A Family Foundation audit without surprises: how to prepare your foundation for review

A family foundation audit does not begin on the day the auditor requests the first document. It begins much earlier, when decisions are made about benefits for beneficiaries, contracts are entered into, the register of contributed property is updated or resolutions adopted by the foundation's governing bodies are documented. 

Good preparation is therefore not about organising files immediately before an audit. It involves identifying, at an early stage, areas where the foundation's actual operations have begun to diverge from its statute, accounting records or applicable legislation. From an audit perspective, these discrepancies are particularly significant. The more complex the foundation's assets and family structure, the more important it becomes to maintain ongoing consistency between legal, accounting and tax documentation. 

Two distinct types of audit for family foundations 

Preparations should begin by distinguishing between two procedures that are sometimes confused with one another. 

The first is a financial statement audit conducted under the Accounting Act, where the foundation meets the criteria for a mandatory audit. Its primary objective is to enable the statutory auditor to obtain reasonable assurance that the financial statements as a whole are free from material misstatement and to issue an independent auditor's report. 

The second procedure is the family foundation audit provided for in Article 77 of the Family Foundation Act. Its scope is considerably broader than an examination of the information presented in the financial statements. It covers the management of the foundation's assets, the incurring and fulfilment of obligations, including public-law obligations, and the assessment of these activities in terms of their propriety, reliability and compliance with applicable law, the foundation's purpose and its governing documents. The audit may be conducted by an audit firm or by a team comprising a statutory auditor, a tax adviser and an advocate or legal counsel. As a general rule, the audit required under the Family Foundation Act must be conducted at least once every four years. However, if the foundation's financial statements are subject to a mandatory audit under the Accounting Act, the Article 77 audit is typically carried out annually as part of the process leading to the approval of the financial statements. 

In practice, this means that a large family foundation may be subject to two separate audit processes within a single financial reporting cycle. Understanding this distinction is fundamental to effective preparation. We discussed this issue in greater detail in our previous article: Family Foundation Audit: What to Check and How to Prepare – A Statutory Auditor's Perspective 

How to prepare a family foundation for an audit

Thorough preparation can help identify and remedy irregularities before they are discovered by the auditors. 

Step 1. Appoint the auditors – do not leave it until the last minute 

The first decision should be to establish who will audit the foundation and what the scope of their work will be.

In the case of a mandatory financial statement audit, the audit firm is selected by the Assembly of Beneficiaries (the body of beneficiaries established under the Family Foundation Act). This follows directly from Article 72(4) of the Family Foundation Act. At the same time, Article 66(4) of the Accounting Act provides that the audit firm must be selected by the body responsible for approving the financial statements, and that the entity's management cannot make this appointment independently.

The management board then enters into an agreement with the selected audit firm. This should not be postponed until the financial statements are virtually complete. The Accounting Act requires the agreement to be concluded sufficiently early to enable the audit firm, among other things, to participate in inventory procedures concerning significant assets. Early involvement of the auditor also allows preliminary audit procedures to be performed and potential problem areas to be identified before the financial year-end.

The audit under Article 77 of the Family Foundation Act must be planned separately. The audit firm or team of auditors responsible for this engagement is also appointed by the Assembly of Beneficiaries. The independence requirements specified in Article 78 of the Act are particularly important in this context.

An audit under Article 77 cannot be conducted by a person who, during the period covered by the audit or while the audit is being performed, has provided statutory audit or advisory services to the foundation. In view of the independence requirements arising from Article 78, entrusting both engagements to the same entity requires particularly careful consideration. The most conservative approach is to appoint separate audit firms to conduct the financial statement audit and the Article 77 audit. It is worth noting that Article 78 refers to a "person" who must not, among other things, provide statutory audit or advisory services to the foundation. The provision itself does not expressly establish a prohibition at the audit firm level.

Step 2. Check whether the documentation reflects how the foundation actually operates

One of the most important elements of preparation is comparing the foundation's formal documentation with its actual operating practices.
The statute of a family foundation is not a document that can simply be filed away after registration.
Among other things, it specifies the foundation's detailed purpose, the rules for maintaining the list of beneficiaries, the scope of their rights, the value of the founding fund, the procedures for appointing governing bodies, the rules of representation and the procedures for amending the statute.
Importantly, an amendment to the statute becomes effective only upon its entry in the Register of Family Foundations.

Before the audit, the foundation should therefore compare at least its statute, current registration details, composition of governing bodies, list of beneficiaries, rules governing the provision of benefits and procedures actually applied in practice.
If, during several years of operation, there have been changes to the composition of the management board or supervisory board, beneficiaries' rights, rules of representation or the asset investment model, it is necessary to verify whether these changes have been properly reflected in the documentation.

Particularly concerning are situations where the foundation operates according to established practices that are not supported by its current statute or adopted resolutions. For an audit under Article 77, demonstrating that a transaction was economically justified is not sufficient. Its compliance with the foundation's purpose and governing documents must also be assessed. 

Step 3. The list of beneficiaries and the register of contributed property require two different checks

The management board is legally responsible for preparing, maintaining and updating the list of beneficiaries. Article 80 expressly entitles the audit firm and members of the audit team to request the foundation's documents, including its current list of beneficiaries.

Before the audit, it is therefore worth verifying whether the list is consistent with the current statute and the documentation relating to individual beneficiaries. This includes checking whether their rights, the conditions for receiving benefits and the required information have been correctly recorded. Information reported to the Central Register of Beneficial Owners (CRBR) requires a separate review. Data subject to disclosure in the register should be updated in accordance with anti-money laundering (AML) regulations and remain consistent with the foundation's supporting documentation.

The second area is the register of contributed property. Under Article 27 of the Family Foundation Act, this register records property rights contributed to the foundation by the founder or other persons. It must identify the contributor, the type and value of each asset at the time of contribution, based on its condition and prices prevailing at that time, and its tax value. The management board is responsible for keeping the register up to date.

An important distinction must be made here: the register of contributed property is neither a balance sheet nor a complete register of all the foundation's assets. Its values should therefore not be expected to correspond mechanically to the total assets reported in the financial statements. After all, the foundation may subsequently invest the funds contributed, sell assets, generate income or acquire additional assets.

Good audit preparation is therefore not about making the register of contributed property match the balance sheet. Instead, it involves establishing a clear audit trail linking the documents evidencing contributions of property, the register itself, accounting records, subsequent transactions and tax documentation. The auditor should be able to trace the history of significant assets and understand the reasons for differences between the various records.

Step 4. Financial documentation should make it possible to reconstruct the history of transactions

For a family foundation, well-maintained accounting records are only the starting point. An audit under Article 77 covers asset management and the incurring and fulfilment of obligations. Consequently, the ability to reconstruct the full economic and legal context of transactions becomes particularly important.

Before the audit begins, the foundation should compile documentation including:

• Agreements relating to major investments and obligations.
• Documents evidencing the acquisition and disposal of assets.
• Bank statements and balance confirmations.
• Loan documentation.
• Valuation reports concerning real estate, shares or other non-financial assets.
• Documents establishing the basis for payments of benefits to beneficiaries.

Transactions involving the founder, beneficiaries and other related parties require particular attention. The auditor will be interested not only in their accounting treatment but also in their economic rationale, how the transaction price was determined and whether they comply with tax regulations and the foundation's governing documents.

In the area of transfer pricing, it should not automatically be assumed that every related-party transaction requires the preparation of local transfer pricing documentation. The first step is to determine whether the statutory conditions giving rise to this obligation have been met. Irrespective of whether a formal documentation requirement applies, the terms of transactions with related parties should nevertheless be commercially justifiable.

Step 5. Conduct an internal tax review before the audit

An audit under Article 77 also covers public-law obligations. Preparations should therefore extend beyond accounting matters.

A detailed review should focus primarily on:

• Benefits provided to beneficiaries.
• Transactions involving the founder and related parties.
• Financing arrangements of the foundation.
• The scope of its business activities.
• Potential benefits classified as hidden profits.

Article 24q of the Corporate Income Tax Act provides for a 15% tax on, among other things, benefits provided or made available by a family foundation and benefits constituting hidden profits. The statutory definition of hidden profits includes, among other things, certain interest payments and fees associated with financing the foundation, specified benefits provided free of charge or for partial consideration, and certain services listed in the legislation that are provided to the founder, a beneficiary or a related party.

The tax review should therefore also cover the accuracy of ongoing CIT settlements, CIT-8FR returns, any applicable transfer pricing obligations and compliance of the foundation's activities with the permitted scope of business activities specified in Article 5 of the Family Foundation Act.

Importantly, such a review should be conducted sufficiently early. An error identified internally before the audit begins can be analysed, corrected where permitted by law, and properly documented. If an irregularity is identified only during the audit, additional explanations may be required regarding its causes and the circumstances in which it was not identified earlier.

Step 6. Meeting minutes should document not only the decision but also the proper decision-making process

In a family foundation, a resolution often provides the formal link between the statute and a particular transaction. For this reason, documentation of the governing bodies' activities is much more important to the auditor than merely maintaining an archive of meeting minutes.

Article 50 of the Family Foundation Act requires proper notification of members of a governing body, establishes rules on quorum and voting majorities, and requires resolutions to be recorded in minutes. The minutes should include a list of members participating in the vote, the content of the resolutions adopted and the voting results. They must be signed by at least the person chairing the meeting and the person preparing the minutes. The foundation's statute may impose stricter requirements than those provided for by law. Before an audit, it is therefore necessary to verify not only whether a particular resolution is on file, but also whether it was adopted by the appropriate governing body, in accordance with the required procedure and voting majority, and whether the transaction or action undertaken corresponds to the approval granted. 

This is particularly relevant to decisions concerning significant investments, financing arrangements, related-party transactions and benefits provided to beneficiaries. The Act also provides for far-reaching consequences of non-compliance. Where a resolution of the Assembly of Beneficiaries is required by law for a particular legal act, that act is invalid if performed without the required resolution.

Step 7. Management board representations – a final element of the audit, not a substitute for documentation

In a financial statement audit, the management board should be prepared to provide the statutory auditor with information, explanations and representations.

This requirement also follows from Article 67 of the Accounting Act, which obliges the management of the audited entity to provide access to accounting records and documents, as well as the information, explanations and representations necessary for the preparation of the independent auditor's report.

Written management representations may cover, among other matters:

• The completeness of information provided to the auditor.
• Recognition of liabilities.
• Related-party transactions.
• Events occurring after the balance sheet date.
• Legal disputes.
• Information relevant to the assessment of the financial statements.

However, one point must be strongly emphasised: a management representation does not replace other audit evidence. It cannot be used to compensate for a missing agreement, valuation or resolution.

For the statutory auditor, a written representation forms part of the audit evidence, but it does not remove the need to perform other procedures required to obtain sufficient appropriate audit evidence. Preparing management representations should therefore not involve simply drafting a ready-made document at the beginning of the audit.

Far more important is verifying in advance whether the management board will genuinely be in a position to responsibly confirm the information contained in those representations.

Step 8. Beneficiaries should also prepare for the auditu 

One of the purposes of an audit under Article 77 is to enable an assessment of whether the foundation's assets are managed in accordance with its purpose and governing documents.

If beneficiaries have concerns about particular investments, benefits, costs, financing arrangements or related-party transactions, it is best to identify these during the audit planning stage. This does not mean that beneficiaries should assume the auditor's role or dictate the conclusions to be reached. Rather, they should highlight areas where risks may be elevated or which are particularly significant from the perspective of the foundation's interests.

This is especially important because the audit report is first submitted to the management board. The management board then presents it to the supervisory board or, if no supervisory board has been established, to the Assembly of Beneficiaries.

The audit should therefore be regarded not only as a statutory requirement but also as an oversight tool that enables an assessment of the quality of family wealth management.

A well-prepared audit begins many months in advance

For a family foundation, the greatest risk is rarely the absence of a single document.
Much more serious problems arise when different elements of the foundation's operations cease to align: the statute provides for one operating model, resolutions establish another, accounting records reflect a third, while actual practices concerning benefits or asset investments develop in yet another direction.
For this reason, audit preparation should be comprehensive. Legal and governance documentation, accounting records, tax matters, assets, benefits and decision-making processes within the foundation's governing bodies all need to be considered together.
An audit should not be treated as an inspection that simply has to be "passed". A properly conducted preparatory review can reveal inconsistencies before they become the subject of an auditor's report, a dispute between beneficiaries or scrutiny by the tax authorities.
For a family foundation whose purpose is to manage wealth over many years and across successive generations, this function of the audit may ultimately prove to be the most valuable.