The act on the statutory auditors sets new rules for the establishment of audit committees and limits the ability of audit firms to provide services.
The new act on statutory auditors came into force in June 2017. The act contains very important regulations for the entire corporate system of companies which are public interest entities, including listed companies. In addition, these regulations will cover such entities as payment institutions, brokerage houses or banks. It is also worth pointing out that companies listed on NewConnect are not covered by the new regulations.
The basic change concerns audit committees and the obligation to create them. Previous regulations stipulated that public interest entities should have an audit committee if the number of supervisory board members exceeds five. After the changes, these entities will have to set up audit committees irrespective of the number of supervisory board members, but depending on the size of the company. The changes will apply in principle to all companies with a turnover of over PLN 34 million.
The committee should consist of not less than three persons, with the majority of the audit committee, including its chairman, remaining independent of the company. The act defines in detail the notion of independence. For example, they cannot be employees who in the last 5 years belonged to the higher level management, including management board, in the past 3 years were employees, currently receive or have received significant remuneration or have significant economic relations with a given entity.
In addition, one of the members must be an expert in financial reviews or accounting and financial reporting. The act does not specify what qualifications are sufficient to determine whether a person meets these criteria. Failure to specify minimum requirements by the act will inevitably cause problems in practice. Due to such criteria, companies may have trouble finding suitable candidates. Consequently, they should already start building audit committees, since they only have time till November this year to adapt to the new regulations.
As a result, changes may be necessary in the composition of the supervisory board, from which an audit committee may be set up. Then we have to check whether we need to set up an audit committee, or maybe we are a smaller company where the audit committee function within the meaning of the new regulation can be met directly by the entire supervisory board.
Going forward, the new regulations should be compared with the current statute. It may be necessary to change its provisions to match the existing regulations. If there are no detailed regulations in the statute, the rules of the supervisory board remain to be verified. According to the new regulations, members of audit committees are appointed by the supervisory board or the general meeting, so it is necessary to clearly specify which governing body make the selection.
Prohibition on the provision of services by auditors
Other significant changes beyond those of the audit committees are related to the tasks of this committee. So far, in principle, such an important task of the committee was to monitor the company's reporting system, internal control, internal audit and risk management. These tasks have expanded and require the audit committee to play a much more active role. With the new act, the possibility to provide some of the other services by audit firms has been significantly reduced. For example, tax advice and other services are excluded in so far as they are relevant to the financial statements. Moreover, any other service provided by an audit firm will need to be approved by an audit committee. There are further tasks for the committees who need to develop procedures for an audit firm to provide any other services.
Breach of the rules governing the appointment, composition and functioning of the audit committee, as well as influencing the outcome of the audit is penalized with fine of up to 10% of the company's turnover. In the case of a natural person, the fine is capped at PLN 250,000 and another penalty may be a ban on serving as a member of the management or supervisory board for a period of up to three years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.