Quality of records
There is a very wide variation in the quality of record-keeping among target businesses. While generalisations are dangerous and may well not apply in any specific case, the following comments can be offered:
- Turkish accounting standards will be overhauled as part of the wide-ranging revision of the Turkish commercial code, but up to now such standards have been ill-defined and heavily influenced by tax law, making them an unsuitable basis for measuring maintainable profitability or even fully measuring liabilities. IFRS financial statements are a definite advantage.
- The biggest single problem in the past was high inflation and the distortionary effects it created in accounts. Now, with inflation below 10% per annum, the problem is reduced.
- The “two sets of books” problem is mainly a feature of small businesses, especially owner-managed businesses with a single “boss”. In fact there would very rarely be actually two sets of books, even in small companies, but there might be unrecorded sales or costs in the main set of books, or fictitious or non-market price transactions put through the books. This creates three problems:
- Clearly the accumulated tax risk may be severe and may lead investors to insist on the set-up of a Newco if any deal is to proceed;
- There may be questions about whether the business’s profitability will be affected by, for example, the loss of customers once it accounts fully legally for VAT in future; and
- Doubts about whether management will wish to run the business fully legally in future may cause the investor to walk away from the deal.
- Poor recording is more widespread in some sectors than others, depending for example on whether customers and suppliers would be open to uninvoiced transactions.
- Statutory audit (applicable to all “A.Ş.” companies) is sometimes largely a formality, and may not be at all reliable. Tax certification reports show that a highly qualified accountant (“YMM”) has done various checks on a company’s tax compliance: their work is usually thorough but is geared towards tax accounting, which may not suit an investor’s needs. “Independent audit” is the normal term for an audit in accordance with international auditing standards and is a major advantage, although it is not compulsory for most privately held companies not traded on an exchange.
How we can assist
We will be able to guide you effectively as to the quality of a target company’s records, based on our very extensive experience. Our audit department can conduct a full audit, should you wish.
We can assist in the conversion of financial statements from local standards to IFRS or US GAAP, or in reconciling specific items such as net profit, EBITDA or equity.
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