International Audit Exemption Thresholds
When operating internationally, companies often face a variety of laws and regulations. Local present management most of the time is aware of the laws and regulations that impact their business, however often the local requirements regarding the financial statements are unknown. Although group auditors, for the purpose of the group financial statements, require component auditors to audit certain subsidiaries, even non-significant components could be subject to a statutory audit.
The purpose of an audit
The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements, by expressing an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, the opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. Although you could interpret that all companies should be subject to a statutory audit, audit exemption thresholds are present to (amongst other reasons) avoid the administrative burden for companies.
Statutory audit requirements in The Netherlands
As part of the reform of the European Union (EU) statutory audit markets, small EU companies are no longer required to have a statutory audit, unless Member States see the need for assurance and set up specific requirements for their own market. A small company is defined as those which, on their balance sheet date for two consecutive years, do not exceed the limits of at least two of the following three criteria:
- balance sheet total: € 4,000,000;
- net turnover: € 8,000,000;
- average number of employees during the financial year: 50.
It should, however, be noted that Member States are permitted to increase the thresholds for a) and b) to a level not exceeding:
- balance sheet total: € 6,000,000;
- net turnover: € 12,000,000.
For the Netherlands the increased thresholds apply as from financial years beginning on January 1st, 2016.
Audit exemption thresholds in the EU
Although the expectation could have been that companies in the EU would adopt the audit exempt thresholds as included in the Accounting Directive, most countries decided to lower their thresholds and/or to add additional/alternative requirements, but also exceptions are applicable in some countries. A few of the examples are:
- Belgium: The audit exemption thresholds for a) is € 4,500,000, b) is € 9,000,000 and c) is 50. However, the thresholds are determined on a consolidated basis for groups, which leads to mandatory statutory audit for smaller entities in the group although individually they fall under the thresholds;
- France: The audit exemption thresholds for a) is € 4,000,000, b) is € 8,000,000 and c) is 50. If a company is the head of a group, and the group is above one of the current thresholds, it is subject to a statutory audit. Furthermore, significant subsidiaries of such groups which are above two of the three following thresholds (a) € 2,000,000 and b) € 4,000,000) are subject to a statutory audit.
Accountancy Europe have published the audit exemption thresholds in 2016 and presents publications every year explaining the developments on audit exemption thresholds around the EU. The most recent version can be found here.
Impact of Brexit on audit exemption thresholds
The United Kingdom left the European Union in January 2020, however did not change their audit exemption thresholds. For accounting periods beginning on or after 1 January 2016, to qualify for audit exemption in the UK a company must qualify as a small company, meeting two of the following requirements:
- annual turnover must be not more than £ 10,200,000;
- the balance sheet total must be not more than £ 5,100,000;
- the average number of employees must be not more than 50.
No statutory audits in the United States
Audit exemption thresholds are not common practice in the United States. Like in the EU, public companies are required to appoint an auditor to audit the yearly financial statements, however privately held companies are not required by law to appoint an auditor. Such obligations could arise on the demand of the stakeholders, for example banks or other lending institutions.
Even if audit exemption thresholds are met in certain countries, based on the group structure, still an audit could be mandatory due to legislation in those other countries. A company in The Netherlands could for example, on the basis of the shareholders’ local obligations, have an audit requirement. Another interesting area is the intermediate holding exemption in which consolidation is waived and thus the audit exemption thresholds are (possibly) met. Next to certain requirements to meet the qualification as an intermediate holding company, it is helpful to keep this in mind defining the audit requirements per country.
Are you part of an international group or do you have subsidiaries abroad? We at Crowe Peak inform our clients and we could inform you in depth on international audit exempt thresholds or other international audit developments and the impact on your company. If you have any questions about international audit, please contact us.