CPAs urged to adhere to high ethical standards

The Securities and Exchange Commission (SEC) has called on the accounting profession to establish and maintain a culture of honesty and high ethics to restore public confidence in the corporate sector.

In a speech Friday before the Philippine Institute of Certified Public Accountants, SEC chairperson Lilia R. Bautista said certified public accountants (CPAs) should perform all professional responsibilities with the highest sense of integrity and encourage mandatory ethics training focusing on recognizing professional responsibility issues and the consequences of ignoring or, worse, actively violating ethics precepts.

"As CPAs, you are bound to uphold the public interest, which cannot be superseded by a contract you sign with your client-firms. You hold a contract of trust with the investing public, like other investment watchdogs such as the SEC. A contract with the public is not so much given as it is earned. That is why we owe complete fidelity to the public’s trust, and that is why we should always err on the side of protecting the investing public," Bautista said.

She pointed out that CPAs should provide accurate, complete, objective, relevant, timely, and understandable financial information to curb corporate failures.

The SEC chief also said accounting firms should be proactive in helping reduce fraud opportunities by identifying and measuring fraud risks, taking steps to mitigate identified risks and implementing and monitoring appropriate preventive internal controls and other deterrent measures.

Bautista said the fraud risk-assessment process should consider the vulnerability to fraudulent activity (fraudulent financial reporting, misappropriation of assets, and corruption) and whether any of those exposures could result in a material misstatement of the financial statements.

In identifying fraud risks, organizations should consider organizational, industry, and country-specific characteristics that influence the risk of fraud, she said.

Bautista added that incentive, opportunity, and attitude/rationalization have been identified as the three elements that fuel financial fraud.

"Incentive pertains to the reasons for the executives to commit fraud, such as strong pressure to perform. While putting pressure on executives certainly is a good motivator, it is important to recognize that when the pressure becomes so intense, people resort to fraud to make the numbers show satisfactory performance," Bautista said.

The SEC official noted that the existence of regulatory loopholes, aside from weak internal controls, also gives opportunity for committing financial statement fraud.

"Enron, in moving many of its transactions "off the balance sheet", exploited to the fullest the loophole in the securities and accounting regulations wherein debts accumulated by subsidiaries, partnerships or other "entities" can be kept off the parent company’s books so long as the parent does not own more than 50 percent of the entity incurring the debt. Thus, this regulatory loophole presented the opportunity for carrying fraud," Bautista said.

Even if the company is not in a difficult situation, the attitude/rationalization behavior can be driven by greed – the craving to have growing revenues and profitability which could lead to prosperity, Bautista said.

Bautista said weak legal measures create incentives to manipulate financial statement to conceal not only poor business performance, but more importantly, obscure the private benefits that corporate insiders enjoy.

She said the SEC has instituted reforms for safeguarding the independence and integrity of external audits. Among others, it requires all external auditors being engaged by public companies to

register with the SEC and to notify the SEC of errors, fraud, or losses which their client-companies fail to disclose.