Amendments to the Audit Law: Key Changes and Updates

With the introduction of the new amendments to the Audit Law, published in Narodne novine No. 85/24, Croatia is aligning its legal framework with the latest European Union requirements. Effective July 27, 2024, this law introduces significant changes to corporate sustainability reporting following the Corporate Sustainability Reporting Directive (CSRD). This directive is part of the EU’s broader push for transparency, sustainability, and socially responsible business practices.

What’s Changing Under the CSRD Directive?

The CSRD, adopted on December 14, 2022, mandates public access to meaningful information on corporate sustainability, including the potential risks businesses pose to people and the environment. One of the most notable changes is the expanded role of auditing firms. They will now be responsible for the statutory audit of financial statements and verifying compliance with the European Sustainability Reporting Standards (ESRS).

Audit firms will assess sustainability reports through limited assurance engagements to ensure consistency between financial and sustainability data. This is crucial for users who rely on these reports to evaluate a company’s overall performance.

Who Must Comply?

One critical update raises the threshold for mandatory audit requirements. Companies that exceed specific criteria in revenue, assets, and number of employees will be subject to statutory audits. Specifically, a company must undergo an audit if it exceeds two out of the following three criteria in the year preceding the audit:

  • Total assets of €2,500,000
  • Net revenue of €5,000,000
  • At least 25 employees on average during the fiscal year

These higher thresholds aim to reduce the burden on smaller businesses, allowing them to avoid audit costs in their early stages while fostering growth.

Longer Initial Audit Engagements

Another significant change is the extension of initial audit engagements.

The new law now requires companies to sign initial audit contracts for two years instead of one, providing greater stability and continuity for companies and audit firms, reducing costs, and enabling better long-term planning.

Sustainability Reporting: New Standards and Obligations

Audit firms must now verify the accuracy of sustainability data reported by businesses in addition to conducting financial audits. The goal is to ensure full compliance with ESRS, covering environmental and social indicators.

The European Commission has the authority to set standards to standardize sustainability verification across the EU. Audit firms will assess whether sustainability reports meet the requirements of EU Regulation 2020/852, which includes evaluating a company’s alignment with climate goals and sustainable business policies. ​(NN – 2024 – 85 – 1475)​.

New Requirements for Auditors

Under the amended law, auditors will face new requirements. They must undergo additional training to assess sustainability reports, and audit firms will need provisional approval before starting operations.

Practical Implications for Businesses

The new obligations require businesses to be more transparent about their sustainability practices. They must present all social, environmental, and governance information per European standards.

At the same time, the raised audit thresholds and extended audit engagements offer businesses more stability while holding them accountable to EU corporate reporting standards.

Penalties for Non-Compliance

Fines for violating these new obligations are also in place. Audit firms can face penalties of up to €106,170 for failing to secure two-year audit contracts or for not formalizing audit agreements in writing according to the law. ​(NN – 2024 – 85 – 1475)​. 

Summary of Key Changes:

  1. Implementing EU Legal Acts: 
    The law now clearly outlines the incorporation of several EU directives into Croatian legislation, including Directive 2006/43/EC on statutory audits of annual financial statements and the CSRD Directive, which governs corporate sustainability reporting. These changes introduce a new framework for verifying sustainability reports.
  2. Role of Audit Firms: 
    Audit firms are no longer limited to reviewing financial statements; they must now verify sustainability reports. This marks a significant shift in practice, helping to integrate financial data with sustainability information, which will be crucial for stakeholders.
  3. Sustainability Reporting Standards (ESRS): 
    The amendments require audit firms to comply with European Sustainability Reporting Standards (ESRS), aligning financial and non-financial data for a more comprehensive view.
  4. Audit Engagements and Thresholds: 
    The revised legal framework significantly raises the threshold for businesses subject to mandatory audits, reducing the number of companies required to undergo statutory audits. This aims to ease the financial burden on small and medium-sized enterprises while focusing on larger entities. Audit engagements are also set for two years, providing more stability in contracts and planning.
  5. New Requirements for Auditors: 
    Certified auditors must now complete additional training and pass an exam focused on verifying sustainability reports. Furthermore, new criteria for obtaining certification and stricter conditions for maintaining good standing and continuous professional development have been introduced.
  6. Temporary Work Authorization: 
    New audit firms must obtain temporary work authorization before officially registering and beginning operations.
  7. Continuous Professional Development: 
    Certified auditors must engage in ongoing professional development, particularly in the field of sustainability, further enhancing their expertise in this critical area.

Conclusion

The changes introduced by the amended Audit Law represent a significant step toward greater transparency and sustainability in business practices. The new standards and obligations will ensure that sustainability reporting becomes integral to corporate governance. Companies can showcase their commitment to responsible business practices while aligning with long-term sustainability goals.

Please contact us for more information on how these changes might affect your business.

Source: Audit Law Amendments (Nar. nov., No. 85/24) 

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