Economy and CNMC question the bid for the audit of Canal de Isabel II

The organizations that monitor competition in Spain show their reservations about one of the large audit contracts of the Community of Madrid. Both the National Commission for Markets and Competition (CNMC) and the Secretariat for the Market Unit, under the Ministry of Economic Affairs, have focused on the public tender to carry out the audit of Canal de Isabel II -dedicated to the water management in the capital region. In the opinion of both entities, the requirements set out in their specifications limit competitive bidding, so that only large audit firms could apply for the contest.

The contract in question was published on August 29, 2022 and tries to find, through public competition, a firm that is in charge of carrying out the annual external audit of the annual accounts of Canal de Isabel II, its foundation and its dependent companies. Several of the Canal’s subsidiaries are domiciled abroad and have pending legal proceedings, such as those that gave rise to the investigation into Operation Lezo.

The reports of the CNMC and Economy came after the appeal presented by the Institute of Chartered Accountants of Spain (ICJCE), who alleged that certain clauses of the administrative specifications could prevent or contravene the principles of free market, pupondi including a “infringement of competition”.

They demand to have audited 1,000 million to win 3

The company that is awarded the tender -still pending resolution- will be in charge of supervising the accounts for the years 2023, 2024 and 2025, with the possibility of extending it in 2026 and 2027. The contract has a base budget of 2.9 million euros, although its estimated value exceeds 4 million. The reason for the appeal lies in the fact that companies with a volume of ordinary income equal to or greater than 1,000 million euros must be justified, which would limit the number of companies that can participate in the contest and would give a certain advantage to the ‘ big four’ (Deloitte, PwC, E&Y and KPMG), which are the ones that usually work with larger clients.

In their appeal, the Chartered Accountants observed that “the amount of the group’s ordinary income is not decisive to accredit the technical knowledge, efficiency, experience and reliability of the bidder”, and that it was “disproportionate”, as it was even higher than the Ordinary income of Canal de Isabel II.

Another of the clauses also required having carried out four works of similar characteristics in the last three years, which according to the ICJCE would mean “having carried out at least two audits of these characteristics in one of the three previous years.” All of this would therefore produce an “intensely restrictive effect on competition”.

A requirement without justification

The public company responded to the complaint considering that having audited companies with revenues of more than 1,000 million was justified “due to the magnitude of the operations carried out by the group”, and because it had avoided “establishing other requirements and solvency criteria such as the volume of assets or the number of employees”. I was also expecting “provided” the number of audits requirement.

The CNMC recognized the plaintiff’s glove and decreed that the required solvency “is contrary to the principles of necessity and proportionality” recognized in the Market Unity Guarantee Law. “It has not been justified by the contracting authority that for the adequate provision of the service the importation of ordinary income is relevant,” it indicates in the file. Nor is it considered valid that “in order to prove technical or professional solvency, a minimum number of similar contracts must have been executed in excess of one in the last three years”.

The Secretariat for Market Unity, for its part, admits that although the requirements established in the specifications are “in accordance” with the Law, the principle of proportionality must be taken into account, according to which the requirements must be those that “restrict or distort as little as possible the possibility of access” to the tender. In this way, he considers that compared to having audited 4 accounts of more than 1,000 million in the last three years, “it would be worth assessing whether there are less onerous requirements for bidders that guarantee their technical and professional solvency.”

Obligation to have teams in Latin America

What the Ministry does directly question is the requirement to have audit teams in the Dominican Republic and Uruguay, countries where Canal de Isabel II also has a presence through subsidiary companies. Thus, it questions the requirement to have “a signatory auditor, an auditor in charge and a team leader with experience in audits” when the administrative document does not specify that “this type of work must be carried out in these countries”, thus being a “disproportionate” obligation.

In this case, the CNMC has chosen to contradict the Ministry, considering that this requirement of personal means is established in the technical specifications, so it does not constitute an obstacle to the application of the Law in force: “The service that is intended includes contracting the audit of the companies of the Canal de Isabel II Group domiciled abroad, and it includes a company whose registered office is in the Dominican Republic and another in Uruguay”.

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