Auditing of company in Italy
Controls on accountancy, company books, assessment of value of a company
Auditing & Evaluation of company in Italy
The auditor in Italy is a professional expert in the financial statements, accounting and control of company records, as well as the principles and rules that regulate these areas; it should not be confused with the accountant appointed by the company who does not prepare the financial statements, but has mere control tasks.
The purpose of the auditing activity is to ensure that the company accounts are in compliance with current regulations (compliance audit) and to identify possible traces of illegal activities or fraud (fraud audit).
- evaluates the accounting records and financial transactions of companies, entities and organizations;
- verifies its accuracy, compliance with current regulations;
- identifies any irregularities;
- gives an evaluation on the preparation of the financial statements and on the compliance of financial transaction;
- provides indications and recommendations to improve the company's management policies;
- performs the analysis of the business context.
The auditor examines in depth:
- the financial statements;
- the accounting records;
- the company's financial statements (separate or consolidated financial statements);
- inventories and all administrative-accounting documents;
- tax returns and the tax situation as a whole, to verify that the amount of taxes and contributions paid are correct;
- the internal control procedures adopted by the company, to assess that they are effective in ensuring a safe financial management.
If the auditor finds accounting or formal errors in the documents subject to verification, he must promptly notify the company management to ensure a prompt correction.
The auditor therefore assesses whether the keeping of a company's accounts is in line with the relevant provisions of law, he works for companies of various kinds, especially in capital companies.
In Italy, article 2409 bis of the civil code states that: the statutory audit of company accounts is carried out by:
- a statutory auditor or by
- a statutory auditing firm,
enrolled in the appropriate register.
The legislation also provides that for joint stock companies, accounting control is exercised by an external auditing firm, registered in the special register of Auditors.
If a company does not have to draw up a consolidated balance sheet (see below), and does not have any other subsidiaries, the audit can be entrusted to the Board of Statutory Auditors (Collegio Sindacale), whose members must be entered in the register of auditors.
If limits are exceeded (see below) there is an audit requirement for any company, so the audit can also be mandatory and, in this case, it is called “Legal Audit”.
The auditing can be voluntary, if the company is not obliged by law to do it, if it still chooses to have control over its financial statements.
The auditor is therefore a professional in the sector, who carries out daily auditing activities for companies, to become an auditor it is necessary to:
- have obtained a degree in economic, business or legal matters;
- have completed a three-year internship with an auditor;
- pass the professional qualification exam.
It is the company that gives the assignment to an auditing company through a decision of the shareholders' meeting.
In the company, the auditor in charge:
- periodically verifies the regular keeping of the social accounts and the correct recording of management events in the accounting records;
- checks whether the financial statements correspond to the accounting records recorded daily in the company and whether this complies with the law;
- draws up an opinion on the financial statements through a specific report which includes:
a) a description of the review carried out and above all
b) an impartial opinion on the preparation of the financial statements, to define if this truthfully represents the company's financial position and if it complies with the rules.
Usually, the professional judgment on the financial statements of the company in question can be:
- without remarks: if it is drawn up in compliance with the standards and drafting criteria;
- with remarks: when the financial statements are reliable but in some aspects differ from the rules or anomalies that must be clarified;
- negative: when it is certified that the financial statements do not comply with the relevant regulations;
- declaration of impossibility: if there are events that prevent the auditor's work, this promptly notifies CONSOB, which is the state supervisory authority competent in these areas.
From March 16th, 2019, article 2477 of the civil code relating to the control body of limited liability companies and limited liability cooperatives was amended, the new version of art. 2477 provides that the appointment of the control body or auditor is mandatory if the company:
a) is required to prepare consolidated financial statements;
b) controls a company obliged to audit statutory accounts;
c) has exceeded for two consecutive financial years at least one of the following limits:
1) total assets in the balance sheet: € 2 million;
2) revenues from sales and services: € 2 million;
3) employees employed on average during the year: 10 units. "
The law states that the s.r.l. (including consortium companies) and limited liability cooperative companies must appoint the control bodies or the auditor and, if necessary, must amend the articles of association and the articles of association if the clauses do not comply with the new version of art. 2477.
The market value of a company does not coincide with the book value of the assets, debts and equity; the market value of a company is often higher than the book value as it is capable of producing a profitability usually much greater than the returns available on the market.
Company evaluation is necessary in the cases of:
- total or partial transfer of shares;
- management buyout;
- management incentive programming;
- entry of new shareholders for capital increases.
The value of a company takes into account:
- cash flow;
- subjective components, such as: the value of synergies that are created by combining two similar or complementary businesses.
The evaluation methods:
a) the asset valuation method expresses the value of a company according to its assets, that is, it analyzes the values of the individual elements of the assets and liabilities from whose comparison emerges the entity of the equity; this occurs through:
- the calculation of the balance sheet net capital: it derives from the sum of the share capital and reserves formed by profits or revaluations;
- the revaluation of any non-monetary elements (technical fixed assets, warehouse inventories, equity investments, securities, etc.) at current values and the discounting of credits and debts;
b) the method of income assessment:
- is based on the concept that the value of a company's economic capital is given by the income that, based on expectations, it will be able to produce;
- the value of the company is supposed to be formed by the sum of the current values of future income achievable by the company;
- highlights the production of income and non-cash flows, as in the financial method;
- this evaluation method is widely used for companies that have reached a certain level of maturity and stability;
c) the Discounted Cash Flow (DCF) assessment method is based on the company's ability to generate positive cash flows, it determines the company's value based on the cash flows actually produced, regardless of the economic results;
d) EVA method and sector multiples represent tools for controlling and verifying the results of the assessment process.
In addition to the overall evaluation, specific elements must be added such as:
- enhancement of synergies;
- enhancement of particular real estate assets created by third party appraisers;
- enhancement of majority bonuses or minority discounts
In case of entry of new members it is necessary to evaluate the proposed investment contract and the clauses relating to the required statutory changes.