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April 23, 2012

Longer tenures lead to higher audit quality: Dutch study

A longer relationship between the auditor and its client leads to a higher number of corrections in the public audit, according to a research by the Nyenrode Business Universiteit (NBU).

The Dutch study also shows that when an audit is coupled with more than 30% of non-audit services to audit clients, the number of corrections made is three times lower. The research states that this less-tough approach does not affect important audit differences.

NBU analysed 147 Dutch audits, including 55% of Public Interest Companies and 45% of very large privately held companies.

The research follows the debate on the European Commission’s (EC) audit reform proposals, which includes mandatory audit firm rotation, mandatory re-tendering and the banning of certain non-audit services to audit clients.

According to the research, which includes information on applied error-tolerance margins, audit differences and management letters, in 23% of companies the audit leads to corrections in the balance sheet prior to the issuing of the auditors’ opinion. The impact of the audit in the correction of notes to the financial statements and the directors’ report is even higher, leading to a 77% of sections being corrected because of the audit.

A quarter of mistakes found by auditors have been classified by researchers as ‘important’ but only seven out of ten of these important audit differences have been corrected in the annual report, the study found.

 “These results lead to questions about whether obligatory rotation of audit firms, as proposed by the EC Commissioner Michel Barnier, will enhance the positive impact of the public audit,” NBU Researcher Joost van Buuren said.


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