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Amsterdam Business School researcher Tjibbe Bosman (Accountancy section) recently presented research and recommendations to the European Commission on the reporting behaviour of Dutch companies subjected to statutory audit in the three years prior to their bankruptcy.

The researchers concluded that the vast majority of these companies (88%) did not file audited financial statements before going bankrupt. Even for two (three) years before bankruptcy 44% (36%) of companies fail to file timely, complete, and/or audited financial statements. For most stakeholders the imminent bankruptcy of a company is therefore hard to observe based on the public information in the trade register. For the majority (63%) of the companies that do file audited financial statement for the pre-bankruptcy year, the auditor fails to issue a warning in the audit opinion relating to going concern.

The research paper Bankruptcy and Auditor’s Reporting in The Netherlands, co-authored with Merel van der Kuip and Wim Janssen of the Foundation for Auditing Research, also showed that 71% of filed financial statements prior to bankruptcy do not contain a disclosure by management of the going concern risk or situation. Furthermore, the researchers find that the risk that a company files for bankruptcy due to a going concern opinion (GCO) issued by its auditor, a large concern for auditors and auditees, seems unlikely at the macro-level. More than 99% of companies survive 12 months after the balance sheet date for which they received a GCO and more than 92% survive after 36 months.

Bankruptcies under statutory audit requirements affected 127,670 jobs and debt of 15.7 billion euro between 2012 and 2020

Social cost

The total unpaid debt due to insolvencies for the Dutch economy is estimated at EUR 4.4 billion yearly or 0.7 percent of GDP (Statistics Netherlands, CBS 2015). For approximately 30.1 percent of insolvencies, criminal or unlawful harm is done to the creditors according to Statistics Netherlands. The reporting behavior of companies and their auditors is therefore an important societal topic. The researchers estimate that bankruptcies under statutory audit requirements affected 127,670 jobs and debt of 5.7 billion euro between 2012 and 2020, where a few large bankruptcies represent most of the damage. However, filing of audited financial statements is not actively enforced by the Dutch Chamber of Commerce or the Bureau Economische Handhaving (part of the Dutch tax authorities), contrary to for example Germany.

Stricter enforcement needed

In the presentation made to the European Commission, Bosman advocates active automatic enforcement of the filing of audited financial statements, comparable to the situation in Germany. Furthermore, Bosman points out that the trade register is not free to access in the Netherlands, other than in for example Germany, Belgium, or the United Kingdom. This put (Dutch) stakeholders at an information disadvantage, increases transaction costs for financial statement users and complicates empirical research with Dutch data. Moreover, Bosman stresses that bankruptcies of statutory audit clients are rare events but with potential high societal consequences and the higher scrutiny of auditors on this topic is therefore justified.