A position statement issued at the end of last year in response to an accounting question is now coming sharply into focus for the first time. According to the statement, all holding companies are subject to an auditing obligation. Or are they?
The ominous accounting question
The Hungarian Accounting Act’s definition of who is subject to an auditing obligation, and when, in the context of a parent company-subsidiary relationship, was amended a few years ago in line with an EU directive. As some practitioners were of the view that the new provision transplanted into the Accounting Act was ambiguous, a position statement was requested from the accounting advisory board.
The reply from the advisory board, published in the form of an Accounting Question and Answer, came as a shock to many. According to the position statement, the provisions of the Accounting Act (Szt.) should be interpreted as meaning that all companies classed as parent companies (that is, companies that hold a share of over 50% in another enterprise) must always have their financial statements audited – and that they are also denied the option of preparing simplified financial statements. Interpreting the rule in this way would extend the obligation to a substantial group of companies to audit their financial statements. Most particularly, a holding company that holds shares in Hungarian or foreign companies, and that would not otherwise be included in a consolidated financial statement will fall under the rules even if the company itself engages in no substantive activity or has no significant assets.
A storm in a teacup…
Examining the law in question more closely, however, it’s far from clear that the position regarding the accounting question can be defended from every angle. According to the Accounting Act definition concerned: “Consolidated enterprises are the parent company, the consolidated subsidiaries and the consolidated jointly managed enterprises, together”. The interpretation is based on the premise that the word “consolidated” does not feature before the term “parent company”, and, therefore, the parent company also falls within the scope of the definition if it is not otherwise consolidated.
Such an interpretation, however, fails to account for the use of the word “together” at the end of the definition. Besides this – purely on the basis of logic, if nothing else – it seems absurd that an enterprise (parent company) that does not include anyone else in its consolidated statements, and is not included in anyone else’s consolidated statements, can be classed as a “consolidated enterprise”.
Similar doubts regarding the position statement could also be raised in the light of the EU directive forming the basis for the provision in question. According to this, member states need to impose an auditing obligation on medium-sized and large enterprises only; so any provision of the Accounting Act that extends the auditing obligation to any parent company would come into conflict with this.
What’s at stake here?
It’s by no means certain, then, that in a possible legal dispute the court would share the opinion expressed in that ominous accounting question and answer. Further it is also worth taking into account the penalties that might be imposed in case of non-compliance.
Should the court of registration notice that a parent company isn’t fulfilling its auditing obligation, then it would call on the enterprise to comply with the law; and in the event of a continuous breach it might, theoretically, impose a fine. Further, the tax authority NAV also has the power to impose a fine, which is capped at HUF 500,000.
Given a situation in which the answer given to the accounting question is questionable, also takes inti account the weight of the sanctions that might be imposed, there are certain to be parent companies that won’t bother appointing an auditor.