SEC requires auditor fee disclosures to address conflicts of interest

The Securities and Exchange Commission (SEC) has mandated publicly listed companies and other public interest entities to disclose fees paid to external auditors to promote transparency and accountability in financial reporting.

The move seeks to address potential conflicts of interest between companies and their auditors, ensuring integrity in financial disclosures.

Under SEC Memorandum Circular No. 18, Series of 2024, issued on Dec. 26, 2024, companies are required to include fee-related information in their annual financial statements (AFS) starting with the period ending Dec. 31, 2024. This aligns with the Code of Ethics for Professional Accountants and strengthens financial integrity.

Under SEC Memorandum Circular No. 18, Series of 2024, issued on Dec. 26, 2024, companies are required to include fee-related information in their annual financial statements (AFS) starting with the period ending Dec. 31, 2024. This aligns with the Code of Ethics for Professional Accountants and strengthens financial integrity.

New guidelines

Covered entities include listed companies, issuers of registered securities under the Securities Regulation Code (SRC), and public companies with at least P50 million in assets and 200 or more equity holders. It also applies to entities preparing financial statements for public market instruments, holders of secondary licenses, and others the SEC may classify as public interest entities.

The new guidelines require companies to present a two-year comparative schedule of fees paid to external auditors. These disclosures include fees for auditing financial statements and services provided to related entities consolidated in the AFS.

If fees to an external auditor exceed 15 percent of the auditor’s total revenue for two consecutive years, companies must disclose this “fee dependency” scenario. 

Exemptions

Exemptions apply to wholly-owned subsidiaries of other public interest entities that already comply at the group level.

Non-compliance will incur penalties under Revised SRC Rule 68 and the SEC’s consolidated penalty guidelines.

The SEC’s initiative underscores its commitment to bolstering transparency in corporate governance and ensuring the public’s trust in financial statements.

Covered entities include listed companies, issuers of registered securities under the Securities Regulation Code (SRC), and public companies with at least P50 million in assets and 200 or more equity holders. It also applies to entities preparing financial statements for public market instruments, holders of secondary licenses, and others the SEC may classify as public interest entities.

Penalties

The new guidelines require companies to present a two-year comparative schedule of fees paid to external auditors. These disclosures include fees for auditing financial statements and services provided to related entities consolidated in the AFS.

If fees to an external auditor exceed 15 percent of the auditor’s total revenue for two consecutive years, companies must disclose this “fee dependency” scenario. 

Exemptions apply to wholly-owned subsidiaries of other public interest entities that already comply at the group level.

Non-compliance will incur penalties under Revised SRC Rule 68 and the SEC’s consolidated penalty guidelines.

The SEC’s initiative underscores its commitment to bolstering transparency in corporate governance and ensuring the public’s trust in financial statements. —Ed: CSN

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