ETHICAL DIMENSIONS OF FINANCIAL ACCOUNTING ON KEEPING

TWO RECORDS FOR INTERNAL AND TAXATION PURPOSES

Financial accounting statements are primarily intended to provide information to

management essential for its planning and decision-making function and to parties that are

external to the organization such as government tax authority. Depending on its intended user and

purpose, a financial statement can be retrofitted however; it shall always be prepared using proper

methodology that is in accordance to accounting standards and shall be strictly adhering to tax

law when submitted to taxation authority.

In the Philippines, the Philippine Financial Reporting Standards (PFRS) which is a set of

GAAP governs the preparation and forms basis for calculation of income for purposes of

financial accounting. Meanwhile, the National Internal Revenue Code (NIRC or the Tax Code)

stipulates basis for calculation of taxable income and preparation of income tax report for

submission to tax authorities. Considering the difference in purpose of tax law and the objective

of financial reporting, several provisions in the Tax Code consequently differs from the rules of

PFRS. Since it is mandatory that income for taxation purposes is calculated based on Tax Code,

most businesses generate two financial reports – one for taxation purposes and another for

internal financial accounting purposes only. Given that the reports follow different rules with

differing provisions, it is expected that these two reports result to differences in calculated taxable

income. Any difference in both reports, however, should always be reconciled and traceable.

For as long as the operating information of the two records is true and the same, there

will be no ethical issue associated with keeping one record for internal purposes only and another

for internal taxation purposes. Information on both records shall be accurate and preparation shall

be based on either accounting standards or law depending on the purpose of the report.
 Ethical Dimensions of Financial Accounting 1

Ethical problems will only arise if one report is generated from falsified information with

the intention of specifically benefitting one party. Inputs on financial records for taxation

purposes should never be advertently adjusted to lower tax dues. Likewise, internal financial

records should not be misrepresented in order to boost company’s performance and meet

shareholders expectations or attract and secure investors. Any falsified or misrepresented data

distorts the fundamental basis of management planning. A falsified report, even if inadvertently

done, once made available to public, will tarnish the company’s reputation to its investors and the

government, which on worst cases, leads to excessive losses.

Without accuracy and credibility, the fall-out on the earliest stages of management would

be inevitable. It is therefore imperative that in preparation of financial reports, whether a

company prefers keeping separate records for internal and taxation purposes, information that to

be used are accurate and proper methodology are employed so that sound management decisions

could be derived at.