Lesson 27 S.P.A.: CONTROLS IN THE TRADITIONAL SYSTEM

Control

Initially was entrusted to the College trade union

Two difficultes of this body:

  • Too much duties
  • Problem in the election process which can conduct to a large possibility of irregularities.

Division of Control

Before

administration control entrusted to the Board of Statutory Auditors

accounting control assigned to an external auditor

The Board of Statutory Auditors

Now

The functions

  • observance of the of the law and the statute;
  • compliance with the principles of correct administration
  • administrators advisors (in some cases)
  • adequacy of the organizational, administrative and accounting structure adopted by the shareholder and on its concrete functioning (Article 2403, paragraph 1).

Exceptions

limited liability companies

  • not qualified as public interest entities or intermediate entities
  • not controlled, parent or jointly controlled by them
    the statute may provide
  • board of statutory auditors also carry out the statutory audit
  • the company is not required to prepare financial statements

In social companies in the form of s.p.a.
accounting control cannot be assigned to the board of statutory auditors: when two of the limits indicated in art. 2435-bis, paragraph 1, are exceeded for two consecutive financial years

Extensions of duties

Supervision of compliance (Article 2377, paragraph 2)

In the s.p.a. open


further manifestation of the duty to supervise the observance of the rules on transactions with related parties (art. 2391-bis, paragraph 3)

In the companies with listed shares


the internal audit must supervise:

  • adequacy of the instructions given to the controlled companies
  • methods of concrete implementation of the corporate governance rules

Composition and appointment

  • Composition: 3 or 5 + 2 reserve

Ineligibility (art.2399)

limits accumulation of duties

  • the civil does not provide any limit
    but the statute can

companies with listed shares
Consob establishes limits on the accumulation of administration and control

appointment of statutory auditors

  • is up to the shareholder meeting
  • must be registered by the administrators
  • remain in office for three years

Duties and powers

  • 1) the statutory auditors must attend the shareholders' meetings as well as the meetings of the board of directors and the executive committee (articles 2405, paragraph 1,

In SPA
the bodies must report at least every six months

In listed companies
the directors must report promptly at least quarterly

  • 2) the board of statutory auditors may ask the directors for information (art. 2403-bis, paragraph 2)
  • 3) The board may exchange information with the corresponding bodies of the subsidiary companies regarding the administration and control systems and the general performance of the corporate activity.
  • 4) At any time, the statutory auditors can proceed, even individually, to inspections and controls (art. 2403-bis, paragraph 1
  • 5) The board of statutory auditors may, after notifying the chairman of the board of directors, call the meeting if in the execution of its mandate it sees reprehensible facts of significant gravity and there is an urgent need to take action (Article 2406, paragraph 2)

The statutory auditors' reaction tools

Annual Report

  • reports to shareholders on the results of the financial year and on the activity carried out
  • formulates its observations and proposals regarding the financial statements and their approval
  • in the s.p.a. open also reports on compliance with the rules on transactions with related parties (art. 2391-bis).

if well-founded suspicion

  • submit the relative denunciation (art. 2409)

can initiate social responsibility action against the directors in all s.p.a. (Article 2393, paragraph 3)

Operation

Meetings of the Board

  • at least every ninety days
  • Meetings are duly convened with the presence of the majority of Auditors and resolutions passed by an absolute majority of those present

Responsibility

exclusive liability
if they do not observe the obligation of truth in their attestations or do not keep secret the facts and documents of which they have knowledge by reason of their office (art. 2407, paragraph 1)

concurrent liability
according to which they are jointly and severally liable with the directors for the facts and omissions of the latter, when the damage would not have occurred if they had supervised in accordance with the obligations of their office (Article 2407, paragraph 2).

The accounting control
In essence, it is a body representing, within the company, the interface of the statutory auditor who, in fact, must submit to it annually a report in addition to the audit report

Auditors and auditing firms

Network

the audit appointment
upon a reasoned proposal of the Board of Statutory Auditors by the shareholders' meeting

fee for the engagement
must be determined in such a way as to guarantee the quality and reliability of the work on the basis of professional resources and working hours analytically estimated and may not be subject to any conditions or be established on the basis of the results of the audit

The office end
is three financial years, expiring on the date of the Shareholders' Meeting called to approve the financial statements for the third financial year.
In Public Interest Entities and Intermediate Public Interest Entities, the mandate has a fixed duration of nine financial years for auditing companies and seven years for individual statutory auditors;

The auditor may resign from office
without prejudice to compensation for damages and in any case and however in times and ways that allow the company to provide otherwise, in the cases and in the manner defined by regulation by the Minister of the Economy

auditor's independence safeguard

  • the prohibition on holding financial instruments issued by the company
  • the prohibition to hold social positions or perform activities of self-employment or subordinate work for the audited company before one year has elapsed since the appointment of auditor ceased;
  • the prohibition for shareholders and directors of the statutory auditing company or an affiliate to intervene in the performance of the statutory audit in a manner likely to compromise the independence and objectivity of the auditor
  • the prohibition on defining the remuneration of employees
  • the prohibition on soliciting or accepting gifts or other kinds of favors

a black list of non-audit services
that the auditor, the legal entities belonging to his network, as well as shareholders, directors, statutory auditors and employees of the company auditors cannot lend to the entity that has conferred the audit engagement or to companies belonging to its group

  • some expressly listed types of tax services;
  • services that involve a role in the management or decision-making process of the audited company;
  • accounting;
  • management of personnel accounting;
  • design and implementation of internal control procedures or technological systems for financial information;
  • evaluation services;
  • some types of legal services;
  • services related to the auditing function of the audited company
  • services related to the financing, structure and allocation of capital as well as to the investment strategy of the company;
  • the promotion, trading or underwriting of company shares
  • certain types of services relating to human resources.

Functions, duties and powers

  • verifying, during the year, the regular holding of the company and the correct recording of management facts in the accounting records;
  • in expressing an opinion on the financial statements with a specific report on the consolidated financial statements, where drafted

The report must contain:

  • opinion(positive) without qualifications if the financial year
  • opinion (positive) with reliefs;
  • negative judgment;
  • inability to express an opinion.

The effects of the judgment on the financial statements
The legitimacy to challenge the resolution approving the financial statements on which the auditor has not formulated any observations, belongs only to many shareholders who represent at least 5% of the share capital (art. 2434-bis, paragraph 2

professional scepticism

record of the information
containing the essential data pertaining to the engagement and create an audit dossier in which the documents and working papers relating to the assignment must be inserted

The responsability

External controls

Entitlement to report

  • Shareholders who represent the tenth or, in open companies, the twentieth of the share capital; the statute may provide for lower percentages of participation;
  • the internal control body (board of statutory auditors, supervisory board or management control committee);
  • In the only JSC open, the prosecutor.

inspection of the administration of the company
The court, after hearing the directors and auditors in the chambers, may order the inspection of the administration of the company at the expense of the requesting shareholders. The provision is reclaimable.

Spontaneous substitution of the administrators

Other external controls

  • Bank of Italy for jsc banking and those carrying out financial intermediation activities;
  • Ivass for jsc insurance
  • Consob for jsc carrying out intermediation activities in the securities market and for ltd issuers of listed financial instruments, including in particular companies with listed shares.

The durability of the office
The term of office is 3 financial years, expiring on the date of the Shareholders' Meeting called to approve the financial statements for the third financial year.


The Internal Control and Audit Committee is not provided for in Legislative Decree no. 39/2010 for entities with an intermediary regime, although some articles of Regulation no. 537/2014 that refer to it are mentioned in them; this obviously causes delicate problems of interpretation.

With the only exception provided for the Art. 2409-bis, paragraph 2, the reform has generalised the attribution of auditing to an external auditor for all companies.