Title
Accreditation of External Auditors of Public Firms
Law
Sec Memorandum Circular No. 13, S. 2003
Decision Date
Oct 23, 2003
The SEC establishes stringent accreditation and reporting requirements for external auditors of public companies and secondary licensees to enhance regulatory oversight and ensure high standards of financial reporting and accountability.
accreditation
external auditors
public companies

Policy, purpose, and compliance focus

  • The SEC adopts a policy to strengthen its enforcement capacity and increase reliance on external auditors’ opinions.
  • High qualification standards and strict reporting obligations are maintained and monitored to encourage quality control and a disciplined financial environment.
  • A system of accreditation and reporting requirements is used to support disciplined audit practices for public companies and secondary licensees.

Scope, coverage, and key terms

  • The Circular is enforceable upon all public companies and secondary licensees of the SEC, and their external auditors, including auditing firms where such auditors are co-owners/partners.
  • Only an external auditor (and the auditing firm, if applicable) accredited by the SEC may be engaged for statutory audits by covered corporations.
  • “External Auditor” means a single practitioner or a signing partner in an auditing firm.
  • “Fraud” is an intentional act that results in a misrepresentation of financial statements and reduces the consolidated total assets of the company by five percent (5%), and may involve:
    • manipulation, falsification or alteration of records or documents;
    • misappropriation of assets;
    • suppression or omission of the effects of transaction from records or documents;
    • recording of transactions without substance;
    • intentional misapplication of accounting policies;
    • omission of material information.
  • “Error” is an unintentional mistake in financial statements that reduces consolidated total assets by five percent (5%), and may involve:
    • mathematical or clerical mistakes in underlying records and accounting data;
    • oversight or misinterpretation of facts;
    • unintentional misapplication of accounting policies.
  • “Gross negligence” means wanton or reckless disregard of the duty of due care in complying with generally accepted auditing standards.
  • “Material information” is information whose omission or misstatement could influence economic decisions of users.
  • “Public companies” are those with:
    • total assets of at least P50,000,000.00 (or such other amount as the Commission shall prescribe); and
    • 200 or more holders, each holding at least 100 shares of a class of its equity securities.
  • Secondary licensees of the Commission include:
    • issuers of registered securities sold pursuant to registration under Section 12 of the Securities Regulation Code (SRC);
    • issuers with a class of securities listed for trading in an Exchange;
    • pre-need companies;
    • financing companies;
    • investment houses;
    • brokers and dealers of securities;
    • investment companies;
    • Government Securities Eligible Dealers (GSEDs);
    • Universal Banks registered as underwriters of securities;
    • investment company advisers;
    • transfer agents;
    • clearing agency and clearing agency as depository;
    • issuers of registered time shares, proprietary and non-proprietary membership certificates;
    • stock and securities exchange/s.
  • “Pre-need company or issuer” means any corporation registered with the SEC and authorized/licensed to issue pre-need plans.
  • “All Other market participants” refers to all holders of secondary licensees mentioned under subparagraph (iv) to (xiv) of Section 3.7.

Accreditation limits and duration

  • Only an accredited external auditor (and its auditing firm, if applicable) may be engaged by covered corporations for statutory audits.
  • The accreditation of an auditing firm does not cover its signing partners and auditors under its employment; the responsible auditor/signing partner must be separately accredited.
  • Accreditation does not exonerate either the reporting company or the external auditor from responsibilities:
    • the management remains primarily responsible for financial statements filed with the SEC, including the fairness of representations; and
    • the independent certified public accountant’s responsibility is confined to expressing an opinion (or lack of opinion) on examined financial statements.
  • The SEC is not liable for any liability or loss arising from the selection of an accredited external auditor and/or auditing firm for regular audit.
  • Accreditation expires or is automatically delisted after three (3) years from the date of approval unless renewed before expiry.

Qualification requirements to be accredited

  • Individual external auditors must be:
    • in good standing as professionals registered with the PRC and the Board of Accountancy (BOA) and entitled to practice public accounting under Philippine law;
    • independent as defined in the Code of Professional Ethics for Certified Public Accountants promulgated by the BOA and approved by the PRC;
    • adherent to the highest standards of professional conduct, including integrity and objectivity.
  • Individual external auditors must have at least five (5) years experience in external audits at the time of application, with no less than two (2) years spent auditing the type of entity for which accreditation is applied.
  • In exceptional cases, participation in industry-specific accounting/auditing seminars conducted by a professional organization or association recognized by the SEC or by BOA/PRC through a Continuing Professional Education (CPE) Council may be considered compliance with the two (2) year requirement.
  • Audit experience counts when acquired as an in-charge, manager, or partner (or equivalent).
  • Individual applicants must have external audit experience of corporate clients with minimum asset bases:
    • general accreditation (public companies and all types of secondary licensees): at least five (5) clients, each with total assets of at least P50 million;
    • pre-need companies only: at least three (3) clients, each with total assets of at least P30 million;
    • all other market participants: at least three (3) clients, with total asset base of at least P20 million.
  • An applicant meeting all qualification requirements for public companies or issuers of securities to the public/listed companies and certifying fundamental knowledge of regulatory requirements on other secondary licensees is granted GENERAL ACCREDITATION, qualifying the auditor to audit all companies covered by the Circular.
  • Auditing firms must be:
    • in good standing and entitled to conduct auditing services under applicable laws, rules, and regulations; and
    • at the time of application, have at least one (1) signing practitioner or partner who is already accredited, or already qualified and applying for accreditation.

How to apply and required forms/documents

  • For initial accreditation of an individual external auditor, the applicant must submit a duly accomplished and notarized application form (SEC Form ExA-001) to the SEC, together with:
    • a copy of the Statement of Representation required under paragraph 3(c)(v) of SRC Rule 68 (submitted only once);
    • a copy of updated PRC license and Certificate of Registration as a public practitioner issued by the BOA/PRC;
    • a notarized certification that the auditor complies with qualification requirements under Section 5.1 and has not been convicted by a competent court for a crime involving moral turpitude or fraud (as defined in the Revised Penal Code), or declared liable by the SEC or a competent court for violation of the Corporation Code or the Securities Regulation Code.
  • For general accreditation, the initial applicant must submit notarized certification that the applicant has fundamental knowledge of regulatory requirements on each of the other secondary licensees.
  • Renewal of individual accreditation requires filing a duly accomplished renewal application (SEC Form ExA-001-R) and attaching:
    • a copy of updated PRC license and Certificate of Registration as a public practitioner issued by BOA/PRC, current and effective;
    • notarized certification of compliance with Section 5.1 and no conviction for moral turpitude/fraud (as defined in the Revised Penal Code), or no SEC/competent court declaration of liability for violation of the Corporation Code or the SRC;
    • written proof of relevant accounting and auditing training for at least twelve (12) hours yearly beginning January 01, 2003, covering subjects such as international accounting standards, international standards of auditing, corporate governance, taxation, and other relevant topics, conducted by recognized/accredited professional organizations or associations through a CPE Council.
  • Every initial or renewal accreditation application by an individual external auditor must be accompanied by a fee of P2,000.00.
  • For initial accreditation of an auditing firm, the firm must submit a duly accomplished and notarized application form (SEC Form AuF-002) signed by the managing partner, with:
    • a copy of Privilege Tax Receipt (PTR);
    • a copy of the firm’s Certificate of Registration as a public practitioner issued by BOA/PRC, current and effective;
    • a copy of the firm’s Pro-Forma Audit Engagement Letter with prospective clients prepared per Annex “A” of the Circular and/or existing engagement contracts with clients;
    • a summary of contracts/agreements with audit clients covered by the Circular involving services other than statutory audit;
    • notarized certification of compliance with general qualification requirements under Section 5.2;
    • a written general description of:
      • quality assurance process (including, but not limited to, client acceptance and retention policies and concurring partner review and consultation process);
      • procedure for monitoring professional ethics and independence from clients;
      • other quality assurance policies or procedures per Philippine Standard on Auditing No. 220 or as required by the SEC;
    • copies of audited financial statements for the immediately preceding two (2) years;
    • an Undertaking under Oath that the external auditor will fully cooperate with the regulator by preserving working papers for seven (7) years and making them available when required or directed.
  • Renewal of auditing firm accreditation requires filing a duly accomplished renewal application (SEC Form AuF-002-R) with:
    • current PTR;
    • a certified true copy of the Certificate of Registration with BOA/PRC, valid and effective;
    • notarized certification of compliance with general qualification requirements under Section 5.2.
  • Every initial or renewal accreditation application by an auditing firm must be accompanied by a fee of P5,000.

Operational requirements for accredited audits

  • Accredited external auditors and auditing firms must not engage in enumerated non-audit services for statutory audit clients unless safeguards under the CPA code of ethics are used to reduce threats to independence, including:
    • bookkeeping or services related to accounting records or financial statements;
    • financial information systems design and implementation;
    • appraisal or valuation services, fairness opinions, or contribution-in-kind reports;
    • actuarial services;
    • internal audit outsourcing services;
    • management functions or human resources;
    • broker or dealer, investment adviser, or investment banking services;
    • legal services and expert services unrelated to the audit;
    • any other services the SEC declares as impermissible.
  • Accredited firms and auditors must comply with:
    • the engagement letter terms and undertakings in accordance with submitted documents under Section 7;
    • generally accepted auditing standards in the Philippines;
    • the Code of Professional Ethics, including independence rules;
    • applicable provisions of SRC Rule 68 and 68.1 and other relevant SEC pronouncements;
    • other pertinent laws, rules, and regulations.
  • The quality assurance and monitoring procedure submitted with accreditation must be complied with.
  • Any change or amendment to the quality assurance and ethics/independence procedure must be reported to the SEC not less than ten (10) days prior to effectivity.
  • If the SEC does not comment or object within ninety (90) days from submission, the changes are deemed duly noted and form part of records of the accredited firm on file with the SEC.
  • The SEC may exercise visitorial power over accredited firms and external auditors as it deems necessary.

Required audit findings disclosure

  • Each covered company must disclose to the SEC on SEC Form 17-C (for public companies or issuers of securities to the public) or via a disclosure letter (for All Other Market Participants) within five (5) days from receipt of external auditors’ findings.
  • Disclosure must cover matters discovered during the company’s recently completed fiscal year and determined in accordance with generally accepted auditing standards.
  • Each engagement contract must include an arrangement that if the company fails to comply with the Section 9.1 reportorial requirement, the external auditor must file a report to the SEC (SEC Form Au-Rep) within thirty (30) business days from submission of findings to the client-company.
  • Disclosed findings must include:
    • any material findings involving fraud or error (as defined under Section 3.2 and Section 3.3);
    • losses or potential losses whose aggregate amounts are at least ten percent (10%) of the consolidated total assets of the company;
    • findings that consolidated assets on a going concern basis are no longer adequate to cover total claims of creditors.
  • External auditors must submit findings to the client-company’s management/audit committee.
  • Adverse findings under the fraud/error, material loss/potential loss, and going concern adequacy items must be discussed with the management/audit committee to preserve confidentiality concerns regarding information.
  • External auditors must document management’s explanation and/or corrective actions on adverse findings, and include these in the report under Section 9.2.
  • Engagement contracts must provide that disclosure of information by the external auditor to the SEC is not a ground for civil, criminal, or disciplinary proceedings against the auditor.

Suspension, delisting grounds, and post-suspension duty

  • After due notice and hearing, the SEC may suspend or delist an external auditor’s accreditation for grounds including:
    • failure to submit the Section 9.2 report required due to non-disclosure by the client-company (for the companies under subparagraphs (i) to (iii) of Section 3.5) or failure to submit required disclosure reports for All Other Market Participants;
    • continuous conduct of audit despite loss of independence under the CPA code of professional ethics;
    • willful misrepresentation in specified application and supporting documents/information, including:
      • accreditation application;
      • report required under Section 9.2;
      • Statement of Representation required under paragraph 3(c)(v) of SRC Rule 68 (except the representation in sub-paragraph (1));
      • notarized certification of compliance with qualification requirements under Section 5.1 and no conviction/declaration of liability as described;
    • an act discreditable to the profession found by the BOA after due notice and hearing, with BOA informing the SEC of results;
    • conviction by a competent court for a crime involving moral turpitude or fraud (as defined in the Revised Penal Code), or declaration of liability for violation of the Corporation Code or the SRC;
    • refusal, for no valid reason, upon lawful SEC order, to submit requested documents in connection with an ongoing investigation (after the external auditor is made aware of the investigation);
    • gross negligence resulting in non-compliance with generally accepted auditing standards in the Philippines or issuance of an unqualified opinion not supported by full auditee compliance with generally accepted accounting principles (GAAP), determined by the SEC after investigation with notice and hearing;
    • conduct of any non-audit services listed under Section 8.1 for statutory audit clients without safeguards to reduce threats to independence.
  • After serving suspension, before accepting any assignment, a suspended external auditor must report the suspension matter to the SEC to update records.
  • After due notice and hearing, an auditing firm’s accreditation may be suspended or delisted for grounds including:
    • willful misrepresentation found by the SEC in its application form and pertinent attached certifications;
    • dissolution of the auditing firm/partnership, as shown by an Affidavit of Dissolution to BOA or by SEC findings of dissolution; accreditation may be reinstated upon showing dissolution was solely to admit new partner(s) followed by reorganization and registration;
    • suspension or delisting of a number or percentage of external auditors (whichever is lesser) as:
      • at least ten (10) signing partners and currently employed accredited external auditors taken together; or
      • external auditors constituting fifty percent (50%) or more of the total signing partners and currently accredited auditors taken together;
    • involvement of the firm or any auditor in a major accounting/auditing scam or scandal; the SEC determines suspension/delisting based on gravity and impact on investing public or securities market;
    • refusal, for no valid reason, upon order of the SEC to submit requested documents in connection with an ongoing investigation (after the firm is made aware of the investigation).

Fine sanctions and penalties for violations

  • Failure to comply with the Circular’s requirements subjects the auditing firm and the responsible external auditor to fines after due notice and hearing under the following scale:

    • Auditing Firm
      • First Offense: P100,000.00
      • Second Offense: P200,000.00
      • Third Offense: P400,000.00
    • External Auditor
      • First Offense: P50,000.00
      • Second Offense: P100,000.00
      • Third Offense: P200,000.00

  • Penalties do not prevent the SEC from imposing other administrative or criminal sanctions.

  • The SEC may reduce fines upon written request of the responsible auditor/firm, based on mitigating circumstances.

  • A responsible external auditor’s accreditation may be suspended or delisted after due notice and hearing.

  • Any company covered by the Circular that knowingly engages the services of a non-accredited external auditor is subject to a penalty of P100,000.00, without prejudice to other administrative sanctions under Section 54 of the Securities Regulation Code and its implementing rules and regulations.

Repeal and transitional rules

  • The Circular supersedes SEC Memorandum Circular No. 5, Series of 2002 insofar as provisions are inconsistent.
  • Previously accredited external auditors/auditing firms under SEC Memorandum Circular No. 5 (Series of 2002) need not re-apply to audit issuers of registered securities or public companies covered for that purpose.
  • Previously accredited auditors hold general accreditation upon submission of:
    • an undertaking to comply with the additional requirements under Sections 8 and 9; and
    • a certification of fundamental knowledge of regulatory requirements on other secondary licensees, allowing them to audit any covered companies.
  • At renewal, external auditors accredited up to December 31, 2003 must present proof of participation/attendance in at least twelve (12) hours of relevant accounting and auditing training for each year immediately prior to renewal.

Gender-neutral interpretation

  • The pronoun “he” is gender neutral and refers to both male and female where applicable.

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