The practical aspects of the appointment of an Auditor

Any reference to the appointment of an Auditor in this collaboration is meant to Auditors or Audit Firm.

The Auditor has a threefold social function: to protect minority shareholders, to protect the company’s creditors and to supervise the Company’s administrators.

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Appointment of Auditors’ legal regulation

The Regulations of the Mercantile Registry – in addition to the Capital Companies Act (LSC) and the Audit Law – govern the appointment of the Auditor.  The following is a guide to the main regulated aspects:

1. Compulsory appointment (art. 351).
2. Legitimacy to request the appointment (art. 352).
3. Processing of the request (art. 353).
4. Opposition to the requested appointment (art. 354).
5. Modality of appointment (art. 355).
6. Exceptions (art. 356).
7. Incompatibilities (art. 357).
8. How the appointment is formalized (art. 358).
9. Period of appointment (art. 360).
10. Remuneration (art. 362).

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What does (materiality) mean in terms of (financial statements)?

Which companies are required to have their financial statements audited?

All companies, except those that meet two of the following three requirements (year 2020) for two consecutive fiscal years.

1. Assets that are less than 2,850,000 euros.
2. The turnover (net amount) is less than 5,700,000 euros.
3. The average number of employees is less than or equal to 50.

In addition to the obligation to audit, companies may voluntarily submit themselves to audit (voluntary audits).

Who should appoint the auditor?

When the appointment derives from the obligation (see previous question) to audit, it is up to the General Meeting.

In the case of voluntary audits (there is no obligation to audit) the management body may appoint auditors. This appointment is considered (2020) valid.

Can more than one auditor be appointed at the same time?

If several auditors are appointed as auditors, they must act jointly.

If the appointment of an auditor falls on one or more individuals, as many deputies must be appointed as the number of regular appointments agreed upon.

Within what period of time must the auditor be appointed?

In the case of mandatory audits, the auditor must be appointed before the end of the fiscal year to be audited. Any subsequent agreement is not valid.

What formalities must be fulfilled in order to register the appointment of an Auditor in the Commercial Registry?

In order to register the appointment agreement, it is necessary to provide (1) Certification of the appointment agreement.

The certification must state:

• Identity of the Auditor or Auditors or Audit firm.
• Date of the appointment.
• Term for which it is appointed.

Also it is necessary to provide (2) Certification of the auditor accepting the appointment.

Can a company appoint an auditor for as long as it considers? indefinitely? one year? seven years? ..

Voluntary Audits: The period for which Auditors are appointed is free.

Mandatory Audits:

First appointment: The first time it is mandatory to appoint an Auditor, it must do so for a term of not less than three years and not more than nine years.

Subsequent appointments.

After the initial appointment period, new appointments may be made, but only for periods of three years each.

Is a tacit extension of the appointment of the auditor possible?

Once the term of the initial mandate or its extension has expired, without the company having indicated that it does not wish to continue, it can be understood that there is a tacit extension. In this case – and this is very important – the company must notify the Mercantile Registry by means of an agreement or certificate signed by whoever is duly authorized to do so. This communication cannot go beyond the date on which the audited Annual Accounts are deposited.

Is it possible to force the appointment of the auditor by a third party?

Forced appointment by the judge

The forced designation by the Judge demands the following requirements:

1. It is accredited by a person with a legitimate interest (vices or essential irregularities in the Annual Accounts).
2. No one has been previously appointed
3. Even if one has been appointed, the audit has not begun
4. If, even though the audit has begun, it is advisable to make another appointment.
5. Provide a deposit or guarantee

Compulsory designation by the Commercial Registrar

The Mercantile Registrar may compulsorily appoint an auditor when the following requirements are met:

1. When the General Meeting, being obliged to appoint an auditor, does not comply with its obligation.
2. In the event that the appointment is made by the administrative body.
3. Tacit extension without notifying the Mercantile Registry.
4.  If the auditor had been appointed but had not accepted the position.
5. And if he/she had accepted it, but it was impossible for him/her to execute his/her mandate.
6. In companies in which auditing is not compulsory, when requested by shareholders representing 5% of the share capital within three months of the end of the financial year.

Can the Auditor’s appointment be revoked?

No. The only way to revoke the mandate before the term is if there is ” a fair cause”.

This is strange. And it is so because whether the contract with the auditor is considered a “mandate” or a “work contract”, it seems reasonable that the Company can freely revoke any contract, including that of the Auditor.

However, in the contract with the Auditor there are three exceptional circumstances:

1. That the appointment of the Auditor is mandatory in some cases if it reaches certain thresholds.
2. That the information provided by the Auditor becomes public and favors the mercantile traffic insofar as it protects third parties.
3. That the minority shareholders have the right to request the audit even if it is not compulsory (because they do not reach the threshold of assets, turnover and employees).

This leads us to a conclusion: To what extent would the auditor be independent if he knew that his contract could be freely, discretionally or arbitrarily revoked by the contracting party? What courage is required of the auditor to declare that the Annual Accounts do not reflect a true and fair view of the company’s assets, if he knows that his contract can be freely revoked?

Once we know that the contract with the Auditor can only be revoked for a just cause, the only thing left to do is to ask the following question.

What is meaning by ” fair cause” to revoke the auditor’s appointment?

And all the logic that we applied to the exceptionality of the audit contract suddenly disappears. There is no positive definition for ” fair cause”. But there is a negative delimitation in the Audit Law. Discrepancies in accounting and auditing criteria or processes do not constitute ” fair cause”.

Must the revocation agreement state or explain what “fair cause” consists of?

This whole debate on Fair Cause is further aggravated when we answer this question.

Article 153 of the Mercantile Registry Regulations indicates that it is sufficient for the resolution to state that fair cause exists. It is therefore not necessary to indicate the reasons justifying the revocation. In the case that the revocation is filed before the Commercial Registry or before the Judge, it seems reasonable to think that it will be necessary to prove something more than the mere indication that there is a fair cause.

Does the lack of independence of the Auditor constitute “fair cause”?

In relation to this issue we refer to the entry “Auditor’s Independence” which, due to its extension and complexity, deserves a separate treatment.

Who can revoke the appointment of the Auditor?

In the first place, the General Shareholders’ Meeting, although if the General Shareholders’ Meeting does not do so for fair cause, it is possible for the administrative body and those who have a legitimate interest to do so before the Judge or the Mercantile Registrar.

And in relation to the revocation of the appointment of the Auditor, the following question can be asked…

What if, during the period for which the auditor has been appointed, the company ceases to be obliged to carry out an audit, because its assets, turnover and number of employees are below the minimum required thresholds? Can it file the annual accounts without the audit report?

In the event that the company ceases to be obliged to carry out an audit, the obligation to present the audit report together with the Annual Accounts can only be avoided when the General Meeting (expressly) revokes the auditor’s mandate, for this “fair” cause. In other case, it will continue to be obligatory to present the audit report together with the Annual Accounts, despite not reaching the thresholds of assets, turnover and number of employees.

What happens if, being obliged to appoint an auditor, the company fails to comply with this obligation?

Pursuant to Article 282 of the Capital Companies Act and Article 378 of the Mercantile Registry Regulations, the RM must immediately proceed to close the registry page. This prevents the filing of annual accounts that are not accompanied by the corresponding audit report.

What happens when the Auditor “denies” the opinion on the Annual Accounts, once his work has been executed? Will those Annual Accounts be considered as deposited? Will they be made public before third parties?

Previously to understand what is meant by “Denial of Opinion” by the Auditor or other qualifications of the Auditor, we recommend this article:

Emphasis of Matter Paragraphs, Unqualified Opinion, Qualified Opinion, Adverse Opinion, Disclaimer of Opinion: The Four Horsemen of Apocalypse

This question does not have a pacific answer. In fact, the Mercantile Registrars (DGRN) are in favor of not considering as Annual Accounts those whose Auditor’s opinion has been denied due to absolute limitation of the scope.

Another alternative to this interpretation is the opposite. The refusal of opinion by the Auditor is a considerable source of information for those who intend to contract with a company (banks, suppliers, clients…).

Subtracting the information from the Commercial Registry, even if that information is a refusal of the Auditor’s opinion, is to hide it from the minority shareholder, the supplier, the client, the Bank. And what is worse, from a practical point of view, to operationally block the company.

Is it possible to deposit the annual accounts after the appointment of the auditor (in a non-compulsory company), if the audit has not been carried out?

No. It is not possible to deposit the annual accounts, even if the appointment is voluntary as the company is not obliged to appoint an auditor. The reason is simple: minority shareholders were deprived of exercising their right to request this appointment, trusting in the appointment of a voluntary auditor.

However, this answer has nuances, since there is a doctrine of the General Directorate of Registries and Notaries (DGRN) that does not require the audit report in the annual accounts, unless it is previously requested by a minority shareholder. In the same way, it must be recognized that other DGRN Resolutions maintain the opposite.

This answer leads us to the following question …

What happens when both the company proceeds with the appointment of an auditor (voluntary) and the minority shareholder requests it (in both cases in the same year)?

In the event that the company proceeds with the appointment of the auditor, before the minority partner submits the request, the appointment of the auditor by the company prevails. Otherwise, the minority partners’ request prevails.

See Judgment No. 301/2013 Audiencia Provincial Madrid.

What if the appointment of the auditor by the company and the request of the minority shareholder coincide, but the mandate to the auditor is not fulfilled or cannot be fulfilled?

In this case, the right of the minority partner prevails and the auditor must be appointed at his request.

The only possible exceptions to this prevalence of the minority partner’s right are the following:

• The due registration of the appointment of the auditor.
• Effective completion of the audit report.
• Making the completed audit report available in the auditor’s appointment file at the Commercial Registry.

If this article has been of interest, we also suggest you to read the following article published on our website:  Evaluation of how an auditor determines the prices of shares.