Communication between auditors and shareholders in listed companies significantly improved in 2013. Auditors attended 99% of AGMs in 2013, and 58% of those auditors gave a presentation, explaining their audit methods and the auditor’s report. These findings are set out in a review by the Dutch Institute of Chartered Accountants (“NBA“) that focused on the role played by auditors during the 2013 AGM season. That role has recently been a subject of discussion. Companies would do well to take note of the NBA’s findings and make timely arrangements with their auditor for the 2014 AGM.
Call by stockholders for more active auditor
An important factor for the NBA in launching its review was a letter that the Dutch Association of Stockholders (VEB) sent to the six large audit firms and the NBA in January 2013. That letter called for auditors to take more initiative and to explain the auditing process at the general meeting. The VEB also advocated that the auditor’s presentation include the main points of the management letter. The VEB’s letter furthermore contained a long list of questions to be put to auditors who did not take any action at general meetings. The VEB sent another letter to the management and supervisory boards of Dutch listed companies in March 2013, expressing its expectation that auditors would be given the opportunity to answer questions at the general meeting, allowing a fruitful discussion to take place.
Response by securities issuers
The Association of Securities-Issuing Companies (VEUO) responded by arguing that the VEB’s demands went beyond what the law or the Corporate Governance Code required. The VEUO advised its member companies to make clear prior arrangements with the auditor on how to answer questions during the general meeting. It also emphasised that the auditor can only be asked questions about the auditing tasks and the report on the annual accounts. The contents of the annual accounts and annual report are the responsibility of the management and supervisory boards. According to the VEUO, the accountant cannot also discuss the contents of the management letter, unless the management or supervisory board make statements about the letter that are materially incorrect.
According to the NBA, communication between auditors and shareholders appears to have significantly improved, and auditors have taken a more active role at AGMs in 2013. The NBA believes the letter sent by the VEB has been a contributing factor in this. The NBA’s review was mainly based on minutes and draft minutes of 80 Dutch listed companies. At the end of its report, the NBA makes a number of recommendations for listed companies and auditors. Listed companies are encouraged to clarify where the responsibilities with regard to the annual accounts lie and to release auditors from their confidentiality obligations. Auditors are asked to prepare a meaningful presentation for the general meeting that shows the auditor’s responsibilities with regard to the annual accounts. Shareholders are also paying increased attention to the contents of the auditor’s management letter. The NBA proposes that the chairman of the supervisory board or audit committee should address the main elements of the management letter at the general meeting and that the auditor should mainly confirm the accuracy of that chairman’s statements.
The NBA also recently published a set of best practices for auditors at listed companies and other public-interest entities. These best practices address the auditor’s relationship with the company’s management and supervisory directors, and they set out the best approach to take when the auditor encounters shortcomings within the company.
For the 2014 general meetings season, the baton seems to have passed to Eumedion, an organisation representing institutional investors. Eumedion sends a focus letter to listed companies annually, but this year it sent an additional letter to the big audit firms setting out its main focus areas for the financial reporting for 2013. In the letter, it asked auditors to issue a more substantive and company-specific auditing report in order to raise investors’ confidence in financial reporting.
These developments show that the way auditors act at general meetings and inform shareholders is attracting increasing attention. Listed companies would be wise to make clear arrangements with the AGM’s chairman and the auditor about the roles that the various individuals are to play at the AGM, and they should do this well before the AGM takes place. The arrangements should also confirm where the auditor should be released from his confidentiality obligations and what elements of the management letter should be discussed.