What do we need Hungarian professionals for?

Today we see companies with foreign parent entities increasingly opting to have their bookkeeping handled abroad. In such cases, these companies use the services of Hungarian accounting firms and/or tax advisory firms to ensure the Hungarian financial statements from foreign general ledgers are also prepared without errors. In other words, based on the general ledger prepared in the integrated system, Hungarian experts help to compile financial statements that comply with Hungarian rules, and “translate” processes carried out abroad to ensure they comply with Hungarian legislation.

It is important to note that even in the case of bookkeeping abroad, i.e. when preparing Hungarian financial statements from foreign general ledgers, the company’s accounts can only be prepared by a chartered accountant registered in Hungary. If the company compiles annual financial statements under IFRS, these can also only be prepared by a chartered accountant registered in Hungary as an IFRS specialist.

If the Hungarian company is subject to an audit, then the audit of the Hungarian entity can only be performed by an audit firm or auditor registered in Hungary.

Tax returns, annual financial statements and all other reports have to be prepared and submitted to the various Hungarian authorities in Hungarian, so these tasks are often performed by the engaged Hungarian accountant or tax advisory firm based on the information provided to them from the integrated system abroad.

What to look out for before preparing Hungarian financial statements from foreign ledgers?

In the six points below we have summarised what should be checked in general ledgers received from accountants abroad before preparing Hungarian financial statements from foreign general ledgers.

1. The integrated systems of foreign companies mostly follow the accounting policies of the parent entity, and are accounted for according to IFRS or US GAAP rules. It is essential to clarify at the outset what approach was used to prepare the ledger.

2. Some integrated systems (e.g. SAP) are able to manage several general ledgers at the same time, thus it is possible to take Hungarian accounting and taxation rules into account alongside IFRS or US GAAP rules.

3. The content of the received general ledger should be clarified and interpreted row by row so it can be treated properly according to Hungarian rules and the content classified in the appropriate rows of the accounts.

4. Items that are permitted under IFRS or US GAAP, but not according to Hungarian accounting standards, should be eliminated.

5. The accounting of depreciation and the capitalisation of tangible assets are both key issues from both an accounting and taxation point of view, so it is worth asking for and learning about the accounting policies applied before preparing the financial statements.

6. Reconciling the tax account with the received general ledger is also an essential task, as we often encounter situations where – for example – the payment of tax advances or the accounting of taxes are not found in the right place in the foreign general ledger.

Our article highlights just a few points that definitely should be taken into account before preparing Hungarian financial statements from foreign general ledgers.  There are of course a number of other factors to consider to ensure that tax returns and financial statements comply with relevant Hungarian provisions. If you need an expert in this field, our accountants experienced in preparing Hungarian financial statements from foreign general ledgers will be happy to help.

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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.

A Missed statutory audit? Here are the consequences! bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

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.

A Statutory audit: useful, or a necessary evil? bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.