Audit of Companies under the TCC, Recent company scandals and company financial statements have revealed the need for regulations on independent auditing. Therefore, the main regulations regarding independent auditing have been made in the new Turkish Commercial Code. In this article, first, general information about the independent audit will be presented. Then, the independent audit regulations within the scope of the New Turkish Commercial Code and the New TCC will be evaluated.
Audit of Companies under the TCC
Companies Subject to Independent Audit within the Scope of Turkish Commercial Code, “Decision on Determination of Companies Subject to Independent Audit” (“Decision”) was published in the Official Gazette dated 26.05.2018 and numbered 30432 will enter into force as of 01.01.2018. As of the date, the Decision of the Council of Ministers dated 19.12.2012 and numbered 2012/4213 regarding the enforcement of the “Decision on the Determination of the Companies to be Subject to Independent Audit” will be repealed.
Companies Subject to Independent Audit and Conditions
In accordance with the decision, companies subject to independent audit are listed below:
- Companies that exceed the threshold values of at least two of the following three criteria for two consecutive accounting periods are subject to independent audit as of the following accounting period:
The threshold values for companies whose capital market instruments are not traded in a stock exchange or other organized markets but are considered publicly traded under the Capital Markets Law are as follows:
- Total assets of 15 million Turkish Lira
- Annual net sales revenue of 20 million Turkish Lira
- Number of employees of 50 people
The threshold values for the following companies are as follows:
- Total assets of 30 million Turkish Lira
- Annual net sales revenue of 40 million Turkish Lira
- Number of employees of 125 people
- Companies, of which at least 25% of the capital belongs directly or indirectly to professional organizations, unions, associations, foundations, cooperatives and their superior organizations, which are public institutions,
- Companies that publish daily newspapers across the country,
- Companies subject to the regulation and audit of the Electronic Signature Law, Electronic Communications Law, Information Technologies and Communication Authority, excluding call center companies;
- Companies that have obtained a license, certificate or authorization from the Energy Market Regulatory Institution and operate under the regulations of this Institution,
Except for the companies in the scope of 1.7 ;
With the exception of subsidiaries and companies that are inactive or whose activities have been temporarily suspended or cancelled (including those whose main contract amendments and similar procedures have not been carried out yet), the SDIF’s audits by the SDIF subsidiaries within the scope of the repealed Banks Law No. 4389 and Law No. 5411, and companies whose management has been taken over;
State-owned enterprises and subsidiaries operating in the frame of the Decree on State Economic Enterprises and companies whose capital is at least 50% owned by municipalities
The threshold values for companies not included in the scope of the companies mentioned above are as follows:
- Total assets of 35 million Turkish Lira
- Annual net sales revenue of 70 million Turkish Lira
- Number of employees of 175 people
All of the following companies are subject to independent audit, without being subject to any criteria.
From the companies subject to the regulation and audit of the Capital Markets Board in accordance with the law No. 6362;
- Investment institutions,
- Collective investment companies;
- Portfolio management companies,
- Mortgage finance enterprises,
- Asset rental companies,
- Central settlement institutions,
- Central depository institutions,
- Data storage enterprises,
- Rating agencies,
- Valuation agencies,
- Incorporated companies whose capital market instruments are traded in a stock exchange or other organized markets or which have a prospectus or issuance document approved by the Capital Markets Board for trading,
- Joint stock companies with the validity period, prospectus or issuance certificate approved by the Capital Markets Board for the purpose of trading or joint stock companies whose capital market instruments are traded on a stock exchange or other organized markets.
Companies subject to regulation and audit of the Banking Regulation and Supervision Agency in accordance with the Banking Law are;
- Rating agencies,
- Financial holding companies,
- Financial leasing companies,
- Factoring companies,
- Financing companies,
- Asset management companies,
- Companies holding qualified shares in financial holding companies as defined in the Banking Law.
Media service providers holding at least one of the following rights or licenses:
- The right to broadcast on national television in a terrestrial environment;
- Satellite television broadcasting license; or
- Cable television broadcast license for multiple cities.
If the company subject to independent audit falls below the threshold values of at least two of the three criteria in two consecutive accounting periods due to exceeding the threshold values, or if it falls below the threshold values of at least two of these criteria by 20% or more in an accounting period shall be excluded from the scope of independent audit.
Companies Outside of Independent Audit
The following companies are not subject to independent audit under the Decision:
- Companies subject to the Law on Privatization Practices, excluding the companies listed under article 2 above;
- Companies whose capital is at least 50% owned by the state, special provincial administrations, foundations established by law and other public institutions and organizations, excluding the companies listed under 2. and 1./(v)/(b) above.
What is TTC control?
With Turkish Commercial Code No. 6102 (“TCC”) entered into force, a system has been established which envisages the audit of joint stock companies with certain qualifications to be determined by the Ministry and by independent institutions and organizations.
Control of Companies under the TCC
1) From now on, the financial statements of the joint stock company and the group of companies will be audited by the auditor in accordance with the Turkish Auditing Standards and with international audit standards.
2) Whether the financial information in the annual report of the board of directors is consistent with the audited financial statements and whether they reflect the truth is also within the scope of the audit.
3) The audit to be carried out will also include whether the company has diagnostic systems against the risks that threaten the existence and future of the company and whether the necessary measures are taken (risk auditing).
4) Financial statements and the annual report of the board of directors that have not been audited will not be deemed to have been prepared; in other words, no profit distribution will be made through these financial statements.
5) The application of the same financial reporting standards and compliance with the same interpretation rules as in all industrialized countries will provide Turkish enterprises with competitive power in the global market and will render the Turkish market an international character.
A final regulation that should be mentioned regarding independent auditing is related to the duty of the board of directors regarding risk detection and prevention. The duty is regulated in Article 378 of the New TTC and is as follows:
“For companies whose shares are listed in the stock exchange the BoD is required to set up an expert committee to run and to develop the system for the purpose of early detection of the causes that jeopardize the existence of the company, its development and continuity of the business unit in danger, of applying the necessary measures and remedies in this regard, and of managing the risk. In other companies a similar committee, if deemed necessary and if the BoD is notified in writing by the auditor, shall be constituted and shall submit its first report at the end of the month following its constitution. In a bimonthly report to the BoD, the committee shall evaluate the situation, indicate the dangers, if any, and suggest remedies. The report shall also be sent to the auditor..”
The Board of Directors has established the system, whether the Committee is authorized as stipulated in Article 378 in order to identify threats or risks that may occur in order to carry out the company’s risk management in a timely manner, and if there is such a system, in accordance with Article 398 of the New Turkish Commercial Code, the auditor reports explaining this commission, preparing a separate report and submits it to the board of directors together with the audit report.
Audit of Companies under the TCC also mentions that auditors cannot provide consultancy or service to the company they audit, other than tax consultancy and tax audit, and they cannot do this through a subsidiary either.
The independent audit will only be carried out within the scope of the permit documents issued by the audit organizations or auditors authorized by the Agency, and the audit and enterprises of the public benefit organizations (PASTA) determined by the Agency according to their fields of activity, the number of jobs, size of the employees and similar criteria are carried out only by the audit organizations. The independent auditors and independent audit institutions to be authorized by the Authority to carry out the said audit are defined in the Decree No. 660 as follows:
Individuals have obtained the Sworn Public Accountant Certificate by the Institution in accordance with the Law and Sworn Professionals, dated 1/6/1989 and numbered 3568, among the authorized, independent audit firm: Audits means the capital companies authorized by the Authority to do so.
Finally, we can state which companies will be subject to audit according to which criteria, as follows:
- Publicly traded joint stock companies will be subject to audit according to the financial statements prepared in accordance with the full set of TAS and TFRS. (01.01-31.12 annual and 01.01-30.06 interim financial statements are subject to independent audit. 01.01.-31.03 quarterly and 01.01-30.09 nine-month financial statements will be announced on the Public Disclosure Platform without being audited.)
- The PIEs will be audited only with their financial statements for the year 01.01-31.12 and financial statements prepared in accordance with the full set of TAS and TFRS,
- Companies that are publicly traded and non-PII, which entered into force on 2018 and will be adapted to financial statements dated 31.12.2018, have to use BOBI FRS (Large Medium Enterprise Financial Reporting Standards) if they wish, instead of full set of TMS and TFRS.