SEC Chairperson Lilia Bautista announced last April this new requirement, which will be included as a provision in the proposed Code on Corporate Governance.
In a nutshell, the code will serve as a guide for corporations intending to strengthen their management practices and, in the process, avoid more cases of corporate failures or closures.
Corporate governance is a system whereby shareholders, creditors and other stakeholders of a corporation ensure that management enhances the value of the corporation as it competes in an increasingly global market place.
However, Editha Tuason, a partner in leading auditing firm Joaquin Cunanan and Co., said the quality of audit work is not improved by the mandated rotation of external auditors but if such is inevitable, a longer period of seven to 10 years should be allowed.
SEC Commissioner Jesus Martinez said while Tuason raised a few valid points, the letter argued strongly "in favor of long-term client retention and was not an earnest pursuit of transparency in financial reporting or corporate governance."
"The said letter claims that long-term association between clients and auditors does not lead to loss of objectivity and that it is a mere perception to assume they become‘too cozy’ in the process. This betrays the fact that when a particular company’s auditor is found to have rendered an unreliable financial report, it is always a certainty for regulators to require that the same books be audited by a different auditor or auditing firm," Martinez said.
He added that mandatory rotation will promote competitiveness among auditors themselves and hence speed up the upgrade of such auditing standards in the country.
"Mandatory rotation stands not on our suspicion toward familiarity, but on our faith in the ideal that the audit profession is governed by increasingly high standards of objectivity and fairness that are evolutionary," Martinez added.
The provision, a consequence of the Enron financial scandal in the US, will initially cover publicly-listed companies (with assets of at least P50 million and 200 or more stockholders) and those whose securities are registered at the SEC (bond, issuers, etc.), but this will soon be expanded to cover other companies regulated by the SEC – pre-need firms, financing and investment companies.