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Financial statements are important documents that depict a company’s financial health. They are intended to help a wide range of stakeholders, including management, vendors, banks, and government agencies, make informed decisions. Because these stakeholders rely heavily on the information provided, it is critical that the financial statements present an accurate and unbiased view of the business. An independent third-party audit of the financial statements ensures their accuracy and dependability. This audit not only improves the credibility of the financial statements but also instills trust in the company’s stakeholders. In the UAE, most businesses are required to have their financial statements audited; however, businesses may also choose to have their financial statements audited voluntarily for a variety of reasons.
Independent Financial Statements’ Audit: Is it a legal requirement?
According to Federal Decree-Law No. 32 of 2021 on commercial companies, every joint stock company or limited liability company (LLC) shall have an annual audit by one or more auditors. Furthermore, according to the guidelines of the Central Bank of the UAE (CBUAE), financial institutions, including banks, insurance companies, and other finance companies, must conduct an annual independent audit. Specific financial audit requirements may differ depending on the type of entity and its activities, as well as the regulations and guidelines issued by the relevant authorities. To ensure compliance with all applicable laws and regulations, entities should consult with a qualified legal or accounting professional.
Why is there a need for independent financial Statements’ Audit?
Why should a company have its books audited? Other than legal reasons, there are numerous others. Let’s shed light on reasons why you might need an audit of your financial statements.
1) For management decision-making
The management of an institution may choose to conduct a third-party audit voluntarily. The management of a company has to make several decisions based on the performance of the business. Therefore, management may prefer independently audited financial statements in order to make well-informed and firm business decisions. Furthermore, if everyone in a business knows that there will be a year-end audit, there will be fewer chances of fraud and errors. This will ultimately affect the overall working culture of the company; corporate governance will improve.
2) For banks and vendors
Banks require audited financial statements to assess the financial health of your business when applying for a business loan. Banks and financial institutions would like to judge the creditworthiness of the business. They need assurance that their money will be returned within the specified time. Furthermore, in order to get credit limits from vendors, some vendors require audited financial statements. They want to access the creditworthiness of your business in order to make a decision about issuing a credit limit. Therefore, audited financial statements are sometimes necessary for your business’s success and growth.
3) For trade license renewal
It’s a general perception that free zone companies do not need audited financial statements in the UAE. However, there are some free zones in the UAE where authorities require audited financial statements for the renewal of a trade license. As a result, companies operating in those free zones must conduct financial audits. Dubai Airport Free Zone (DAFZA) and Dubai International Financial Center (DIFC) are examples of free zones that require audited financial statements.
4) For a branch of a foreign company
A branch of a foreign company operating in the UAE must have separate accounts for the operations in the UAE. Furthermore, they should also appoint auditors registered in the UAE and conduct an independent audit of the books. Usually, the authorities require businesses to submit audited financial statements for trade license renewal or within a specified time after the accounting year ends.
5) For prospective investors
A business may look for investors at any point in time or even think of selling part of the business. A vast majority of the funders will look for audited financial statements rather than un-audited ones. The reason is clear: auditing increases credibility and boosts the confidence of users of financial statements. Therefore, it is always beneficial to present independently audited financial statements.
Conclusion
Finally, independent financial statement audits are critical for UAE-based businesses. Though audits are not required by law for some businesses, it is recommended that businesses seek advice from qualified professionals to determine whether they are necessary or advisable for their specific circumstances. Apart from legal requirements, companies should consider voluntary audits for reasons such as management decision-making, stakeholder credibility and trust-building, and obtaining credit from financial institutions and vendors. Authorities mandate financial audits for foreign companies with branch offices in the UAE and for trade license renewal in some free zones. Overall, conducting an independent financial statement audit is a wise business decision that can enhance the credibility of a company’s financial position, promote good governance, and lead to better-informed decision-making by management, investors, and other stakeholders.