Annual Financial Statements: Does the Auditor’s “disclaimer of opinion” in his report violate the requirement to audit them?

Index

1. Importance of accounting information and formulation of accounts
2. The Auditor’s role
3. The major problem of auditing accounts for SMEs
4. Exceptions to the obligation to audit
5. Does a disclaimer of opinion violate the requirement to audit?
6. Conclusions

1.- Importance of accounting information and the formulation of accounts.

The company is the basic unit of the economy and the commercial legal traffic. The best safeguard of this protected legal asset – which is the commercial traffic – is a reliable and essential accounting information for the decision making in a commercial company. Who do I contract and who I don´t? Who do I give credit to and who I don´t? Who has the real capacity to attend to this hiring of a good or service?

The formulation and publicity of the mandatory filing of annual accounts also serve this purpose.

2.- The Auditor’s role

However, in order for the annual accounts to be reliable, an independent figure must ensure their veracity. This role corresponds to the auditor.

What is the requirement to audit? Which companies are obliged to audit their accounts?

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When is it necessary to restate the annual accounts?

The reformulation of the annual accounts is exceptional, but essential if the requirements for its application are met. The responsibility of the Directors depends, to a large extent, on the veracity of the financial statements. Let's see how it applies and how to proceed.

3.- The major problem of auditing accounts for SMEs

(SME: Small and Medium-Size Enterprises) The big problem is the cost of auditing services. A priori all Spanish companies are obliged to audit their financial statements. However, the reality is that the exceptions – due to the cost of the audit service – are so wide that barely 2% of Spanish companies audit their financial statements.

4.- Exceptions to the obligation to audit

Exceptions are deducted a sensu contrario from the obligation to audit.

There is only an obligation to audit

When at least two of the following circumstances occur in two consecutive fiscal years:

• That the total assets exceed 2,850,000 euros.
• To have an annual turnover of more than 5,700,000 euros.
• To have an average number of employees of more than 50.

Companies that audit their financial statements are also required to audit their financial statements:

• Issue securities admitted to trading on official secondary securities markets.
• Issue bonds in public offering.
• Carry out financial intermediation activities on a regular basis.
• To carry out activities regulated by private insurance regulations.
• Pension funds and pension fund management companies.
• To have received public aid or subsidies, both Spanish and European, in the last accounting year in excess of 600,000 euros.
• To have entered into contracts with the Public Sector in the last accounting period for an accumulated amount of more than 600,000 euros. This amount must also represent more than 50% of its annual turnover.

Foundations (under certain circumstances).

• Have the obligation to audit the annual accounts by imposition of the bylaws.
• If the members agree at the general meeting the obligation to audit the accounts.
• If the members representing at least 5% or more of the capital stock request it in the commercial registry.

5.- Does the Auditor’s “disclaimer of opinion” in his report violate the requirement to audit them?

Jurisprudence has considered the disclaimer of opinion as an omission of the requirement to audit. It has even been considered as a negative audit. The most current case law, already consolidated by the Supreme Court, has been pronouncing against this criterion.

Therefore, the disclaimer of opinion does not in any case mean that the obligation to audit has been omitted. Nor does it necessarily mean that the audit has produced a negative result. The disclaimer of opinion does not mean that the financial statements do not reflect a true and fair view of the company.

The disclaimer of opinion should only be understood as a statement by the auditor. A statement in which he/she states that he/she has not been able to obtain sufficient information to be able to form an opinion on the accounts.

6.- Conclusions

It has been commented that the obligation of the company to prepare annual accounts is a basic element in the economic system. It has also been said that the figure of the auditor is equally important as a control of these accounts. Importance that is manifested in the auditor’s opinion on the accounts, contained in the report. But should the auditor’s opinion, when rejected, be decisive in determining whether the company has failed to comply with this duty? The jurisprudence, already consolidated by the Supreme Court, says it does not.

If this article has been of interest, we also suggest you to read the following article published on our website:

Director´s Liability for failing to deposit the Annual Accounts (or Financial Statements).

Non-compliance with accounting duties.