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August 25, 2020 09:14 AM

Shrinking Auditor Market in the Netherlands: Addendum and a Suggestion

Posted by Willem Buijink

I think it is helpful to add some information to the Audit Analytics blog post about concentration in the market for PIE statutory audits in the Netherlands. I add information about concentration in the market for non-PIE statutory audits. It is noteworthy that in the market for non-PIE statutory audits the same process of concentration is occurring. I also add some reflections and a suggestion.

Some context: the Dutch auditing oversight body is called AFM, the auditing rule maker is the Ministry of Finance (MinFin (and in the background of course it is the EU)), and the NBA is the professional body for accountants.

AFM started licensing audit firms in 2007. About 700 audit firms applied: 18 of which applied for a PIE licence. In 2008 there were 483 licensed audit firms, of which 13 obtained a PIE licence.

The Audit Analytics blog post showed that 12 years later, in 2020, the number of PIE audit firms is 6: i.e. it has more than halved. But note also that the AFM register of licensed audit firms (on its website) shows that the number of non-PIE licensed audit firms has in those 12 years also roughly halved, from 470 then, to 267 now. Note that the PIE audit firms can also do non-PIE audits.

The number of PIEs has over the same period decreased a little, but is now predicted to increase, after a regulatory intervention by MinFin, to around 1.000 this year. The total number of statutory audits has also decreased somewhat and is now about 19.000 (excluding the PIE audits).

All this means that both for PIE audits and the other statutory audits the number of suppliers of these audits has decreased significantly, i.e. the market is more concentrated now for both types of audits.

Several remarks appear in order. 1) What caused this process of concentration ? It is consistent with MinFin (and hence the EU) wanting it to happen. In fact in 2004 MinFin predicted that ultimately 200 audit firms would remain in the market for statutory audits. Also, MinFin recently seriously considered, but then rejected for the time being, a proposal to revoke a statutory audit firm licence for (non-PIE) audit firms with fewer than 10 clients. The report in which this proposal was made shows that this would lead to a further 100 audit firms leaving the market: i.e. some 170 non-PIE audit firms would remain. MinFin's hypothesis appears to be that having fewer, and larger, audit firms will lead to higher quality auditing. 2) The Netherlands also has a Competition Authority. That has so far not opined about these events in the market for statutory audits. 3) The AFM has repeatedly expressed a concern with audit market supplier concentration. So far it has not reacted to the concentration process now visibly taking place. 4) The NBA on its website also gives the number of audit firms that are potential entrants, i.e audit firms not licensed to do statutory audit but managed by NBA members. That number is about 1.700. 5) Finally: it would be interesting to see whether a similar, and similarly strong, process of audit market concentration has taken place since 2006, the original implementation of the Auditing Directive, in the other EU member states, and what the audit quality effects are. (Or are there EU countries in which entry into the statutory audits market (and the PIE audits market) is actively encouraged ?). Mark DeFond and Clive Lennox have a paper (in JAE, 2011) on an exodus of small US audit firms after SOX from the US statutory audits market. That paper could, partially, serve as a model for research into these effects.

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About Willem Buijink

OPEN UNIVERSITY OF THE NETHERLANDS
Professor of Accounting, Open Universiteit, Heerlen, The Netherlands

Professor of Accounting, Open Universiteit Heerlen, Department of Accounting and Finance, 2015-present. Before that I was Professor of Business Economics, Universiteit Tilburg, 2001-2016; Professor of Business Economics, Universiteit Maastricht,...

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