1. General Overview

In Turkey, the general rules and principles regarding independent audit are mainly regulated under the Turkish Commercial Code No.6102 ("TCC") and Decree on the Determination of the Companies Subject to Independent Audit ("Decree").

Accordingly, companies would become subject to independent audit if they are explicitly listed in the Decree or in case they exceed thresholds stipulated under the relevant legislation and those companies might face certain consequences if they are not audited despite being subject to independent audit. In this article, our aim is to reveal companies that are subject to independent audit and consequences of not-being audited.

  1. Which Companies Are Subject to Independent Audit?

Companies listed in Annex I of the Decree are subject to independent audit regardless of any threshold and those are as follows:

  1. The following companies are subject to regulations and audit of the Capital Markets Board pursuant to Capital Market Law No. 6362;
  • Investment institutions;
  • Collective investment enterprises;
  • Portfolio management companies;
  • Mortgage finance corporations;
  • Asset leasing companies;
  • Central exchange institutions;
  • Central custody institutions;
  • Data storage foundations;
  • Rating Institutions;
  • Assessment institutions;
  • Joint stock companies whose capital market instruments are traded in the stock exchange or other organized markets or which have offering circular or export document that bear validity period approved by the Capital Markets Board in order to be traded;
  • Joint stock companies whose capital market instruments are not traded in the stock exchange or other organized markets; however, which issue capital market instruments except for shares without being offered to public (until the end of the accounting period in which the issued capital market instruments are paid off) or which have offering circular that bear the validity period approved by the Capital Markets Board for this purpose.
  1. The following companies are subject to regulations and audit of the Banking Regulation and Supervision Authority pursuant to Banking Law No. 5411;

- Banks;

- Grading institutions;

- Financial holding companies;

- Financial leasing companies;

- Factoring companies;

- Financing companies;

- Asset management companies;

- Companies having qualified shares over financial holding companies as defined in the Banking Law No. 5411.

  1. Insurance, reinsurance and pension companies carrying out activities within the scope of Insurance Law No. 5684 and the Individual Pension Savings and Investment System Law No. 4632.
  2. Authorized institutions, precious metals intermediary institutions or companies conducting business in manufacturing or trading precious metals, which are allowed to conduct activities in Borsa Istanbul markets.
  3. Licensed warehouse enterprises established in line with the Agricultural Products Licensed Warehousing Law No. 5300, public warehouses established in line with the Public Warehouses Law No. 2699.
  4. Media service provider companies having at least one of the following rights or licenses:

- Right to make television broadcasting from land,

- Satellite television broadcasting license, or

- License for cable television broadcasting to multiple provinces.

In addition to the foregoing, the Decree groups other companies into three sub-categories and companies which exceed the threshold value of at least two of the three criteria stated below two financial years in a row become subject to independent audit. Said three criteria are as follows:

- For companies whose capital market instruments are not traded in the stock exchange or other organized markets but are considered as publicly held companies within the scope of Capital Market Law No. 6362 relevant criteria are as follows:

- total assets worth of TRY 15 million

- having net sales revenue of TRY 20 million

- employing 50 employees

  1. For companies listed in Annex II of the Decree relevant criteria are as follows:

- total assets worth of TRY 30 million

- having net sales revenue of TRY 40 million

- employing 125 employees

- Companies listed in Annex II of the Decree are as follows:

- Companies at least 25% of their share capitals are directly or indirectly owned by public professional organizations, unions, associations, foundations, cooperatives and superior institutions thereof;

- Companies publishing daily newspapers throughout the country;

- Except for the call center companies, companies that are subject to regulation and audit of Information Technologies and Communication Authority within the scope of the relevant Turkish legislation;

- Companies carrying out operations under the regulations of Energy Market Regulatory Board;

- Except for the companies listed under Annex I;

- Excluding subsidiaries and companies which are inactive or whose activities are suspended temporarily or revoked, subsidiaries of the Saving Deposit Insurance Fund ("TMSF") and the companies whose supervision and management are taken over by TMSF within the scope of the relevant Turkish legislation;

- Public economic enterprises and their subsidiaries carrying out activities under the relevant Turkish legislation and companies at least 50% of share capitals of which are owned by municipalities.

  1. For any other companies which are not listed above:

- total assets worth of TRY 35 million,

- having net sales revenue of TRY 70 million

- employing 175 employees

The companies which have exceeded the threshold value of at least two criteria stated above two financial years in a row, become subject to independent audit beginning from the following financial year.

The companies will no longer be subject to independent audit if those remain (i) under the threshold values two financial years in a row or (ii) at least 20% less than the threshold value of at least two of the three criteria in a financial year. The companies which are subject to independent audit must appoint an independent auditor for each activity year and in any case before the end of the activity year in which the independent auditor would fulfill its duties.

  1. What Are the Consequences of Not-Being Audited?

Under Article 397/1 of the TCC, independent auditor must audit financial statements and activity reports of the companies which are subject to the audit.

According to Article 424 of the TCC, general assembly resolution related to approval of balance sheets lead to release of board members, unless otherwise stated in the resolution. However, if certain issues are not indicated in balance sheets at all or as required or balance sheets include certain issues that prevent revealing position of the company accurately and this has been made consciously, approval of balance sheets cannot be considered as release of board members. Therefore, board members cannot be released based on unaudited financial statements. Moreover, profit cannot be distributed and share capital cannot be increased or decreased based on such unaudited financial statements.

It is also worth mentioning that in accordance with Article 553/1 of the TCC, board members may be held liable against the company, shareholders and creditors of the company, if the company, shareholders or creditors of the company suffer any losses, as the company has not been audited, although it is subject to independent audit under the relevant legislation.

Moreover, as per Article 1524 of the TCC, companies which are subject to independent audit must create a website and allocate a section for the announcements that need to be made by the company under the laws. In this respect, the board of directors of the company must announce the newly-appointed independent auditor on the company's website.

According to Article 562/12 of the TCC, a judicial fine corresponding to a time period starting from 100 days to 300 days shall be imposed on the board members of the companies subject to independent audit but has not created a web-site. This judicial fine would be respectively from (i) approximately between TRY 2,000 (~ EUR 232) and TRY 10,000 (~ EUR 1,160), when calculated over the maximum daily rate of TRY 100 (~ EUR 11) - the minimum daily amount is TRY 20 (~ EUR 2,3) to (ii) approximately between TRY 6,000 (~ EUR 697) and TRY 30,000 (~ EUR 3,490), when calculated over the maximum daily rate of TRY 100 (~ EUR 12) - the minimum daily amount is TRY 20 (~ EUR 2,3) depending on the court's decision.1

Furthermore, a judicial fine corresponding to up to 100 days shall be imposed on those who have not put the required content on such web-site as stated under Article 1524 of the TCC. This judicial fine would be up to approximately between TRY 2,000 (~ EUR 232) and TRY 10,000 (~ EUR 1,160), when calculated over the maximum daily rate of TRY 100 (~ EUR 11) - the minimum daily amount is TRY 20 (~ EUR 2,3).

  1. Conclusion

In conclusion, conditions for being subject to independent audit are explicitly listed in the relevant legislation and the companies subject to independent audit under the laws must appoint an independent auditor for each activity year. As there are severe consequences triggered by not-being audited despite being subject to independent audit, companies must thoroughly assess whether they fall under the relevant legislation related to independent audit and if they are subject to independent audit, they must appoint an independent auditor for each activity year and in any case before the end of the activity year in which the independent auditor carries out its duties.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in September 2020. A link to the full Legal Insight Quarterly may be found here.

Footnotes

1 Euro figures within this article are provided on estimates based on the currencies at the time of writing.

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.