• The objective is to raise the quality of audits to increase confidence in economic and financial information.
  • The rotation is set at 10 years, some fees are limited and a list with 11 incompatible services is established

The Council of Ministers has approved the referral to the General Courts of the Bill of Audit Law (PL) derived from the need to adapt to European regulations. The European directive and regulations increase the transparency and independence of auditors and constitute an essential element of the internal market. It is about raising the quality of audits with the ultimate goal of strengthening confidence in economic and financial information. In the Spanish standard, a rotation period of 10 years is set, the fees for services other than the audit in the Public Interest Entities (EIP) are limited and up to 11 incompatible services for the auditor are collected in relation to the audited one. EIP are considered credit institutions, insurers and listed companies (including those operating in the MAB) among others already in force as collective investment institutions, pension funds and mutual guarantee companies.

The rule has passed through the State Council after its approval by the Government in the first round last December. In the text that is now sent to the General Courts, the observations of this advisory body have been incorporated, in addition to others requested by the sectors involved. The process of adapting the Spanish regulations to the EU Directive 2014/56 of the European Parliament and the Council concerning the legal audit of the annual and consolidated accounts and Regulation 537/2014 on the specific requirements for the so-called EIP is completed. The entry into force of both standards has a June 2016 deadline.

Regarding the requirement of rotation, the PL foresees a maximum period of contract duration of 10 years. After this period has elapsed and if a public tender is held, the auditor may continue four more years, provided that between another auditor and a joint audit is carried out. Limitations are also established for fees received by the auditor of the EIP who audits, in two ways. In the case of services other than the audit, the remuneration cannot exceed 70% of the average of the fees for audit services received during the last three years for three or more consecutive 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, in general, the fees of the latter cannot exceed 15% of the total income received by the audit company in the last three years.

In accordance with one of the essential principles of community regulations, the PL reinforces the independence of the auditors. Specifically, up to 11 incompatible services are collected that the auditor cannot provide to the auditee who is EIP, its parent and its dependents. Among others, accounting, internal auditing, advocacy or design of internal control procedures or risk management services related to financial information stand out. Tax and valuation services will also be incompatible unless they have no direct effect on the audited states or are of relative importance. Certain family members of the auditor cannot provide such 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 PL intends to clarify the role of the auditor and increase the information. For all auditors, a greater content of the audit report is established. In the case of the EIPs, an additional report is required as a novelty that must be submitted 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 about financial institutions rated as systemic risk, as well as the communication of irregularities detected both to supervisors and to the Administration of Justice. Also for this type of entities the content of the current annual transparency report is increased, by incorporating certain financial information.

From the entry into force of the standard, all the EIPs will be required to have a general audit committee and not only listed companies as before. The members of these committees must be non-executive directors and most of them must be independent. Its competences include the following: inform the administration body of the result of the audit, supervise the financial information process, authorize the services to be provided by auditors other than incompatible ones, examine with them the possible threats to independence and be responsible for the selection process. The CNMV will be responsible for supervising the fulfillment of these functions, without prejudice to the competences related to the supervision of the audit activity of accounts reserved to the Institute of Accounting and Audit of Accounts (ICAC).

The barriers to the exercise of the audit activity are also eliminated by prohibiting the limitation clauses imposed on the audited one, which restricts the auditor's selection capacity. For the EIP auditors, the development of requirements related to the organizational structure and the dimension that the auditors of accounts or the EIP audit companies must fulfill is enabled and a public, periodic and mandatory bidding process is regulated for the selection of auditors, which cannot include discriminatory criteria or prohibit their participation to auditors with lower turnover. These measures meet the requirements of external rotation.

Regarding national supervision, ICAC's powers in the assessment of the existence of systemic and concentration risks, the analysis of auditors' statements or the transfer of information and cooperation with the European supervisory authorities are extended. The resources necessary for the exercise of these new functions will come from the ICAC fees. In addition, the independence of the governing bodies of the ICAC is reinforced with respect to the auditors who are required to be part of the auditors during a certain period of time who are not practicing auditors.



Source of the new

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *