Global Compliance

Commercial Company Audit Laws and Regulations – UAE

Introduction

In corporate governance, the role of the auditors as gatekeepers is utmost important. They protect the interest of the shareholders of a company as well as other parties to the corporate governance. Auditing and transparency of finance is a fundamental principle of a commercial company. Failure of auditing standards or non-compliance with the disclosure can easily lead to a corporate scandal. The law which governs the auditing of companies in the United Arab Emirates (UAE) is Federal Law Number 2 of 2015 regarding the Commercial Companies Law hereinafter referred to as the Companies Law or the Law. The practice notes guide its readers to conceptualize the procedure of auditing under the Companies Law. It also assists the readers in identifying the process of appointing an auditor in the company, and even discusses the rights and duties of the concerned auditor. The article, in respect of mandatory audits for commercial companies in UAE, applies to all public or private joint stock companies (PJSC) or limited liability companies (LLC). 

The importance of auditing under the Commercial Companies Law.  
The Law, under Article 27, obliges every joint stock company and limited liability company (LLC) to appoint one or more auditors in order to audit the accounts of the company every fiscal year. Every company in the UAE is required under the law to keep its accounting books in its head office for a period of at least 5 (five) years from the end of the financial year of the company. It further allows other types of companies including sole proprietorship to appoint an auditor in accordance with the provisions of the Law. The companies established under the Law must prepare financial accounts annually and must adhere to the International Accounting Standards and Practice while preparing the reports whereby, providing a clear view of the company’s profits and losses. The partners or shareholders of the company are allowed to obtain a copy of the last audited accounts, audit report, statements of its holding, or subsidiary company. Article 94 of the Law stipulates the agenda of the annual general assembly, wherein the quorum must discuss the auditor’s report, the financial statements of the company as also the remuneration of the auditor. Companies in the UAE must follow the regulations laid down in the Commercial Law to appoint auditors. Below is a list of points related to the appointment of Auditors in the UAE:

• Every LLC must have one or more auditors who must be elected by the General Assembly of the partners of the firm every year. The provisions for Public/Private joint stock company applies to LLC; 
• In accordance with Article 175 of the Companies Law, the auditor can request the Board of Directors to convene the board meeting. Wherein, the General Assembly should be convened within at least fifteen (15) days from the date of the invitation sent by the auditor. 
• Every public joint stock company/LLC shall have one or more auditors nominated by the Board of Directors and simultaneously approved by the General Assembly;
• The Assembly can appoint the auditor/auditors for one renewable year, whereas, such term should not exceed three (3) successive years. Thus, the auditors must undertake his duties for the next annual General Assembly. The owner of the company may, during the incorporation of the company, appoint an auditor with prior approval of the competent authority to perform his duties until the first General Assembly;
• The Assembly must ascertain the fees for the auditor, provided that the remuneration must be reflected in the accounts of the company;
• The Board of Directors should issue a decision pertaining to the following conditions which the auditor must adhere to:
  • Must possess a license to practice the profession in the State and must have experience of auditing the joint stock companies/ LLC; 
  • Approved by competent authority;
  • Not to inter-relate the auditor profession with the capacity as a shareholder in the company; 
  • Should not be a partner or agent of any of the founders of the company or related to the board of directors of the company; 
  • The name of the auditor must be approved by the Central Bank if the companies have obtained the license from the Central Bank. 

Rights and duties of the Auditors.

• The auditor can invite the General Assembly upon request made to the Board of Directors. 
• Approving the financial statements of the company.
• To seek relevant information for any or all transactions whilst auditing the accounts of the company. 

Statutory duties of the auditors in the UAE.
Article 246 of the Companies Law enumerates the responsibilities of the auditor as follows:

• The auditor should review the accounts of the company including the balance sheets, profit, and loss account, all the transactions of the company with related parties, and ensure the applicability of the Companies Law, Articles, and Memorandum of Association of the company.
• Upon reviewing the accounts of the company, the auditor is obliged to prepare a report as an outcome of the inspection. The auditor should provide the report to the General Assembly and the competent authority. 
• He must review the records and other documents of the company, seek explanations for any particular transactions, and must verify the assets and liabilities of the company. 
• If the company fails to provide adequate auditor explanations, he must mention it explicitly in his report directed to the board of directors. However, if the board of directors fails to facilitate the same, the board should provide a copy to the competent authority. 
• The auditor must seek relevant information and explanations from the auditors of the holding company. 

Duties related to confidentiality and conflict of interest.

• The auditor is further under an obligation to keep confidentiality concerning the particulars of the company. If an auditor fails to do so, they will be dismissed from the company and will be liable for the severe penalty (Article 247). 
• The auditor is prohibited from purchasing the securities of the company whose accounts are audited by him, sell such securities or offer consultancies on the concerned securities. 
• The auditor must notify the competent authority of any violation of the provisions of the Companies Law in ten (10) days from the date of detecting the violation/ criminal activity. 

Statutory obligations on Audit reports.

• Pursuant to Article 245 of the Law, the auditor shall issue a report on the accounts audited. If the company appoints more than one auditor, the auditors should distribute their duties, must prepare a separate report on the task assigned, and must also prepare one combined report for which they will be jointly liable. The report must bear the name and signature of the auditor. 
• The report should specifically highlight whether or not the accounts are in consonance with the provisions of the Law, and whether the accounts depict the true financial position of the company. 

Background and methodology of the audit report.
The methodology part should contain the details of the audit report and the method carried out for the auditing. The types of content included in the methodology part:

• The underlying reason for the auditing.
•  The method used for the process of auditing.
• Derating of the audit and the reasons for the delays.
• The goal of the site.

The basic content of an Audit report.

• The auditor report should reflect the following particulars to ensure the report was prepared in accordance with the provisions of the law:
  • The financial position of the firm at the end of the fiscal year, more specifically the balance sheet;
  • Profit and loss accounts;
  • Regular accounts of the company;
  • Statement showing the purchase of any shares and stocks;
  • Statement mentioning that the report is identical to the books and records of the company;
  • Statement dealing with the conflict of interest and financial transaction between the company and any of its related parties; 
  • Any violation of the Articles of Association during the fiscal year which had an adverse effect on the company’s financial position, whether such contradiction is resolved or not or is it still prevalent;
  • Whether there is a penalty imposed on the company due to such contraventions;
  • State the financial position of the company at the end of the fiscal year, the profit and loss account of the holding, and also subsidiary companies which are inclusive of consolidated statements as a whole. 

Glossary

• Commercial Company Law: Federal Law Number 2 of 2015 regarding Commercial Companies Law of UAE.
• Civil Code: Federal Law Number 5 of 1985 regarding the Civil Transactions Law.
• Ministry: Ministry of Economy.
• Company: the commercial company.
• Diligent Person: The person possessing sufficient expertise and commitment required for performing his work.
• Competent Authority: the local authority having competence with regards to the affairs of the companies in the relevant emirate.
• Member of the Board of Directors: any member of the members of the board of director of the company which includes the chairman as well.