An important issue for companies in Turkey is the "Independent Audit" of their financial statements. However, as surely known, not all, but only some of the companies are subject to independent audit. According to the latest status, companies must retain independent auditors if they meet during two subsequent financial years at least two of the criteria below, either itself or together with its affiliates:
- A total assets value of TRY40,000,000 or above.
- A net sales revenue of TRY80,000,000 or above.
- 200 employees or more.
So the requirements for being subject to an independent audit are actually obvious. But what says the law about the consequenses of non-compliance with independent audit requirements? In other words, what if a company reaches the abovementioned tresholds, but still do not appoint an independent auditor in accordance with the law? The answer to this question is not as obvious as it is about the requirements of being subject thereto.
There are two "clearly" regulated conseqences by the law: One provision stipulates that financial statements and the annual activity report of the board shall be deemed as null and void (TCC Art. 397/3) and the other one regulates that the board members of the company subject to independent audit shall be obliged to pay a judicial fine of 300 days to 400 days if they should not make a web-site with a content which is in accordance with the law (TCC Art. 1524/12). Side effects associated with the first sanction are following:
- Financial statements may not be submitted to financial institutions, which would have also the result that credits may not be granted;
- Board members may not be released for their activities in the relevant financial year;
- General assembly may not approve the financial statements, which would have also the result that the dividends may not be distributed to shareholders;
- Capital increase and decrease is not allowed.
Few months ago, the General Directorate of Internal Trade, which is entitled to audit and send circulars to trade registries has "created" a new sanction: Companies who did not appoint an independent auditor, even though they were supposed to do so, and did not registrate the resolution about the appointment of the independent auditor may not registrate any resolution of their Company. In this circular, the Directorate of Internal Trade has mentioned also that these companies shall be notified by the relevant trade registries and warned therewith to pay an administrative fine of TRY 4.000 if they should not comply with the independent audit requirements since TCC Art. 33 regulates that companies are obliged to pay this mentioned fine if they do not registrate an issue which is mandatory according to the TCC.
The reliance on Art. 33 of the TCC with regard to the application of the administrative fine may be acceptable since the law clearly regulates which companies are obliged to appoint an independent auditor and that the resolution about such appointment must be registrated with the trade registry. However, it is not understandable and it has no reliance on any provision of the law, that the trade registry may reject the registry of other issues, for example the appointment of a new board or signatory authories, with the grounding that a mandatory provision about an completely different issue has not been met. For example, it might be understood and would found a legal basis if the trade registry rejects the registry of a board resolution about the appointment of signatory authories, if the duty term of the board has expired.
It is also worth to be mentioned that the practise of the trade registry about the non-compliance to the law is not unique. For example, Art. 409 of TCC regulates that the ordinary general assembly must convene within 3 months as of the end of each financial year. However, we did not expierenced any "registry blockage" for Companies, which did not held an ordinary general assembly for years.
An interesting question about that issue is also after which moment the trade registry may reject the applications of a company, that has not appointed an independent auditor for the previous financial year. The law says that the independent auditor may be appointed until the last day of the subsequent financial year, f.e. 31st December of 2017 for the financial statements of 2016. So does that mean the Company may not request any registration after the 1st January of 2018? We are of the opinion that the trade registry will apply the registry blockage only to Companies, which have been already notified to remedy the non-compliance within 30 days about the independent auditor appointment.
As a final word, we would like to notice that it is a necessity of the principal of legality, that the practise of the trade registries has a legal basis in the law. Especially the regulations about the appointment of independent auditor and the audit itself must be revised since the lawmakers did not even published any regulation about the audit of financial statements of Companies, which do not reach the abovementioned tresholds and are therefore not subject to independent audit.
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.