Spain’s SME accounting firms consolidate under inflationary pressures

The Spanish government has sought to boost the business sector, in particular the SME market, with far reaching reforms in taxation, ESG, insolvency and digital invoicing. It has created new areas of possible growth for local firms but they struggle to capitalise, with inflation putting pressure on fees and a chronic skills shortage. Many mid-tier firms are acquiring or merging with SMEs to keep up with demand.

Spain’s business environment has seen a raft of new regulation in an effort to make it more efficient. New models have been established for the presentation of annual accounts for all trading companies, including consolidated companies. Changes have also been made to the legalisation of accounting books and new penalties have been established for failure to file annual accounts with the Mercantile Register.

A new RICAC (Resolution of the Instituto de Contabilidad y Auditoría de Cuentas) on income recognition is established and a new Accounts Auditing Regulation is published. The General Accounting Plan, the General Accounting Plan for SMEs, the Rules for the Preparation of Consolidated Annual Accounts (NOFCAC) and the Rules for the Adaptation of the PGC to non-profit entities have been amended, with effect for financial years beginning on or after 1 January 2021. Companies in the European Union (EU) will be required to disclose information on the impact of their activities on people and the planet, and on the sustainability risks they face, creating a new market for ESG services in Spain.

An important step in promoting the growth of the SME community and supporting local entrepreneurs has been a regulation that now allows people to create a limited liability company with EUR1 share capital. The ‘Crea y Crece’ Act introduces a series of corporate measures, but the most important is the modification of the minimum capital required for the incorporation of limited liability companies to EUR1, compared to the legal minimum capital of EUR 3,000 established until now.

There has also been structural reform of the insolvency system, which came into force on 26 September, 2022. This has been long awaited, as the one-year extension requested by the Government in July 2021 had already expired on 20 June 2019. The reform aims to attack the main limitations of the Spanish insolvency system, which are pre-insolvency instruments, late recourse to insolvency proceedings, the excessive duration of insolvency proceedings, which almost always (90% of cases) end in liquidation and not in an agreement, and little use of the second chance.

Finally, a new temporary tax on large fortunes and a new contribution system for the self-employed based on their real income has been approved for 2023. According to the draft Bill for the Creation and Growth of Companies, electronic invoicing will be mandatory in Spain from 2023 for companies and entrepreneurs with an annual turnover of more than EUR8 million. Those below the threshold must apply electronic invoicing within the next three years.

A more heavily regulated environment and increasing reliance on technology have left Spanish firms hungry for others to acquire or merge with, as they look to keep up with demand and find the skill sets they need. In common with the rest of the world, Spanish accountancy firms are facing a skills shortage and lack of new entrants into the profession. This has led to many scrambling for resources in a market that has been boosted by the post-pandemic recovery of the economy, debt refinancing, the peak of private equity activity and new generation fund applications that have increased demand for professional practices.

Lluís E. Guerra Vidiella, partner at PrimeGlobal member firm AUDITIA Audit, Tax and Advisory, has seen the market for small and medium-sized practices in Spain start to churn into M&A activity as they fight to keep up with market changes.

Marc Ivars, partner at MGI Àmbit, an MGI Worldwide member firm, has seen a spike in M&A activity in 2022. “The accounting sector in Spain has traditionally been characterised by its atomisation,” he said. “However, there is currently a trend towards the concentration of companies, as a form of non-organic growth, in a sector that requires technological investment to gain efficiency, ability to attract and engage talent, diversification of areas of activity and commercial effort to overcome the innate resistance to change.”

While a lot of new business is being generated, it can be hard to turn that into profit. “Medium-term growth areas include compliance, data protection, digital technology and cybersecurity consulting, and this is forcing the industry to rely on an increasing number of staff specialising in these new segments,” said Vidiella. “One of the biggest challenges for the industry has been the return to face-to-face work with mixed remote/face models, as well as the retention of young talent due to the gap between a very demanding industry culture that demands long working hours and many deliveries and queries against the clock, and the desire of young people to have a more balanced life.”

Manuel Gómez Conesa, partner at MGI Audicon & Partners, says that on a European level, it looks like business is booming - the accounting and auditing sector at European level is reaching historical turnover figures and is expected to continue to increase in the coming years. “However, fees and margins in Spain are becoming tighter and tighter,” he said. “In Spain, the margin is lower than in other EU countries. The sector is concerned that there are no young people interested in pursuing a career as an auditor and that there is no generational replacement of members (ROAC).”

The rising inflation that is dogging the Spanish economy is the main reason fees are being held back, according to Carlos Maestre, director of Morison ACPM. “In respect of customer demand the market is stable and recovering after the COVID crisis, but it is difficult to pass on price increases due to inflation to the client via review of professional accounting fees,” he said.

As well as being able to offer sophisticated IT and data consultancy to clients, Spanish firms desperately need to update their own systems and processes. The shift to working online during the pandemic showed that many were not ready for the digital world. “Now that teleworking has become widespread, it has revealed shortcomings in many firms digitisation processes,” said Ginebra Mostajo Estrada, partner at MGI Audicon & Partners. “Beyond the use of IT tools, processes needed to be established that allow immediate access to information and its transmission in a reliable way. Digitalisation is the key to firms becoming more competitive and offering higher value-added services.”

The accountancy industry in general is having a hard time balancing the demand for services, the need for profit and the ability to attract skills. “I understand that we must distinguish between low-value-added work and other services that focus on financial control and analysis,” said Ivars. “The former would be defined by the fact that they are susceptible to automation, suffer from lower demand and face greater price pressure. The latter behave in the opposite way but attracting and retaining the necessary talent is more difficult. This is a trend that is becoming more pronounced over time. I believe that the sector needs to reorient itself towards these types of services that provide greater value if we want to improve our margins and customer loyalty.”

In the short term, the bigger firms are trying to increase fees – according to Esther Fernández Rama, managing partner of Kreston Iberaudit, the medium-sized firms and the big 4 firms that have tried to incorporate all the requirements of the new regulation regarding quality and independence are trying to increase the fees with respect to the work to be performed, although there is usually some competition depending on the geographical area of Spain.

“Regarding the forecasts for the next 12 months in the auditing sector, we have seen glimpses of growth in a new market,” she said. “Due to the new sustainability reporting demands on companies, auditing firms are starting to employ specialists in their teams who can satisfy these technical requirements.”

Ivars has seen an increase in demand for international taxation, transfer pricing, planning and financial control for SMEs, data protection and M&A. “New technologies, e-commerce, and renewable energies are among the sectors experiencing the most growth in Spain,” he said. “We are also seeing a reactivation in the tourism sector, which had a difficult time during the pandemic.” Estrada has seen services of a cyclical nature, such as advice on restructuring, refinancing or insolvency and labour law, as companies recover from the pandemic and now struggle to counteract the effect of the war in Ukraine. “There is new scope for the role of the accountancy advisor in relation to services focused on accompanying companies in a recovery phase with advice on mergers and acquisitions, restructuring or viability plans,” she said.

However, Ivars warned the Spanish economy is about to take a downturn. “Spain's economy does not have the brightest prospects for the upcoming year,” he said. “It is anticipated that consumption will decline, economic growth will slacken, or possibly a recession could occur. The enormous levels of leverage held by many businesses and the inflation we have been seeing over the past several months could cause them to go out of business or, at the very least, trigger crises. In this sense, there are likely to be opportunities in the area of corporate restructuring, corporate finance or business recovery.”

“We would like to continue to focus on the creation and development of services that assist corporate management in making decisions,” he continued. “These services would rely on technology but also require a necessary human touch based on the advisor’s experience. On the other hand, we think it is critical to further refine our sectoral specialisation, emphasising those that are seen as emerging while also highlighting those that have a significant influence on the Spanish economy, such as the tourism, construction, and real estate sectors.”