SEC tightens grip on auditing practices in wake of Enron fiasco

In the aftermath of the celebrated Enron collapse in the United States, the Securities and Exchange Commission (SEC) is further tightening its grip on the auditing practice in the Philippines as it seeks several reforms in accounting standards.

"The Enron case has indeed become a catalyst for much needed change in corporate governance and the accounting profession, in particular," SEC Chairman Lilia Bautista told members of the Financial Executives Institute of the Philippines (Finex) in a forum.

"Like other regulators, we at the SEC are looking for further safeguards. Like the US SEC and UK Financial Services Authority, we are considering whether companies should rotate their auditors every three years," she said.

Bautista added that in other countries, it has been proposed that audits be done by the state. It has also been argued that compulsory rotation would mean firms in the first year as a spell would be vulnerable as they would have no experience of the company on which to draw, while firms in their last year would have little incentive to perform well.

She cited a report by Ernst & Young CEO Jim Turley who stated that since rotation would likely reduce audit quality in both the early and late years of an audit term, a better approach would be the rotation of partners and staff on an engagement.

Bautista said another important consideration resulting from the Enron case is the off-balance sheet financing, wherein in the Enron example, special purpose entities were used to move assets and debts off the balance sheet.

"Partnerships and trusts, most of them invisible or incomprehensible to ordinary investors, were used in the Enron case to enhance its earnings and maintain its credit rating. Off-balance sheet transactions have become widely adopted by companies in recent years to hide debt and massage financial performance," the SEC head noted.

She urged the local Accounting Standards Council to follow the lead of the US Financial Accounting Standards Board, the private-sector body that sets the rules, to come up with plans for dealing with off-balance sheet vehicles at the soonest possible time.

"We still have to study this problem and how to deal with these special vehicles," Bautista said. Among other things, she said the US SEC wants executives to report more quickly the share dealings by company executives and other dealings with their own company. It is also asking management to offer more complete and timely discussions of furture financial health.

"In sum, what the public wants are financial reporting and disclosures in plain English – easily understood by all stakeholders," she added.