Disciplinary Decisions in Accounting
In 2022, the Accountants Chamber in Zwolle issued two significant rulings concerning international group audit practices. These decisions provide valuable lessons for practitioners under NV COS 600 standards. The cases discussed are:
- The case of the Indonesian component
- The case of the Israeli component
We will now examine the case of the Indonesian component.
Case Details (source: Dutch Disciplinary Court for Accountants)
The first ruling, dated January 23, 2023, involves a Dutch group accountant who lacked sufficient information in his audit file about the client’s Indonesian subsidiary because the component auditor did not grant access to the subsidiary’s audit file.
The case pertains to a family business engaged in door manufacturing, gradually relocating production to the Czech Republic and Indonesia. Two brothers, indirect shareholders of a B.V. that owned 70% of the Indonesian subsidiary, sold their shares to a new owner in September 2019.
A chartered accountant was responsible for auditing the financial statements of the Dutch entities, including the Indonesian subsidiaries. The Dutch group accountant relied on the work of the Indonesian auditor. In mid-2020, the Indonesian auditor issued an unqualified opinion on the 2019 financial statements of the Indonesian subsidiary. However, shortly before the Dutch group accountant was to issue his opinion on the Dutch company’s 2019 financial statements, indications of financial mismanagement in the Indonesian subsidiary emerged. This led the Indonesian auditor to investigate inaccuracies in the financial administration and conclude that certain balance sheet items needed downward adjustments. Consequently, the brothers who sold their shares had to compensate the new owner due to these findings, prompting them to file a complaint against the Dutch group accountant.
In September 2020, the Indonesian auditor issued an unqualified opinion on the revised 2019 financial statements of the Indonesian subsidiary. The Dutch group accountant’s reliance on the Indonesian firm’s work was challenged as he was denied access to the subsidiary’s audit files, and his inquiries largely went unanswered. When responses were provided, they were brief and lacked substantiation.
The Accountants Chamber found that being denied access to the subsidiary’s files was not a sufficient reason for the lack of adequate audit evidence in the group accountant’s file. The risk of being denied further access should be borne by the group accountant.
Lessons Learned
The Accountants Chamber’s decision highlights several important lessons regarding the nature and extent of audit documentation the group accountant must maintain:
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Undivided End Responsibility: Group accountants are fully responsible for the audit of the group financial statements, as per standards 230 and 600. They must document their work and that of their team in a timely and clear manner in the group audit file.
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Independent Documentation Duty: While group accountants may refer to documentation from component auditors, the review reports must be sufficiently detailed and meet the requirements of Standard 230. If not, additional documentation in the group audit file is necessary.
According to NV COS 600.50, group-level audit documentation must include:
- Analysis of group components, indicating which are significant and the nature of the work performed on their financial information.
- Extent, duration, and intensity of the group-level team’s involvement in the work of component auditors.
- Written communications from the group-level team to component auditors regarding audit requirements.
The rulings underscore the group accountant’s duty to independently secure all necessary information and documentation to meet these documentation standards. Effective collaboration between the group accountant and component auditors is essential, often requiring customized involvement. The group accountant must take a proactive and leading role in the group audit process.