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Denmark reinstates audit for some SMEs to tackle tax fraud

Author: ICAEW Insights

Published: 24 Jun 2022

After years trying to reduce red tape, the correlation between loss of tax revenue and absence of audit has changed the political appetite to lower the audit threshold.

New audit obligations for some SMEs in Denmark have been introduced to strengthen efforts against fraud and contribute to fewer companies making mistakes in their accounts and declarations of tax and VAT. 

Reducing the burden for businesses, especially for SMEs, had been a mantra for many governments including Denmark’s liberal administration in power until 2019, and resulted in a gradual reduction of audit obligations for Danish SMEs since 2006. 

However, Anders Lau, Head of Communication at FSR, the Danish audit institute, says there was a feeling that the relaxation of audit obligations had gone too far and the price of reduced red tape for business has been a huge increase in the number of companies failing to pay their fair share of tax over the past eight years.

“If you compare us to the other Nordic countries – Sweden, Finland and Norway – the audit threshold in Denmark is a lot higher,” Lau says. As a result 170,000 companies – equating to about 60% of all Danish businesses – have opted out of audit. According to a report from the Danish audit institute, tax revenue losses of more than DKK1.5bn annually are directly attributable to a reduction in audit obligations. 

The tax authorities themselves suggest that 10% of all companies commit tax and VAT fraud and most of the tax gap is due to non-payment of tax by companies with less than DKK10m in turnover. This is roughly the same group of companies that are not subject to audit. Although about 10% of all companies commit tax and VAT fraud, it’s only 2.4 per cent of all companies that are subject to tax control from the authorities.

The election in 2019 of a new Danish Social Democratic government prompted calls to reinstate audit for some SMEs. Lau says with tax and VAT fraud on the rise, the need to regain trust in business was a major concern for the new government. Police reports of financial crime have grown fivefold in Denmark in the past 10 years according to a report from the Danish audit institute, and police reports of tax and VAT fraud alone have risen from 1,600 in 2009, to over 6,000 in 2019. 

The correlation between loss of tax revenue and absence of audit has changed the political appetite to lower the audit threshold, Lau says. At the same time, the growing political desire to plug a large business tax gap is changing attitudes towards audit as an important tool in ensuring that more companies are compliant with rules and regulation. “We have seen some spectacular cases of business fraud in the media and the only reason why criminals have been able to get away with this is because there has not been an auditor involved. In 2019, for the first time I think in Danish history, there was a political majority that wanted to reinstate audit for some SMEs.” 

Agreement on audit obligation was reached in June 2021 and passed into law on 19 May 2022. Under the new rules, companies with a turnover of between DKK5m and DKK8m across 11 risk industries must as a minimum have a compilation report; previously the threshold was DKK8m. The industries in question include road freight transport, restaurants, cafes and pubs, data processing and web-hosting business, and wholesale and retail motor sales businesses. At the same time, there is an audit obligation for companies with a balance sheet total of more than DKK50m. Altogether this means that 1,000 additional companies were required to use an auditor.

“We were very satisfied with that because for the first time we are in a situation where the regulation is tightened and politicians on both sides of Parliament recognise the societal value of audit,” Lau says. “We would have liked to see more companies included in this agreement, but the pandemic really got in the way; there was so much uncertainty and a lot of businesses were under very high pressure so the politicians didn't want to put new burdens and costs on companies. 

“There is no denying that audit costs money and therefore can be considered by some a burden to companies, but we've been very focused on showing the loss of value when you take away audit – in particular the lack of reliable information to creditors, banks, investors and business partners about whether this is a healthy company to do business with,” he says. “We’re in a good place now and there is a recognition that there is value when you involve auditors. There is also a recognition in some parts of the business community that tax fraud had gone too far and that those organisations paying the correct tax and VAT were the ones who were losing out.” 

Lau says the positive political and business reaction to the lowering of the audit threshold hinges on good communications about the broader benefits. “You have to get very close to the value of audit. Show the facts – for example the extent of fraud, the loss of tax revenue and the extent of errors in annual reports. I think what has been quite successful is to show the societal value of having an auditor on board.”

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