Philippine firms, the study found out, tend to comply only with the basic financial statement disclosure requirements of GAAP (Generally Accepted Accounting Principles). But compared with American companies studied, the financial statements of Philippine firms provide fewer informative disclosures on major sources of revenues, items of operating expenses and information on significant subsidiaries and equity investments.
The study concludes "the financial reporting control system in the Philippines needs strengthening." Of great concern is the fact that "some of these findings have valuation implications."
Among the problems cited is the failure of some companies to recognize temporary declines in the market value of their short-term stock investments that overstated net income during periods when the aggregate market value of their portfolio is less than its cost. Also, some companies fail to adjust earnings per share to account for the effect of stock dividends that result in erroneous price-earnings ratios used for investment purposes.
This is why the study recommended the revision of some rules to make reportorial requirements clear and mandatory rather than preferred. And secondly, there should be a good monitoring mechanism to ensure implementation of these rules. The study calls for sanctions. "Violators should not be limited to issuers of financial statements. The public accounting firms which audit the financial statements of listed firms should not be spared from the sanctions."
Among the more interesting findings of the study is the need to provide separate information regarding the parent’s and subsidiary’s long term liabilities. This is needed to give creditors and preferred shareholders a better idea of their position within the company.
The study also noted that it is important to disclose the extent of subsidiaries’ liabilities because financial difficulties of even one subsidiary may be sufficient to drag down the whole group.
Another observation of the study has to do with the need for clearer presentation of details and amounts regarding related party transactions such as management fees, advances, and sales/purchases of goods and services. This is because related party transactions can be used for "cosmetic accounting" or manipulation of figures to make the financial position or performance look better than it really is.
Also considered important is the provision of adequate information in the computation of earnings per share, essential in computing price/earnings ratio of a stock that guides investment decisions based on whether the stock is cheap or expensive. With the issuance of different types of securities like convertible preferred shares, convertible bonds, warrants and other financial instruments, computation of earnings per share has become more complex.
And so the study goes on and on. I understand that Finex and SEC have looked at this study, conducted public hearings and are now in the process of refining rules to improve financial reporting, specially by listed companies. Hopefully, the accounting profession through PICPA and the accounting firms get more involved in the process and support the effort. In a post Enron environment and given our desperate need for capital, we can do nothing less.
Internationally, Allan Greenspan has declared the recession over. In his words, recovery "is already well under way." Economists were so upbeat that they even wondered if the short period of recession qualified as a recession at all.
Here in the Philippines, the peso is showing uncharacteristic strength. The entry of Kirin’s investment has no doubt helped bring the peso’s value closest to the P50 to $1 value than it ever managed in a while. Exports of computer and semiconductor related products have also reportedly started to pick up.
But BusinessWeek reports the economy is bouncing back mostly on account of what could end up being a short-lived rebuilding of inventories. "The recovery could sputter later in the year if capital spending doesn’t pick up…Business investment will have to turn around if we are to sustain the recovery." And for businesses to start investing, profits will have to get a lot stronger. "Indeed, while the recession may have been mild, the hit to profits during the downturn has been severe, in part because businesses overbuilt so much in the boom."
The automotive and appliance sectors are showing strong sales in the first two months. Both could however be victims of increased costs in the aftermath of the Bush decision to impose tariff protection for old line domestic steel producers. Higher end product costs could turn off consumers. Retaliatory measures that European and other countries affected by the American protectionist move for steel could also negatively impact on worldwide sales of American cars and appliances.
So the good news was there last week. Tentative as they were, they could lift up spirits not just in Makati and Ortigas but in Malacañang as well.
A survey was conducted which asked respondents to "please give your opinion about the food shortage in the rest of the world?"
The survey was a huge failure because:
1. In Africa they did not know what ‘food’ meant.
2. In Western Europe, they did not know what
‘shortage’ meant.
3. In the Middle East they did not know what ‘opinion’ meant.
4. In South America they did not know what ‘please’ meant.
5. And in the US they did not know what ‘the rest of the world’ meant.
(Boo Chanco’s e-mail address is bchanco@bayantel.com.ph)