The Netherlands is renowned for its favorable business climate, which has led to the establishment of numerous international holding structures through the country. Within these structures, there are often intermediate and top-level holdings that have limited or no operational activities in the Netherlands. These (intermediate) holdings are set up for various reasons, such as creating efficient financial structures within large international organizations, fulfilling capital requirements, and addressing tax considerations. Due to the international nature of these group structures, backlogs in the audit of these groups are frequently encountered.
Causes
There are several reasons for the occurrence of backlogs in the audit of group financial statements. The following are some commonly observed causes:
- Complexity: International group structures often encompass multiple subsidiaries, branches, and operations across different countries. These structures can be complex due to varying legal, financial, and reporting requirements in each jurisdiction. Auditing such complex structures necessitates specialized knowledge and experience in international accounting and auditing standards, as well as local regulations and practices.
- Language and Cultural Barriers: International group structures may involve entities in different countries with diverse languages and cultural norms. Effective communication and understanding between the group auditor and the entities being audited can be impeded by language barriers and differences in communication styles.
- Legal and Regulatory Considerations: Auditing international group structures requires compliance with the laws and regulations of each relevant jurisdiction. Auditors need to be familiar with the legal and regulatory frameworks of multiple countries to ensure proper adherence to audit standards and requirements. Navigating these different legal and regulatory environments can be challenging and time-consuming.
- Coordination and Logistics: Auditing an international group structure often requires coordination with local accountants in different countries. This necessitates effective coordination, communication, and collaboration among accountants working in different time zones, employing different auditing methodologies, and following diverse reporting frameworks. Managing these logistical aspects can be complex and may require additional time and effort.
- Independence and Conflicts of Interest: Accountants must maintain independence and objectivity when performing their duties. Auditing an international group structure can give rise to conflicts of interest due to potential business relationships or connections between accountants and the entities being audited. Ensuring independence and managing potential conflicts of interest can be challenging, requiring strict adherence to professional ethics and standards.
- Quality and Reputation Considerations: International group structures often involve significant financial resources, necessitating the consideration of both public interest and the interests of other stakeholders. Selecting an accountant with a strong reputation for quality and expertise in auditing complex multinational organizations is crucial. However, finding accountants who meet these criteria and have the capacity to handle such engagements can be challenging.
Impact on the Audit of Financial Statements
Backlogs in meeting the audit requirements have a substantial impact on the audit of previous years. Once a backlog occurs, it often leads to a growing backlog as the entity falls out of sync with the annual cycle of preparing and auditing financial statements. This affects the work of the auditor and may result in adjustments to the judgment regarding the financial statements. Escaping from this situation can be difficult as the backlogs accumulate, and finding an accountant capable of catching up on multiple years’ audits can be challenging.
Consequences for the Company and Management
Non-compliance with the statutory audit requirement carries severe consequences. The company’s management is responsible for arranging an audit by an auditor affiliated with an audit firm registered with the AFM (Authority for Financial Markets). Failure to fulfill the audit obligation constitutes an economic offense and may lead to criminal consequences, such as fines, imprisonment, or community service for the directors. Furthermore, non-compliance with the audit obligation can have implications for directors’ liability, especially in the event of bankruptcy. Additionally, there are other consequences of not (timely) conducting the mandatory financial statement audit, including an increased risk of errors, irregularities, or fraud in the financial statements, limited access to capital, diminished trust from external parties, and an increased risk of internal fraud within the organisation.