Contracts for the audit of financial statements following the amendment to the Accounting Act in Poland

The amendment to the Accounting Act, which entered into force on June 21, 2017, resulted in several significant changes to the principles of entering into contracts for the audit of the financial statements. Previously, the auditor could be selected for any period of time. Currently, in light of art. 66.5 of the Act, the first contract is concluded for a period of not less than two years.

What is the first contract for the audit of financial statements?

The Act on statutory auditors, audit companies and public supervision of 11 May, 2017, indicated a few changes to the Accounting Act, including one that relates in particular to companies that audit financial statements. Following the amendments art. 66.5 provides as follows:

(...) the first contract for the audit of financial statements is concluded with the auditing company for a period of not less than two years, with the possibility of extending it by subsequent periods of at least two years (...).

Along with the introduction of the amendment to the Act, many doubts arose as to the definition of the "first contract", because the concept was initially read in several ways: as a contract for the first examination by the audit firm (which had not previously audited reports), as the first contract concluded after the amendment of the provisions of the Act or as first contract with a new auditor. These doubts have been dispelled along with the Ministry of Finance's ruling, which clarifies that this requirement applies to the conclusion of contracts with a new auditing company and to the extension of the contract concluded with it. In the case of a follow-up contract with an existing auditing firm (with which the contract was concluded under the provisions of the old law), the contract may be concluded for a minimum of one year.

The Polish Chamber of Statutory Auditors, on the other hand, determines the first contract for auditing of financial statements for a given financial year, as one which was not preceded by an audit contract between the auditing company and the entity's management for the previous year's report. As emphasized on its website, the requirement of a minimum two-year period for the first contract applies only to financial statements prepared for financial years after June 16, 2016. To sum up, if a given firm is the new auditor of the company when examining the financial report for 2018, then the contract should cover the 2018 and 2019 financial years at a minimum.

Other key aspects in the relations between the audited entity and the auditor

Articles 134 and 136 of the Act on statutory auditors, audit firms and public supervision specify other important aspects in the relationship between the company and the auditor. These are:

• maximum period of uninterrupted cooperation with the auditing firm (or associated auditing firm) of five years,
• the type of services that the auditor can not provide to its client that is a public interest company and with respect to which a statutory audit is conducted, e.g. services related to an internal audit, bookkeeping or tax services.

This means that if the audited entity wants to establish cooperation with an auditing company for a period of five years, assuming that the minimum duration is two years, it should conclude:

• one contract for a period of five years,
• one contract for a period of 2 years and an extension for a period of 3 years (or vice versa).

After this time has elapsed, a minimum period of 4 years break occurs, but it applies only when the auditor carried out the audits without interruption.

What changes do the amended provisions bring?

The greatest benefits from the changes relating to the conclusion of contracts for the audit of financial statements in Poland are for the audit firms, as the minimum period of two years creates more opportunities for them during the audit and eliminates the need to seek new clients every year. In turn, for the audited entities the greatest benefit is the fact that the auditor has the opportunity to get to know the company better, which means the audit services should be of a higher quality.

The amendment of these provisions raise many doubts, especially in the case of companies that signed a contract a year before the entry into force of the amendments. In addition, legal consequences resulting from the signing of the first contract rest with the management board, not the auditor. Article 66.5 provides that the head of the audited entity is required to conclude a two-year contract, while Art. 79 determines the nature of the sanctions in case this requirement is not met – these include, among others, fines or restriction of liberty.