1. INTRODUCTION
Under the newly abolished Turkish Commercial Code numbered 6762 (“PTCC”), three (3) mandatory organs namely; general assembly, board of directors and auditor/statutory auditors are prescribed for joint stock companies. However, the Turkish Commercial Code numbered 6102 (“TCC”) sets forth only two (2) mandatory organs which are consisting of the general assembly and board of directors. In other words, the mandatory organ status of statutory auditor is abandoned under TCC and the audit activity is delegated to independent professionals completely organized out of the company’s structure. This article will exclusively examine the independent auditing which serves a significant role for the new audit mechanism envisaged under the TCC.
2. INTERNAL AND EXTERNAL AUDIT
The audit in joint stock companies can be carried out in two (2) different ways. The first type of such is the internal audit. As per the PTCC, the statutory auditing organ (auditors) was considered as one of the mandatory organs of the company and non-existence of such organ was determined as a reason for the dissolution of the company. However, the statutory auditor is no longer recognized as a mandatory organ under the TCC and thus, non-existence of such organ does not constitute a reason for dissolution. Having said that, it is also possible to establish a sub-organ or a committee/commission by the board of directors to serve thereunder. Accordingly, the board of directors may, at its discretion, establish internal audit committees for financial auditing in this regard. Likewise, paragraph 2 of Article 366 of the TCC explicitly states that the board of directors may establish committees in order to supervise the company’s affairs and to prepare a report on matters which are brought to its attention and enforcement of its resolutions or internal audit.
The second type of audit is the external audit. Such audit is performed by the independent and objective third parties who are not related to the company. Prior to the recent amendments made in the TCC with the Law numbered 6335, all joint stock companies were subject to the independent audit regime. However, Article 397 of the TCC has introduced a new principle outlining that the companies, which are subject to the audit under Article 398 of the TCC, shall be determined by the Council of Ministers. “Resolution of Council of Ministers Regarding the Determination of Companies Being Subject to the Independent Audit” (“Resolution of Council of Ministers”) which was prepared in accordance with the law that entered into force as of January 23, 2013 and standards required for companies subject to independent audit were determined by “Procedures and Principles of Resolution of Council of Ministers on the Determination of Companies Subject to Audit.”
In addition to Resolution of Council of Ministers determining the companies to be subject to the independent audit, Independent Audit Regulation which regulates the procedures and principles concerning independent auditing and the authorization and liabilities of independent auditors has entered into force as of December 26, 2012. According to the Independent Audit Regulation, independent audit is defined as follows; “conducting an audit and preparing an audit report by inspecting the financial tables and other financial details in the books, records and documents of the company which are subject to audit, with the aim of obtaining sufficient and appropriate statutory audit evidences which would ensure a reasonable assurance with regard to their compliance with financial reporting standards and accuracy”. In the light of foregoing, the independent audit consists of matters regarding, directly or indirectly, auditing, examination and assessment of the company and financial tables, annual activity reports of the company prescribed to be audited under TCC by the auditors and auditing institutions in accordance with the applicable law with respect to systems in relation to earlier detection and management of the risk. The purpose of independent audit is to form an opinion which provides assurance as to whether financial tables, annual activity report of board of directors and other financial information of company are in compliance with the Turkish Audit Standards. In other words, the independent audit mechanism seeks to notify shareholders and other relevant persons by preparing a clear, reliable, comprehensible and fairly disclosing report in compliance with the principles of corporate governance and true and fair view.
In consideration of the foregoing, Law numbered 6335 has determined the independent audit mechanism as mandatory to the companies which are determined by Resolution of Council of Ministers. Hence, some companies became exempt from the independent audit and such matter was fairly criticized. Accordingly, the lawmaker has established a rule concerning the audit of the joint stock companies which are not subject to independent audit under paragraph 4 of Article 397 of TCC and the cooperatives subject to Law numbered 4572 and their upper organizations not subject to independent audit by adding a new provision in paragraph 5 of Article 397 of TCC through Article 80 of Law Numbered 6455 Regarding the Amendments to the Customs Law and Other Laws and Statutory Decrees. As per aforesaid rule, qualifications, ethical principles, duties and authorities, elections, dismissal or resignation of auditors responsible for conducting such audit in accordance with the provision regarding the procedures and principles of independent audit; matters concerning the content of the audit and the audit reports; and presentation of the audit report to the general assembly shall be regulated under a regulation to be prepared by the Ministry of Customs and Trade and enacted by the Council of Ministers. It should be noted that such regulation has not entered into force yet. Having said that the auditing under such regulation shall also be regarded as a type of external audit of companies. Likewise, such audit shall be conducted by objective and independent persons who are not related to the company. However, such external audit shall differ from the independent audit adopted under paragraph 4 of Article 397 of TCC.
3. COMPANIES SUBJECT TO INDEPENDENT AUDIT UNDER PARAGRAPH 4 OF ARTICLE 397 OF TCC
General criteria on total assets, net sales revenue or number of employees to determine whether a company is subject to independent auditing as per Article 3 and 4 of the Resolution of Council of Ministers are as follows:
(i) Total assets, equal to TL seventy-five million (75,000,000) or above,
(ii) Annual net sales revenue, equal to TL one hundred and fifty million (150,000,000) or above,
(iii) Number of employees, equal to two hundred and fifty (250) and above.
In order for a company to become subject to independent auditing, at least two (2) of the three (3) foregoing criteria for two (2) consecutive fiscal years should be satisfied by the company on its own or through its affiliates or subsidiaries. The criteria are not required to be the same criteria with the one which was envisaged to be exceeded in such consecutive fiscal years. Notwithstanding the foregoing, the companies operating their activities in the fields stated under the list numbered (I) annexed to the Resolution of Council of Ministers shall be subject to audit without any criteria.
4. AUDITOR
As per Article 400 of the TCC, independent auditing may only be performed by certified public accountants or sworn-in public accountants licensed under Law of Certified Public Accountancy and Sworn-in Certified Public Accountancy and authorized by Public Oversight, Accounting and Audit Standards Authority and/or equity companies which are comprised of such persons. Accordingly, persons who do not fall within the scope of such cannot perform the auditing activity. Notwithstanding Article 399 of the TCC, stating that the independent auditors shall be elected by the Company’s general assembly, auditors may also be assigned through a decision of the court under several exceptional circumstances. In the event that an auditor is not assigned until the fourth (4th) month of Company’s operation period or the assigned auditor terminates his/her audit contract, the courts may assign an auditor upon request by any of the members of board of directors or shareholders.
The board of directors shall, without delay, prepare and submit the financial tables and annual activity report to the auditor in accordance with its submission duty specified under Article 401 of the TCC. Moreover, the board of directors shall ensure access of the auditor to investigate the statutory books, correspondences, documents, assets and liabilities of the company. The auditor shall prepare and submit an audit report which will include its opinion regarding the Company and remarkable issues to be taken into consideration following its examination on information, documents and data subject to auditing. Aforementioned audit report is clarified under Article 402 of the TCC. According to such provision, the audit report concerning the financial tables shall be written in a clear, comprehensible and simple manner regarding the type, scope, characteristic and results of the audit and such report shall contain comparison of previous years. In addition, the statements of the board of directors in the annual activity report regarding the company shall be evaluated by the auditor in a separate report in terms of their accuracy and consistency with the financial tables. The auditor shall base his/her evaluation on the company’s financial tables. Firstly, auditor’s opinion with respect to assessment of board of directors regarding the company’s status shall be presented in the audit report. As part of the audit of company’s financial tables, in addition to analysis of survival of the company and its development in the future, financial position of the company shall be assessed under such opinion to the extent permitted by the report of company’s board of directors.
In addition to the foregoing, auditor shall be assigned for each activity period prior to the expiry of the relevant activity period during which the auditor will perform its duties. Elected auditor may be dismissed upon filing of the shareholders representing ten percent (10%) (5% in publicly traded companies) of the share capital or board of directors a lawsuit with the claims of “dismissal and appointment of a new auditor” to the commercial court of first instance at the place at which the headquarters of the company is registered.
5. LETTER OF OPINION
As per Article 403 of the TCC, auditors shall prepare a letter of opinion separately from the audit report following the audit process. The letter of opinion is a document in which the auditor explains whether the financial table and annual activity report of the company is prepared in compliance with the applicable legislation following the examination of evidences gathered during the auditing process. Such letter shall be issued in any of four (4) different ways; namely as “positive opinion”, “restrained positive opinion”, “negative opinion” or “avoiding from giving an opinion”. Opinion letters shall be issued in a clear and reasoned manner and in compliance with the notification rules.
In the event that the opinion letter prepared by the auditor is positive, it may be assumed that the company’s financial tables are accurate, actual and any violation has not been detected in terms of Turkish Accounting Standards and other requirements following such auditing. Such positive opinion letter constitutes a basis for releasing the board of directors as well, since decisions may be adopted concerning the financial tables and annual reports following the issuance of a positive opinion letter. In the event that the auditor has any hesitations, he/she may restrain the positive opinion letter or declare a negative opinion letter.
Restrained positive opinion letter shall be issued in a situation where the financial tables contain contradictions that can be corrected by authorized institutions of the company and such contradictions do not have comprehensive and significant effects on the announced results in the tables. The subject, extent of the restrain and ways to correct the contradictions shall be explicitly indicated in the restrained positive opinion letter.
As per Article 403 of the TCC, in the event that a negative opinion letter is provided, the board of directors calls extraordinary general assembly for a meeting within four (4) business days following the delivery of letter of opinion; thereafter the general assembly elects the new board of directors. Unless otherwise stated in the articles of association, the members of board of directors can be re-elected. The new board of directors shall have financial tables prepared in compliance with the TCC, articles of association and standards within six (6) months and shall present such tables to the general assembly together with the audit report. In contrast to positive opinion letter, negative opinion letter does not constitute a basis for releasing the board of directors. Such opinion letter may be regarded as a document forming a basis for incurrence of directors’ liability. On the other hand, the auditor shall also have the right to avoid providing an opinion by stating reasonable grounds in case where the company’s books contain an uncertainty that prevents the audit to be conducted or significant restrictions on matters subject to audit have been made by the company. Auditor’s avoidance to provide opinion shall result in the same consequences of negative opinion.
As per Article 367 of the TCC, companies which are subject to audit shall explicitly state whether the financial tables have been audited and if so, type of the opinion letter of the auditor in the heading of respective financial table as per Article 367 of the TCC. The aforementioned provision is also applicable for the annual activity report of the board of directors. In case the audit has not been carried out on financial tables and annual activity report of the board of directors subject to the audit, they shall be considered as null and void.
6. CONCLUSION
Imposition of independent audit obligation to the companies is one of the remarkable legal reforms in the business life introduced by the TCC. The relevant law aims to notify the shareholders and other relevant persons of audit results in terms of principles of corporate governance and true and fair view through a report which is clear, comprehensible and issued in accordance with the public disclosure principles.
In the previous period, companies determined by the Resolution of Council of Ministers were exclusively subject to the independent audit under TCC. It was criticized that only two thousand five hundred (2.500) joint stock companies out of approximately a hundred thousand (100.000) joint stock companies were subject to audit according to the aforesaid criteria and the remaining number of such companies were exempted from such obligation. As a result of that, the joint stock companies which are not subject to independent audit pursuant to the Resolution of Council of Ministers have also became subject to independent audit through addition of a new paragraph in Article 397 of the TCC.
Adoption of International Audit and Assurance Standards in TCC shall attract more investors to the Turkish market and encourage the foreign investors to make investment in Turkey that has its legal assurances necessary for a balanced business life. It should be noted that accurate and reliable financial documents are essential for all companies which have forward-looking policies.
FOOTNOTE
1 30 Haziran 2012 tarih ve sayılı 28339 Resmi Gazete’de yayımlanan Türk Ticaret Kanunu ile Türk Ticaret Kanununun Yürürlüğü ve Uygulama Şekli Hakkında Kanunda Değişiklik Yapılmasına Dair Kanun.
