- The objective is to raise the quality of audits to increase confidence in financial and economic information
- The rotation is fixed at 10 years, some fees are limited and a list is established with 11 incompatible services
The Council of Ministers has approved the Draft Bill (APL) on Accounts Auditing derived from the need to adapt to European regulations. The European directive and regulation increase the transparency and independence of auditors and are an essential element of the internal market. It is about raising the quality of audits with the ultimate goal of reinforcing confidence in economic and financial information. The Spanish regulation establishes a rotation period of 10 years, fees for other services in Public Interest Entities (EIP) are limited and up to 11 incompatible services are listed for the auditor in relation to the audited one. Credit, insurance and listed entities (including those operating in the MAB), among others already in force, such as collective investment institutions, pension funds and reciprocal guarantee companies, are considered EIPs.
The APL has already passed the public hearing process in which it has received 24 observations, some of which have been taken into account for the new text. Now it will go to the Council of State for its subsequent approval by the Council of Ministers and the sending of the Draft Law to the Cortes Generales for its parliamentary processing and entry into force. This will culminate the process of adapting Spanish regulations to Directive 2014/56 EU of the European Parliament and the Council on the statutory audit of the annual and consolidated accounts and Regulation 537/2014 on specific requirements for so-called EIPs. The entry into force of both regulations has a June 2016 deadline.
Regarding the requirement of rotation, the APL foresees a maximum duration of the contract of 10 years. At the end of this period and if a public contest is held, the auditor may continue for four more years, provided that another auditor enters and a joint audit is carried out. In addition, limitations are established for fees received from the EIP, through two channels. In the case of services other than auditing, the remuneration cannot exceed, for three or more consecutive years, 70% of the average of the fees for audit services received during the last three years. Those received for services required by national or EU law are excluded. On the other hand, for reasons of concentration and to avoid financial dependence on the same entity, its fees cannot exceed 15% of the total income received in the last three years.
In accordance with one of the essential principles of Community law, the APL reinforces the independence of auditors. Specifically, up to 11 incompatible services are collected that the auditor cannot provide to the auditee that is EIP, its parent and its related companies. Among others, the services of accounting, internal audit, advocacy or the design of internal control procedures or risk management related to financial information stand out. Tax and valuation services will also be incompatible unless they have no direct effect on the audited statements or are of little relative importance. Certain family members of the auditor may also not perform these incompatible services to the audited entity. For example, the auditor's spouse cannot keep the auditee's accounting.
Transparency is another objective of this standard, for which the APL aims to clarify the role of the auditor and increase information. For all auditors, a greater content of the audit report is established. In the case of EIPs, they are required as a novelty an additional report that must be delivered to the audit committee. It should explain issues related to the results and the audit process, in order to contribute to the integrity and transparency of the audited financial information itself. Information obligations are added to EIP supervisors on financial institutions classified as systemic risk, as well as the communication of detected irregularities to both supervisors and the Administration of Justice. Also for this type of entity, the content of the current annual transparency report is increased by incorporating certain financial information.
As of the entry into force of the standard, all EIPs will be required to have a general audit committee and not just listed companies as up to now. The members of these committees must be non-executive directors and most of them must be independent. Its responsibilities include the following: informing the administrative body of the results of the audit, supervising the financial reporting process, authorizing the services to be provided by auditors other than incompatible auditors, examining with them the possible threats to independence and being responsible for the selection process. The CNMV will be responsible for supervising the fulfillment of these functions, without prejudice to the powers in supervision of the activity of auditing accounts reserved for the Institute of Accounting and Auditing of Accounts (ICAC).
Barriers to the exercise of the audit activity are also eliminated by prohibiting the limiting clauses imposed on the audited one, which restricts the auditor's selection capacity. For EIP auditors, the development of requirements related to the organizational structure and the dimension that EIP auditors or audit companies must meet is enabled, and a public, periodic and mandatory bidding process is regulated for the selection of auditors, which cannot include discriminatory criteria or prohibit lower auditors from participating. These measures join the external rotation requirements.
With regard to national supervision, ICAC's powers are expanded with regard to, for example, the assessment of the existence of systemic and concentration risks, the analysis of the auditors' statements or the submission of information and cooperation with the European supervisory authorities. Part of the resources necessary for the exercise of these new functions will come from the ICAC fees. The independence of the governing bodies of ICAC with respect to auditors who are required to be part of them are not and have not been for a certain period auditors of exercising accounts for a certain period is also reinforced.