THE SECURITIES and Exchange Commission (SEC) is requiring publicly listed companies (PLCs) and other public interest entities to disclose fees paid to their external auditors to improve transparency.
The corporate regulator issued Memorandum Circular No. 18 on Dec. 26 last year. This circular includes rules on disclosing fee-related information of external auditors, the SEC said in an e-mailed statement on Monday.
“To enhance transparency relevant to external auditors’ independence and align with the commission’s rules on fee disclosure requirements with the Code of Ethics for Professional Accountants duly adopted in the Philippines, the commission resolved to issue these guidelines,” the SEC said.
The guidelines will apply to the annual financial statements (AFS) of covered entities for the period ending Dec. 31, 2024, onwards.
Entities covered by the guidelines include PLCs, issuers that have sold a class of securities pursuant to a registration under Republic Act No. 8799 or the Securities Regulation Code (SRC), and public companies or firms with assets of at least P50 million and 200 or more holders of at least 100 shares of a class of equity securities each.
The rules also apply to companies filing their financial statements for the issuance of any class of instruments in a public market; holders of secondary licenses issued by the SEC, Bangko Sentral ng Pilipinas, and Insurance Commission; and other corporations that the SEC may consider in the future as public interest entities.
Under the guidelines, all covered companies should present fee-related information in a two-year comparative format as a supplement to their AFS.
“The required disclosure covers fees paid or payable to, or as agreed with, the external auditor/audit firm and network firms for the audit of financial statements on which the external auditor expresses an opinion,” the SEC said.
Fees charged to the company and its controlled entities, consolidated in the financial statements, will be presented in a two-year comparative format.
The new disclosure guidelines also cover fees charged to any other related entities directly or indirectly controlled by a covered company for services by the external auditor/audit firm or a network firm.
If applicable, the guidelines also state that total fees received by the external auditor/audit firm from the covered company that represent over 15% of the total fees received by the external auditor for two consecutive years, and the year this situation first arose, should also be disclosed in the two-year comparative format.
Meanwhile, the SEC said covered companies are not required to adhere to the guidelines if the information relates to a parent entity or an entity directly or indirectly wholly owned by another public interest entity that is also preparing consolidated financial statements which already include the supplementary schedule.
The SEC warned that those who fail to comply with the guidelines will face penalties as prescribed under the Revised SRC Rule 68 and the commission’s consolidated scale of fines and penalties.
“This is a commendable measure to enable regulators and the investing public to better assess the independence of external auditors,” China Bank Capital Corp. Managing Director Juan Paolo E. Colet said in a Viber message.
“The hope is that higher transparency will strengthen corporate governance and help address ethical concerns around fee dependency,” he added. — Revin Mikhael D. Ochave