Audit & Assurance 27 January, 2023

Restoring trust in the financial reporting ecosystem

financiele vastlegging
Crowe Peak/ Knowledge Hub/ Audit & Assurance/

Restoring trust in the financial reporting ecosystem

Mandatory reporting on fraud and going concern in the auditor’s report to the annual accounts

Reporting on fraud and going concern has always been particularly important. However, it has become even more relevant in recent years due to events like COVID-19 and the rapid digitization of various industries and companies. As these circumstances have led to many incidents of fraud and companies going bankrupt, the significance of proper financial reporting has increased even more. In that context the Netherlands introduced the concept of mandatory reporting on fraud and going concern. Crowe Peak tells you all about this.  

Going concern and the public trust

When a company collapses, all stakeholders are affected, from employees to investors, and it eventually erodes the public’s trust in financial markets. Therefore, going concern issues are also a priority of many governments. Fraud and going concern issues are often correlated. Fraud can threaten a company’s ability to continue as a going concern; it deteriorates investors’ trust in the company and can lead to its failure. Conversely, fraudulent behavior may aim to hide a company’s going concern issues.

The Covid-19 pandemic has shown that it is impossible to prevent all corporate failures. However, a stronger financial reporting ecosystem could enable entities to timely adopt preventative measures or better manage their consequences.

Therefore, it is important for companies to identify and assess the risks associated with fraud and going concern and to implement measures to mitigate these risks. Auditors like Crowe Peak assess companies’ processes and information used in performing these assessments. In addition, they test the measures implemented by management.

New developments regarding financial reporting

On 23 September 2020, the NBA (Royal Netherlands Institute of Chartered Accountants) made its intentions clear to the Standing Committee on Finance in the Lower House of Parliament (Vaste commissie voor Financiën in de Tweede Kamer) to mandatory report on fraud and going concern in the independent auditor’s report. Dutch Auditing Standards (standard 700 – Forming an opinion and reporting on financial statements) have been amended by making it mandatory for independent auditors to report on how the auditor assessed the client’s fraud and going concern risk assessments, as well as the procedures performed. The auditor will also refer to the relevant passages in the Directors Report in the financial statements where management reports on its own assessments performed and the results thereof.

For Dutch listed entities  this became already mandatory for financial periods starting after 15 December 2020 (in other words financial year 2021). Reporting on fraud and going concern was already mandatory in the audit opinion of the 2021 financial statements, and highly recommended in the directors’ report and in relevant disclosures in these financial statements. For all non-Public Interest Entities, this becomes mandatory for financial periods starting on or after 15 December 2021.

Users of a company’s financial statements often wonder what procedures auditors perform in terms of fraud and going concern. The amendments to the auditing standards will now provide for more transparency in this regard.

What does this mean for your audit?

All engagement letters for audit engagements have also been amended to provide for management and those charged with governance and the auditor’s additional responsibilities in the assessment and reporting on fraud and going concern.

So, what does this mean for current and prospective audits and what are the next steps? Considering that the implementation is mandatory for the current financial year, it is especially important for us at Crowe Peak to have the necessary conversations with our clients as soon as possible to explain the changes in reporting, as well as the effect these changes may have on any procedures being performed, or any additional procedures that may have to be performed.

Businesses are responsible for preventing fraud in their organizations. Therefore, your auditor can check which policy and risk appetite the client has, and which procedures are in place to prevent fraud. E.g., does the client have a code of conduct, whistleblower procedures, incident registration etcetera.

Does your company require more information regarding the new audit standards? Please contact one of our audit specialists.

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