Report: Nearly four out of ten limited liability companies neglect their audit obligationsTax Administration Bulletin, 6/14/2023
Nearly 40 per cent of Finnish limited liability companies neglect their audit obligations. This is indicated by the Grey Economy Information Unit’s report published yesterday. Currently, Trade Register information does not indicate clearly enough whether a company has fulfilled its audit obligations.
The Grey Economy Information Unit investigated how small- and medium-sized limited liability companies with an audit obligation comply with their obligations.
The results show that almost 40 per cent of small- and medium-sized Finnish companies have deficiencies in complying with their audit obligations. The most common neglect – in 30 per cent of all companies – was the non-registration of the audit report in the Trade Register. In addition, 19 per cent of the companies included in the investigation did not have a registered auditor, and seven per cent provided incorrect information about the audit in their tax return.
“As a rule, the investigated companies have given information about auditing acceptably in their tax returns. This serves to interpret that companies are aware of their audit obligations. However, deficiencies in Trade Register information about auditing are fairly common, and the non-registration of the audit report cannot be explained by ignorance, at least not every time,” says Johanna Miettinen, Senior Adviser at the Grey Economy Information Unit.
Companies carrying a tax risk neglect their obligations more often than others
The report also investigated whether companies with a tax risk neglect their obligations more often than other companies. According to Head Analyst Tomi Martikainen, the results show that companies that carry a risk from the perspective of taxation are also more likely to neglect their obligations regarding the audit than others.
“Companies carrying a tax risk probably seek financial gain through tax avoidance and the shadow economy. This is why these companies do not require an auditor to confirm that their financial statements give accurate information and that their managers have acted lawfully,” the authors of the report say.
The report covered nearly 59,000 limited liability companies regarding 2021 and more than 57,000 for 2020. The target group consisted of small- and medium-sized private limited liability companies that meet the conditions set for the audit obligation in the Limited Liability Companies Act. As a rule, all corporate entities that have an accounting obligation must provide an audit report in Finland. Smaller corporate entities are exempted from the statutory audit obligation.
No overview of compliance with obligations regarding the audit
Companies with an audit obligation are obligated to provide auditing information through tax returns, register their auditor in the Trade Register, and submit the auditor’s report to the Trade Register attached to their financial statements. However, no overview of compliance with obligations regarding the audit has been available in Finland. Janne Marttinen, Head of the Grey Economy Information Unit, says that this can partly be explained by companies being obligated to register with and submit reports to various authorities.
The report points out development needs in the Trade Register.
“The Trade Register should be developed so that its information would indicate each company’s audit obligation and compliance with it. As a result, parties that use financial statements information could better assess the reliability of financial information and the lawfulness of each company’s management,” says Marttinen.
“What is more, the report shows that compliance with the audit obligation, for example, could be monitored better than at present by developing the exchange of information between the authorities. In particular, the exchange of information between the Finnish Tax Administration and the Finnish Patent and Registration Office would offer better opportunities to monitor the fulfilment of the audit obligation. Improving the exchange of information has also been written down in the current programme for combating the shadow economy,” says Marttinen.
The Grey Economy Information Unit investigated the fulfilment of audit obligations by limited liability companies for the first time to this extent.
“Comprehensive and reliable financial statements information increases the transparency of business activities and the reliability of financial information provided by companies. For parties outside companies, it is important that Trade Register information is up to date, also regarding information about the audit. This is why it is important to monitor compliance with the audit obligation,” says Janne Marttinen.
Report: Obligations regarding the audit are neglected