Under the Companies Act, the annual reports of every limited liability company must be audited. The auditor, elected at the annual general meeting of shareholders, must be a certified or approved Swedish auditor. Shareholders holding 10% of the total voting power may appoint a minority auditor.

At least one of the auditors must be a public accountant if the company is deemed a "large company" by virtue of meeting any of the following criteria:

- For the past two years, the company's net assets exceeded 1,000 base units (see below) at year-end or the average number of employees exceeded 200.
- The company's shares or debentures are quoted on the Stockholm Stock Exchange.

The "base unit" is a concept often used in Sweden because contributions, benefits or prices are adjusted periodically for inflation. The base unit effective 1 January 1995 was SEK 35,700.

In their audit report, auditors must include a statement verifying that the annual report has been prepared in accordance with the Companies Act. The audit report must also include a recommendation to the shareholders on the following three points:

- Approval of the balance sheet and statement of earnings, including, if applicable, the consolidated financial statements;
- Approval of the board's proposed allocation of earnings available for distribution as dividends; and
- Granting of discharge of responsibility for the members of the board with respect to their administration of the company for the fiscal year.

Under the Companies Act, auditors must note in their audit reports failures to make timely payments of VAT, payments to the social security system or payments of taxes withheld from employees' salaries.

The auditor has a statutory duty to indicate in the audit report if the annual report has not been prepared in accordance with the Companies Act, or if the auditor has not received all of the requested information or explanations. The auditor is also expected to indicate in the audit report whether grounds for criticism of the board's conduct exist, in which event the board could be liable for damages to the company.

Aside from performing a financial audit, Swedish auditors are required to express an opinion on the directors' and the chief executive's administration. This requirement influences the auditor's approach and the focus of the audit.

The contents of this article are intended as a general guide to the subject matter. Specialist advice should be sought for your specific circumstances.

For further information contact Per Snellman on Tel: +468 613 9000 0r Fax: +468 791 7511; or enter a text search 'Ernst & Young' and 'Business Monitor'.