A new Law on the Regulation of Audits in the Field of Entrepreneurship and Protection of the Interests of Entrepreneurs was adopted in July 2013 outlining new criteria for conducting audits, as well as improving the general procedures to be followed. The new Law will take effect at the beginning of next year. Although it will apply to various types of audits conducted by state bodies in Azerbaijan, only certain provisions of the new Law will apply to tax and antimonopoly audits.

  1. Types of Audit

An audit means the totality of measures aimed at evaluating the compliance of businesses with applicable mandatory requirements. Such measures include clarifications, monitoring, observations, inspections, control, raids, etc. Audits may be regular or extraordinary.

A regular audit is conducted in accordance with a pre-approved plan based on the type of risk group to which a particular business has been assigned. Except for the food industry, audits are to be held annually for the high risk group, once every two years for the average risk group and once every three years for the low risk group.

Regular audits cover the period from the last regular audit and, in the absence of a prior audit, the period from the date of state registration of the business to the date of the current regular audit (in any event, the audit period must not exceed the prior three years).

Regular audits for large taxpayers shall last no more than 10 business days and for small and average taxpayers – no more than five business days.

An extraordinary audit will be conducted, inter alia, if the business fails to report to the auditing body1 on the implementation of an earlier decision of the auditing body, or where information included in such report is incorrect; in the event of a substantial threat to human life or health, the environment or public property; or if the business requests the auditing body to conduct the extraordinary audit.

Extraordinary audits for large taxpayers shall last no more than five business days, or for average and small taxpayers – no longer than three business days.

  1. Evaluation of Risk

In order to determine the periodicity of audits the regulator will identify the type of risk. Information on risk groups will be publicly available.

Risk is defined as “the possibility of causing damage to human life and health, the environment and the property interests of the state.” When assigning a business to a particular risk group, the relevant auditing body will evaluate:

  • The scope of business activity
  • The period within which the business has been active
  • The specifics of the products produced (works carried out, services rendered)
  • Various statistical data (such as negative complications or violations of mandatory legal requirements in the past)
  • The results of previous audits
  • Discrepancies and contradictions in mandatory reporting

Where it is possible to assign a business to more than one group, the higher risk group will be chosen. Not more than 10% of all businesses may be assigned to the high risk group and not more than 30% to the average risk group, while all remaining businesses will be assigned to the low risk group. Assignment to risk groups will be revisited every three years

  1. Some Regulatory Requirements

It is important that the new Law expressly provides that audits will have legal consequences only when conducted in accordance with the prescribed procedures. In the past, violations of the applicable procedures (such as the failure to record the audit in the unified register) would result only in individual responsibility measures for the auditors concerned.

In addition, the new Law provides specific requirements for auditors2, such as the obligation to follow ethical standards, the avoidance of conflicts of interests, and the like. (These requirements are also applicable to tax audits). It is notable that auditors are limited to conducting audits and are not authorized to impose limitation measures or to issue decisions.

Auditing bodies must provide certain consultation to businesses which includes: free and uninhibited access to normative documents (including technical normative legal acts); providing the rules for challenging the decisions of the auditing body, as well as providing information reflecting the powers of the auditing body and responses to audit questions on the website of the auditing body; establishing a toll-free call center for the purposes of providing consultation, etc. (These requirements are also applicable to tax audits).

Auditing bodies must prepare annual reports (to be publicly available) for each calendar year reflecting, inter alia, consultation provided to businesses, the number of audits per each type of risk group, the most frequently violated requirements, proposals for new normative acts that will lessen the compliance burden, etc. (This requirement also applies to tax bodies).

  1. Limitation Measures

An auditing body may in exceptional circumstances impose certain limitation measures, such as in cases of danger to human life and health, the environment and public property or where it is not possible to immediately remove the danger and the auditing body is allowed by law to impose such limitations. Such limitations may include the suspension of various production processes, or the entire production process, the suspension of sales or production, the withdrawal from circulation or the recall of goods or particular lots of goods, the suspension of employees, etc.

The chosen limitation measures must be proportionate to the direct damage caused or threatened. The limitation measures must apply only to the section of business activity in which the violation was revealed or to the section with regard to which the failure to implement limitation measures may result in substantial damage to or threaten human life and health, the environment or state property interests.