Financial reporting inadequate – Study

Philippine corporations have been inclined to follow only the minimum disclosures required by the Generally Accepted Accounting Principles (GAAP), according to a study conducted by the University of the Philippines’ College of Business Administration.

UP was tapped by the Securities and Exchange Commission (SEC) to review the annual financial statements filed by listed corporations in 2001 to determine their compliance with accounting rules and standards followed in the country.

The review was done by professors from the College of Business Administration in UP.

The study included financial statements of 131 companies listed in the Philippine Stock Exchange. These included firms in the following sectors; banking, communication, power and energy, transportation services, construction, food, beverage, holding firms, manufacturing, distribution and trading, hotel and recreation, property, mining and oil.

About 64 percent of the financial statements reviewed were audited by premiere accounting firm Sycip, Gorres Velayo & Co., 12 percent of Cunanan Price Waterhouse, eight percent by Punongbayan & Araullo, and 16 percent by others.

The financial statements were analyzed in terms of the degree of compliance with the GAAP.

A review of the financial statements of listed firms led to the conclusion that the financial reporting control system in the Philippines needs to be strengthened. The study revealed that Philippine corporations tend to provide few disclosures, failing to capture the information needed to reasonably determine the viability of a corporation and how a company is running its business and spending its cash.

Findings showed that 51 out of 131 firms had violated reporting requirements of existing SFAS or SEC regulations.

The research team also found two companies to have overstated goodwill related to their investments in subsidiaries. The subsidiaries involved either had been incurring losses or were no longer in operation.

In some cases, financial statement disclosure did not conform to rules on the information required for consolidated financial statements.

A parent company whose securities are traded on the securities exchange is required to present consolidated financial statements.

A consolidated income statement includes results of operations of the consolidated entity in greater detail and is thus supposed to be more informative than the parent company’s income statement.

Results also showed that 13 companies failed to provide sufficient detail on the computation of their earnings per share (EPS).

EPS is one of the most important figures in the financial statements. Since EPS is frequently used for financial statement analysis particularly for security analysis and valuation, it is vital that the basis for computing EPS is clear.

Financial statement disclosures did not conform to rules on the information required for consolidated financial statements.

Other violations spotted were the following:

• inconsistent accounting policies in amortizing deferred items

• inadequate provisioning for doubtful receivables, from affiliates which have been incurring losses.

• non-disclosure of amounts of material related party transactions

• improper deferral of administrative expenses

• non or unclear revenue policy

• missing or defective rule 68 schedule

• inadequate disclosures on assets used as security loans

SEC general accountant Roberto Manabat said the results of the review highlighted the need to come up with substantive, prudent changes with regard to accounting, audit oversight and standard setting within the accounting industry.

To give the investing public more confidence in the reliability and integrity of financial reports, Manabat said there is need to increase the information available to investors to make better assessment of a corporation’s viability. "We need a new financial reporting attitude that calls for voluntary reporting of essential information," he said.

Manabat said the improvement in the information system of Philippine capital markets will redound to the benefit not only of investors and regulators but ultimately of Philippine corporations as well.

The spate of US corporate failures and breakdowns in faithful accounting has undermined the public’s faith in financial reporting.