Left unchecked, the incompatible structure and purpose among internal audits could have increasingly negative impacts on the independence of censorship in Romanian Companies. One such impact arises from the current legal provision that removes the need for censors-shareholders to be expert accountants. In these cases, censors are often approved by the directors of a company, thereby turning them into de facto subordinates.
Since auditors must be independent of the audited entity and not involved in any decision-making processes, the above scenario could jeopardise a professional examination of an organisation’s financial statements, effectively rendering the entire censorship process obsolete.
Moreover, censors are considered to possess specialised knowledge, something that cannot always be provided when appointments take place from within a company. Should this be the case, the control system of the company through the censors becomes insignificant.
Distinction and identity of roles: Censors, financial auditors, and the internal audit
Regulated by Romanian Company Law No. 31/1990 (the Company Law), the activity of censorship can be broken down into two main categories: control over company management, and control over specific financial-accounting matters.
In essence, accounting control – as set out in Article 163 of the Company Law – consists of certifying the financial statements, verifying the way in which the accounting records are kept, and ensuring legal regulations are observed in the process of evaluating the company's assets.
The Romanian legislator established that certain companies are exempted from appointing censors. Therefore, if a company is legally obligated to audit their financial statements, such company shall be audited by the financial/statutory auditors, and the internal audit would be organised according to the rules laid down by the Romanian Chamber of Financial Auditors.
According to law, those companies that are legally bound to carry out a financial audit can also appoint censors, besides the auditors. In these cases, it is the attribute of the general meeting of shareholders to decide whether to appoint censors and/or have only financial auditors – the censors being optional.
However, when the financials of a company are audited, appointing optional censors would be useless and unjustified, since their attributions overlap with those of the financial auditor, and can be reasonably held as a legislative error, given there would be no specific advantage in having two types of control for the same purpose.
Censorship is legally mandatory, but companies have the option to choose a financial audit instead of it, unless their financial statements are subject to the legal obligation of a financial audit, in which case censors remain an option and the financial audit remains an obligation.
As such, the general provision stating that joint stock companies have to appoint at least three censors are contextualised, specifically depending upon the existence or not of the liability to have audited financial statements.
Even if censors must act with the diligence of a good manager, prove loyalty, and comply with the applicable professional and ethical standards, financial auditors seem more suitable to exercise the requisite control, given that it is exercised in accordance with the standards of international audit.
Moreover, given that the censors can be chosen from the company shareholders, they constitute an internal body of the company, while financial auditors are not an internal body and render legit opinions regardless of any inside interest of the shareholders. They are professionals independent of the company, specialised in verifying the correlation of an entity's financial statements with the acceptable general accounting principles.
The overarching purpose of the internal audit is to verify whether the activities of an audited company are compliant with its policies, programs, and management, which cover part of the competencies listed for the censors. The internal auditors who are mandatory for the entities subject to statutory audit are employed and dismissed by the executive management body, while financial auditors are appointed by the articles of incorporation, and after the company’s formation, appointed and revoked by the general meeting of shareholders.
The reason for establishing this type of audit mechanism is to provide control, thereby ensuring that the company observes important activities carried out by the shareholders, and implicitly to prevent the business from becoming insolvent.
Nowadays, in the context of internationalisation, control of the company through censors appears to be inefficient, at least in financial-accounting terms; this being the most relevant part of the control function from a shareholder perspective.
The continuous development, increase in complexity of economic-financial relations, and implicitly of the financial-accounting regulations have made verifying activities at an organisational level – as well as the development and management of the financial-accounting activity – difficult to achieve, necessitating the timely intervention of professionals.
These professionals must be independent from the controlled company, and apply control standards in a uniform way, regardless of the controlled company. As such, these standards can be successfully met through the work of financial auditors.