AFM shares recommendations to strengthen audit committees in their role relating to audit of the financial statements

The Dutch Authority for the Financial Markets (AFM) reviewed the role of audit committees of Dutch Public Interest Entities (PIEs) in selecting the audit firm and monitoring of the statutory audit. With its observations and recommendations, the AFM aims to strengthen audit committees in the performance of that role.

• Leading role in selection process audit firm
• Room for improvement in monitoring the external audit
• Transparency selection process not sufficient yet
• Specific recommendations for strengthening role
• Important link in financial reporting process

Leading role in selection process audit firm

Audit committees are increasingly taking a leading role in the process of selecting the audit firm. In 92% of companies that recently changed auditors, the chairman of the audit committee also chaired the selection committee. In 2015, during AFMs previous review, this was 79%. Additionally, audit committees indicate that generally sufficient relevant knowledge was available within the audit committee for the adequate fulfilment of their role.

Room for improvement in monitoring the external audit

From the review, it emerges that there is room for improvement regarding the monitoring role with respect to the external audit. The audit committee could monitor the independence of the auditor/audit firm more closely and the follow-up of the auditor’s recommendations to the company.

Transparency selection process not sufficient yet

Further, the transparency to shareholders requires attention. Shareholders – for all PIEs in our review – were solely provided with the name of the proposed audit firm. However, shareholders should be provided with at least two choices and the duly justified preference for one of them.

Specific recommendations for strengthening role

The report includes more specific recommendations that audit committees may use to strengthen their role. During the review, there was a lot of dialogue with audit committees. Previously, the AFM shared the (preliminary) outcomes of the review during a webinar for audit committee members at the end of 2020.

Important link in financial reporting process

Audit committees are responsible for selecting the auditor/audit firm and monitoring their statutory audit of the financial statements. For that reason, they are an important link in the relationship between the supervisory board, the company, the auditor and the shareholders.