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From Where We Sit

Preparation of financial statements Part 2

Benjamin R. Punongbayan Benjamin R. Punongbayan

I have written previously about the preparation of financial statements (FS) in relation to a resolution by the Board of Accountancy (regulator) requiring the submission of a “certificate” by the CPA preparer of the FS, which should be attached to the audited FS filed with the SEC and the BIR. Just for clarification, the FS preparer is a person separate and distinct from the external auditor.

There have been continuing developments regarding the resolution but which do not cure the controversies that initially arose. As a long-standing member of the profession, I feel I have a responsibility to continue to express my thoughts on these persisting issues.

The original resolution was followed shortly by a lengthy list of Q&A. This Q&A was subsequently revised. Recently, an amending resolution was issued. These series of issuances within a short period of time confirmed my thoughts that the resolution was drawn up hastily, without adequate process, and was not properly conceived.

I noted a substantial change in the amending resolution. It now requires compliance by the FS preparer with a standard, in its entirety, covering the work of external auditors on compilation engagement. On this basis, the FS preparer will now have to issue the report required by that standard and no longer the certificate required in the original resolution. If correct, this interpretation provides relief to the FS preparer in that the report required by the compilation standard indicates clearly that the compilation (preparation) is not an assurance engagement. I said relief because the originally required certificate, which provides assurance on the FS, places the FS preparer into the zone of professional liability risk. He does not have that exposure now.

However, the report following the compilation standard becomes meaningless when attached to the audited FS. There will now be two reports on the same FS – one, the opinion of the external auditor providing assurance that the FS are presented fairly in accordance with applicable accounting standards, and the other, the report of the preparer which does not provide assurance (quoted in more detail below). This combination does not give a good portrayal of the accounting profession; it gives the appearance that CPAs are not sure of what they are doing.

I also believe that the requirement for a CPA FS preparer, who is an officer/employee of the entity owning the FS, to follow the compilation standard is utterly inappropriate. This standard was promulgated to be used by external auditors for compilation engagement to make it clear that such engagement is entirely different from assurance (external auditing) engagement. The compilation standard covers many requirements, among which are: issuance by the “professional accountant in public practice” of an engagement letter; performance of quality control procedures as these relate to the engagement team and to the auditing firm as a whole; compliance with professional ethics for CPA practitioners; exercise of professional judgment; issuance of the report referred to earlier. Clearly, these requirements are out of the ballpark of a CPA FS preparer who is an officer/employee. I will find it absurd to see an FS preparer-officer/employee sending to his bosses an engagement letter, and later issuing a report saying to them: “These financial statements and the accuracy and completeness of the information used to compile them are your responsibility….” I am “not required to verify the accuracy or completeness of the information you provided…. Accordingly, I do not express an audit opinion or review conclusion on whether these financial statements are prepared in accordance with….”

Clearly, if the regulator wants to persist in requiring the FS preparer who is an officer/employee to issue a certificate to be attached to the audited FS, in fairness, it should promulgate a suitable new set of standard for him to follow. This standard must include what he needs to do to deal with the differences between what he prepared and the final audited FS. These differences are material and almost always occur as a result of the external audit.

There is also a requirement that the external auditor must report to the regulator his communication to management of the latter’s non-compliance with the requirements of the regulator. This is a violation of the ethics rules on the confidentiality of client information. This requirement, which was first mentioned in the revised Q&A, was probably precipitated by the non-cooperation of the SEC to monitor compliance of the regulator’s requirements and the lukewarm treatment by the BIR of such monitoring.

To be fair, in a reaction to comments, the regulator indicated that its principal objective is to “professionalize” CPAs in commerce and industry (C&I) through accreditation and compliance with continuing professional education requirements. It chose the FS preparation work of the CPAs in C&I as the focus of this “professionalization.” Maybe, before proceeding, we should examine carefully what we mean by “professionalization” of CPAs in C&I who are officers/employees of the entity. As CPAs, they are already professionals in the first place and as such they should be able to properly prepare FS without further “professionalization.” To link the additional “professionalization” of CPAs in C&I to the preparation of FS is misguided and just put unnecessary additional burdens on the CPAs in C&I and their employers.

That said, if the regulator still wants to require CPAs in C&I who are officers/employees to obtain CPE regularly, then it may have to find another way to do it. I hold a different view, though. Although provided in the Accountancy Law, but largely unimplemented, I believe CPAs in C&I need not be required to have compulsory CPE. They can pursue that voluntarily. We should not treat their work in the same way as the work of CPAs in public practice. The latter’s work is to provide assurance to the community at large of the fairness, and therefore reliability and credibility, of the FS. As such, they need to be up-to-date in their knowledge and skills. They also need to do so because they are exposed to professional liability risk.

In my opinion, the Accountancy Law should be reexamined and amended to have the mandatory CPE requirement removed for CPAs not in public practice and, therefore, make it consistent with general international practice.

The author, Ben Punongbayan founded Punongbayan & Araullo (P&A) in 1988. Today, P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 20 Partners and over 700 staff members.

As published in The Manila Times dated 06 April 2016

If you want to read Part 1 of Preparation of financial statements, please click here.