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June 29, 2009

Special report: Filipino profession tackles hectic schedule

With presidential elections less than a year away, the Filipino accounting profession is facing a busy time as the government steps up efforts to increase tax collecting and continues with efforts to raise standards of corporate governance and financial reporting. David Hayes reports.

With national Presidential elections due to be held in May 2010, the state of the Philippines’ economy, taxation and other related issues will come under more intense public scrutiny in the coming months.

Francisco Gonzalez, executive director of the Philippines Institute of Certified Public Accountants (PICPA), explains that this is set against a backdrop of difficult economic times.

“We are suffering economically in the Philippines, especially companies that are foreign related. People are feeling the pinch,” he says. “Credit is tightening. Employee perks are diminished. Things are tightening up everywhere. A lot of local property companies have seen defaults from overseas Filipinos.”

Under pressure to finance greater state investment, the government is stepping up efforts to increase tax collecting. The Bureau of Inland Revenue (BIR) has brought in new regulations to widen the tax collection net, which has resulted in a rising work load for accounting firms, particularly navigating between local tax laws and IFRS.

“The changes need accountants. Public auditors comply with tax accounting rules when they prepare statements. They require more material to submit to BIR and this requires more work by office accountants,” Gonzalez explains.

“The government needs more revenue and BIR is stepping up efforts to collect more taxes. They are tightening the noose to clamp down on evasion. More and more big companies are compliant. They comply with IFRS but the BIR tax accounting system is not updated to those requirements.”

The interpretation of tax code rules when analysing accounts prepared following IFRS rules is causing problems. PICPA is working with BIR to try and resolve these. The valuation of assets is one example.

“We have a deferred tax system so if there is a realisable loss you can claim, but you cannot claim on tax as that is not a realisable loss. This means a reconciliation between the BIR’s tax rules and IFRS will have to be studied and explained,” Gonzalez explains.

One idea being floated to resolve problems arising from the gap between BIR’s tax code and IFRS is the use of a tax compliant financial statement. BIR is holding a series of seminars on this topic and has asked PICPA to train examiners on new standards of financial reporting.

“BIR wants to do tax compliant financial reporting using another revenue form but that deters small companies who do not want to be tied up with the rules. Once a tax starts to become a hindrance people start to consider whether to set up a new business,” Gonzalez warns.

Many other tax changes are coming, which will increase accounting firms’ work loads. Most changes do not involve new taxes, rather implementation of previously agreed updates.

“The government, for example, is increasing the spread of withholding taxes for the top 5,000 companies here. This is more work for accountants and more compliance work,” Gonzalez remarks. “We have to do this because the government needs money. The Philippines moved back down to 30 percent for withholding taxes on 1 January 2009, from 35 percent before. The regulation was pre-planned five years ago. It was part of the pay off when the government increased the rate of VAT from 10 percent to 12 percent.”

The mismatch between BIR tax regulations and IFRS reporting standards is one of several issues remaining to be dealt with following the government’s decision in 2001 for the Philippines to become one of the first countries in the Asia-Pacific region to adopt IFRS.

IFRS was adopted with several deviations and using a staggered approach. In the real estate sector, for example, IFRIC 15 is scheduled to be effective from 2012. The delay is due to the impact of the standard on the real estate sector. A reprieve was also granted to the mining industry.

More than 1,000 companies, including about 300 listed companies on the Philippines Stock Exchange, use IFRS. Non-public accountable entities with assets below PHP250 million ($5.16 million) and liabilities below PHP150 million are not required to adopt IFRS – they are permitted to use the Philippines GAAP that was in general use prior to 2005.

It is also not yet mandatory for state entities to use IFRS. These entities fall into two classifications – government enterprises and non-profit government bodies. The former are due to adopt IFRS while non-profit government organisations will adopt International Public Sector Accounting Standards eventually.

Supervision

The Philippines Regulations Commission (PRC) supervises the accounting Filipino profession through the Board of Accountancy, which operates under the Department of Labour and Employment.

Gonzalez says the PICPA and the Board of Accountancy work together to progress the accounting profession.

The board has six members; all are accountants and serve renewable six year terms. The PICPA submits five nominations for each seat, from which the PRC shortlists three. The final selections are made by the President of the Philippines.

The prime purpose of the Board of Accountancy is to prepare exams for new entrants to the profession. It also supervises standard setting agencies – the Auditing Assurance Standards Council and the Financial Reporting Standards Council. In addition, the board has the power to investigate and punish.

As part of measures to raise the standard of auditing and other services that accountants provide, the Board of Accountancy is establishing a quality assurance programme that will involve an ongoing audit of auditors.

This quality assurance programme is required by the International Federation of Accountants, and Gonzalez says the profession is trying to move it ahead.

“The Accountancy Board is trying to put the programme into law so it can impose penalties, but it takes three to four years to amend the law,” he explains.

The proposed amendments are currently with Congress, once they pass that stage they must also pass through the Senate.

“The board is trying to introduce other minor changes at the same time but quality assurance is the main item,” Gonzalez explains. “The Big Four firms already do quality assurance but the problem is the sole practitioners. We are trying to modify Big Four quality assurance programmes for small and medium practices following IFAC’s recommendation while we wait for the Accounting Law amendment.”

Quality assurance and good governance are important issues for PICPA and have been identified as priorities by the institute’s new president, Antonio Tecson, whose 12 month term begins on 1 July.

“Governance is a big issue for our institute. We are moving forward with bankers and other groups,” Gonzalez remarks. “We have met with bankers who complain that audits and reports are not up to standard. They want different reports to BIR, so accounting firms’ clients need two or more reports. We believe that banks are part of the problem.”

Qualification hurdles

Meanwhile, PICPA is moving ahead with efforts to streamline the accreditation process facing senior and partner level accountants due to the various bodies involved in controlling the financial sector.

For accountants working in audit, passing the qualifying exams is just the first step. The various commissions responsible for supervising different areas of the financial sector also operate their own qualification systems to control the standard of audit work affecting their sphere of responsibility.

Most accounting firms try to cover the whole range of financial statement audits. An accountant first tries for Board of Accountancy accreditation and then studies the requirements for each sector, including the Securities Exchange Commission (SEC) and the Central Bank.

Accounting firms generally are better placed to provide a wide range of audit services as few sole practitioners have the time or resources to study for all the qualifications.

“We are trying to unify accreditation. BIR, SEC, the Central Bank and the Insurance Commission have prepared a draft agreement for accreditation by the Board of Accountants to use as a basis and then add on their own individual requirements,” Gonzalez explains.

“This will maintain the existing system of multiple accreditations but accountants can say they are accredited and then add on each accreditation as required.”

FOREIGN PRACTICE

Outdated ban on foreign accountants causes concern

Professional services firms and professional bodies in the Philippines are battling a ban that the Philippines Constitution places on foreign accountants and lawyers working in the Philippines.

The ban is seen as outdated by many in these professions and has implications for the Philippines World Trade Organization and Association of South East Asian Nations (ASEAN) treaty obligations. Yet it remains in effect and recently has caused problems for the country’s largest accounting firm.

In February, SGV, a member of Ernst & Young (E&Y), was forced to dismiss the practice’s managing partner, vice-chairman and 13 other partners who opposed the practice’s terms of involvement with E&Y’s Asian region practice, saying it could contravene the Philippines Constitution.

Unable to resolve the issue to their satisfaction, SGV’s 70 other partners voted to dismiss the group, having received legal advice that their terms of involvement with E&Y did not contravene the constitution.

SGV is currently drafting its terms of involvement with E&Y, having been assured by the Big Four firm that SGV’s involvement should not contravene Philippines law.

“The government should step in but the issue is how to interpret the constitution of the Philippines,” Philippines Institute of Certified Public Accountants executive director Francisco Gonzalez said.

“It’s the same situation with the legal profession here and international law firms. The situation is in limbo right now.”

Other Big Four and mid-tier accounting firms are thought to be affected by the same issue in their membership of international accounting organisations.

The issue has also started to emerge in the establishment of mutual recognition agreements (MRA) between certain professions among ASEAN member countries. ASEAN’s secretariat recently launched an MRA initiative that would allow accountants, doctors and dentists to practice in other ASEAN member countries.

There are concerns that with the 2010 presidential elections soon to enter their run-up phase, the issue of MRA may not be tackled until the presidential elections are over. The Philippines: Profession in brief

Established in 1929, the Philippines Institute of Certified Public Accountants (PICPA) has been recognised as the accredited professional organisation for CPAs in the Philippines since 1975.

PICPA

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