Accreditation of external auditors
After two motions for reconsideration of an adverse Supreme Court decision (an action that is allowed only under extraordinary circumstances), the Securities and Exchange Commission (SEC) received final confirmation of the validity of Memorandum Circular No. 13-09, which requires the accreditation of auditing firms and external auditors of companies imbued with public interest.
These include, among others, issuers of securities, listed companies and public companies or those that have total assets of at least P50 million, or such other amount as the SEC shall prescribe.
The accreditation process has three levels (A, B and C) depending on the nature of the business and its capitalization.
Failure to comply with the accreditation process would subject the auditors concerned to administrative penalties and, worse, would put under strict scrutiny the companies they audited.
A group of certified public accountants (CPA) questioned the validity of that circular principally on the ground that the accreditation requirement infringes on the power of the Board of Accountancy to supervise and regulate the accountancy profession in the country.
By way of background, prior to the issuance of that circular in 2009, the SEC received numerous complaints from the public, in particular, investors in securities, about being scammed by companies they had dealt with on the basis of their audited financial statements (AFS).
As it turned out, those AFS did not strictly comply with the then accounting rules, or otherwise contained questionable statements and representations.
The crux of the circular is, only auditors and auditing firms that have relevant expertise and experience to professionally review the financial data of those businesses should be allowed to certify the correctness of their AFS.
The court ruled that the accreditation requirement is consistent with the SEC’s mandate under the Securities Regulation Code to “…protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent and manipulative devices…”
The SEC’s regulatory authority covers both juridical persons (referring to the companies) and natural persons, i.e., individual auditors who audit the entities mentioned in the circular.
On the issue of regulatory overreach on the ground that CPAs are under the supervision of the Board of Accountancy, the court said the “…accreditation requirement applies only to CPAs who are independent auditors of the financial statements of covered entities, thus showing that it is not a regulation on the accountancy profession per se but on the specific activity of auditing.”
Thus, CPAs who are not engaged in statutory audit work in those businesses, such as bookkeeping, are not obliged to secure accreditation from the SEC to be able to continue to engage in those activities.
In the same token, if a CPA does audit work in a business that is not included in the entities covered by the circular, such as a small-scale enterprise or nonprofit organization, that CPA does not have to secure SEC accreditation for that kind of work
In the corporate sense, the external auditors are the “gatekeeper” of the companies they audit, a role they perform when they certify the correctness of their clients’ AFS once they are submitted to the regulatory authorities.
That certification is an indirect statement of assurance to the public that the AFS can be relied upon or taken at its face value.
Although companies may have internal auditors who can be relied upon to be knowledgeable with accounting rules, the external auditors are “…expected to possess a more profound understanding of the intricacies of financial statements than those from whom they originate and thus, must be held to a higher standard.”
Rather than treating it as a bureaucratic nuisance, the accreditation requirement should be looked at as a “weeding out” process to maintain the integrity of the AFS of the covered entities that the public primarily relies on when they make investment decisions.
