SEC seeks overhaul of accreditation standards for auditors to curb corruption

The Securities and Exchange Commission (SEC) is proposing a sweeping overhaul of accreditation standards for auditors to curb corruption and protect the investing public.

In a draft memorandum circular released on April 1, the SEC outlined amendments to the guidelines for auditing firms and external auditors. 

The proposal seeks to expand the SEC's reach into the private sector, specifically targeting companies that handle massive government projects.

In a move to increase transparency in public spending, the SEC said it is introducing a new requirement for corporations engaged in large-scale government work.

For auditors seeking Group A accreditation—which covers listed companies and large public entities—the bar has doubled. 

Under the new proposal, the SEC said applicants must demonstrate a history of handling at least five corporate clients with total assets of at least P100 million each, a significant increase from the current requirement of P50 million per client.

For Group B, which includes investment houses and brokers, the regulator is proposing to raise the threshold to five corporate clients with assets of at least P50 million each, replacing the existing, more lenient standard that requires only three corporate clients with total assets of P20 million each.

For Group C applicants, who audit smaller financing and lending companies, the SEC is also tightening the standards.

While maintaining the threshold at P5 million assets per client, the SEC is increasing the required number of clients from three to five to ensure auditors have broader experience in the sector.

To ensure accountability, the SEC said contractors will be required to:

• Maintain the accredited auditor until the project is fully completed or delivered.
• Submit a notarized schedule disclosing project descriptions, costs, and current status.
• Secure an official auditor's report covering these disclosures.

By increasing the track record thresholds, the corporate regulator said it is aiming to ensure that only firms with proven capacity handle regulated entities.

The proposed changes to the track record standards shift the requirements for all three accreditation tiers, moving from a focus on the number of clients to a more rigorous standard based on both client count and asset size.

The SEC is also proposing stricter rules for underperforming or dishonest auditors. 

The regulator said its draft introduces several new grounds for the outright denial of accreditation, including:

• Concealment: Misrepresenting or hiding information during the evaluation process.
• Negligence: Issuing an "unqualified" (clean) opinion when a client uses the wrong accounting framework.
• Material Errors: The discovery of six or more material findings in a single set of financial statements.
• Conflict of Interest: Failing to maintain independence, such as when an auditor directly prepares the financial statements they are supposed to be checking.

The SEC said the new grounds add to existing grounds such as gross negligence and violations of the Code of Ethics for Professional Accountants.

The commission said it is currently inviting stakeholders to weigh in on these changes. 

The public and members of the financial industry have until May 15 to submit their comments and feedback. — VDV, GMA News