the Netherlands and globally. Worldwide BDO has about 1,200 offices in more than 130 countries with about 55,000 partners and staff. More information If, after reading this publication, you have any questions about the introduction of the new legislation, please contact John Hijmans, Corporate Clients Partner, on +31 (0)30 284 9715 or send an email to john.hijmans@bdo.nl. If there is anything else you would like to know about our audit services or about the non-audit services BDO can offer you, our professionals will be happy to arrange an introductory meeting with you.
WWW.BDO.NL This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Accountants & Adviseurs to discuss these matters in the context of your particular circumstances. BDO Accountants & Adviseurs, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO is a registered trademark owned by Stichting BDO, a foundation established under Dutch law, having its registered office in Amsterdam (the Netherlands). In this publication BDO is used to indicate the organisation which provides professional services in the field of accountancy, tax and consultancy under the name BDO. BDO Accountants & Adviseurs is a registered trade name owned by BDO Holding B.V., having its registered office in Eindhoven (the Netherlands), and is used to indicate a group of companies, each of which separately provides professional services in the field of accountancy, tax and/or consultancy. BDO Holding B.V. is a member of BDO International Ltd, a UK company limited by guarantee, and forms part of the worldwide network of independent legal entities, each of which provides professional services under the name BDO. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 02/2013 BA1316