Change in value limits
In order to relieve administrative burdens, in 2011, the government introduced a number of measures. One of these was the alteration of audit obligation regulations. One of the most important changes was the increase of value limits, which was implemented in two steps (in 2012 and 2013, the sales revenue limit was increased from HUF 100 million to HUF 200 million and in 2014, it will increase to HUF 300 million). However, the provisions regarding employee headcount did not change, i.e. the limit remained 50 employees.
The question now is which companies this amendment affects and how. What should companies in a decision-making position consider?
The modification of statutes is prescribed in the Act on Business Associations (the Company Act),which provides that a company has audit obligation if this is prescribed in the Act on Accounting of if the founders so provide in the statutes, the articles of association or the deed of foundation of the company or if the act so provides in order to protect public property.
The Act on Accounting prescribes audit obligation for the following business entities:
- public finance organizations, other organizations, the National Bank of Hungary and
- healthcare, social and education institutions established by the above persons or by natural persons,
if the conditions regarding the value limit and the employee headcount are fulfilled.
Stricter regulations may be prescribed in special government decrees on the other organizations defined in the Act on Accounting (e.g.: condominiums, associations, foundations, investment funds etc.).
Pursuant to the Act on Accounting, no audit obligation applies to the business year started in 2012 if all of the following conditions are fulfilled:
- the average annual (annualized) net sales revenue of the entrepreneur in the two business years preceding the business year did not exceed HUF 200 million and
- the average number of employees employed by the entrepreneur in the two business years preceding the business year did not exceed 50.
For the business year starting in 2014, the above value limit of HUF 200 million will increase to HUF 300 million.
In the case of an entrepreneur established without a predecessor in title, if data for either or both of the two business years preceding the business year is not or is only partly available, then current year expected figures and the (annualized) figures (if any) of the preceding (first) business year shall be considered.
A check based on general rules may not be enough
However, the above may not be applied by:
a) entrepreneurs keeping double entry books for which audit obligation is prescribed by law,
b) savings banks,
c) enterprises covered by consolidation,
d) Hungarian branch offices of enterprises having their seat abroad,
e) the entrepreneur who diverges, on an exceptional basis, from legal regulations in order to provide a true and fair view.
The following table shows the cases when companies have to engage an auditor in respect of the business year starting in 2013 (based on general rules only):
Average sales revenue of the business years 2011 and 2012 <= HUF 200 million
Average sales revenue of the business years 2011 and 2012 > HUF 200 million
|Average employee headcount of the business years 2011 and 2012 <= 50|
No audit obligation
No audit obligation
|Average employee headcount of the business years 2011 and 2012 > 50|
If, based on the above, the company has an audit obligation, its main body shall elect the auditor at the time of acceptance of the financial statements of the company for the previous year, i.e. the election of the auditor is not the responsibility of the management but in many cases the owners delegate the finding of an auditor and the operative negotiations to the management.
What should you consider when making your decision?
Cost efficiency is a natural concern of both owners and management but prior to the decision regarding 2013 (especially if previously the company had audit obligation) future effects should be considered. If the company’s figures previously sank below the value limit but later it becomes subject to an audit obligation again, there may be consequences which can be dealt with if detected in due time. These could be, for instance, the following:
- In the case of substantial inventory, the company has to make sure that the auditor can gain proper assurance during later audits regarding the year-end inventory of the non-audited business year. This may mostly be an issue for companies that do not keep a quantity and value record during the year and for whom a turning day stock-count is therefore unavoidable and for whom the audit of the stock-count may be necessary.
- Subsequent posting and verifiability of material valuations. How can you ensure the review by an auditor of potential impairment of balance sheet items? Will all data and information be available (e.g.: inspection by an auditor or an expert commissioned by the auditor).
The two examples above show that savings achieved now may not necessarily pay off in the future if the exemption from the audit obligation is likely to be temporary only. Later, the company may be faced with problems, which may lead to a restriction of authority in audit terms. For this reason, it is important to also consider the future implications of your decision besides the aspects of cost saving. Audit is not only an obligation but also an option pursuant to the Company Act. Accordingly, the owner may, in its own discretion, decide to commission an auditor.