Financial reports unreliable – survey

The Securities and Exchange Commission said corporations have a long way to go in making sure that the financial statements they file are free of any misrepresentations and are in compliance with the international accounting standards.

Citing a survey conducted by premier accounting firm Sycip Gorres Velayo and Co. on corporate governance and practices, SEC Chairman Lilia R. Bautista said only a few believe in the financial and operational information provided by corporations in their financial reports.

Bautista said there is still a perception that almost all corporations conspire with their auditing firms to windowdress their financial statements to make it appear that they are in good financial health.

"Corporations are now faced with a bigger and more difficult task of safeguarding the integrity of internal and external audits. I say bigger and more difficult because [the survey] revealed just how far our corporations have yet to go with respect to fulfilling their obligations satisfactorily," she said.

She said that of the 75 firms that have participated in the survey, 58 percent debunked the reliability and integrity of financial and operational information and more than half or 54 percent do not think that their internal audit unit provides "reasonable assurance to the board on critical areas of good governance."

The survey also revealed that 60 percent of those surveyed did not have an audit committee.

Bautista said corporations are mandated to provide quality financial information and disclosure to the investing public in a timely manner.

She said internal auditors should be more willing to look behind the numbers presented to them, to question the unusual and challenge anything that does not make sense. "Auditors should stop thinking of their jobs as being limited to just looking at the numbers and making sure that they balance. The time calls for the imposition of more forensic auditing to dig behind the journal entries," Bautista said.

Bautista said corporations and banks which do not have audit committees must make the establishment of this committee their first priority. For those which already have an audit committee, the directors who sit in this committee must be assured independence from management’s undue influence and must have the necessary financial expertise to be able to properly discharge their duties and responsibilities.

To ensure the integrity of external audits, the BSP and SEC have converged on a number of best practices to be imposed on banks and corporations. These include requiring the accreditation of the external auditor by BSP or SEC, mandating the rotation of external auditors every five years or earlier, and requiring the external auditors to report any errors, fraud or losses which management fails to disclose to the public.