Audit Partner at RSM Poland
We have already written a lot, both here and in national journals, about the importance of audit services, their meaning for businesses, the cooperation of management boards or supervisory bodies with auditors, and the qualities of a good auditor. Now it is time to say something about how this auditor (a statutory auditor or an audit firm) should be chosen.
Many entrepreneurs remain unaware of the fact that their organisation is subject to an obligatory audit of financial statements by a statutory auditor, and that the distribution of profit for the financial year is invalid under the law if the audit requirement has not been met. Most accountants and management boards are aware of this fact, yet they do not always approach this properly, e.g. they do not observe the provisions of the balance sheet law when choosing the statutory auditor. It must be emphasised here that if you do make the right choice of the auditor, your audit may be invalid and hence the distribution of profit may be invalid under the law. There are also entities that are aware of the audit obligation and know the rules behind the correct choice of an audit firm, but for different reasons they do not choose the right auditor from the point of view of the way they have practiced the cooperation with a statutory auditor.
Below, we are going to present the rules we consider the most important for companies to follow when choosing a statutory auditor in a couple of steps.
First: the obligation to audit financial statements
The first step is to determine which entities/bodies are required to have an audit performed. Entities that meet 2 out of 3 criteria (balance sheet total, revenues and headcount) are obliged to submit their financial statements for audit by a statutory auditor, but this is not all, as according to Article 64 par. 1, 3 and 4 of the Accounting Act, banks, joint-stock companies, acquiring companies as well as companies newly established as a result of a merger, entities preparing their financial statements in accordance with IFRS or capital groups preparing consolidated financial statements are also under this obligation. As practitioners, we often see cases where small joint-stock companies (small in terms of their balance sheet total, turnover or headcount) forget about the audit requirement.
Second: the body authorised to choose the auditor
As a general rule, the choice of an auditor (an audit firm, Article 66 par. 6 of the Accounting Act) is made by the body approving the financial statements, unless, for example, the articles of association or an agreement provide otherwise. We often come across such a situation in our practice, in which the choice of an auditor is assigned to the supervisory board by the owners. What is important, however, is the fact that this choice cannot be made by the entity’s manager (usually identified with the management board).
Third: a contract with statutory auditor for at least two years
It should be recalled at this point that a recent amendment of the Accounting Act has introduced an obligation to conclude a contract with the auditor for a term of at least 2 years (Article 66 par.5: In the case of statutory audit, the first contract for auditing financial statements shall be concluded with an audit firm for a term of at least two years, with the option of renewal for further at least two-year terms).
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Fourth: stay independent
When choosing an audit firm, you cannot be guided only by the need to stay independent, but also consider the experience of the statutory auditor, his or her business expertise, the use of internal verification protocol by the audit firm, along with the constant improvement policy, professional ethics or reputation. We could write a couple of separate articles about the independence; from our observations, what seems essential is that the audit firm, and in particular the key statutory auditor, cannot be connected, either personally or through capital, with the client, because this may result in a biased design of audit procedures and, what follows, a deficient audit report (earlier known as the opinion). An auditor acting under his or her client’s pressure is also prone to unethical, client-dependent behaviour. This subject is discussed in more detail in the Act on Statutory Auditors, Audit Firms and Public Supervision (hereinafter: ASA), where, for example, Article 69 par.6 reads: An audit firm and the key statutory auditor shall not perform the audit if there is a risk of self-control, self-interest, promotion of interests of the audited entity, familiarity or intimidation resulting from financial, personal, economic, employment or other relationship between the audited entity and the key statutory auditor […].
Fifth: better earlier than later
From a practical point of view, the auditor should be chosen early enough for the audit firm to properly design their preliminary work, focusing on the verification of the in-house control environment and learning the client’s business. Owing to this, later tests and final works will go smoothly, which is surely good for the audited entity. It should be remembered that most entities decide to have an audit performed in February-March, also being the time for preparing tax statements, budgets, reports to parent companies, etc. If you plan your cooperation with the statutory auditor in advance, you will avoid working in a hurry and thus bring many benefits for the entity. We wrote more about the cooperation of accountants, management boards and supervisory boards with an auditor on our blog in May 2017.
We should add that the timing of choosing the auditor should allow the statutory auditor to observe the stocktaking: it is a basic test of the presence of stocks, difficult to be replaced with other procedures, as opposed to the verification of the remaining current assets. Therefore, entities preparing their financial statements e.g. as at 31.12.2019, as a rule of thumb should already have held their first meetings with auditors and discussed the cooperation for the coming months. Obviously, it would be even better to have constant cooperation with an auditor or at least choose a statutory auditor for a time horizon of a couple of years; if the auditor is changed too often, before he or she gets to know the client’s business well and all the risks involved, there is no added value, not only for the owner, but also for the management board or accountants of the entity.
Summing up, in order to make a right choice of an audit firm, you should:
plan the choice of an auditor well in advance;
collect data and have a full picture of the auditors, learn the opinions about their work, check the resources of an audit firm, see if it has any internal verification in place or its own technical department for handling unusual matters, etc.;
before choosing a statutory auditor, invite 2-3 audit firms for a meeting to see their approach to cooperation with the client, understand their audit methodology and if you will understand each other during the cooperation. It is good if the audited entity is convinced that the auditor will meet the owners’ expectations, also in the case of e.g. verification of additional consolidation package prepared in accordance with US GAAP or IFRS;
discuss invoicing additional hours spent on activities going beyond the audit, explanations or e.g. repeated verifications of financial statements.
Having this information, the entity’s management should feel convinced recommending a given audit firm either to the owners or the supervisory board. And once a resolution on the choice of an audit firm has been adopted and an audit contract concluded, both parties should start good and long-term cooperation, beneficial for all the stakeholders. For this to happen, it is clearly important that partners or supervisory boards become involved in the process of choosing an auditor.
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