Paper 'The alternative quarter'

20 april 2021
Pragmatic model


The helm in accountancy is changing again. At the request of the MvF, quartermasters are at work to indicate the next quarter. You can guess what they will come up with. Or is there an alternative? Will the accountant now be truly independent? Can the costs of auditing be effectively reduced? Will there be more security for investors? More opportunities for every qualified accountant? Is an annual audit opinion really necessary? Will 'stand-alone audits' be the solution? Can the tax authorities outsource the audit? Broaden the scope and control of the accountant? More control on governance?
Speaking of ethics after Enron, think of Archegos, Wirecard and Steinhoff. They keep the fear of fraud and deception alive.
Are even more rules and supervision the solution?
This paper discusses the solution, the threat and the challenge for the accountant in the future.


The heart of the matter: on the way to restoring trust

In the future of the accountant, it is independence that is particularly troubling when it comes to restoring confidence in the profession. For as the saying goes: 'whose bread you eat, whose word you speak'. Whatever the quarter-masters of the MvF might come up with, supervisors, laws and regulations and disciplinary proceedings cannot prevent the recurrence of scandals and will continue to do so. And all of this is at the expense of the unsuspecting user of the annual accounts. It goes without saying that they should be protected against this. And that is possible. In M&A transactions, the risk of warranty breaches or claims is shifted to an insurer. This brings security for the buyer or seller, and the transaction is more easily concluded as a result. It could be exactly the same in the field of annual accounts audit. All those involved in the annual accounts - the investor, the shareholder, the financier, the government, the employee, the supplier and the customer - ultimately seek certainty. A certainty that an auditor's report now offers. Namely, that the assets and results presented comply with the regulations in accordance with Book 2, Title 9 of the Dutch Civil Code. But given the number of fraud cases, their extent and the damage caused - financially, socially and in terms of reputation - is this not more of a false reality? Or is there a more efficient and fraud-proof model? Yes, there is.

Breaking through society's distrust of the accountant can be achieved by a change in role using a variant of W&I insurance (warranty and indemnity insurance). The policy of a W&I insurance provides cover for losses arising from guarantees wrongfully issued. A variant of W&I insurance covers those involved in the annual accounts against loss due to mismanagement, deception or fraud. That is what the accountant is focusing on. His position will therefore be completely different.


The new position of the accountant

The auditor will have a new client, the insurer, the insurance fund or a guarantee fund. His task will be to have companies audited and, based on the results, to impose conditions on the company to prevent mismanagement, deception and fraud in the areas of governance, internal control and reporting. Failure to do so will result in the loss of cover. This means that the company is cut off from the capital market. The auditor's opinion plays a crucial role in this.

Auditors organise themselves in a Guild that determines the remuneration and the rules of the game against the insurer.

In recent decades, the quality of corporate reporting and accounting has improved considerably. The internationally developed standards in the field of accounting have found their way into national regulations (think of Dutch GAAP). And also in the field of reporting we have high-quality education programmes. Chartered controller is now a household name. Of the number of accountants, many more are in business and work internally in a company or bank than externally. A large number of external accountants are involved in reporting: the compilation of annual accounts. The result of this work has already been elevated to a 'light' audit opinion by regulations.

An annual audit of the annual accounts is not worthwhile for all companies. The audit risk, a material misstatement of the financial statements, is limited for many companies. Multi-year audits, either on a rotating or random basis, will provide sufficient assurance to the insurer when it comes to trust in the annual reporting of companies.

The above means that if a W&I insurance is taken out with the annual accounts, the annual statutory audit can be dispensed with. However, the need for control in companies is increasing in society. Not only because of the scandals of the past, but especially because of the greater need for control in the areas of governance, environment, privacy protection, big data and AI, sustainability, and so on. Society wants more certainty in these areas as well. This will lead to the creation of related control products that can also be included in the insurer's policy. An insurance fund, or insurance companies, will be the new clients of auditors. Accountants who will understand governance, internal control and annual reporting. Supervisors of accountants will then no longer be needed. The insurer, too, has an interest in professionally critical auditors who, in the interest of the insurer, must prevent and detect possible breaches of BW 2 Title 9. Of course, based on audit, they come up with requirements that have a preventive effect on good governance, internal control and annual reporting.

For the accountant, working on behalf of the insurer, it does not get any easier. It requires a lot of knowledge and experience. Continuous educational development is required. A state examination should be developed in which the accountant takes an exam once every four years. If the exam is passed, the accountant is promoted. This is in line with the training system used in Defence. In this way, there will be accountants with a different number of stars. They will organise themselves in a guild in which there is no place for the auditor, the accountant in business and the accountant-compilers. The guild is a democratic institution, and examinations are public.

An important starting point for an insurer with regard to the above is that, in principle, each party involved in the annual accounts knows its own responsibility and acts accordingly. Employees fall back on social security, the tax authorities on their own resources, the supplier on his credit insurance and the company should also cover its specific risks itself wherever possible. What remains then is the risk of loss to the investor resulting from deception, fraud and mismanagement.

The affordability of the system will be ensured by a premium from the company itself. Furthermore, interested parties will also be charged. A form of investor tax on every stock exchange transaction will be levied for the benefit of the insurer. The government becomes a co-interested party. It can delegate its powers of control under tax law to the guarantee fund. Accountants become independent of their client and are therefore well suited to carrying out audits under the tax code.

Similar already existing forms are the Travel Guarantee Fund Foundation and the funds formed from disposal fees. The insurance tax to finance the fire service is also similar. And that is how I would like to see it. The accountant to fight fire in the financial world, independent from the audited: preventive advisory, but inclusive.

Can the size of the insured interest be covered by an insurer? In the defaults that have occurred up to today, it is the investors - including pension funds, wealthy individuals and foundations - who have been presented with the bill. Professional asset management makes these risks somewhat manageable. For this reason alone, the insurer can build in a premium risk and a cap in case of default. In any case, the interest to be insured must be in proportion to the risks that, from a social point of view, must be borne by each investor or other user of the financial statements.

Are audit offices of the SEC or the AFM not sufficient to cover the risks of a material error in the annual accounts? The SEC is known for its scandals. Recently, the German financial watchdog went wrong. Piling audit upon audit does not lead to more certainty. No, the auditor must be independent of the person being audited and must have a financial interest in ensuring that the audit is carried out properly. And last but not least, the person being audited must have an interest in such insurance. Without a policy, the capital market remains closed to the auditee.



• Dependence of auditor on auditee is broken

• Social cost savings

• More control on governance

• Creation of insurance fund/insurers to cover risks

• Training requirement coupled with promotion

• Increasing demands on audited quality of governance, internal control and annual reporting

• Organic growth related audits such as environment, sustainability, etc.

• Reduction of government involvement in accountancy

• Auditors Guild protects interests of auditors and guards the gold standard of the profession



• Politics and/or Government and/or Stock Exchanges and/or Insurers create Insurance Funds and financing.



• Confidence in (financial) accountability.


About the author

Eppo H. Horlings RA has worked as an external chartered accountant all his life. He is convinced of the value of the independent accountant in, on the one hand, assisting companies in the volatile force field we call 'the market' and, on the other, protecting society from the enormous impact and damage of fraud cases and scandals. From a start-up, Eppo's office grew into the largest independent accountancy firm in Amsterdam alongside the Big Four. In 2007, he started again as a team specialist in the field of guarantees and compensation in the broadest sense of the word. Eppo Horlings works at Horatio Audit & Assurance B.V.

Here you can find the paper 'The alternative quarter'