Why is it a good idea to have your company’s financial statements audited?

For several years now, new thresholds have been in force for auditing annual reports, which exempted many companies from the obligation to have their annual reports audited. 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?

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 misstatements. 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 statements. The extent and volume of a review engagement 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 statements 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. For one thing, trustworthiness and transparency could be diminished by not conducting an audit or review.

Check whether you are required by law to have an audit or review conducted

The new thresholds for auditing of annual reports have been in force for several years. As operating volumes may vary from one year to the next, now, with 2019 almost over already, is a good time to look at whether your company is required to order an audit or review of this year’s annual report.

The current thresholds are:

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

• public limited companies with more than two shareholders
• state accounting entities
• local authorities
• 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.

Audit of annual report is obligatory for all public limited companies with more than two shareholders. If there are two or fewer shareholders, see the thresholds to determine whether audit or review is required.

For example, if a public limited company has two shareholders and the balance sheet volume in the period ended is 1 million euros, turnover 1.2 million and the average number of employees is 30, the obligation of review applies to the annual report for the period ended. This obligation stems from two thresholds being crossed for the requirement of review to apply.

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

Author: Helery Roos, audit manager and sworn auditor, Grant Thornton Baltic 

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