The Companies Act sets three limits: assets, turnover and employees. How they work, which other cases require an audit and what happens if the obligation is ignored.
Many owners are unsure whether their company is audited “because it has to be”. The rule is clear, but it is easy to apply wrongly because it turns on three figures measured over two years. Knowing where the company stands, and checking every year, avoids a late discovery.
The general rule
Article 263 of the Companies Act (Ley de Sociedades de Capital) requires the annual accounts, and the management report where there is one, to be reviewed by an auditor. The exception is for companies that, for two consecutive financial years and at each year-end, meet at least two of these three circumstances: total assets not exceeding €2,850,000; net annual turnover not exceeding €5,700,000; and an average number of employees during the year not above 50. A company loses the exception if it ceases to meet two of the three for two consecutive years. In its first financial year after incorporation, conversion or merger, the company is exempt if it meets two of the three at the year-end.
For example, a company with €3,000,000 of assets, €6,000,000 of turnover and 20 employees exceeds two limits (assets and turnover). If that situation lasts for two consecutive years, the exception is lost. What counts is the combination, and over time, not any single figure in a single year.
A common confusion is with the limits for abbreviated accounts. Article 257 sets different, higher figures (€4,000,000 of assets, €8,000,000 of turnover and 50 employees) that decide only whether a shorter balance sheet may be prepared. They do not decide whether an audit is required.
Other cases
The audit law (Law 22/2015) requires an audit, whatever the size, of entities that issue securities admitted to trading or bonds offered to the public, of financial intermediaries and, within the limits set by regulation, of insurers and of entities that receive subsidies or aid, or carry out works, services or supplies for the State and other public bodies. Other contracts may also require it: a financing agreement or a shareholders’ agreement can oblige the company to have audited accounts.
Voluntary audits and audits requested by a minority
A company that is not obliged can still decide to audit. If it does and the appointment is registered in the Commercial Registry (Registro Mercantil), the auditor’s report is filed with the accounts (article 279). It can be worthwhile before a sale, a financing round or the arrival of a new partner, because it gives the figures credibility.
Shareholders representing at least 5% of the capital may also ask the registrar to appoint an auditor, at the company’s expense, for a given financial year, provided they apply within three months of the year-end (article 265.2).
Who appoints the auditor, and when
The general meeting appoints the auditor before the end of the financial year to be audited, for an initial period of between three and nine years, and cannot dismiss the auditor during it without just cause (article 264). If the meeting fails to do so, the directors or any shareholder may ask the registrar to make the appointment (article 265.1). The audit must be carried out by an auditor authorised by the ICAC (the Spanish accounting and audit institute) and entered in its official register, the ROAC.
The timetable
The directors must prepare the accounts within three months of the year-end (article 253), the general meeting must approve them within the first six months (article 164) and they must be filed in the Registry within the month after approval (article 279). An audit needs time, so it is best to appoint the auditor before the year ends rather than in March.
What happens if the obligation is ignored
If the required documents are not filed on time, the Commercial Registry will not register any document relating to the company while the failure continues, with limited exceptions (article 282). The ICAC may also impose a fine of €1,200 to €60,000, rising to €300,000 for each year of delay when the annual turnover of the company or its group exceeds €6,000,000 (article 283).
What to do
Each year, once the accounts are closed, compare the three figures with the limits and with the previous year. If the company is close to them, plan ahead. If it belongs to a group, check the group’s position too. And consider whether a voluntary audit would help a coming transaction.
Sources. Companies Act, Royal Legislative Decree 1/2010 (articles 164, 253, 257, 263 to 265, 279, 282 and 283); Audit Law 22/2015 (first additional provision).
At Pearson Specter, with our associates, this is part of the “Internal control and review of accounts” service in the Corporate area. When an audit report is required, it is signed by an auditor entered in the ROAC.
This guide is for general guidance: whether an audit is required is checked company by company.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
