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Italy: Legislation on the Audit of Government Accounts

(Aug. 18, 2016) On August 5, 2016, new legislation on the statutory audit of governmental accounts entered into effect in Italy. (Legislative Decree No. 135 of July 17, 2016, Implementing EU Directive 2014/56/EU that Amends Directive 2006/43/EC Concerning the Statutory Audit of Annual Accounts and Consolidated Accounts (L.D. No. 135), GAZETTA UFFICIALE, No. 169 (July 21, 2016), NORMATTIVA (in Italian); Directive 2014/56/EU of the European Parliament and of the Council Amending Directive 2006/43/EC on Statutory Audits of Annual Accounts and Consolidated Accounts (Apr. 16, 2014), EUR-LEX.) The audits are referred to as “statutory audits” to distinguish them for audits that are voluntary or not mandated by law.

The main purpose of statutory audits is to review and evaluate a company’s balance sheet by means of a report that contains the specifications established in the new law. (L.D. No. 135, art. 17(1).)

Highlights of the law are presented below.

Registry of Statutory Auditors

Companies that are legally certified in an EU Member State may petition Italian authorities for registration in the Register of Statutory Auditors (the Registry) maintained according to Legislative Decree No. 39 of January 27, 2010, which implements EU Directive 2006/43/CE. Such companies may carry out statutory auditing tasks under the condition that the person responsible for the task complies with certain criteria established in the legislation. (Id. art. 2.)

Training for Statutory Auditing Tasks and Continuing Education

The training required to exercise statutory auditing functions is subject to several requirements including: (a) the training must provide the minimal theoretical knowledge in order for the trainee to pass the professional eligibility examination and exercise statutory audit activities; (b) the training must last for three years; (c) the training must be with a statutory auditor or a statutory auditing company certified in the EU; (d) the trainer must take part in the tasks to be performed by the statutory auditor where the training is developed; and (e) the trainer must comply with professional confidentiality rules. (Id. art. 3(1)(1)(a)-(e).)  Online access to the Registry is free and open to the public.  (Id. art. 3(1)(3).)

For all legal purposes, the new legislation recognizes the training undertaken, in whole or in part, with a statutory auditor or a statutory auditing company registered in another EU member state. (Id. art. 3(1)(7).)  The Ministry of Economy and Finance (the Ministry), jointly with the Ministry of Justice, is charged with administering, at least once a year, an examination of professional competence for the statutory auditing profession.  (Id. art. 4(1).)  The Ministry must also define the criteria for the accreditation of training courses for persons responsible for quality control and the minimum content of such courses.  (Id. art. 6(1).)

To be permanently listed in the Registry, the statutory auditor must complete continuing education programs, which are defined annually by the Ministry and are aimed at maintaining and improving theoretical knowledge and professional capabilities. (Id. art. 5(1)(1) & (2).)  Private entities may also request accreditation from the authorities to provide the continuing education, provided that they have complied with specific criteria established by the new legislation.  (Id. art. 5(7).)

Principles Governing Statutory Auditing

Prior to accepting or continuing with the task of statutory auditing, statutory auditors must evaluate and document compliance with independence and objectivity requirements, and also determine the risks involved in the task and the availability of competent professional staff that would assist carrying out the task. (Id. art. 13(1).)  They also must establish adequate administrative and accounting procedures and internal quality control systems for theelectronic preparation of data.  (Id. art. 13(2).)  In addition, statutory auditors must carry out an annual evaluation of their internal procedures to determine if there may be eventual failures in their internal procedures and to establish remediation measures.  (Id. art. 13(7).)

Special Rules for the Statutory Auditing of Public Interest Entities

The legislation sets forth rules concerning the statutory audit of public interest entities, that is, Italian corporations issuing securities in regulated Italian and EU markets, banks, insurance companies, and re-insurance companies. (Id. art. 18(1).)  The key auditor in any statutory auditing process may not perform any corporate functions at the company that is being audited (id. art. 18(5)) and may not perform that task beyond seven continuous years; he or she may resume those tasks after three years have passed since the end of the seven-year period (id. art. 18(4)).

Quality Control by the Ministry of Economy and Finance

According to the new legislation, the Ministry must control the quality of individuals and companies that perform statutory auditing functions. (Id. art. 20(1).) To that effect, the Ministry may exercise several powers including requesting periodic information from concerned parties and demanding inspections, clarifications, data, and the documents involved in auditing processes.  (Id. art. 20(2).)

The new law creates the Central Commission for Statutory Auditors within the Ministry, to perform the oversight and control functions allocated to the Ministry by the new legislation. (Id. art. 25(1).)

Professional Ethics Rules

All entities registered in the Registry must abide by the professional ethics rules prepared by professional associations jointly with the Ministry and the National Commission for Companies and the Stock Market (CONSOB, based on the title in Italian). (Id. art. 10(1).)  Such entities are legally required to adopt an approach called “professional skepticism,” which is defined as “an attitude characterized by a doubtful approach, a constant monitoring of conditions that could indicate a potential inaccuracy due to error or fraud, as well as a critical evaluation of the documentation intrinsic to the audit.”  (Id. art. 10(4).)  Statutory audit entities must also abide by professional secret and confidentiality rules, the observance of which must persist even after the respective matter has been concluded.  (Id. art. 11(1) & (4).)

Third-Country Auditors

The Minister has the power to determine whether to allow the registration in Italy of individuals and entities that perform statutory auditing tasks in third countries. (Id. art. 22(1).)  To be registered, such individuals and entities must comply with two requirements: (1) they must issue audit reports on the annual accounts or the consolidated accounts of an entity based in that third country, and (2) the audited entities must be authorized to conduct securities transactions in an Italian-regulated stock exchange. (Id. art. 22(1).)  Third-country auditors registered in the Registry are subject to the public control system applicable to all auditors in Italy.  (Id. art. 23(1).)  Based on reciprocity and as an exception such auditors may claim an exemption when they have been subject within a previous three-year time period to the quality control system of another EU Member State or of a third country that  is deemed to be equivalent to the auditing control system established in Directive 2006/43/CE (article 46).  (Id. art. 23(2).)

Civil Liability

Statutory auditors have joint and several liability with a company’s directors for damages arising from non-compliance with their duties. (Id. art. 17(1).)  The company’s officers who collaborate with auditing activities are also severally liable for the damages arising from their non-compliance with contractual obligations or for any illegal actions.  (Id. art. 17(2).)  Any injured party may claim damages under the provisions of the new law, and the action is subject to a five-year statute of limitation from the date of the audit report.  (Id. art. 17(3).)

Criminal Penalties            

If the Ministry detects irregularities within a statutory auditing process, it may impose several types of penalties, including a warning to a declaration of non-compliance, a letter of public censorship, fines, suspension from or cancellation of registration in the Registry, revocation of a license, and a prohibition against the auditor’s accepting new auditing tasks. (Id. art. 21(1).)

The Ministry must publish on its website all the administrative sanctions it has applied. (Id. art. 21(5).)  The new legislation also includes grounds for the rehabilitation of individuals or entities whose listing in the Registry has been cancelled.  (Id. art. 21(3)-(4).)