Audit Committee Quarterly Spring 2011
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Audit Committee Quarterly Spring 2011


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1-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 1Audit Committee QuarterlySpring 2011Themes: Pensions, auditorsand the audit committeeWelcome 3Signals 4The audit committee and the external auditor 6Interview Frans Cremers 9Pensions and the auditcommittee 12Interview Henk Scheffers 16Ten to do’s for 2011 19Current developments 211-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 22 Audit Committee Quarterly – Spring 2011About usThe Dutch Audit Committee Institute The Audit Committee Quarterly (ACI) was set up by KPMG with (the ACQ) is designed to help keepthe aim of providing members of audit committee members abreast audit committees with the required of developments and changes in the knowledge and to offer a forum for corporate governance arena. The ACQexchanging knowledge and views will be distributed at the direct while carrying out their tasks. request of audit committee members, ACI follows developments in the supervisory board members, corporatefield of corporate governance in directors or other officers.general, and audit committees in particular, both in the Netherlands For more information on the work and internationally. of ACI please click on our or contact:The tasks, roles and responsibilities of audit committees – but, no doubt, Audit Committee Institutealso the expectations of stakeholders – KPMG Accountants N.V.appear to be constantly changing. P.O. Box 74555ACI has therefore started a number of ...



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1-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 1
Audit Committee Quarterly
Spring 2011
Themes: Pensions, auditors
and the audit committee
Welcome 3
Signals 4
The audit committee
and the external auditor 6
Frans Cremers 9
Pensions and the audit
committee 12
Henk Scheffers 16
Ten to do’s for 2011 19
Current developments 211-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 2
2 Audit Committee Quarterly – Spring 2011
About us
The Dutch Audit Committee Institute The Audit Committee Quarterly
(ACI) was set up by KPMG with (the ACQ) is designed to help keep
the aim of providing members of audit committee members abreast
audit committees with the required of developments and changes in the
knowledge and to offer a forum for corporate governance arena. The ACQ
exchanging knowledge and views will be distributed at the direct
while carrying out their tasks. request of audit committee members,
ACI follows developments in the supervisory board members, corporate
field of corporate governance in directors or other officers.
general, and audit committees in
particular, both in the Netherlands For more information on the work
and internationally. of ACI please click on our website or contact:
The tasks, roles and responsibilities
of audit committees – but, no doubt, Audit Committee Institute
also the expectations of stakeholders – KPMG Accountants N.V.
appear to be constantly changing. P.O. Box 74555
ACI has therefore started a number of 1070 DC AMSTERDAM
initiatives to assist members of audit
committees. or tel. +31 (0)20 656 7098
ACI initiatives include roundtable
meetings, publication of the Audit
Committee Quarterly, conference
and board presentations, periodic
distribution of time-sensitive information
and a website.
© 2011 KPMG Accountants N.V.1-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 3
Audit Committee Quarterly – Spring 2011 3
Introduction to the Spring 2011 edition of the Dutch
Audit Committee Quarterly
Pensions, auditors and the audit criticism regarding the report of the employees and offer them insurance
committee supervisory board deserves some schemes with different investment
In this Spring issue of the Dutch Audit consideration. As the other article in profiles.
Committee Quarterly we present a this section about the Henri Sijthoff
mixture of practical and more reflective Prize shows, the annual report does The other theme under debate at the
material, including some personal not escape criticism either. moment is the relationship between
experience from two prominent the audit committee and the external
supervisory board members. To start For this Quarterly we have chosen two auditor. The audit profession is clearly
with the practical part: I hope the Ten themes that we think merit some extra in the politicians’ and regulators’
To Do’s for 2011 (pages 19-20) will be attention: firstly the way audit spotlight. It is as yet unclear whether
useful for audit committees, particularly committees deal with pensions and this will lead to new regulation,
when preparing the meeting about the secondly the working relationship affecting the ways audit committees
annual report. The article also contains between the audit committee and the and external auditors work together.
some other reminders concerning external auditor. My experience with Our article presents an overview of
important tasks of the audit committee. pensions is that in the analysis of the best practices and gives some
In Current Developments (pages 21- financial results, the impact of pensions suggestions to clarify and possibly
22) you will find the highlights of the is always eliminated because of its enhance the relationship between a
recent evaluation of the Corporate volatility. I think that pension risks, company and its external auditor.
Governance Code by the Monitoring precisely because of their volatile In the interview about this subject
Commission. I think especially the nature in case of defined benefit Frans Cremers, who sits on several
schemes, should be discussed at least supervisory boards and audit
once a year by the audit committee. committees, offers some very sensible
The article about pensions is followed comments and advice from his own
by an interview with Henk Scheffers, experience. What I find particularly
supervisory board and audit committee interesting is how he stresses the
member at numerous companies. importance of ‘boardroom fähigkeit’ of
Interestingly, Scheffers does not look the lead partner in his contacts with
at pensions as part of employment supervisory board members and
conditions, but views the present executives. I completely agree with
pension problems as reputation risks Cremers that an external auditor who
for the company, besides a financial understands the ‘boardroom language’
risk and a reporting issue. He advises and is not afraid to speak out, can be
companies that outsource pension more effective in his work and more
management and investment to pay valuable to the company.
close attention to the track record of
the pension investor. Also, they should Ben van der Veer
communicate proactively with their Chairman
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4 Audit Committee Quarterly – Spring 2011
A selection of topics relevant for audit committees
COSO Seeks input on update of internal control
COSO plans to take a fresh look at the Tabaksblat Code (NL) explicitly refer to concepts and guidance in the framework
framework in light of significant the COSO framework. COSO plans to will be refined to reflect the evolution
changes in the business and regulatory take a fresh look at the framework in of the operating environment along
environment over the past two decades. light of significant changes in the with changed expectations of regulators
business and regulatory environment and others with an interest in internal
Developed by the Committee of over the past two decades to see where control. It also expects the enhancements
Sponsoring Organizations of the it may need some updating. To start this to take into account more than just
Treadway Commission in 1992, the process, COSO has launched an online financial reporting needs, looking at
COSO framework is the generally survey, asking for a wide range of operations and broader compliance
accepted basis for establishing and stakeholders to say what they believe is objectives as well. The final framework
evaluating an internal control structure. still relevant in the framework, as well update is expected to be completed in
Among others, the Sarbanes Oxley Act as what's missing and what should be 2012. (
(US), the Turnbull Report (UK) and the updated. COSO anticipates certain
COSO releases resources aimed at enhancing ERM programsecently published two new for Getting Started” describes successful “Developing Key Risk Indicators
papers to help companies that want to step-by-step efforts by companies to to Strengthen Enterprise Risk
get more serious about enterprise risk launch an ERM programme. The second Management,” it is intent to help
management. paper is targeted at companies that need management develop effective key
some focus on strengthening an existing risk indicators that will heighten
The first paper “Embracing Enterprise ERM programme with some tighter board and management awareness of
Risk Management: Practical Approaches focus on key risk indicators. Titled enterprise risk. (
NBA: financial reporting of hospitals is under par
Financial reporting by Dutch health groep van Accountants, NBA) in its general and few reports provide a real
care institutions has several publication Het jaar 2009 Verslagen, insight into the risks facing the hospital.
shortcomings, says the Dutch which was published in January 2011. There is also room for improvement in
Institute of Accountants (NBA). The NBA has investigated all eight the governance information the hospitals
academic hospitals and all 83 general provide, in particular the information
Financial reporting of hospitals, hospitals in the Netherlands. Only two about the supervisory board (raad van
especially the information about risks of the 91 financial reports on 2009 give toezicht). At 30 percent of the institutions
and risk management is not up to an explanation of the internal risk the maximum terms for the supervisory
standard, says the Dutch Institute of management and control system. board positions are exceeded.
Accountants (de Nederlandse Beroeps- The information about risk is very (
© 2011 KPMG Accountants N.V.1-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 5
Audit Committee Quarterly – Spring 2011 5
IMF notes Companies forge stronger links
limitations in between executive pay and
AFM authority performance
in oversight Companies are toughening the and 41 percent expect to do so in 2011,
standards and enforcement of compared to just 26 percent in 2009.
over financial performance-based executive pay Companies also are more reluctant
programs for 2011. to allow incentive payouts unless
reporting performance targets are met: in 2010
As companies reassess many long-time only 18 percent of companies deviated
The IMF has noted that the AFM practices that have come under fire by from plan performance formulas
has limited authority to request shareholders and regulators, they are to allow a bonus payout though
information from issuers in order toughening the standards of performance targets were not met,
to ensure their compliance with performance-based executive pay down from 24 percent a year earlier.
financial reporting standards. programs, according to a survey by Performance-based long-term incentives
the US compensation consultancy Pearl will account for 47 percent of executive
This can be read in the preliminary Meyer & Partners. The survey was held incentive value in 2011, up from 37
findings of the International Monetary among 279 participants, ranging from percent in 2009. In contrast, use of
Fund (IMF) staff dated 14 December the Fortune 50 to emerging high-growth "plain vanilla" stock options and stock
2010 concerning the assessment of companies in the United States. appreciation rights (SARs) are expected
the soundness and stability of the More than 40 percent of companies to decline to 24 percent of award value
Netherlands financial sector. Based on increased their annual bonus in 2011 from 34 percent in 2009.
the Act on Supervision over Financial performance requirements in 2010 (
Reporting (Wet toezicht financiële
verslaggeving), the AFM can request
further information from a listed
company, should it have doubt as to
whether financial reporting standards Auditor responsibility for material
have been applied correctly.
If the company involved refuses to omissions in notes to financial
cooperate in providing additional
information, the AFM cannot directly statements
order the company to comply. It has
to request the Enterprise Chamber of The NBA (the Dutch Institute of that a significant number of unlisted
the Amsterdam Court (Onder- Accountants) reconfirmed that auditors companies have for many years not
nemingskamer) to have such need to address in their audit opinion complied with the related legal
information being provided by court any material omission in the notes to requirement which has been in existence
order. Also, the AFM cannot force a the financial statements. since the adoption of the 4th EU
company to revise its annual financial Directive in Dutch law in 1984. The
statement. This authority also lies with Effectively, this means that auditors will law only allows one exception to this
the Enterprise Chamber. Overall, the have to qualify their opinion and requirement and that is when the amount
IMF staff finds that the Netherlands include, where practicable and possible, to be disclosed can be related back to a
has developed a robust supervisory the missing information in their opinion, single individual.
framework that exhibits high levels of particularly so when that information is It will be interesting to see whether
implementation of the principles of required by law. Whilst that requirement this explicit statement by the NBA will
the International Organization of extends to all such information, the lead to more compliance by unlisted
Securities Commissions (IOSCO). resulting press coverage has focused companies in their 2010 financial
( exclusively on the disclosure of the reporting or where applicable to any
1410.htm) remuneration of boards of unlisted qualified opinions by their auditors.
companies. It has become apparent (
© 2011 KPMG Accountants N.V.1-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 6
6 Audit Committee Quarterly – Spring 2011
The audit committee and
the external auditor
By Philip Wallage
The changing role of the auditor whether or not a company in its criticism. Moreover, responding to
The auditing profession is under entirety is ‘in control’. By that the demands from society, auditors must
scrutiny. Along with bankers, analysts, public demands a judgement not only give relevant information to external
supervisory boards and rating of the numbers, but also of the risk stakeholders like investors and
agencies, auditors have received their management system of a company, supervisors. Last but not least further
part of the blame for the financial and plus an opinion about non-financial discussion about the (narrow) scope
economic crisis. Recent investigations information. This requires a more of the current formal engagement to
and studies by regulators around the holistic view and approach by the audit the financial statements, is to
world can partly be seen in this light. external auditor, who has to translate be expected.
In the autumn of 2010 the Dutch his knowledge of the company into a The audit profession is also under
Authority for the Financial Markets view on the aspects mentioned above. investigation internationally. In October
(AFM), like its British equivalent the This approach has several implications 2010 the European Commission
Financial Reporting Council, published for the audit profession. Open published a Green Paper entitled ‘Audit
a report about the functioning of the communication with the company Policy; Lessons from the Crisis’. This
big audit firms during the financial and its direct stakeholders should be consultation document does not stop
crisis. According to the AFM, intensified, based on mutual respect at calling into question the very
improvements are required regarding and professional frankness or even structure of the auditing sector. In the
compliance with auditing standards,
quality control and professional
scepticism in the conduct of audits.
Another challenge for the audit
profession comes from the
investigations into the causes of the
‘banking crisis’ by the parliamentary
Commission De Wit in 2010. In the
parliamentary debate that followed
the publication of the findings of the
Commission, it appeared that the
present role and tasks of the external
auditor are not always fully
understood. There is a demand for
assurance about things that are not in
the annual statements of a company,
exceeding the scope of the external
auditor’s report. People don’t like
uncertainty and ‘simply’ want to know
© 2011 KPMG Accountants N.V.1-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 7
Audit Committee Quarterly – Spring 2011 7
Paper, the European Commission says benefit from openness, a timely that the chairman of the audit
it wants to open a debate on the role exchange of information, and a committee and the external auditor
of the auditor, the governance and positive critical attitude of both the can call or meet each other at all
the independence of audit firms, the auditor and audit committee. The latter times. This contact includes
configuration of the audit market, the selects the external auditor and clarifications of current topics, but also
creation of a single market for the proposes his appointment at the unforeseen circumstances like fraud.
provision of audit services, the general shareholders’ meeting. More regulated exchanges of
simplification of rules for small and Important tasks of the audit information concern the management
medium sized companies and the committee include supervising the letter and the auditor’s report.
international co-operation for the independence and the remuneration of
supervision of global audit networks. the external auditor, and supervising Enhancing the quality of the
It asks whether auditors should be non-audit services. The audit relationship with the external
appointed by national or European committee also reviews the audit auditor
regulators rather than by the company, scope, plan and findings. The quality of the working relationship
and whether joint audits, audit Good and timely communication between the audit committee and the
consortia, mandatory rotation or between the audit committee and external auditor can be further
re-tendering should be introduced. the external auditor about financial enhanced by considering the following:
The Green Paper received more reporting and risk management is very • In order to optimise the
than 700 responses and the European important, which is – for auditors independence of the external
Commission will announce follow formally required – reflected in the auditor, his appointment should be
up measures and proposals to the International Standards on Auditing in the hands of the audit committee/
European Parliament in the following (ISAs). The exchange of information supervisory board. Naturally, the
months. includes topics like the control opinion of the CFO and the CEO
environment, risks regarding executive regarding the candidate is very
Communication between external remuneration, the quality of the relevant and should be taken into
auditor and the supervisory board/ financial results, the quality of the account. However, the selection
1audit committee governance and the ‘tone at the top’ process must be controlled and
A good working relationship between that influences the company’s culture. directed by the audit committee.
the supervisory board or the audit The communication between the audit The formal appointment of the
committee and the external auditor is committee and the external auditor external auditor takes place by
vital for good corporate governance will benefit from the presence of the and at the general shareholders’
and a well functioning information external auditor at the meetings of the meeting;
supply chain. Moreover, this audit committee and his presence at • There should be a direct reporting
relationship should be based on the annual shareholders’ meeting. line between the external auditor
mutual respect and trust and will There should be a standing agreement and the supervisory board or audit
1 It should be emphasised that the supervisory board/ audit committee are both charged with governance.
© 2011 KPMG Accountants N.V.1-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 8
8 Audit Committee Quarterly – Spring 2011
committee. It can be useful for the What the Corporate Governance Code says about the external
supervisory board to receive earlier auditor’s report
(draft) versions of the reports from V.4.3 The report of the external auditor pursuant to Article 2:393, paragraph 4,
the external auditor to the CFO of the Netherlands Civil Code shall contain the matters which the external
and CEO; auditor wishes to bring to the attention of the management board and the
• At the periodic meeting between supervisory board in relation to the audit of the financial statements and
the audit committee and the the related audits. The following examples can be given:
external auditor without the
presence of management, the A. With regard to the audit:
‘tone at the top’ and the quality • information about matters of importance to the assessment of the
of staff and management should independence of the external auditor;
be subjects of discussion; • information about the course of events during the audit and cooperation
• The audit committee should not with internal auditors and/or any other external auditors, matters for
only consume information discussion with the management board, a list of corrections that have
presented by the external auditor not been made, etc.
but also discuss critical issues;
• At least once a year the quality and B. With regard to the financial figures:
effectiveness of the communication • analyses of changes in shareholders’ equity and results, which do not
between the external auditor and appear in the information to be published, and which, in the view of the
the audit committee should be external auditor, contribute to an understanding of the financial position
reviewed; and results of the company;
• Periodically, the public responsibility • comments regarding the processing of one-off items, the effects of
and accountability of the external estimates and the manner in which they have been arrived at, the choice
auditor should be discussed and of accounting policies, when other choices were possible, and special
confirmed between the auditor and effects of such policies;
the audit committee. Core values of • comments on the quality of forecasts and budgets.
this responsibility and accountability
are independence and objectivity; C. With regard to the operation of the internal risk management and control
• The audit committee should have systems (including the reliability and continuity of automated data
an understanding of the results of processing) and the quality of the internal provision of information:
periodic reports on the quality of • points for improvement, gaps and quality assessments;
audit firms and auditors by external • comments about threats and risks to the company and the manner in
supervisors (such as the AFM). which they should be reported in the particulars to be published;
• compliance with articles of association, instructions, regulations,
Philip Wallage is a partner of KPMG loan covenants,
and Professor of Auditing at the • requirements of external supervisors, etc.
University of Amsterdam
© 2011 KPMG Accountants N.V.1-ACQ Spring 2011 WEB 10-02-2011 11:17 Pagina 9
Audit Committee Quarterly – Spring 2011 9
“Mutual trust and openness
are very effective”
Frans Cremers about working with the external auditor
Upfront clarity about mutual very clear ideas about how the audit “Some auditors look up to
expectations, trust and respect, committee can benefit from the executive and supervisory
complete openness and timely external auditor. Cremers has seven
board members too much,
exchange of information, a positive supervisory board memberships (see
which impairs theircritical attitude of the auditor.These box). At five of these, he is chairman
are the most important ingredients of the audit committee. freedom to speak their
for a fruitful working relationship
between the audit committee and Let us start with some practicalities.
the external auditor, says Frans Is the external auditor present at every
Cremers.This requires time and meeting of the audit committee? commotion. So unless there is an
effort, he tells Ben van der Veer. “Certainly. For me that is self-evident. important issue at hand, he will not
There is still room for improvement, Except of course when we discuss easily speak out. Mutual trust is a very
he adds. “Some lead partners lack the external auditor himself. I value an important factor in this respect. When
the international experience to be open relationship with the external the auditor tells me something, he
‘boardroom material’. And some of auditor, based on trust. For me that must be confident that I will not
them look up too much to top implies that we share all important confront the CFO directly with the
executives and supervisory board information at the earliest moment. matter, lest an awkward situation
chairmen, which impairs their There must be a mutual ‘no surprises’ should arise between those two. I
freedom to speak out.” attitude. I have always done it that think audit committee chairmen should
way, also when I was CFO of VNU. foster their relationship with the
Frans Cremers (59) likes to take his At least once a year during an audit external auditor, because he is much
time to think and weigh his words. committee meeting we meet with the better informed about what goes on in
But he is as determined as he is soft external auditor, without the presence the organisation than we are.”
spoken. The former CFO of publishing/ of management. At every normal
market research company VNU has meeting I ask if the external auditor Have you seen much change over
wants to talk with us without the CFO the years concerning the relationship
and the CEO being present. The between the audit committee and the
answer is nearly always no. But he external auditor?
knows he can call me anytime when “In the 14 years that I have been CFO
he wants to talk to me personally.” and supervisory board member, I have
always adhered to the principles I have
Is the attitude of the external auditor sketched just now: a relationship based
always completely proactive, or do on mutual openness and trust between
you have to encourage him to speak audit committee, management and
his mind? external auditor, in order to get the best
“Well, I know accountants are out of the combination.” >>
naturally prudent and want to avoid
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10 Audit Committee Quarterly – Spring 2011
“Apart from being
I want a lead partner
to be what I call
boardroom material”
Do you require from the external the world are consulted. But apart How Frans Cremers views the working
auditor reports about separate topics, from being sufficiently knowledgeable, relationship of audit committee and
or is it all in the management letter? I want a lead partner to be what I call external auditor:
“The management letter is of course ‘boardroom material’.”
the main document for the audit • Upfront clarity about mutual
committee meeting preparing the Can you explain what you mean by expectations.
annual report. Fortunately, the that? • Mutual trust and respect.
management letter has become easier “By boardroom material I mean • Complete openness and timely
to digest. I remember books of many someone who is comfortable with exchange of information.
closely printed pages that we had to executives and supervisory board • Positive critical attitude of the auditor.
read entirely in order to sift out the members because he or she is • Allowance to speak confidentially
important pieces of information. We acquainted with their way of thinking, about delicate matters.
have agreed that the main document talking and decision making. Someone • Ability of the auditor to communicate
focuses on the important issues. I also who is not afraid to exchange opinions on boardroom level.
want to see the level of the internal freely and who knows how to be
controls be put into a score from one critical without being rude. You have to
to ten, in order to see where the have international experience in order or audit committee and the external
auditor’s worries may lie. In the to become fit for the boardroom auditor, possible issues are on the
meeting, we invite the external auditor environment. It is also very helpful for table in an early stage. Then I expect
to highlight those points he thinks are your English. I don’t know whether that the external auditor and the CFO
most important for us to know.” accountants are required by their firms deal with those issues appropriately.
to work in different international Sometimes an issue is not solved right
Do you also expect the external cultures, but occasionally I have my away and some more talking or
auditor to have some expertise about doubts regarding auditors I know. Also, research is necessary, but in my
the industry or are you satisfied with on lead partner level I see differences experience a joint conclusion is always
the purely professional expertise? in that respect. Some of them look up reached in time. And I have never felt
“I do not think I have ever taken to executive and supervisory board that the external auditor did not dare
industry expertise into account when members too much, which – to me – to report an inappropriate activity
selecting a new auditor, so the answer impairs their freedom to speak their by the CFO, such as earnings
must be no. Professional expertise is mind.” management. Of course the auditor
the most important criterion. Having sometimes comes to me to discuss
said that, I know that the lead partner In your opinion, is the external auditor certain accounting practices.”
does not know everything there is to sufficiently independent and critical
know about, for instance, IFRS. towards top management of the What can the external auditor do
He has to refer to colleagues in his company? better to facilitate your job as audit
office who are the real specialists. “When there is a situation of mutual committee chairman?
Sometimes ten accountants around trust between the supervisory board “It is very important that the external
© 2011 KPMG Accountants N.V.