Skills shortage and exam fraud stalk Netherlands market

The situation is only getting worse across all sectors but, to add to its woes, exam fraud amongst the Big Four has damaged the reputation of the accountancy sector.

Fraud and sustainability have been top of the auditing agenda in the Netherlands this year, with reporting on fraud and going concern now mandatory in audit reports for the 2022 annual accounts onwards. The introduction of mandatory reporting on sustainability by large sized entities, which will be presented in the board of director’s report, is also demanding an auditor’s skill set, as this forms part of the annual accounts on which the audit opinion is based.

“Auditors are going to have to increase their skill sets to meet these requirements,” said Sjoerd Kuiper, Partner at Verstegen auditors and consultants, an MGI Worldwide member firm. “This is why the professional body for accountants has flagged sustainability reporting (CSRD) as a mandatory study subject for all accountants for 2023.”

The demand for accounting services is typically influenced by the overall economic health of a country, and the Netherlands bounced back strong after Covid. The measures brought in to combat Covid also created a mini-boom for accountancy services.

“During and after the pandemic requests for services increased because of all of the government grants that were given to companies and the requirement that the final declaration needed to be supported by an auditor’s opinion,” said Kuiper. “Furthermore, because of the difficulty recruiting and retaining staff, expenses increased, which resulted in higher fees. Also, clients of the Big Four are searching the market for cheaper audit firms and firms that suit their expectations. Therefore, we are still growing in our client size.”

The Netherlands is facing a skills shortage across all sectors and the labour market is tight. Firms are having to adapt to the demands of new recruits, according to Kuiper, by offering flexible work arrangements and opportunities for career development.

“The biggest challenge for accountancy firms is recruiting and retaining staff,” said Erik Klop, partner at Visser & Visser, a PrimeGlobal member firm. In general, there is a shortage of financial professionals, including accountants, in The Netherlands. A growing number of companies required by law to audit their financial statements cannot find an accountant. As a result, firms’ fees are rising.”

The lack of skilled staff has had a big impact on auditing public interest entities (PIE) in the Netherlands for the last few years. An Audit Analytics study in 2020 showed how concentrated auditing was in the Netherlands due to the dwindling number of audit firms registered to audit PIEs. In 2018, there were nine audit firms licensed to audit PIEs. However, by 2020, three had left the PIE market, leaving both listed and non-listed PIEs searching for new auditors long before the mandatory rotation.

Following Regulation (EU) No 537/2014 of the European Parliament, companies in the Netherlands must rotate their auditor every ten years; a three-year cooling off period is also required before a previously engaged auditor may be re-hired.

The Big Four controlled the majority of the market even prior to the departure of the three auditors. By 2020, this was causing a delay in several companies publishing their annual reports, and some even had to go as far as postponing reporting or extending their financial year as they were unable to secure a new auditor.

The study was last updated in 2021, and showed that the Big Four continued their dominance across the top three indexes on the Euronext Amsterdam in 2021.

With such a tight grip on the auditing market, it will have done investor confidence no good to learn that there is a problem with exam fraud amongst the big four.

In July, it was found that at least 500 workers at KPMG in the Netherlands have cheated during the compulsory exams. The company had imposed sanctions on an unknown number of employees, and some had been fired following an internal investigation into the claims that staff had swapped answers to the tests.

KPMG Nederland director Marc Hogeboom also stepped down as boss of the accounting arm, but remains an auditor and partner at KPMG. He said in a statement he “should have been more alert to signals” that pointed towards workers sharing their answers. Roger van Boxtel, the supervisory board chairman and former NS boss resigned at the end of June, two years ahead of schedule. He says now he did not complete a “voluntary training course correctly”.

The investigation was sparked after one employee reported to senior management that others were sharing the answers to mandatory tests between them. The 500 figure is an interim number and the investigation, which started last year and covers the previous five years, is continuing, according to KPMG.

The fraud “impacts on the integrity and professionalism of accountants,” Hanzo van Beusekom, chairman of financial services watchdog AFM said in a statement.

“I am shocked by the scale of this cheating and the fact that it is playing out across all layers of the organisation… We strongly urge employees within the sector to proactively report abuse.”

The reputation of the Netherlands accounting profession suffered another blow in October when it was found that Deloitte Nederland is the second of the big four accountancy offices to be embroiled in fraud.

Deloitte and the AFM have not said to what extent fraud had been committed or how many people were involved. However, the accountancy firm said the investigation covers all 8,000 employees in all positions in the Netherlands, as well as some 6,000 former employees.

The firm expects to complete its investigation by the end of the year.

“We now have two examples of cheating at the top of large accountancy firms, when you would expect them to set an example,” said AFM director Hanzo van Beusekom. “This confirms the practice is widespread.”

Despite such negative news, demand for services across the board is good, with no specific growth areas standing out. Now, after the pandemic, merger and acquisition activity is returning to the level it was at before.  Several accounting firms merged with other firms over the past year, while there has been an increase in private equity companies investing in accounting firms in the Netherlands. The top 30 accounting firms, besides the big four, are particularly targeted, according to Klop.

During the pandemic a large number of new businesses started, which resulted in an increase of requests for services for compilation of annual accounts and support with financial administration, according to Kuiper.

“The mandatory reporting on sustainability will effect the day-to-day business for customers, but also our field of work,” he said. “The outcome of the report of the authority financial markets in the Netherlands will need to lead to improvement of auditing quality and help improve the profession and secure the accountancy sector as a whole.”

Klop has seen all service areas show an increase in revenues, but especially audit related services. Accounting firms are all busy preparing for the new CSRD legislation, which is going to create a new service line.

The Netherlands economy had bounced back strong post-pandemic but it started to cool down in the first half 2023. Labour shortages in every sector, not just accounting, are beginning to hamper government efforts to boost growth.

The first two consecutive quarters of this year saw negative real GDP growth. Real consumption spending decreased in both the first (-0.2%) and second quarter (-1.6%) of 2023, as households adjusted to the higher price levels. At the same time, export volumes decreased as the economic outlook in the main trading partners worsened. The widespread slowdown also shows in a sharp decrease in industrial production.

However, the labour market remains strong, with the unemployment rate still at a historically low level and with significant increases in wage growth. The pick-up in wage growth is projected to lead to a recovery in real wages and a return to modest private consumption growth towards the end of 2023. Overall, GDP growth in 2023 is expected at 0.6%.

In 2024 and 2025, quarterly growth is forecast to pick up progressively, as a further drop in inflation, coupled with still strong wage growth, are set to support real disposable incomes. On the downside, tightening financial conditions and persistent labour shortages are set to weigh on business investment growth in the next years. Annual growth is forecast at 1.1% in 2024 and 1.7% in 2025. The current account surplus is forecast to remain sizeable, at around 9% of GDP, over the forecast horizon.

The labour market continues to be tight, with vacancies exceeding the number of unemployed persons, and several sectors experiencing labour shortages. The unemployment rate picked up marginally to 3.5% in the second quarter of 2023, while remaining historically low. On the back of a slowing economy, the unemployment rate is forecast to increase to 3.9% in 2024 and 2025, yet remaining well below the unemployment rates seen before the pandemic. Fuelled by a tight labour market and surging inflation, nominal wage growth increased considerably and is expected to reach 6.2% in 2023, 5.5% in 2024 and 3.9% in 2025.

However, full implementation of the government’s investment plans is expected to be held back by, primarily by labour shortages.