(NAR) VOL. 14 NOS. 3-4 / OCTOBER - DECEMBER 2003
SEC. 1. Policy Statement
In order to strengthen the enforcement capacity of the Commission as a regulatory body and increase reliance on the opinion of external auditors, the Commission hereby adopts a policy on the accreditation of external auditors and their reporting requirements. High qualification standards and strict reporting obligations for external auditors of public companies and secondary licensees of the Commission shall be maintained and monitored through a system that will encourage quality control and disciplined financial environment.
SEC. 2. Coverage
This Circular shall be enforceable upon all public companies and secondary licensees of the Commission, and their external auditors, including the auditing firms in which such auditors are co-owners/partners.
Unless specifically exempted, all requirements provided hereunder shall apply to all companies mentioned in the preceding paragraph.
SEC. 3. Definition of Terms Under this Circular
3.1 External Auditor - means a single practitioner or a signing partner in an auditing firm.
3.2 Fraud means an intentional act by one or more individuals among management, employees, or third parties that results in a misrepresentation of financial statements, which will reduce the consolidated total assets of the company by five percent (5%). It may involve:
3.3 Error means an unintentional mistake in financial statements, which will reduce the consolidated total assets of the company by five percent (5%). It may involve:
3.4 Gross negligence means wanton or reckless disregard of the duty of due care in complying with generally accepted auditing standards.
3.5 Material information means information whose omission or misstatement could influence the economic decisions of users.
3.6 Public companies are those which have total assets of at least Fifty million pesos (P50,000,000.00) or such other amount as the Commission shall prescribe, and having two hundred (200) or more holders each holding at least One hundred (100) shares of a class of its equity securities.
3.7 Secondary licensees of the Commission shall include:
3.8 Pre-need company or issuer means any corporation registered with the Commission and authorized/licensed to issue pre-need plans.
3.9 All Other market participants refers to all holders of secondary licensees mentioned under subparagraph (iv) to (xiv) of Section 3.7 above.
SEC. 4. Scope and Limitations of Accreditation
4.1. Only an external auditor, and his auditing firm if applicable, who is accredited by the Commission shall be engaged by corporations covered by this Circular for statutory audits.
4.2. The accreditation of an auditing firm shall not cover its signing partners and auditors under its employment. The auditor/signing partner responsible for the engagement must be separately accredited by the Commission.
4.3. The accreditation of external auditors does not exonerate the reporting company or said auditors from their responsibilities. Financial statements filed with the Commission are still primarily the responsibility of the management of the reporting company and accordingly, the fairness of the representations made therein is an implicit and integral part of the issuer's responsibility. The independent certified public accountant's responsibility for the financial statements required to be filed with the Commission is confined to the expression of his opinion, or lack thereof, on such statements which he has examined.
4.4. The Commission shall not be liable for any liability or loss that may arise from the selection of said accredited external auditor and/or auditing firm to be engaged by a corporation for regular audit.
4.5. The accreditation of an external auditor and/or auditing firm shall expire or it shall be automatically delisted after a period of three (3) years from date of approval of his accreditation unless renewed before expiry date.
SEC. 5. Qualification Requirements
5.1. Individual External Auditors
A. General requirements applicable to all applications for accreditation
B. Specific Requirements
For general accreditation (i.e. for public companies
and all types of secondary licensees) at least five (5) clients with total assets of at least P50 million each For Pre-need companies only at least three (3) clients with total assets of at least P30 million each For All Other Market Participants at least three (3) clients with total asset base of at least P20 million each.
iv. An applicant who meets all the qualification requirements for an external auditor of public companies or issuers of securities to the public/listed companies and certifies that he has fundamental knowledge of the regulatory requirements on each of the other secondary licensees shall be granted a GENERAL ACCREDITATION by the Commission which means that he shall be qualified to audit all companies covered by this Circular.
5.2. Auditing Firms
SEC. 6. Application by Individual External Auditors
6.1. For initial accreditation, a duly accomplished and notarized application form (SEC Form ExA-001*) shall be submitted by the applicant external auditor to the Commission, together with the following documents:
6.2 The accreditation may be renewed by filing a duly accomplished renewal application for (SEC Form ExA-001-R*) and attaching the following documents:
6.3. The application for initial or renewal accreditation of an external auditor shall be accompanied by a fee of Two Thousand Pesos (P2,000.00).
SEC. 7. Application for Accreditation by Auditing Firms
7.1 For initial accreditation, a duly accomplished and notarized application form (SEC Form AuF-002*) shall be signed by the managing partner of the auditing firm and shall be submitted to the Commission together with the following documents:
i. Notarized certification that the firm is in compliance with the general qualification requirements under Section 5.2 of this Circular;
7.3 The accreditation may be renewed by filing a duly accomplished renewal application for (SEC Form AuF-002-R*) with the following documents:
7.4 The application for initial or renewal accreditation of an auditing firm shall be accompanied by a fee of Five Thousand Pesos (P5,000).
SEC. 8. Operational Requirements
8.1 The accredited auditing firm or external auditor shall not engage in the following non-audit services for his statutory audit clients, unless the safeguards under the code of ethics for CPA's are undertaken by the firm or auditor to reduce the threat to independence:
8.2 The firm and/or the external auditor shall comply with the following:
8.3 The written procedure for quality assurance and monitoring of professional ethics and independence from clients which is submitted with the application for accreditation shall be complied with. Any change or amendment thereto shall be reported to the Commission not less than ten (10) days prior to its effectivity. If the Commission does not comment or object to the said changes within ninety (90) days from date of submission, the same shall be deemed duly noted and shall form part of the records of such accredited firm on file with the Commission.
8.4 The Commission may exercise visitorial power over the accredited firms and external auditors, as it deems necessary.
SEC. 9. Reportorial Requirements
9.1 For the companies covered by this Circular, each shall disclose to the commission on SEC Form 17-C in case of public companies or issuers of securities to the public, or in a disclosure letter for All Other Market Participants, within five (5) days from receipt of the findings from its external auditors, the matters indicated under Section 9.3 hereof which have been discovered by the latter during the conduct of audit for the company's recently completed fiscal year, and determined in accordance with generally accepted auditing standards.
9.2 Every contract of engagement shall include an arrangement that in case the client-company fails to comply with the reportorial requirement in Section 9.1, the external auditor shall, within thirty (30) business days from the submission of his findings to the client-company, file a report (SEC Form Au-Rep*) to the Commission.
9.3 The following findings shall be disclosed:
9.4 The external auditor shall submit its findings to the client-company's management/audit committee. The adverse findings in 9.3 (i-iv) shall be discussed by the external auditor with said body in order to preserve the concerns of the supervisory authority and external auditors regarding the confidentiality of the information.
9.5 The external auditor shall document the management's explanation and/or corrective action taken regarding his adverse findings. The same shall be included in the report mentioned under Section 9.2.
9.6 The contract between the company and the external auditor shall contain a provision that the disclosure of information by the external auditor to the Commission shall not be a ground for civil, criminal or disciplinary proceedings against the auditor.
SEC. 10. Grounds for Suspension or Delisting of Accreditation
10.1. An external auditor's accreditation shall be suspended or delisted, after due notice and hearing by the Commission, under any of the following circumstances:
10.2. An external auditor who has been suspended by the Commission shall, after serving the suspension period and prior to his acceptance of any assignment, report the matter to the Commission to update his records with the same.
10.3. An auditing firm's accreditation shall be suspended or delisted, after due notice and hearing, under the following grounds:
a. Any misrepresentation which the Commission may find to be willful, in its application form and pertinent attached certifications;
b. Dissolution of the auditing firm/partnership, as evidenced by an Affidavit of Dissolution submitted to the Board of Accountancy, or upon findings by the Commission that the firm/partnership is dissolved. The accreditation of such firm/partnership shall however be reinstated by the Commission upon showing that the said dissolution was solely for the purpose of admitting new partner/s and thereafter shall be reorganized and registered;
c. There is a showing that the accreditation of the following number or percentage of external auditors, whichever is lesser, have been suspended or delisted for whatever reason, by the Commission:
i. at least ten (10) signing partners and currently employed accredited external auditors, taken together; or
ii. such number of external auditors constituting fifty percent (50%) or more of the total number of the firm's signing partners and currently accredited auditors, taken together.
d. The firm or any one of its auditors has been involved in a major accounting/auditing scam or scandal. The suspension or delisting of the said firm shall depend on the gravity of the offense or the impact of said scam or scandal on the investing public or the securities market, as may be determined by the Commission.
e. Refusal for no valid reason, upon order of the Commission, to submit requested documents in connection with an ongoing investigation. The firm should however be made aware of such investigation.
SEC. 11. Sanctions
11.1. Failure to comply with the foregoing requirements shall subject the auditing firm and the responsible external auditor, after due notice and hearing, to the following scale of fines:
Auditing Firm External AuditorFirst Offense P100,000.00 P 50,000.00Second Offense 200,000.00 100,000.00Third Offense 400,000.00 200,000.00
11.2. The foregoing penalties shall be without prejudice to other administrative or criminal sanctions that may be imposed by the Commission.
11.3. These penalties may be reduced by the Commission, upon written request of responsible auditor/firm, depending on the presence of mitigating circumstances for the violation.
11.4. The responsible external auditor's accreditation may also be suspended or delisted after due notice and hearing by the Commission.
11.5. Any company covered by this Circular that knowingly engages the services of an external auditor who is not accredited by the Commission, shall be subject to a penalty of P100,000.00 without prejudice to other administrative sanctions provided under Section 54 of the Securities Regulation Code and its implementing rules and regulations.
SEC. 12. Repealing Clause
This Circular supersedes SEC Memorandum Circular No. 5, Series of 2002, insofar as provisions inconsistent with those in this circular.
SEC. 13. Transitory Provisions
13.1. All external auditors/auditing firms previously accredited to audit issuers of registered securities or public companies pursuant to SEC Memorandum Circular No. 5 series of 2002 need not re-apply for this purpose.
13.2. Previously accredited auditors shall hold a general accreditation upon submission of the following:
13.3. At the time of renewal of accreditation, external auditors who have been accredited by the Commission up to December 31, 2003, shall present proof of participation or attendance in at least twelve (12) hours of relevant accounting and auditing training for each of the years immediately prior to their renewal date.
SEC. 14. Gender Neutral
It is understood that for purposes of this Circular, the pronoun "he" shall be gender neutral and shall refer to both male and female where applicable.
SEC. 15 Effectivity Clause
This Circular shall take effect October 01, 2003 and will cover audited financial statements with periods beginning January 1, 2004 and thereafter. Early adoption of the additional requirements is, however, encouraged.
Adopted: 23 Oct. 2003
(SGD.) LILIA R. BAUTISTA
Chairperson