Statutory and regulatory accounting in the electric power industry

areview of annual reports of the listed distribution Utilities (du) for the year 2020 indicates that there appears to be none or very little consideration made of the legal or regulatory framework by the external auditors of the laws and regulations in an audit of the entity financial statements. In fact, some practitioners and even those involved in the audit of the du financial statements appear to be ignorant about this audit requirement.

Apart from the ERC, the public can only rely on the external auditors to inform them of any impropriety, errors or wrong application of principles. The risk of significant misstatements in the financial statements of the DU can come from the revenue recognition process.

Officially, the amendment to Philippine Standards on Auditing No. 250 was approved by the Auditing and Assurance Standards Council on May 18, 2018. As a result, effective for audits of financial statements for periods beginning on or after December 15, 2020, the requirement to include this responsibility as part of the audit work program was the more prudent action on the part of the auditors, considering that:

a. Rate-setting can constitute about 50 percent of the more significant risks in the audit of any DU.

b. The rate-setting activity cannot be looked at as a stand-alone activity by the regulator because this is the product of the DU submission and the regulator decision. Any error, or irregularity in the process by either party or in connivance with each other will be a significant disadvantage to the consumers and can benefit only the DU.

c. The Energy Regulatory Commission is short of people who are CPAS with experience in both the statutory and legal aspects of the regulation. The ERC Board is dominated by legal minds with majority having little experience in the industry and its regulation.

d. The turnover of members of the board (new members every two years) does not support the retention of experienced and capable allaround regulator. Most of the experience are developed in the line people. Furthermore, training on regulatory practice is not supported by the budget of the ERC.

Under the above situations, the role of or participation by the external auditors is a very important component in attaining the objective of the Electric Power Industry Reform Act of 2001 to protect consumers. Apart from the ERC, the public can only rely on the external auditors to inform them of any impropriety, errors or wrong application of principles. The risk of significant misstatements in the financial statements of the DU can come from the revenue recognition process. To address this, there is a need to include in their work program the usual validation of the internal control process (relating to accumulation of energy consumption and billing the same) and, the familiarization and validation of the legal framework especially on the rates. This means the external auditor is expected to be familiar with Epira and its rules and validate the rate setting methodology and, on a limited basis, attend public consultations and hearings.

From my experience as a former regulator in ERC, I have observed very little or no participation at all by external auditors during hearings and public consultations conducted by the ERC. This is also true in the case of hearings conducted by the Senate and Congressional Committees in the power sector.

Apart from the above requirement to consider the legal and regulatory aspects as part of the auditors’ work program, the external auditors (at least the top members of the audit team handling the DU audit) and/or members of the audit firm specialty groups (banking, financing, insurance, mining, telecommunications, power, etc.) should, on a mandatory basis, attend important hearings or public consultations conducted by ERC as well as the Congressional and Senate Committees on Power and Energy to be able to participate and be able to share competencies and experiences at an early stage rather than offer their inputs later when a regulatory decision has been made. They should be able to also advise members of the Senate and Congressional Committees during their deliberations of matters requiring changes or in their duties in aid of legislation.

Alfredo Non is a CPA by profession and a former Partner at SGV & Co. He served as Commissioner of the Energy Regulatory Commission till he completed his term in 2018. He also served as Director and Executive Officer of several private companies and a former professor in Financial Management at the Ateneo Graduate School of Business.