After 31 May, a large number of accountants and businesses in Hungary can breathe a sigh of relief as companies with a normal financial year have submitted their annual tax returns and published their financial statements. But what happens in the event of a missed statutory audit, and the financial statements have been published without an auditor’s report? What are the consequences of this, and more importantly, how can a company rectify the situation?
Who are subject to a statutory audit?
In our earlier articles (including here and here) we discussed who are subject to a statutory audit in Hungary. To summarise here briefly, the obligation to be audited is primarily prescribed by the Hungarian Act on Accounting. It is partly linked to thresholds, namely, if a company’s net sales revenue in the two financial years prior to the reporting year did not exceed HUF 300 million (roughly EUR 758,000) on average, and the average headcount in the same two years did not exceed 50 people, then the company does not have to be audited. On the other hand, the type and activity of the company along with other aspects define the criteria for a statutory audit.
This latter group includes consolidated Hungarian companies, irrespective of which country the consolidation takes place in, and whether the company’s individual figures reach the above thresholds or not.
How can you determine if there has been a missed statutory audit?
Each company with a filing and publication obligation related to financial statements has to fulfil such obligations electronically. In this process, the authorised business gate user or the case manager sends the financial statements to the Company Information and Electronic Company Registration Service provided by the Ministry of Justice (Company Registration Service) through the Online Reporting and Form Completion System.
The financial statements data published at the Company Registration Service are public, i.e. accessible by anyone. Based on the information queried here, the tax authority, the Court of Registration and, for instance, the Chamber of Hungarian Auditors can learn about the company’s details, its operating form, activities, and among other things, whether the statutory audit thresholds on average for the two years prior to the given financial year were exceeded.
If a company’s individual figures do not reach the above-mentioned threshold, but it is consolidated in Hungary or in another country, then the Hungarian company is subject to a statutory audit. However, determining this fact about consolidation is quite a lengthy procedure for someone outside the company.
What to do in the event of a missed statutory audit?
If you are facing a missed statutory audit, this must be rectified as soon as possible. The auditor must be chosen for at least a year under an engagement contract. The statutory auditor may be an individual or an audit firm registered at the Chamber of Hungarian Auditors. If the audit is conducted by an audit firm, a person responsible for the audit must be appointed. The entity’s company-law documents must be amended to include the name of the selected auditor, which must also be registered with the Court of Registration. The information on which financial years are audited under the engagement is not recorded in the company register, but is set out in the engagement contract.
Published financial statements cannot be subsequently replaced or corrected. In certain cases, financial statements may be suspended within 12 months of publication, but this may not happen because an audit was not carried out. No attachments may be added to financial statements already published, nor is it possible to subsequently upload the independent auditor’s report as a mandatory attachment, if the company has failed to do so.
The fact an audit was not carried out for the previous year may be mentioned in the financial statements of the reporting year containing an auditor’s report.
Whose responsibility is it to meet the company’s audit obligation?
Within the company’s highest decision-making body it is the joint responsibility of the members to ensure that the compilation and publication of the financial statements comply with the statutory provisions.
What are the legal consequences of a missed statutory audit?
Where a statutory audit is conducted, the filing and publication obligation for financial statements pursuant to the Act on Accounting can only be met by attaching the auditor’s report. Failure to do so is grounds for not meeting the filing and publication obligations related to the financial statements.
When conducting a statutory audit, failing to file and publish an independent auditor’s report can give rise to a legality procedure pursuant to Section 74 (1) d) of the Companies Act and/or to the initiation of a tax authority procedure pursuant to Section 227 of Act CL of 2017 on the Rules of Taxation, including, among other things, a cancellation of the tax number.
In addition to the above, pursuant to the Hungarian Act on the Rules of Taxation, the tax authority may impose a default penalty, and the general liability rules of the Civil Code apply to violations of accounting rules.
In summary, a missed statutory audit must be rectified as soon as possible. It should also be taken into account that the auditor may not only want to examine the reporting year, but also the previous financial year, to be able to consider the opening figures of the reporting year as duly substantiated. This is time-consuming and costly for the company, but can still be more cost-effective than a default penalty or other legal consequences.
In the event of a missed statutory audit, the non-compliant company may still avoid the legal consequences – such as the default penalty or a cancelled tax number – if the management takes the necessary steps in time. The accountants at WTS Klient Hungary have helped prepare and publish countless financial statements in the nearly 25-year history of the company, and have in-depth experience with statutory audit obligations. Feel free to contact us if you have a question on this topic, or would like to entrust us with your company’s accounting.