Law 22/2015, of 20 July, on Audits of Accounts (Ley 22/2015, de 20 de julio, de Auditoría de Cuentas –“LAC”) adapts Spanish law to the changes introduced by EU Directive 2014/56, amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, as well as the provisions of EU Regulation 537/2014 on the specific requirements for the so-called public-interest entities (basically, entities that issue securities admitted for trading on regulated securities markets, credit institutions and insurance undertakings subject to supervision and control).
According to the Explanatory Statement of the Law, the ultimate purpose of the reform is to strengthen users’ trust in economic and financial reporting by enhancing the quality of audits of accounts. In this way, the intention is on the one hand to increase transparency in auditors’ activity by clarifying the purpose of the audit and its scope and limitations, and on the other to reinforce the independence and objectivity of the auditors in the performance of their activity. Moreover, it aims to contribute to the integration of the audit market through the incorporation of the so-called European passport, and a higher degree of harmonisation, not only in the rules governing the activity, but also in the rules for oversight and disciplinary measures.
Over the course of its various articles the Law regulates the general aspects of the system of access to audit activity, the requirements to be followed in the performance thereof, the rules for organisation of auditors and the performance of their work, and the monitoring system and the penalties to ensure the full effectiveness of the regulations.
Notable among the general provisions of the Law is the expansion of the content of the audit report on annual accounts, including the purpose of the audit, the description of significant risks of the existence of material misstatements, and the declaration that the auditor or auditing company have not provided any services that would compromise their independence (Article 5 LAC), as well as the reinforcement of the requirements related to audits of consolidated accounts (Article 7 LAC).
In compliance with the provisions of EC law, the Law includes the obligation of professional scepticism and the application of professional judgement that must direct the performance of any auditing activity (Article 13 LAC), but it also maintains the general principle of independence, whereby auditors and audit companies, and now also any person in a position to be able to directly or indirectly influence the results of the audit, must refrain from participating in any way in the management or decision-making of the audited entity (Article 14.1 and 2 LAC), and are even prohibited from in any way influencing the results of the accounts audit for an entity with which they have an employment, business or any other kind of relationship, which could generate a conflict of interests or be generally perceived as a cause of such a conflict (Article 14.4 LAC).
In particular, auditors and audit companies are bound by the obligation to establish systems to safeguard against the threats that could arise from conflicts of interest or from any business, employment, family or any other kind of relationship, with the addition of new grounds for incompatibility, and the detailed regulation of incompatibility due to relationships with entities associated with the audited entity, situations involving relatives, and individuals or entities directly related to the auditor or the audit company or belonging to the same network (Articles 15 to 20 LAC).
Notable among the new regulations related to contracting is the fact that shareholders with more than five percent of share capital or voting rights in the audited entity or the governing body of that entity may petition a trial court in the jurisdiction of the entity’s registered office for the removal of an auditor appointed by the general meeting and the appointment of another, with just cause (Article 22 LAC). This provision contrasts with the stipulations in the Law on Voluntary Jurisdiction (Ley de Jurisdicción Voluntaria –LJV), which entrusts the resolution of court cases for appointment and removal of auditors to the clerk of the Commercial Court in the jurisdiction of the entity’s registered office (Article 123.1 LJV).
Amendments to other commercial laws
The new LAC also includes significant changes to both the Code of Commerce –Código de Comercio, “CCom”– (1st Final Provision, LAC) and the Corporations Act –Ley de Sociedades de Capital, “LSC”– (4th Final Provision, LAC).
Specifically, it includes the possibility that the statement of changes in equity and the cash flow statement may not be compulsory (Article 34.1 Ccom), in keeping with the reform to the annual accounts at the head offices of capital companies, or, in contrast with the procedure until now, the assets and liabilities that can be measured at fair value are no longer limited, simply referring for these purposes to the regulatory determinations within the limits of the European law (Article 38 bis.1 CCom).
On the other hand, it is legally stipulated that goodwill is to become an asset subject to depreciation. The reform introduces the generic category of intangible fixed assets, which are assets with a useful life defined for depreciation over a period of ten years, when their useful life cannot be reliably estimated, unless another legal or regulatory provision establishes a different period (Article 39.4.I CCom). In the specific case of goodwill, which may still only be included on the balance sheet when it is acquired for consideration, it is assumed, unless proven otherwise, that its useful life is also ten years (Article 39.4.II CCom). This new requirement imposes the obligation for the notes to the annual accounts to report the term and method of depreciation of intangible fixed assets (Article 39.4.III CCom).
On the other hand, there are now more cases of companies exempted from the obligation to consolidate accounts, although these can never include public-interest entities pursuant to the LAC (Article 43 CCom).
The valuation of shares and the preparation of certain reports which until now were entrusted exclusively to an auditor are now assigned to an independent expert, who nevertheless still may not be the company’s auditor. This is the case for the transfer of company shares for consideration other than purchase or for no consideration [Article 107.2 b) LSC], and for mortis causa transfers (Article 124.2 LSC), in the event of the liquidation of a usufruct of shares (128.3 LSC), or the separation and exclusion of partners (Articles 353.1, 354 and 355 LSC), as well as cases of exclusion of the right of first refusal in capital increases [Articles 308.2 a) and c); 505.1, 2 and 3 (for listed companies)] LSC); or the elimination of the right of pre-emptive subscription of convertible bonds [Article 417.2 b) LSC].
In general, the obligation to establish a restricted reserve equivalent to the goodwill that appears as a balance sheet asset has been eliminated (Article 273 LSC). And when a capital company can prepare an abridged balance sheet, the statement of changes in equity will not be mandatory, as was already the case for the cash flow statement (Article 257.3 LSC).
On the other hand, the mandatory content of the notes and the abridged notes has been expanded (Articles 260 and 261 LSC). If the accounts need to be reformulated, an expansion of the audit report is no longer sufficient; instead, a new report must be issued (Article 270.2 LSC). And the auditor’s report must also be submitted for deposit in the Commercial Registry when the audit has been agreed to voluntarily and the appointment of the auditor has been registered (Article 279 LSC).
For the appointment of auditors by general meeting, the LAC is expressly cited as governing the duration of the contracts in public-interest entities, and any contractual clauses that limit the appointment to particular categories or lists of statutory auditors or audit companies are declared null and void (Article 264 LSC). In cases of appointment by the commercial registrar, in addition to expressly citing the Commercial Registry Regulations as the governing provisions, it is established that before accepting the appointment, the auditor of accounts must assess whether the appointment effectively complies with the provisions of law regulating account auditing activity (Article 265 LSC). It is also required for the registrar, upon making the appointment, to set the compensation to be received by the auditor, or at least the criteria for its calculation (Article 267.3 LSC).
In public-interest companies, in addition to any shareholders representing at least five percent of voting rights or capital, the audit committee and the Accounting and Auditing Institute (ICAC) have legal capacity to petition a court for the removal of the auditor(s) or audit company(ies) appointed by the general meeting or by the Commercial Registry, and the appointment of another or other auditor(s), with just cause (Article 266 LSC). In particular, in the case of the audit committees of listed companies, the minimum number of independent members required to be on the committee has now been raised from two to a majority, and its responsibilities are set out in greater detail (Article 529 quater LSC).
Entry into force
It is important to bear in mind that the new LAC comes into force as a whole on 17 June 2016, although some of its provisions come into effect earlier (14th Final Provision). For example, the provisions in Title I, Chapters I, III and IV, Sections 1-4, related to the performance of audits of accounts and the issuance of the associated reports, are applicable to audits of annual accounts for fiscal years beginning after that date, as well as to other financial statements or accounting documents for that fiscal year.