When and What Type of Auditor Should Be Selected?

The audit obligation was removed from the smallest accounting entities as part of the comprehensive reform of the audit legislation. The selection of an auditor is once again relevant in the spring general meetings. When preparing for these meetings, it is essential to understand the regulations regarding the selection of an auditor.

According to the Auditing Act, only an approved auditor can be selected as an auditor, i.e., a KHT or HTM auditor or a KHT or HTM audit firm. In entities and foundations under the control of a municipality or joint municipal authority, a JHTT auditor or JHTT audit firm can also be selected in addition to an approved auditor. The selection of other than approved auditors is possible during a transitional period for entities and foundations established before the law came into force on July 1, 2007.

Obligation to Select an Auditor

Entities and foundations must select an auditor and conduct an audit as required by the Auditing Act and other laws. The starting point is that all accounting entities and foundations must choose an auditor. Entities include, among others, limited companies, housing companies, partnerships (general and limited), cooperatives, and associations.

The smallest accounting entities are exempt from the mandatory audit requirement by law, with some exceptions. They can voluntarily opt for an audit. The size thresholds for the audit obligation were set relatively low when the Auditing Act was enacted. The application of these thresholds is explained below.

Many entities have audit provisions in their articles of association, partnership agreements, or rules. The Auditing Act does not override these provisions. Therefore, an auditor must also be selected in entities below the size thresholds of the Auditing Act if the articles of association, partnership agreement, or rules require it. For example, the Finnish Patent and Registration Office applies a reduced handling fee to notifications of changes to the articles of association that only involve the removal of audit provisions.

According to the Companies Act, a minority of shareholders can always demand the selection of an auditor. A minority is defined here as shareholders holding at least one-tenth of all shares or one-third of the shares represented at the general meeting.

It is also noteworthy that so-called holding companies must always select an auditor, regardless of size thresholds. A holding company is defined in the Auditing Act as an entity whose primary business is the ownership and management of securities and which has significant influence over another accounting entity’s business or financial management as described in Chapter 1, Section 8 of the Accounting Act.

A new entity starting its operations is not required to select an auditor unless its operations exceed the size thresholds of the Auditing Act at the time of establishment.

Obligation to Select a KHT Auditor or KHT Firm

At least one auditor must be a KHT auditor or KHT firm if the entity is publicly traded or if at least two of the following criteria are met in the entity or foundation during the preceding financial year:

The balance sheet total exceeds EUR 25,000,000

Revenue or equivalent income exceeds EUR 50,000,000

The entity or foundation employs an average of more than 300 people

The Companies Act also requires that in a public limited company (Oyj), at least one auditor selected by the general meeting must be a KHT auditor or KHT firm. This applies even if the company is not publicly traded.

Should You Choose a Good Auditor Anyway?

The reform of the Auditing Act aimed to clarify and professionalize auditing in Finland. For this reason, after the transitional period, only an auditor who has passed the auditing examination can act as an auditor. The content of auditing and the quality control of auditors received much attention during the preparation of the law. As a counterbalance, small entities were exempted from the audit obligation, but they still have the option to choose an auditor if the owners so wish.

When successful, auditing adds value to the entity and its owners. Success requires mutual trust. Whether the selection of an auditor is voluntary or mandated by law, the choice should be made carefully, and an auditor who can be trusted should be sought as a partner.

The article was published in issue 2/2008 of a magazine (this writing is an abridged and translated version of the original Finnish article).