MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has tightened the guidelines on the selection of external auditors for banks and financial institutions to preserve the integrity of financial reports and transparency in the financial system.
BSP Governor Benjamin Diokno said the Monetary Board issued a resolution approving the revised framework on the selection of BSP supervised financial institutions.
Diokno said the revised guidelines is in accordance with the cooperative arrangement among financial sector supervisors including the BSP, Securities and Exchange Commission (SEC), Insurance Commission (IC), and the Philippine Deposit Insurance Corp. (PDIC), under the auspices of the Financial Sector Forum.
The BSP chief said the regulator considers the external auditing profession as a partner in promoting the integrity of financial reports and transparency in the financial system.
Under the revised guidelines, banks and supervised financial institutions should engage the services of an external auditor included in the list of selected external auditors.
The regulator requires banks to only appoint an external audit or belonging to the same category or from categories higher than its category.
“The Monetary Board may require the BSP supervised financial institutions to appoint an external auditor from higher categories as part of the BSP’s supervisory action on the BSP supervised financial institutions,” he said.
Diokno stated in the circular the appointed external auditor should likewise audit the banks’ trust departments as well as its subsidiaries and affiliates engaged in allied activities.
Universal, commercial otherwise known as big banks together with foreign banks as well as banks’ trust departments and trust corporations are classified under group A, while thrift or mid-sized banks, non-bank financial institutions with quasi-banking license as well as their trust departments and trust corporations are categorized under group B.
On the other hand, rural and cooperative, otherwise known as small banks, non-stock savings and loan association, pawnshops, remittance and transfer companies, foreign exchange dealers including virtual currency exchanges and electronic money issuers and credit card issuers are classified under group C.
The BSP said external auditors applying for the first time inclusion or renewal of inclusion in the list of selected external auditors should file their application with the SEC starting June this year.
The inclusion in the list of selected external auditors is valid for five years or a shorter period prescribed by the financial sector supervisors. Their performance shall be periodically evaluated and the assessment would serve as the basis for their continuing inclusion in the list.
Diokno said the external auditor including the engagement and quality control partners of the audit firm should be rotated in accordance with the relevant provisions of the Code of Ethics for Professional Accountants as adopted by the Philippine Board of Accountancy.
The BSP chief said external auditors are required to divulge any material finding involving fraud or error; actual or potential losses, the aggregate of which amounts to at least 10 percent of consolidated total assets; and significant doubt as to the ability of the banks to continue as a going concern.
He said auditors are also required to report material breach of laws or BSP rules and regulations such as, but not limited to prescribed capital and liquidity ratios, significant deficiency in allowance for credit losses, material weaknesses in fair value measurement methodology, and significant vulnerabilities to money laundering and combating the financing of terrorism.
Likewise, they are required to report material internal control weaknesses which may lead to financial reporting problems as well as findings on matters of corporate governance that may require urgent action by the regulator.
Diokno said the BSP reserves the right to deploy its range of supervisory enforcement actions to promote adherence and bring about timely corrective actions.
“For this purpose, the BSP may issue directives or impose sanctions on BSP supervised financial institutions and its directors/trustees who approved the appointment of the external auditor, who/which are not in the list of selected external auditors and for non-compliance with the provisions,” he said.
Furthermore, he said the regulator may shorten the period of validity of inclusion of an external auditor in the list, suspend, or delist external auditors from its list based on the results of assessment of the quality of audited financial statements as well as non compliance.