SEC steps up effort to upgrade financial reporting of listed firms

The Securities and Exchange Commission (SEC) is stepping up efforts to upgrade the standards of financial reporting and disclosure of listed companies and other firms with secondary license to make sure that accurate and quality information is provided to the public.

The SEC released last week the final draft of a circular that imposes new requirements on public companies regarding disclosure of internal controls over financial reporting. The move is aimed at strengthening the external auditing process and enhancing the quality of disclosures in periodic reports of listed companies.

The SEC wants more detailed disclosures regarding related party transactions. The disclosures must include the identification of the related parties transacting business with the registrant, the business purpose of the arrangement and how transaction prices were determined by the parties.

The disclosure shall also include information about parties that fall outside the definition of related parties but with whom the registrants or its related parties have a relationship that enables the parties to negotiate terms of material transactions that may not be available from other clearly independent parties on arm’s length basis.

SEC General Accountant Roberto Manabat said this requirement is intended to address the pervasive findings on the inadequate related party disclosures noted in the SEC’s review of financial statements for 2001 and 2002.

The proposed rules also require the disclosure of fees paid for professional services rendered by an external auditor, and the pre-approval policies of the audit committee with respect to the services of the external auditor.

This amendment, Manabat said, will put teeth to our rules discouraging the auditor to render non-audit services to his audit clients unless the threat to his independence is safeguarded.

Critics of current practices say some accountants have become too cozy with the companies they audit, threatening the integrity of financial reports and undermining investor confidence.

The SEC’s Code of Corporate Governance requires companies to disclose all material matters regarding their financial situation, performance, ownership and governance.

Such information include earnings results, acquisition or disposal of assets, board changes, related party transactions, shareholdings of directors and changes to ownership.

Audited financial statements (most typically including the balance sheet, the profit and loss statement, the cashflow statement and notes to the financial statements) are the most widely used source of information on companies.

The SEC has committed to adopt international accounting standards by 2005. The adoption of the IAS is expected to enhance the comparability, understandability and reliability of financial statements; boost the country’s global competitiveness and promote greater investor protection.

According to the SEC, the 2005 timetable should provide the agency with enough incentive and momentum to secure improved accounting standards.

The adoption of the IAS is also expected to help avert accounting scandals similar to that of WorldCom and Houston-based trading firm Enron.

Many countries have considered measures to improve the independence of auditors and their accountability to shareholders.

They believe that the application of high quality audit standards and codes of ethics is one of the best methods for increasing independence and strengthening the standing of the accounting profession.