Annual report

Which companies have to audit this year’s annual report?

Aivar Kangust Aivar Kangust

New thresholds came into effect for auditing annual reports. In essence, it is no longer compulsory for many companies to have their annual report audited. Now is a good time to look at whether your company is required to order an audit or review of year 2016 financial statements.

First off, a look at the new minimum levels (effective starting 2016) for companies required to conduct either a review or audit of their annual financial statements. The minimum threshold for the audit obligation for financial years starting 1 January 2016 or later was doubled and the threshold for the review obligation was increased by 60%.

The new thresholds are:

 

Audit is compulsory

Review is compulsory

 

At least two indicators exceed

At least one indicator exceeds

At least two indicators exceed

At least one indicator exceeds

Sales revenue or income (in euros)

4 million

12 million

1,6 million

4,8 million

Assets as at balance sheet date (in euros)

2 million

6 million

0.8 million

2.4 million

Average number of employees

60

180

24

72

Audit of financial statements remains compulsory for the following entities, however:

  • public limited companies
  • state accounting entities
  • local government units
  • legal person governed by public law
  • political parties receiving state budget appropriations
  • foundation where one of the founders is the state, a legal person governed by public law, local government, political party or company in which the state has, at minimum, decision-making power for the purposes of the State Assets Act or if the conditions shown in the above table apply.

The audit thresholds in other European Union member states can be viewed here.

Why order an audit or review if this is not obligatory?

From the company’s viewpoint, it may seem a good solution to be rid of the audit or review obligation: less work and financial expense. Yet the other side of the coin should be considered – what do the company and the public have to lose? For one thing, trustworthiness and transparency be diminished by not conducting an audit or review. Why?

The answer should start with an explanation of what “audit” and “review” mean. An audit gives owners and managers assurance that the company’s accounting processes are in good order. This helps ensure trust of customers and partners. Also important is that the management receives feedback in the course of the audit on any shortcomings found and recommendations for eliminating them – so that the company is protected against fraud and unsound recognition of items in accounting. An audit can also identify risk areas – sources of possible material errors in financial reporting. To sum up, company management receives from the auditor valuable information for managerial purposes, including proposals for making the accounting system more effective.

Alongside an audit, there is another, limited and thus less extensive alternative for providing assurance: review of financial reporting. The extent and volume of a review is smaller than that of an audit, restricted mainly to interviews with management and analysis. A review does not give clients as much assurance, but it is still a good resource for making sure that financial reporting is in order.

I therefore believe that audit or review of financial reporting should be part of the battery of control procedures at any company – even if it is not required by law. The reason is simple: a company’s owner and directors can get assurance from an independent party that the company’s accounting and processes are in order.