Appointing or waiving the requirement for an auditor

According to both Alberta’s Business Corporations Act and the Canada Business Corporations Act, corporations are generally obligated to appoint an auditor. However, non-distributing corporations (this includes most small private corporations), may be entitled to waive this requirement. This choice could save your corporation money, but also has potential drawbacks, discussed below.

Benefits of Appointing an Auditor

Audited financial statements offer a thorough, independent review of a corporation’s financial health. They require a higher level of review and provide a greater level of assurance that the information contained in the financial statements is accurate and complete. This higher level of scrutiny can build credibility and trust among shareholders, creditors, and potential business partners.

In addition to fulfilling potential legal obligations, an auditor can serve as an invaluable advisor. Their insights can improve your internal controls and operational efficiency, possibly leading to enhanced profitability over the long term.

Drawbacks of Appointing an Auditor

The most immediate drawback of appointing an auditor is the cost, which can be prohibitive for smaller businesses. These expenses can include not only the auditor’s fees but also the internal time and resources spent to prepare for the audit.

The costs will vary significantly from corporation to corporation, however, you can expect to budget a minimum of an additional $5,000 if audited financial statements are required. Often, the cost will be much higher.

While audited financial statements are comprehensive, the process can be time-consuming and disruptive to regular business operations. Additionally, the level of scrutiny may be considered overkill for small corporations with simpler financial arrangements, making less intensive financial reviews a more practical choice.

Alternatives

For those businesses looking to bypass the costs associated with a full-scale audit, many opt to appoint a certified accountant or accounting firm to serve in an advisory capacity. This usually incurs lower fees and allows corporations to still benefit from financial guidance without the comprehensive—and costly—audit.

Eligibility and Conditions for Waiver of Auditor Appointment

Federal Corporations

Federally incorporated, non-distributing entities can opt to waive the auditor requirement under the Canada Business Corporations Act. However, it’s important to note that this waiver requires consent from all shareholders, including those holding non-voting shares, and that this consent must be obtained each year to remain effective.

Alberta Corporations

Non-distributing corporations incorporated under the Alberta Business Corporations Act can also waive the auditor appointment requirement. Until recently, doing so required unanimous consent from all of the shareholders (including those with non-voting shares), just like federal corporations. However, under a recent amendment to the Alberta Business Corporations Act, waiving the requirement to appoint an auditor now requires only a special resolution. A special resolution means “a resolution passed by a majority of not less than 2/3 of the votes cast by the shareholders who voted in respect of that resolution or signed by all the shareholders entitled to vote on that resolution”.

Like federal corporations, Alberta corporations are required to waive the requirement to appoint an auditor each year, otherwise, an auditor will be required.

Why You Should Get it in Writing

Failing to properly document the decision to waive an audit requirement can lead to expensive challenges down the line. In the absence of proper documentation, disgruntled shareholders can (and often do) demand audited financial statements for several past years. Complying with such a demand could easily incur tens of thousands of dollars in auditing and legal fees.

This is one of the reasons that preparing annual corporate resolutions is so important.

How a Lawyer Can Help

Working with an incorporation law firm like All In Business Law ensures that your corporate paperwork is in order. Our Standard and Pro Corporate Legal Support plans include the preparation of annual director and shareholder resolutions, which can include waiving the audit requirement (if desired). This not only saves you money on accounting costs but also shields you from future disputes that can arise from lacking proper documentation.

Summary

In summary, corporations, whether registered in Alberta or under federal jurisdiction, are usually required to appoint an auditor. However, non-distributing corporations in both jurisdictions have options to waive this requirement under specific conditions and with shareholder consent. Working with a lawyer to maintain your corporation after it is registered, can help ensure that the requirement to appoint an auditor is properly waived if your corporation does not wish to incur this significant expense.

Note: Please consult the Alberta Business Corporations Act and the Canada Business Corporations Act for the most current legal requirements.