Actualidad Spain

Transparency and independence of the Audit function

Draft for a Financial Audit Law, 27th February 2015.

This bill aims to update Spanish regulation on the auditing of accounts and implement the set of standards and principles established in the European Parliament and European Council’s Directive 2014/56/UE, 16th April 2014, and its subsequent implementing regulations. Its main objective is to increase transparency in the activities of auditors and encourage greater trust in the financial and business information that they provide to the markets.

In line with best international practices in corporate governance, the bill tries to guarantee the ability of auditors to carry out an independent and objective audit.  It thus establishes that financial auditors may not be engaged for less than three years, but nor may they be kept on for more than nine. If a company wishes to extend the engagement for longer, they will have to hire another audit firm to perform a joint audit. Likewise, once engaged, the audit firm’s contract may only be revoked when due grounds can be proven.

The requirements regarding the content of the audit have been tightened up significantly. The audited company must provide more thorough information to the auditors, the investors, stakeholders, shareholders and regulators.

In order to ensure auditors can be more objective and avoid possible conflict of interest, the bill includes significant limits on the fees that audit firms may charge. It includes an obligation to report these fees to the Spanish accounting supervisor each year (Instituto de Contabilidad y Auditoría de Cuentas). Moreover, for twelve months after the audit has been signed off, the partners who carried it out may not join the board or the senior management of the company they have audited, or indeed any other institutions where these companies have a controlling interest.

The bill devotes an entire section to the auditing of accounts for entities dubbed of “public interest” (listed companies, insurance companies and financial institutions), which are considered vital to the efficient functioning of domestic and international markets. It lays down more demanding requirements for their audits with respect to the terms of engagement, the turnover of firms, and the itemisation of their fees, as well as the internal organisation of the audit itself and the methodology applicable to it.