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Audit of financial statement

New obligations under the amended Act

NEW LAW | The most important criterion from the point of view of participation in the audit committee is the prerequisite of autonomy from the public-interest entity.

On 1 June 2017, the President signed the Act on Statutory Auditors, Audit Companies and Public Supervision (hereinafter referred to as the "Act").

By implementing the provisions of the Regulation No. 537/2014 of the European Parliament and of the Council on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC, the Act introduces many new obligations for supervisory boards.

The companies, whose shares are listed on the stock exchanges (public-interest entities; hereinafter referred to as  "PIE"), shall have the audit committee in compliance with the new regulations. Only small companies that at the end of a given fiscal year and at the end of the fiscal year preceding a given fiscal year did not exceed at least two of the following values:

a) PLN 17 mln - in case of total assets at the end of the fiscal year,
b) PLN 34 mln - in case of net revenue from the sale of finished goods for the fiscal year,
c) 50 persons - in case of annual average employment per full-time employment

- the supervisory board or other supervisory or control body of the public-interest entity may be entrusted with performing the functions of the audit committee.

Members of the Supervisory Boards

In compliance with the Act, the audit committee shall be composed of at least three members selected from the members of the supervisory board.

The members of the audit committee shall meet the following criteria:

  • the majority of members, including a chairperson, shall be independent of a given public-interest entity,
  • at least one member should have sufficient knowledge and skills in the field of accounting or audit of financial statements,
  • members should have professional knowledge and skills in the industry, in which the public-interest entity operates; such condition shall be considered satisfied if at least one member of the audit committee has knowledge and skills in the industry or individual members have knowledge and skills in the industry within the specific areas,
  • the chairperson of the audit committee shall be appointed by the members of the audit committee or supervisory board or other supervisory or control body of the public-interest entity.

The prerequisite of autonomy from the PIE is especially important from the point of view of participation in the audit committee. The prerequisite has been described in detail in Article 129 sec. 3 of the Act.

A number of conditions to be met

A member of the audit committee is considered independent of the PIE if such member meets the following criteria:

1) has not belonged within the last five years from the date of appointment to any higher management staff, i.e. was not a member of the management board or any other management body of a given public-interest entity or entity related thereto;

2) is not and has not been within the last three years from the date of appointment an employee of a given public-interest entity or entity related thereto, except for the situation when the member of the audit committee is an employee, who does not belong to any higher management staff and who was selected for the supervisory board or other supervisory or control body of a given public-interest entity as the employee representative;

3) does not exercise control within the meaning of Article 3 sec. 1 point 37 letters a-e of the Act on Accounting and does not represent persons or entities exercising control over a given public-interest entity;

4) does not receive or has not received additional remuneration in substantial amount from a given public-interest entity or entity related thereto, except for the remuneration received as a member of the supervisory board or other supervisory or control body, including audit committee;

5) has not maintained within the last six months from the date of appointment any significant economic relationships with a given public-interest entity or entity related thereto, directly or as the owner, partner, shareholder, member of the supervisory board or other supervisory or control body or member of the higher management staff, including member of the management board or other management body of the entity maintaining such relationships;

6) is not and has not been within the last two years from the date of appointment:

a) owner, partner (including general partner) or shareholder of the present or former audit firm responsible for auditing financial statement of a given public-interest entity or entity related thereto, or
b) member of the supervisory board or other supervisory or control body of the present or former audit firm responsible for auditing financial statement of a given public-interest entity or entity related thereto, or
c) employee or person from the higher management staff, including member of the management board or other management body of the present or former audit firm responsible for auditing financial statement of a given public-interest entity or entity related thereto, or
d) another natural person, whose services such member used, or who was supervised by the present or former audit firm or auditor acting on its behalf;

7) is not a member of the management board or other management body of the entity, where the member of the supervisory board or other supervisory or control body is the member of the management board or other management body of a given public-interest entity;

8) has not been a member of the supervisory board or other supervisory or control body of a given public-interest entity for over 12 years;

9) is not a spouse, a person in cohabitation therewith, a relative or relative by affinity in direct line, but in secondary kinship up to fourth degree - of the member of the management board or other management body of a given public-interest entity or person mentioned in points 1-8;

10) does not remain in adoption-like relationship, under custody or guardianship with the member of the management board or other management body of a given public interest entity or person mentioned in points 1-8.

Tasks of the body

The Act specifies the tasks of the audit committee. According to Article 130 of the Act, the aforesaid tasks are the following:

1) the monitoring of:

a) financial reporting process,
b) efficiency of internal control systems and risk management systems and internal audit, including within the scope of financial reporting,
c) activities related to financial review, in particular an audit performed by an audit firm, including all conclusions and arrangements of the Audit Oversight Commission resulting from the control performed at the audit firm;

2) controlling and monitoring of impartiality of an auditor and audit firm, in particular in the event when the audit firm renders non-audit services for the public-interest entity;

3) informing the supervisory board or other supervisory or control body of the public-interest entity about the audit results and explaining in what way such audit contributed to reliability of financial review in the public-interest entity and what was the role of the audit committee in the audit process;

4) assessment of impartiality of the auditor and acceptance of the permissible non-audit services rendered thereby in the public-interest entity;

5) development of the policy for choosing the audit firm to perform the audit;

6) development of the policy context for the provision of the permissible non-audit services by the audit firm, entities related thereto and member of the audit firm network;

7) development of the selection procedure of the audit firm by the public-interest entity;

8) recommendations on the selection of auditor for the supervisory board, including:

a) indication of the audit firm, to which the statutory audit shall be entrusted, 
b) representation that the recommendation is free from any impact of third parties,
c) acknowledgment that the audited public-interest entity has not entered into any agreements including clauses limiting the choice of the audit firm.

9) provision of recommendations aimed at ensuring reliability of the financial reporting process in the public-interest entity.

Recommendations and selection process

The Act determined the scope of recommendation on whether the company continues collaboration with the auditor or not.

In case of change of the auditor, the recommendations of the audit committee:  

1) shall include at least two possibilities for choosing the audit firm, together with the reasons therefor, and an indication of the justified preferences of the audit committee for one of such firms;

2) shall follow the selection procedure organized by the audited entity.

What is important, the public-interest entities that are small or medium enterprises and companies with reduced market capitalization (see: box) may not implement the auditor selection procedure.

Other entities should implement such procedure meeting the following criteria (Article 130 sec. 3 of the Act): 

a) the audited public-interest entity may invite any two audit firms to place bids for the statutory audit services provided that:

  • it does not infringe provisions of Article 17 sec. 3 of the Regulation no. 537/2014 (the condition of rotation of auditors, see: box),
  • the organization of the tender procedure does not exclude from participation those firms which generated less than 15% of their total remuneration from audits in the public-interest entities in a given EU Member State in the previous calendar year, included in the list of audit firms mentioned in Article 19, see: box,

b) the audited public-interest entity shall prepare tender documentation for the invited audit firms, which:

  • would allow such firms to learn about the business of the audited public-interest entity,
  • would include an indication of the financial statements to be audited,
  • would include clear and non-discriminatory selection criteria applied by the audited public-interest entity for the purpose of evaluation of bids placed by audit firms,

c) the audited public-interest entity shall be free to determine the selection procedure and may conduct direct negotiations with the interested bidders during such procedure,

d) the audited public-interest entity shall evaluate the bids placed by audit firms in compliance with the selection criteria specified in the tender documentation and prepare a statement including the conclusions from the selection procedure approved by the audit committee,

e) the audited public-interest entity and audit committee shall consider all arrangements or conclusions included in the annual report mentioned in Article 90 sec. 5 of the Act, which may have impact on the selection of the audit firm, see: box.

Definitions and conditions

  • The company with reduced market capitalization is the company whose shares have been admitted to trading on a regulated market and whose average market capitalization calculated as the arithmetical mean of the value of the market capitalization on the last date of quoting within the last three calendar years is less than EUR 100 million.
  • Maximum duration of continuing commissioned statutory audits of the PIEs conducted by the same audit firm or audit firm related to such audit firm or any member of the audit network operating in the EU Member States, to which such audit firms belong, may not be longer than five years.
  • By 31 March of the following year, the Audit Oversight Commission shall publish on its website a list of audit firms that conducted statutory audits in the public-interest entities in the previous year, together with the information on whether such firms met the criteria stipulated in Article 16 sec. 3(a) of the Regulation no. 537/2014 (Article 19 of the Act).
  • By 31 May of the following year, the Audit Oversight Commission shall publish on its website an annual report including, among other things, the conclusions from: audits in the audit firms, results of disciplinary procedures and penalties imposed on such audit firms (Article 90 sec. 5 of the Act).

Authorizations

The Act also describes special tools for the audit committee allowing it to perform certain tasks as provided for therein.  The audit committee may: 

  • without any intermediation of the supervisory board or other supervisory or control body - request from the company to provide all the necessary information, explanation and documentation,
  • request that the key audit issues, which were mentioned by the auditor in the report prepared thereby and addressed to the supervisory board, be discussed by the auditor. 

The amended Act on Auditors became effective as of 21 June 2017 - 14 days prior to publication in the Journal of Laws [DzU] of 6 June 2017 item 1089. 
Therefore, the public-interest entities shall have very little time to implement the provisions of the Act, especially that in some cases such regulations may cause personal changes to the supervisory boards. 

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