SEC Memorandum Circular No. 5, s. 2002 – Accreditation and Reportorial Requirements of External Auditors of Public Companies
SEC Memorandum Circular No. 5, s. 2002 establishes the accreditation requirements, reportorial obligations, grounds for suspension, and sanctions applicable to external auditors and auditing firms engaged by public companies.
SEC MEMORANDUM CIRCULARS
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SEC Memorandum Circular No. 5, s. 2002
Accreditation and Reportorial Requirements of External Auditors of Public Companies
Document Number: SEC Memorandum Circular No. 5, s. 2002
Date Issued: June 2002 (the signed copy leaves the exact day blank)
Issuing Agency: Securities and Exchange Commission
Signed by: Lilia R. Bautista, Chairperson
Effectivity: January 1, 2003, covering audited financial statements for fiscal years ending June 30, 2003 and thereafter.
Overview
SEC Memorandum Circular No. 5, s. 2002 establishes the Commission's accreditation system for external auditors and auditing firms engaged by public companies. The Circular prescribes qualification standards, accreditation procedures, reporting obligations, disclosure requirements, grounds for suspension or delisting, administrative sanctions, and the responsibilities of both external auditors and public companies to strengthen the reliability of audited financial statements and improve investor confidence.
Full Text
SEC MEMORANDUM CIRCULAR NO. 5
Series of 2002
RE: Accreditation and Reportorial Requirements of External Auditors of Public Companies
Section 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 shall be maintained and monitored through a system that will encourage quality control and a disciplined financial environment.
Section 2. Coverage
This Circular shall be enforceable upon all public companies and their external auditors, including the auditing firms of which such auditors are co-owners, partners, or employees.
Section 3. Definition of Terms
For purposes of this Circular:
3.1 External Auditor refers to a 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 resulting in a misrepresentation of financial statements that reduces the consolidated total assets of the company by five percent (5%). Fraud may involve:
Manipulation, falsification or alteration of records or documents;
Misappropriation of assets;
Suppression or omission of transactions from records or documents;
Recording transactions without substance; or
Misapplication of accounting policies.
3.3 Error means an unintentional mistake in financial statements that reduces the consolidated total assets of the company by five percent (5%). Error may involve:
Mathematical or clerical mistakes;
Oversight or misinterpretation of facts; or
Misapplication of accounting policies.
3.4 Public Company means any issuer of securities that is:
Registered under Section 12 of the Securities Regulation Code;
Listed for trading on an Exchange; or
Has assets of at least ₱50,000,000 (or such other amount as may be prescribed) and at least 100 shareholders, each owning at least 100 shares of a class of equity securities.
An issuer ceases to be considered a public company upon notifying the Commission at the beginning of the fiscal year that the required shareholder threshold is no longer met.
Section 4. Scope and Limitations of Accreditation
Only SEC-accredited external auditors and, where applicable, SEC-accredited auditing firms may conduct the regular audit of corporations covered by this Circular.
Accreditation of an auditing firm does not automatically cover its signing partners or auditors, who must obtain separate accreditation.
Accreditation does not relieve management of responsibility for the financial statements nor limit the external auditor's professional responsibility.
The Commission assumes no liability arising from the selection or engagement of accredited auditors or auditing firms.
Accreditation is valid for three (3) years, unless renewed before expiration.
Section 5. General Qualification Requirements
5.1 Individual External Auditors
Applicants shall:
Be in good standing as Certified Public Accountants authorized to practice public accounting;
Possess the required independence under the Code of Professional Ethics;
Adhere to the highest standards of integrity and objectivity;
Have at least five (5) years of external audit experience, including two (2) years auditing a public company;
Have acquired such experience as an in-charge auditor, manager, partner, or equivalent; and
Have served at least five (5) active corporate clients, each with assets of at least ₱50 million.
5.2 Auditing Firms
Auditing firms shall:
Be in good standing and legally authorized to provide auditing services; and
Have at least one (1) signing partner who is already SEC-accredited or simultaneously applying for accreditation.
Section 6. Application by Individual External Auditors
Applications for initial accreditation shall be filed using SEC Form ExA-001 together with the documents specified in the Circular, including:
Statement of Representation;
Updated PRC license and Certificate of Registration;
Required notarized certifications.
Renewal applications shall use SEC Form ExA-001-R together with the required supporting documents.
The accreditation fee is ₱2,000.00.
Section 7. Application for Accreditation by Auditing Firms
Applications for initial accreditation shall be filed using SEC Form AuF-002, while renewals shall use SEC Form AuF-002-R, together with the documentary requirements prescribed by the Circular.
The accreditation fee is ₱5,000.00.
Section 8. Reportorial Requirements
Public companies shall disclose to the Commission through SEC Form 17-C within five (5) days after receipt of findings from the external auditor involving matters specified in this Circular.
Where the client fails to make the required disclosure, the external auditor shall submit a report (SEC Form Au-Rep) to the Commission within the periods prescribed.
The reportable findings include:
Material fraud or error;
Losses or potential losses amounting to at least 10% of consolidated total assets; and
Findings that corporate assets are no longer sufficient to satisfy creditor claims on a going-concern basis.
External auditors shall:
Discuss adverse findings with management or the audit committee;
Document management's explanation or corrective action; and
Ensure that engagement contracts authorize disclosure to the Commission without exposing the auditor to civil, criminal or disciplinary liability.
Section 9. Grounds for Suspension or Delisting of Accreditation
The Commission may suspend or delist the accreditation of an external auditor or auditing firm, after due notice and hearing, for grounds including:
Failure to comply with mandatory reporting requirements;
Loss of independence;
Willful misrepresentation in accreditation documents;
Professional misconduct determined by the Board of Accountancy;
Conviction of crimes involving moral turpitude or fraud;
Violations of the Corporation Code or Securities Regulation Code; and
Refusal to submit documents lawfully required by the Commission during an investigation.
The Circular likewise provides specific grounds applicable to auditing firms, including dissolution, significant suspension of accredited auditors within the firm, involvement in major accounting or auditing scandals, and refusal to cooperate with Commission investigations.
Section 10. Sanctions
Failure to comply with the Circular may result in the following administrative fines:
Offense Auditing Firm External Auditor
First Offense ₱50,000.00 ₱25,000.00
Second Offense ₱100,000.00 ₱50,000.00
Third Offense ₱150,000.00 ₱100,000.00
The Commission may reduce the foregoing penalties upon written request where mitigating circumstances exist.
An external auditor's accreditation may likewise be suspended or delisted after due notice and hearing.
Any company covered by this Circular that knowingly engages a non-accredited external auditor shall be subject to a ₱100,000.00 penalty without prejudice to other administrative sanctions under the Securities Regulation Code.
Section 11. Gender Neutral
For purposes of this Circular, the pronoun "he" shall be construed as gender-neutral and shall refer to both male and female, where applicable.
Section 12. Effectivity Clause
This Circular shall take effect beginning January 1, 2003, and shall apply to audited financial statements for fiscal years ending June 30, 2003, and thereafter.
Signed on behalf of the Commission in June 2002, Mandaluyong City, Philippines.
(Original Signed)
LILIA R. BAUTISTA
Chairperson
Source
Official Source: Securities and Exchange Commission
Official URL: https://appointment.sec.gov.ph/mc-2002/sec-memorandum-circular-no-5/
Citation:
Securities and Exchange Commission. SEC Memorandum Circular No. 5, s. 2002, "Accreditation and Reportorial Requirements of External Auditors of Public Companies," June 2002 (effective January 1, 2003).