A steadfast practice
THE PRACTICE of audit and accountancy in the Philippines has made significant progress over the past decade. Chief executives of leading local accounting fi rms, as well as industry regulators, believe that the profession has developed well for the most part but not without a bit of
struggle on several fronts.
STRICTER CLIMATE
What has predominantly defined the industry in recent years is the country’s adoption of the International Financial Reporting Standards ( IFRS) in 2005, as part of the global harmonization of accounting standards. Professional accountancy firms in the country are thus required to follow the Philippine Accounting Standards and the Philippine Financial Reporting Standards, which directly correspond to International Accounting Standards and IFRS.
“The Philippines is one of the early movers in the region with respect to adopting international accounting and auditing standards. As mentioned, we have adopted Philippine Financial Reporting Standards (PFRS) and the Philippine Standards on Auditing (PSAs) which are virtually equivalent to IFRS and International Standards on Auditing (ISAs), respectively. This gives Filipino accountants the edge not just in the region but globally,” Wilson P. Tan, SGV & Co. Assurance head, said in an e-mail to BusinessWorld.
According to Mr. Tan, another important development is the increased clamor in the Philippines, as well as in other
countries, for better but less complex accounting and reporting standards in the aftermath of the financial crisis in 2008. Prior to it, local firms adhered to the accounting standards issued by the United States.
“Work on IFRS 9, the new standard for financial instruments, has been accelerated in response to the crisis and as affirmed by the G20. This was in recognition of the clamor to reduce the complexity in accounting for financial instruments and the need for timeliness in accounting for expected credit losses,” Mr. Tan explained. “The crisis has also highlighted the need for having a common fair value measurement as well as common disclosure requirements as a way to bridge IFRS and US’ own Generally Accepted Accounting Principles (GAAP). Already, we have seen IFRS 13, Fair Value Measurement, issued in May 2011 with regard to this. Finally, we have also observed developments to improve the disclosure of ‘offbalance sheet vehicles.’ This was addressed by IFRS 12, which was issued in May 2011.”
In a separate interview, R.G. Manabat & Co. Chairman and Chief Executive Officer (CEO) Roberto G. Manabat noted that even the local practice now operates in a stricter regulatory environment.
“The regulators have become stricter and the rules have become more stringent as a result of the global financial crisis. But technically, this is good for the practice in the sense that companies are complying and would therefore require higher quality professional services which R.G. Manabat & Co. can provide,” Mr. Manabat said.
Isla Lipana & Co. Chairman and Senior Partner Alexander B. Cabrera, for his part, believes that while the profession is a little too regulated, it works towards elevating the credibility of all firms.
“New regulations on the industry make expectations so high that the firms need to adjust the way they do audit and this has become more costly for clients,” Mr. Cabrera told Busi
nessWorld. “But with stronger regulatory and private direction towards good governance, integrity, and transparency, this will create the trust necessary for investors to be more enticed to come and bet on the country.”
Danilo T. Alas, chairman and CEO of Alas Oplas & Co., echoed the same sentiment.
“At this point in time, our regulators — the Board of Accountancy ( BoA), SEC, Bangko Sentral ng Pilipinas, Insurance Commission, Cooperative Development Authority, and the National Electrification Administration — are now accrediting the firms that will perform external audit to specialized industries. So, if for instance you want to perform services for rural banks or thrift banks, you have to secure accreditation from the central bank. But prior to that, you have to also secure accreditation from the BoA. ‘ Yung accreditation namin, dugtong- dugtong. Parang ang sikip ng mundo para sa amin ( We have to be accredited by so many regulators. The environment is getting too rigid),” Mr. Alas said in an interview. “But I truly embrace that development because I believe what will happen now is only the strongest firms will be able to outlast this kind of environment.”
Meanwhile, Navarro Amper & Co. Managing Partner and CEO Greg Navarro mentioned that a lot of training followed the adoption of IFRS, since these standards were relatively new and there were no precedents or reference materials that outlined how to implement them properly.
“The local profession stepped up. I was head then of the Association of Certified Public Accountants in Public Practice and we actually hired professionals from the academe to develop training materials for practitioners, particularly small ones. Because the large practitioners already had their global affiliations, the advocacy of the organization at that time was to really assist the small- and medium-sized local practitioners in coping with the changes brought about by the standards,” Mr. Navarro said.
ACADEMIC IMPROVEMENTS
The quality of people and the quality of work in the practice have also dramatically improved in recent years, primarily driven by developments in the academe.
“The academic side of accounting practices the highest standards of teaching,” remarked Mr. Alas. “They have to meet the requirements of the practice, and the practice requires well- educated and well-trained accountants for the country to be at par with the rest of the ASEAN. Thus, certified public accountants (CPAs) who studied and trained in the country are easily accepted abroad.”
Today, there are about 150,000 CPAs registered with the Professional Regulation
Commission ( PRC) and BoA, and around 450 schools in the country offering the accountancy program. In an interview, BoA Chairman Joel L. Tan-Torres said that, on the average, the enrolees in accountancy schools have been increasing in the past decade, but only a small portion of whom get to graduate.
“Of the over 130,000 students who enrol each year in accountancy programs, only over 10,000 graduate,” Mr. Tan-Torres said.
Punongbayan & Araullo Chairperson and CEO Ma. Victoria C. Españo, for her part, thinks this is a result of the schools being competitive in terms of producing competent graduates.
“Before, almost everybody gets to graduate in accountancy, but now I understand that schools — because of pressure either from the PRC or the Commission on Higher Education — are really making sure that the students who finish the course are prepared for the board examinations,” Ms. Españo explained in an interview.
According to her, schools have implemented screening examinations for every year level, and only students who pass those exams will be able to move on to the next academic year.
Despite the shrinking number of graduates, the passing rate of the accountancy board exam has improved. Mr. Tan-Torres said that over 15,000 examinees (including those who failed in previous examinations) take the CPA board examination every year, and only around 20% to 40% of them pass.
WHERE TO IMPROVE
“Like any other industry keen for growth,” Cirilo P. Noel, SGV & Co. chairman and managing partner, pointed out, “there is room for improvement for everyone in the local accounting industry in areas like training and knowledge transfer.”
For one, Mr. Cabrera feels that the accounting practitioners should have a more active role in helping the academe improve further. He said that professors should be more intimate with practical aspects, like what really goes on in the business or what are the critical issues encountered by corporations on a day-to-day basis.
“Being skilled theoretically is important, but sometimes you won’t be able to test the value of that theory if you are not able to see the problems it creates or solves in the practice. The ideal scenario is to be strong in theory and to be strong in application,” he said.
Although Ms. Españo said that the schools are producing good professional accountants, she also thinks there is a lot of opportunity to strengthen the curriculum. She pointed out that a study P& A recently conducted found a gap between what is being produced by the academe and what employers need. In general, some accountants do not perform well in terms of English competency, critical thinking, and communication.
“I think the schools are producing good graduates, but when I say good, my reference point is the students’ ability to pass the board exam,” Ms. Españo said. “But the board exam does not measure or include all qualities and skills that employers require. For instance, the study found that CPAs find it difficult to talk to professionals from other industries. That could be improved if at the school level, they are already being trained to talk to their peers from other fields.”
Mr. Manabat, on the other hand, feels that key players in the industry need to prepare well for the upcoming regional integration.
“Right now, it’s just accounting services that is clear in terms of what’s going to be open. But there is pressure on the part of the Philippine government to include other ser-
“Being skilled theoretically is important, but sometimes you won’t be able to test the value of that theory if you are not able to see the problems it creates or solves in the practice. The ideal scenario is to be strong in theory and to be strong in application.”
vices, such as auditing and signing of reports which under the law right now is limited to Filipino firms. Knowing the direction of opening up everything, it’s incumbent on the local practitioners to step up and improve the capability of their people,” he said.
GROWTH PROSPECTS
In light of the forthcoming economic integration among ASEAN nations, Mr. Tan-Torres feels that the involvement of accountants in various sectors of the local and ASEAN economy and market will make the accountancy practice grow in importance.
He did point out, however, that local practitioners have to prepare well for the opportunities and challenges that the regional integration will give rise to. He particularly mentioned the recent approval of the ASEAN Mutual Recognition Arrangement for Accountancy Services which will provide mobility for the accountants in the region.
“The open market will bring about opportunities like being able to work in the ASEAN region and, for local accounting firms, being able to expand their practice given the expected increase in market and business volume,” he said. “But it will also result in more competition in the workplace, since ASEAN accountants can also enter the country to work. So the Filipino accountant should be able to upgrade his skills to face [this kind of] competition and take advantage of the opportunities.”
Thus, as the official regulator of the profession, the BoA has formulated a set of strategies under the initiative called “Expanding Horizons” to address the developments related to the integration in the country and in the profession.
Two of the most important programs of the initiative, according to Mr. Tan-Torres, are the Quality Assurance Review ( QAR) Program and the Continuing Professional Development (CPD). The QAR, directed towards the public practice sector, will involve the BoA doing oversight over the quality of work of the auditors. The CPD, on the other hand, mandates the CPAs to pursue continuous education and training to ensure that they are updated on the developments globally and locally.
“The accountants in the other ASEAN nations are constantly improving themselves. So, we cannot just relax and be left behind,” said the BoA chairman.
Under the ASEAN Economic Community ( AEC) Blueprint, members are meant to “remove substantially” all restrictions in the services sector by 2015 and allow ASEAN equity participation of 70% for all services sectors.
But no major upheavals are expected in the meantime as the regional bloc has not completed Mutual Recognition Agreements, which will allow professionals to practice in different countries in the region. Members have also included exceptions in the annexes to the AEC agreements, such that existing foreign equity restrictions under local laws will continue to be upheld.
“Nevertheless, the Philippine accounting industry is ready for regional integration. It is in fact favorable for Philippine accountants. Our industry is well-versed in international standards and practices and Filipino CPAs are ahead of the pack in this regard,” said Mr. Tan.