statutory auditMost owners and managing directors still tend to consider audits as a necessary evil. Yet there are many benefits to having an auditor or an audit, alongside the associated burdens of course.

How do we benefit if our company is subject to a statutory audit?

Apart from inspecting a company’s accounting records and financial statements, a reliable auditor can highlight accounting and tax risks. An auditor can offer opportunities to consult on the accounting treatment of transactions during the year, and help in assessing the expected accounting implications of decisions to be made by management or owners.

Creditors, banks, and even the Hungarian tax authority (“NAV”) during a tax inspection, respond differently to financial statements that come with an unqualified auditor’s report.

What are the burdens that come with a company audit?

First of all, the audit fee is an extra cost. There can be significant differences in fees, depending on whom the company appoints to carry out this task (BIG4 or a Hungarian company with an international, or a Hungarian company without an international background). The most important thing is that the auditor’s report definitely has to be issued by an auditor registered at the Chamber of Hungarian Auditors.

Appointing an auditor creates additional administration and legal tasks for a company because the auditor has to be stated in the deed of foundation and it becomes public company information as well. The appointment has to be registered at the Court of Registration, which also incurs a fee. Auditors can be appointed for a minimum of 1 year, and a maximum of 5 years.

What also has to be taken into account is that the statutory audit will tie down capacities at the company, and the audit itself could prolong the accounting close. If the company has to be audited, then this fact along with the particulars of the auditor and the audit fee must be included in the financial statements. Of course, the financial statements also have to state if the company is not obliged to be audited and the figures have not been audited.

But who is subject to a statutory audit anyway? 

Audit obligations are primarily prescribed by the Accounting Act. On the one hand the obligation to be audited is linked to thresholds, namely, if a company’s net sales revenue in the two financial years prior to a given financial year does not exceed HUF 300 million (approx. EUR 960,000) on average, and the average headcount in the previous two years did not exceed 50 people, then the company does not have to be audited.

In the case of companies established without a legal predecessor, if data is missing or incomplete for either or both of the two financial years prior to the given financial year, then the expected figures for the reporting year and – if applicable – the (annualised) figures for the previous (first) financial year must be considered when calculating the thresholds outlined above.

On the other hand, the type and activity of the company along with other aspects define the criteria for a statutory audit, irrespective of whether the company reaches the above-mentioned thresholds or not. On this basis, the following companies are subject to a statutory audit in Hungary:

  • companies limited by shares,
  • savings cooperatives,
  • consolidated companies, irrespective of which country the consolidation takes place in,
  • companies of public interest,
  • companies with public debts in excess of HUF 10 million (approx. EUR 32,000) overdue by more than 60 days as of the reporting date of the previous financial year,
  • the Hungarian branch offices of foreign-registered companies, unless the registered office of the foreign company is located in an EU Member State,
  • companies which, owing to exceptional circumstances, deviate from the Accounting Act in order to provide a true and fair view,
  • companies preparing consolidated financial statements.

If a company has a foreign parent and this parent company compiles its annual financial statements under IFRS, while the Hungarian subsidiary is consolidated, it can make sense for the Hungarian subsidiary to opt for IFRS financial reporting as well. Owing to the consolidation, the Hungarian subsidiary will automatically fall into the statutory audit category, and it may choose to compile its financial statements in accordance with IFRS because of its parent company.

There are some special cases where audits are mandatory, even though the company itself is not otherwise obliged to be audited. If the company is subject to a statutory audit, then the appointed auditor may inspect the accounting compliance of the following aspects. If the company is not subject to a statutory audit, then an independent auditor must be separately appointed.

These special cases include the following:

  • evaluation of a member’s non-cash contribution,
  • review of interim balance sheet,
  • review of calculation and accounting of value adjustments,
  • review of fair value measurements and compliance of related accounting,
  • in the event of a change in bookkeeping currency, review of the transition balance sheet prepared based on the switch from HUF to foreign currency or from one foreign currency to another.

In the case of company transformations, mergers and separations, the transformation balance sheet (both the draft and the final transformation balance sheet) and the underlying inventory of assets and liabilities (both the draft and the final inventory of assets and liabilities) must be checked by an auditor independent of the registered auditor.

Of course, companies may also appoint an auditor even if this is not prescribed for them by law, because based on the “two heads are better than one” principle, a thorough auditor can also create added value for the owner and the management.