|Turkey: Auditing in Joint Stock Companies|
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Subject to the provisions of the Commercial Code (Law 6762), the Ministry of Industry and Trade approves:
·the establishment of capital corporations;
·applications for statutory modifications;
·the creation of branches by foreign capital corporations; and
·the participation of foreign capital corporations in existing corporate entities.
Turkey takes a non-discriminatory and equal approach to foreign investors: they are given the same status as local investors. There are no rules requiring Turkish participation in the capital or management of a local company invested with foreign capital. Almost all sectors in Turkey are open to foreign investors and companies can be established with 100% foreign capital.
Joint stock companies and Turkish regulation
Joint stock companies are business associations with legal personality and a fixed capital. The company's articles of association must state a legally required minimum capital. This amount reflects the initial financial strength of the company and is divided into shares (stocks), which are each given equal value and the nature of a negotiable instrument. Persons, either natural or legal, contribute or promise to contribute a certain amount of capital to the company in return for shares. Companies with more than 250 shareholders or which offer their shares or bonds to the public are subject to the Capital Markets Law (2499/1981). A company must be formed of at least five persons and be registered in the Commercial Registry in order officially to exist. Companies may be incorporators of other companies. The liability of the company's members is limited by their subscribed capital shares.
The Ministry of Industry and Trade maintains the authority to permit the establishment of joint stock companies that are open to the public and subject to capital markets regulations. All other general-purpose companies can apply directly to commercial registries throughout Turkey with the necessary documents and can be established through registration in the Commercial Registry.
Conditions of joint stock company audits
As auditing is built on the questioning of correctness and appropriateness, it plays a critical role in bringing about the transparency that is required to provide and maintain an environment of trust in the markets. The purpose of auditing in joint stock companies is to protect, on the one hand, the company entity, its partners and its creditors, and, on the other, future partners and creditors. Within the context of an audit in the broadest sense, it is possible to include minority shareholders that represent one-tenth of the company's shared capital (this threshold is one-twentieth with regard to public joint stock companies). Audits in the broadest sense will also include:
·the discharge from liability of founders, board members and auditors (Article 310 of the Commercial Code);
·the right to prosecute the board of directors (Article 341);
·the right to defer the certification of the balance sheet (Article 377); and
·the rights of several shareholders to ask for explanation in case of doubt (Article 363(1)), to be informed (Articles 362 and 363(3)) and to study the commercial books and correspondence of the joint stock company (Article 363(2)).
On the other hand, an audit in the narrowest sense can be undertaken by bodies and organisations which are assigned and empowered for this purpose.
Auditing and the draft Commercial Code
The Commercial Code was adopted in 1956. As a candidate for EU membership and an emerging market, Turkey aims to attract foreign investment; thus, Turkish corporate legislation needed to be brought into line with the rest of the world in order to continue the economic integration that began with globalisation. Therefore, in 2006 the Ministry of Justice formed a committee composed of scholars, judges and practitioners for the preparation of the new draft Commercial Code. Turkish law allows regulators - including the Capital Markets Board, the Banking Regulation and Supervision Board and the under secretariat of the Treasury - to set their own auditing requirements for the entities under their respective jurisdictions. The draft code will be the fundamental code regulating all types of joint stock company, both public and private.
New auditing system
The draft code introduces a radical change concerning the audits of joint stock companies. One significant change is the abolition of the requirement to have statutory auditors among the statutory bodies of joint stock companies. According to the system, the auditing of joint stock companies of all sizes shall be conducted by independent auditing companies pursuant to a contract between the joint stock company and the auditing firm. As opposed to existing practice where natural persons who are not sworn independent auditors are appointed as statutory auditors, in small-scale joint stock companies a minimum of two independent sworn-in auditors or public accountants must be appointed to ensure compliance with law, Turkish accounting standards and the company's articles of association. The auditing function must be performed by a sworn independent auditing firm.
Pursuant to the old Commercial Code, an internal audit committee is one of the corporate organs of a company. Under the new draft code, an audit committee is no longer considered an organ of a company. The draft code adopts a reformist and unifying approach that orders all types of company to retain external auditors and be audited by eligible, professional and independent auditors complying with international accounting standards and acting with due care.
The audit: internal and external
The audit is carried out both internally and externally. The external audit is performed primarily by the Ministry of Industry and Trade. The Tax Office also has absolute authority to audit the company's accounts. The aim of this audit is to protect the public economic order.
Companies may voluntarily subject their accounts to auditing through auditing individuals or firms (eg, sworn financial accountants, such as the 'big four' auditing companies). Separate from this outsourced internal auditing, the Commercial Code also mandates an audit by a minimum of one and a maximum of five statutory auditors appointed by the board of directors. If they are more than one, the statutory auditors act as a board. They can be appointed to office for three years and be re-elected, provided that the board of directors of the joint stock company has no other reservations.
The statutory auditors are natural persons appointed to audit the activities of the joint stock company. They need not be accountants or hold any similar title; however, they cannot have a familial connection to members of the board of directors and more than half of the statutory auditors must be Turkish citizens (if there is only one auditor, he or she must be a Turkish citizen). In practice, the statutory auditors are independent accountants or shareholders.
Most of the reforms contemplated by the committee are reflected in the draft code and it is now awaiting ratification by the Council of Ministers. Given that the world is in the midst of a significant financial crisis, it is now even more vital for an emerging market such as Turkey to be attractive to foreign investors. The only way to accomplish this is to create a transparent and secure business environment.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Sept.29, 2010