The question usually arrives from group finance, and it is a reasonable one. The group is audited by a large firm, the consolidated accounts are signed, so does the entity in Bangkok, Singapore or Hong Kong really need its own local audit as well?
The short answer is yes in Thailand, yes in Hong Kong with one narrow exception, and in Singapore it depends on a test that looks at the group as much as the entity. The longer answer explains why the group audit does not do the job, and what to do about the cost.
Thailand: every company, every year, no exemption
A limited company registered in Thailand must have its financial statements audited by a Thai certified public accountant every year and filed with the Department of Business Development. There is no small company exemption and no dormant company exemption. A subsidiary that was incorporated to hold a licence, did nothing all year and has no bank account still needs an audit, an annual general meeting and a filing. The statutory accounts are prepared under Thai standards, in Thai, and signed by a Thai auditor, none of which a group auditor in another country can do. Why dormant Thai companies still need an audit covers what happens when this is missed for a few years.
Hong Kong: every company, every year, unless it has formally gone dormant
Hong Kong is the same in substance. Every incorporated company needs an annual audit by a Hong Kong practising certified public accountant, regardless of size, and the audited accounts support the profits tax return. There is no small company threshold. The one exception is a company that has declared itself dormant by special resolution under the Companies Ordinance and has no accounting transactions at all, which is a formal status rather than a description of a quiet year. A holding company that receives a dividend or pays a bank charge is not dormant in that sense.
Singapore: it depends, and the group is tested too
Singapore is the jurisdiction where the question is genuinely open. A private company is exempt from audit if it qualifies as a small company, which means meeting at least two of three criteria: revenue not above S$10 million, total assets not above S$10 million, and not more than 50 employees. Two features of the test matter for a subsidiary. It looks backwards over the two preceding financial years, not at the current one. And where the company belongs to a group, the group must qualify as a small group on the same criteria, measured on a consolidated basis. A small Singapore subsidiary of a large regional group is therefore audited, however modest its own numbers. The Singapore audit exemption is easy to lose goes through the mechanics.
Why the group audit does not cover it
The group auditor gives an opinion on the consolidated financial statements of the parent, under the parent's accounting framework, for the parent's shareholders and regulator. The local statutory audit is a legal filing obligation of the subsidiary, under local standards, often in the local language, signed by a locally licensed auditor and lodged with a local registry. They are different documents answering to different laws, and one does not discharge the other.
What the group audit does do is create an overlap in the work. The group auditor will usually instruct a component auditor at each material subsidiary, and the same firm's local office may already be looking at the numbers. The efficient arrangement is to have the statutory audit performed by the same firm, or by a local firm working to the group auditor's instructions, so that the reconciliations, confirmations and judgements are made once and used twice.
What usually goes wrong
Three things, in our experience. The first is the calendar. Local filing deadlines are often earlier than the group's, and a subsidiary that waits for the group timetable finds itself late with the local registry. The second is the reporting package. The subsidiary reports to the group in a group format and under the group framework, and nobody prepares the local statutory accounts until the auditor asks for them, at which point the differences between the two, in revenue recognition, leases, provisions or presentation, have to be worked out under pressure. The third is the dormant entity that everyone forgot: the company set up for a project that never started, still on the register, still owing an audit and a filing every year, with penalties accumulating quietly.
What to do about it
Run one calendar for the group that has every local deadline on it, not only the group's. Keep each subsidiary's books in a state that can produce both the group package and the local statutory accounts without a rebuild, which mostly means keeping the reconciliation between the two frameworks current rather than reconstructing it in the audit season. Decide once a year which dormant entities to close, because a company that exists costs an audit whether or not it trades. And where the group has several entities in the region, put someone in charge of the whole calendar rather than one person per country. That is a large part of what we do for regional groups, and it is the reason the country pages for Thailand, Singapore and Hong Kong each carry the local filing calendar in full.
The rules above are as we understand them at the time of writing. Thresholds and filing rules change, so confirm the current position with your auditor before acting on it.
Written by Jérôme Le Louer, Managing Partner at SmeCFO.