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Relevant accounting irregularities

What are the accounting irregularities relevant to judges?

The Relevant Accounting Irregularities after the Supreme Court Ruling 583/2017

The Supreme Court Sentence nº 583/2017 of October 27th, accumulates the latest judicial decisions on the subject.

Article 164.2 describes conducts which, without the need for fault (negligence) or intent, or an aggravation of the insolvency, the Bankruptcy Procedure must be ruled as guilty.

By stating the rule “in any case”, it excludes the possibility that negligence (fault), intention (fraud or bad faith), or aggravation of the insolvency may affect the ruling of guilt.

Negligence does not modulate the relevant guilty irregularity. The following Supreme Court rulings reflect this: The Supreme Court Ruling nº 644/2011 of October 6th, The Supreme Court Ruling nº 298/2012 of May 21st, The Supreme Court Ruling nº 421/2015 of July 21st, The Supreme Court Ruling nº 492/2015, of September 17th, STS 269/2016, of April 22nd, and The Supreme Court Ruling nº 490/2016, of July 14th.

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The concept of Relevant Accounting Irregularity

Accounting irregularities are those that do not allow the financial or asset situation to be understood or known. In other words, the accounting irregularity has to be of such a magnitude that it prevents the accounting from contributing what is expected of it in the commercial trade.

The Commercial Code and article 1 of the General Accounting Plan require that the Annual Accounts must be clearly written so that the information is understandable and useful for displaying the Company’s financial statements, profits and losses and estate. Accounting must be brought into line with legal and economic reality. In short, the accounts must constitute relevant information for the understanding of the company. These requirements and this wording revolve around commercial trade.

Commercial Trade Operators must be able to make decisions on the basis of the data provided by accounting in the Public Financial Statements: the Annual Accounts.

In this sense, the Supreme Court Ruling nº 994/2011 considers the Annual Accounts to be “statements of knowledge” and hence their “significance”. This informative function makes error or negligence or intention irrelevant. The degree of awareness of the extent of the deviation from the financial statements cannot affect the rating. All of this is taken without prejudice to the degree of reproach in which the sanction will be applied, if it can be affected by the fraud or serious fault.

The Relevant Accounting Irregularities and the bona fide third party.

Any trader makes decisions with the elements available to him, without having to prove that he made the decision based on that information. The fact that he could have potentially taken it based on the available obligatory information is enough.

From a quantitative point of view, the amount of the impact will have to be evaluated in relation to the size of the company.

It will be quantitatively relevant when the economic amount of the impact, in relation to the size of the company, significantly alters the asset and financial situation that is projected.

The Relevant Accounting Irregularities and Auditing

The audit report will be relevant in the evaluation of the evidence, but does not imply a rating of responsibility. It is a report that reinforces the reliability of third parties as operators in commercial trade, but it is not a determining evidence.

The Auditor shall issue a report that must be impartial and independent but subject to auditing rules. The Auditing Rules will discover any substantial non-compliance. But being a reference point, they do not correspond in their integrity to the aspects that are the object of analysis. Therefore, it will be a relevant evidence but not enough on its own, to direct the opinion on the responsibility.

The fact that the audit report has exceptions does not imply the responsibility of the administrator or an automatic ruling of the Bankruptcy Procedure. It is true that the Supreme Court gives the audit report the character of an expert opinion, but it is still a work designed for a different purpose than the judicial process itself.

The Madrid Provincial Court is opposed to endorsing the conclusions of the audit report, without prejudice to its evaluation of its content.

The Memory and accounting irregularities.

The Memory is also a relevant document that forms part of the Annual Accounts. If it does not contain all the information or contains false information, it may be relevant to determine responsibility.

Typology of “relevant accounting irregularities” for Judges

The Principle of Relative Importance and Relevant Accounting Irregularities

Relevance may have a direct relationship with the Principle of Relative Importance contained in the Conceptual Framework of the General Accounting Plan.

The Technical Standards on Auditing express “Relative Importance” as a magnitude in the financial information that, either individually or as a whole, and in light of the circumstances surrounding it, makes it likely that the judgment of a reasonable person, who relies on the information, would have been influenced or his decision affected as a result of the error or omission (La Coruña Provincial Court, Ruling 14/2015, Section 4th)

Lack of documentary evidence justifying a transaction as a relevant accounting irregularity

A relevant accounting irregularity is considered to be an irregularity that distorts the appropiate understanding of the economic and patrimonial situation of the company at the expense of the confidence of third parties, not having documentary support and considering the quantitative and qualitative importance of the adjustment (La Coruña Provincial Court, Ruling 14/2015, Section 4th).

Remuneration of administrators as a relevant accounting irregularity.

The removal of the remunerations received from the Company’s assets may be considered improper if it does not prove that it corresponds to a specific relationship different from that of the position of corporate director, given that the Company’s Articles of Association maintain that his position is unpaid or free.

Double accounting or non-compliance with accounting obligations

Double accounting is a relevant accounting irregularity by itself. The Receivership cannot doubt when proposing the guilty ruling. And there are numerous sentences that ratify the Bankruptcy Procedure as guilty in accordance with the LC in this sense.

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