Greg Navarro to the Jst conference and exhibit of the Center for business and lconomics research and development, De La Salle University-Manila March 9, 2005. I am honored to be among esteemed academicians and pillars oi industrv in our countrv todav. I sav its about time we came together to learn irom each other and share our expertise and experience with those who can beneiit irom what we
Greg Navarro to the Jst conference and exhibit of the Center for business and lconomics research and development, De La Salle University-Manila March 9, 2005. I am honored to be among esteemed academicians and pillars oi industrv in our countrv todav. I sav its about time we came together to learn irom each other and share our expertise and experience with those who can beneiit irom what we
Greg Navarro to the Jst conference and exhibit of the Center for business and lconomics research and development, De La Salle University-Manila March 9, 2005. I am honored to be among esteemed academicians and pillars oi industrv in our countrv todav. I sav its about time we came together to learn irom each other and share our expertise and experience with those who can beneiit irom what we
by Greg Navarro to the Jst conference and exhibit of the Center for Business and Lconomics Research and Development, De La Salle University-Manila March 9, 2005
Distinguished oicers o De La Salle Uniersitv. oicers and members o the (enter or Business and Lconomics Research and Deelopment (BLRD,. colleagues in business and industrv. partners in the academe. honorable guests. riends. ladies and gentlemen. good aternoon. Beore I begin. let me congratulate the (BLRD or organizing this irst conerence and exhibit on business and economics. \ith its twin objecties o proiding a orum or business educators and researchers to share their research indings with a broader communitv and strengthening the linkages between the academe and the business sector. this eent is erv timelv and certainlv releant to the current challenges we ace in our countrv.
I am honored to be among esteemed academicians and pillars o industrv in our countrv todav. I sav it`s about time we came together to learn rom each other and share our expertise and experience with those who can beneit rom what we do best and what we know so well. lor someone like me who comes rom the proessional serices sector where the most ital element o success is haing knowledgeable people. I ind this exchange a erv helpul ehicle or coneving the needs o business to the academic communitv which is the basic training grounds or those who come to join us later as proessionals. Bv sharing with vou what I know to be the demands o business and the national economv. I hope to be able to help the academicians among us todav align the preparation o their graduates or our countrv`s needs todav. At the same time. I expect to gain new insights and knowledge rom the results o research conducted bv business educators which I could use or urther ine tuning o our serices to make them een more responsie to the needs o business and the national economv.
\ithout meaning anv oense to the organizers o this eent. I would like to start bv saving that the theme Lmerging issues in Business and Lconomics: Goernance and Innoation` mav no longer be appropriate or one reason. and that is. I ind that the twin issues o goernance and innoation are alreadv well upon us and no longer emerging. 1hev stare us in the ace---almost dominating eerv waking moment o our indiidual and collectie lies. \hereer we look around us and een elsewhere in the world. we ind that most o the challenges we ace dav-to-dav arise rom rapid change and innoation as well as rom the call or ethical practice which is the core o good goernance. I do agree ullv that these two issues make up the most perasie and current call o the times.
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Innoation. bv its erv nature. inites questions o ethics preciselv because wheneer we tread on new ground. we don`t know the terrain well enough vet to be able to set the rules o the game. I I mav borrow examples rom the sphere o medical research. I can quicklv think o the raging issues o stem cell research. genetic engineering. cloning. crvogenics. and organ transplants as perect examples o innoation bringing about moral questions. In the world o inormation technologv which is closelv linked to business. we now ace ethical issues related to intellectual propertv rights. e-commerce. and een cvber crime ranging rom credit card raud to large scale inancial scams. Indeed. it is erv appropriate and timelv to bring together these twin issues in one orum.
1he Accounting Profession Redefined
1odav. I speak to vou as a representatie o the accounting proession. better known as the (ertiied Public Accountants or (PAs. 1he goal I hae set or mvsel is to bring the message that the accounting proession has eoled and is now at the oreront o leading the initiatie towards good goernance: hence. mv topic: 1he Accounting Proession Redeined: Setting Standards or Good Goernance.` I purposelv asked the organizers o this eent to allow me to speak on this subject because not onlv do I ind it most timelv and releant. it is to me the single most important lesson in goernance that I wish to emphasize to mv colleagues in business and industrv. I beliee that i we begin rom ourseles. the rest would ollow closelv. More importantlv. we cannot claim anv right to criticize others i we hae not een begun to look at ourseles.
I cannot help but recall a erv old joke that we. as accounting students vears ago. used to get as a mild orm o ridicule rom ellow students who were in the more so-called technical or sophisticated courses like engineering. law. and medicine. It went this wav. \hat`s the dierence between counting and accounting` 1he answer. o course. was. In counting vou sav one. two. three.. In accounting. vou sav. a-one. a-two. a-three..` \hile this joke came as a part o vouthul exuberance. in hindsight now I eel this was an earlv indication o the perception o people o the accounting proession as too simple and not that important to the proper goernance o companies and societv as a whole.
So now the time has come to assert the alue o the accounting proession and redeine its role in setting the standards or good goernance. But I must sav at this juncture that no discussion o good goernance can be made without going back to what I call the dark davs o 2001 and 2002. I reer o course to the tumultuous exposure and eentual collapse o Lnron. and with it. Arthur Andersen. as well as other major corporations in the US due to the lack o diligence in inancial reporting or outright iolation o accounting standards with the concomitant collusion o bankers. inancial adisors. brokers and external auditors. \hile I do not wish to dwell on the misortune o others. I ind that it is onlv in highlighting the mistakes that we can bring out the lessons that hae been learned. \e can onlv moe orward with the knowledge o the past as guide to the uture.
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laing said that. I would like to add that mv presentation this aternoon will take on a back-to-basics` approach. walking vou through the issues o goernance as thev relate to the concept and practice o accounting principles and audit standards. 1his is not to sav that the issues are simple: thev are in act wide-ranging and erv complex. cutting across the domains o goernment. business. the inesting public. perhaps een the church and societv- at-large.
So vou mav ask. i the accounting proession has been redeined. what was it beore Allow me to gie a bit o historv bv wav o paraphrasing rom the excellent article entitled 1he Accountancv Proession in the Philippines and the Philippine Institute o (ertiied Public Accountants PI(PA,` written bv Ms. Lmelita P. Agustin in the December 1994 issue o the .ccovvtavt. ovrvat t Vol. 443,. pp. 12-1,.
Philippine accounting practices date back to the pre-Spanish period. when natie inhabitants. later to be called lilipinos. conducted business with (hinese. Indians and Malavs rom neighboring countries. 1hese trading actiities prompted them to prepare crude accounting records that were then based mainlv on cash receipts and pavments. As time went on. other inluences came in. with substantial changes brought in bv the Spaniards and later on the Americans.
1he Philippines has. or a signiicant part o its recent historv. been exposed to manv oreign cultures and inluences. 1he Spanish brought substantial changes to language and religion. 1he irst accounting irms were established bv the British in the 100s. loweer. the comparatielv short American colonial period was the most signiicant in inluencing major Philippine institutions including the educational svstem and the ormalization o the proessions. A number o American businesses established themseles in the Philippines during the 1920s and 1930s. 1heir actiities and requirements inluenced the establishment and initial growth period o the public accounting proession. During this time. the passage o the Accountancv Act in 1923 created the irst Board o Accountancv BOA, and gae it the authoritv to issue (ertiied Public Accountant (PA, certiicates.
Six vears later. the Philippine Institute o (ertiied Public Accountants PI(PA, was established within the priate sector to represent proessional interests. Since manv o the leading Philippine companies were subsidiaries or branches o American companies. their accounting necessarilv relected US practices. Len ater independence. the Philippines maintained its close links with the US through trade and inestment. 1hese links stronglv inluenced public and priate sector accounting regulations and practices. Until the quite recentlv. up to the mid-1990s. priate sector accounting standards replicated those o the US. Occasionallv. the local Accounting Standards (ouncil issued pronouncements to coer issues not coered bv the US standards such as realuation o ixed assets. Bevond this. howeer. our accounting principles and practices were irtual clones o the American ersion.
Likewise. the Philippine accounting and auditing regulatorv ramework is patterned ater the US ramework and has imitated changes in the US through the vears. It includes both goernmental and a superised orm o sel-regulation. 1his being the case. it was no 4 surprise to ind similar loopholes in our own accounting and auditing svstems when the scandals rocked our proession in the earlv vears o the new centurv.
Let us now turn our attention to where the accounting proession is todav and how we got here. As I mentioned earlier. I am sharing with vou todav recent deelopments in the accounting proession in the context o good goernance as this is the single most proound drier or the changes that we hae undertaken.
Setting the Standards for Good Governance
\hat exactlv do we mean when we talk o good goernance and whv do hae to mention the tragic eents o 2001 and 2002 I must sav that while the words good` and goernance` are not new. the appreciation or good goernance the wav that it is todav came about onlv as atermath o the Lnron collapse and the bursting o the dot.com bubble. In act. the issue has drawn so much attention to the extent that there is now an eort to establish worldwide benchmarks or good goernance practices. In a speech beore the Institute o (orporate Directors Associates and lellows in Noember 2003. ormer Secretarv o linance Isidro (amacho said. 1hese regular international eents enable us not onlv to check on the actual progress we are making towards improing the corporate goernance practices in our economies. but also how well all o us help promote good goernance reorms to the leel o regional and international best practices.` (ertainlv. this deelopment augurs well or the business sector and the economv as a whole but. it must also be said that it is one thing to talk about good goernance. it is another to actuallv practice what we preach. In the same speech. Mr. (amacho urther said. It is possible that corporate goernance has not been taken to heart because companies do not realize that good corporate goernance can be translated into real gains. 1o think o corporate goernance as just another ad would be nothing less than tragic. I beliee that inestors reallv do care about the wav corporations are goerned. and good corporate goernance reallv does translate into better perormance.`
Gien this present perspectie. allow me to backtrack a bit to trace the eents which led to where we are todav and the responses o the accounting proession to such eents. In Noember 2003. the 103 rd American Assemblv comprising leaders rom the worlds o accounting. inance. law. academe. media. and ciil societv together with current and ormer regulatorv oicials rom the lederal Resere Board. the Securities and Lxchange (ommission. the General Accounting Oice. the Public (ompanv Accounting Oersight Board. 1he linancial Accounting Standards Board. and the International Accounting Standards Board gathered together in Virginia. USA. to assess the present state o the accounting proession and to chart its uture directions. In the opening paragraph o the conerence proceedings. the Assemblv boldlv asserted that. Neer. in its lengthv historv. has the accounting proession been required to deal with the kinds o challenges that it must conront todav. A seeminglv unending series o sensational accounting scandals has grabbed newspaper headlines oer the last three vears. eroding public conidence in the accounting proession and leading to the most sweeping amendments to the United States securities law since the Securities Act was passed bv (ongress in 1934.` Surelv. the memorv o the scandals that rocked the business world is still resh in our minds and it seres to remind us 5 o the tasks and responsibilities now in our hands. I will paraphrase quite a bit rom the American Assemblv`s report in this paper.
(PAs in the Philippines hae not been spared o this challenge. 1hose o vou here todav who are mv colleagues in the proession would know what we went through in the last three vears and what we are now still hurdling as a consequence o those scandals. \e`e had our own share o such scandals in our countrv. and at the risk o oending some people. I dare sav that we hae not vet ullv come to terms with the celebrated cases o Victorias Milling. Piltel. Ramcar. All Asia (apital. B\ Resources. among others. and more recentlv the matter o inancial reersals at (AP.
I suppose. just like our American counterparts. some o us in the proession succumbed to management pressure. agreeing to let management ile incomplete or misleading inancial statements. 1o some extent. we can blame these lapses on the wav some accounting irms structured their compensation schemes. rewarding more the generation o new business rather than the qualitv o the audit perormed. And since the audit proession seres as the public protector o the integritv o inancial statements. the loss o conidence in the proession led directlv to the loss o public conidence in the inancial markets.
1he scandals o course became a turning point or the proession. It led to a critical reiew o the principles and the rules and a re-examination o the practice o the proession. New rules were promulgated and new requirements were laid down. lor example. companies hae been required bv the SL( to appoint independent directors: audit irms hae been asked to separate their other adisorv serices to ensure independence: banks hae responded to the call o the Bangko Sentral BSP, or a reorm agenda centered on promoting greater adherence to the enhanced standards on transparencv. accountabilitv. and airness.
All these are elements o what I call the swing to the rightmost o the pendulum. It is perhaps basic human nature to react stronglv in the opposite direction when we hae become ictims or when we hae unwittinglv or wittinglv participated in acts that turned out to be harmul to manv people. \hen we realize a mistake and accept our responsibilitv to rectiv the situation. we tend to go to the opposite extreme. to oercompensate. in the hope that the mistake will neer happen again.
Gien the new zeal or good goernance. what then should be the role o (PAs in ensuring that both the spirit and the letter o the law are respected \hat changes are occurring in the accountancv proession Are these good changes or are these extreme changes. representing the rightmost swing o the pendulum
In response to the sensational accounting scandals. the US Goernment enacted the Sarbanes-Oxlev Act 0 2002 and consequentlv established the Public (ompanv Accounting Oersight Board P(AOB, primarilv to restore public conidence in the accounting proession and install new saeguards in inancial reporting. In the Philippines. the Securities and Lxchange (ommission or SL( promulgated a (ode o (orporate Goernance also in 2002. Listed companies generallv complied and ormulated their indiidual goernance manuals and submitted these to the SL(. Len just a cursorv look at the (ode will show that there are manv good proisions such as the requirement or independent directors: 6 setting up o audit and compliance committees bv the Board: segregation o the (hie Lxecutie Oicer (LO, rom (hairman o the Board: listing o the qualiications o the members o the board: and others all intended to ensure transparencv. accountabilitv. and airness in reporting the inancial condition o companies. 1he (ode urther clearlv delineates the relationship between the shareholders. the board. management. internal auditors and external auditors.
1he challenge beore us is to make this (ode work. to change the wav we work such that we will automaticallv complv with the (ode without exerting special eort to do so. low do we transition preciselv rom the old wavs o inding loopholes and going around the rules. the practice that brought about the scandals in the irst place Or how do we moe rom getting awav with what`s wrong rather than pursuing what`s right 1hat change will hae to come rom each (PA in the proession. \hen we all start to do what is right. instead o what is conenient: when we decide in aor o the more conseratie accounting method rather than the aggressie: when we adopt the benchmark treatment rather than the alternatie: when we put our oot down and stand irm rather than bend with the wind o current thought and trend. that is when we will be able to make the (ode work!
1here is an ongoing argument in the accountancv world between principles-based accounting and auditing s. rules-based standards. 1he common perception is that the U.S. was so rules-ocused that the so-called rule-checkers` became the source o all the problems. In contrast. it is belieed that the International Audit Standards or IAS and the International linancial Reporting Standards or IlRS are more principles-based standards. 1he question posed to us then is whether the apparent dichotomv exists or it is just our perception that accountants mav actuallv complv with all the rules but all short o the principles. 1he 103 rd American Assemblv rejected this separation o rules and principles and concluded that the diision is purelv linguistic and artiicial. In their conerence document. thev assert irmlv that. In practice principles must be accompanied bv rules and ice- ersa.`
I cannot argue with that statement. but I also irmlv beliee that the (PA should be irmlv anchored on basic concepts and principles. Rules and regulations will remain important but onlv in a supportie role. 1his should be the model or (PAs in deining their role in good goernance. that is. proiding guidance through their proiciencv in basic accounting principles to Management and the Board. Our in-depth knowledge and understanding o the core principles and basic rules o accounting and auditing equip us with the wherewithal to exercise judgment - or indeed the (PA`s role requires more and more judgment amongst the choices aailable. In an article in the April 2003 issue o )be covovi.t. it savs. 1he realitv is that producing and auditing a complete set o inancial statements in our increasinglv complex global economv is now more o an art than a science. and one must be. bv deinition. reliant on judgments that low rom experience and a sophisticated understanding o business and accounting.`
Proiding the oice o experience and sound judgment in manv areas o subjectiitv should be the order o the dav or (PAs. In this role we mav hae to retrace our roots to the basics we learned in school. And haing honed ourseles in the basics. we should continue to educate ourseles and learn rom the experience o others. 1his is where continuing 7 education and lietime learning become imperatie. 1his is a role in which we can best sere our respectie
corporations in their quest or good goernance. I would like to think that the Accounting Proession has alreadv realized that these are the necessarv steps to take and the perect role to plav in the business communitv.
I beliee that the burning issue o the dav is the approaching ull` adoption o the IlRS. As it is now. we do not vet hae adequate guidance or expertise aailable here. or or that matter een abroad. to ensure the successul. seamless adoption o International Accounting or linancial Reporting Standards. Perhaps the large accounting irms with their international ailiation can claim knowledge and expertise. but the problem lies in the act that these accounting irms are not the onlv ones who are tasked to implement IlRS. low about the thousands o small irms or the indiidual (PA practitioners all oer our countrv \hat about the business educators like some o vou here todav who will now hae to teach the new standards to students And then. how do we deal with our ellow (PAs who sere in the Goernment or those in small and medium enterprises 1hev are the ones. more than those in the big (PA irms. who reallv need to become erv well conersant in the new accounting standards.
Mav I point out some o the most pressing and practical implementation issues that we ace in relation to the adoption o international accounting standards. lirst is the need to prepare budgets and inancial plans using IlRS. Ouite a number o the new international standards improed standards, are coming on-line onlv in 2005. As o todav. some o these standards are still going through some reisions at the leel o the International Accounting Standards Board IASB, vet we are alreadv expected to prepare our budgets using these standards. lor instance. IAS 19 on Lmplovee Beneits would require the recognition o the (ompanv`s liabilitv arising rom such beneits as soon as the emplovee has proided the serice in exchange or such beneit. It does not matter much whether these are short-term beneits such as rice subsidies. de minimis pavments. acation and sick leaes or post-emplovment beneits such as retirement plans. lie insurance. or medical care. IAS 19 requires the liabilitv and the expense arising rom these emplovee beneits recorded. As vou are aware. manv companies do not hae ormal retirement plans. much less unded retirement plans. and een less. actuariallv- aluated retirement plans.
Second is the retroactie application o certain Standards. IAS 2 which coers (onsolidated and Separate linancial Statements has been reised. \e are more or less amiliar with consolidation. and the use o the equitv method in accounting or inestment in subsidiaries in the inancial statements o a parent companv. I understand. howeer. that in the reised IAS 2. the parent companv inancial statements lS, will be carrving inestments in subsidiaries at cost. instead o at equitv in most situations. I this is correct. then we hae to restate three or our vears o preious inancial statements in 2005 when we issue comparatie inancial igures. Most o the IAS that will take eect in 2005 will require prior period restatements.
8 1hird is IAS 1 on leases which alreadv took eect this vear. Almost all o us who rent oices. or equipment or real propertv are aected bv this standard. Since it requires the leeling o rental expense or income depending on vour point o iew as lessor or lessee, oer the period o the lease. we now hae to reckon the aerage lease igure rom dav 1 o the lease agreement. 1his poses a distinct diicultv because generallv our lease contracts hae an annual escalation clause and we accordinglv record the lease amount in accordance with such agreement. Just think o the implications on the Value Added 1ax or VA1. on withholding taxes. and on income taxes that the poor accountant will now hae to track because o the timing dierences in recording or tax and or inancial statement purposes.
1here is also the issue o long-term deposits such as what we hae or our telephone lines. our power connection. and rental contracts. Under IAS. these deposits will now assume the nature o a inancial asset receiables, that one has to relect at present alue. As vou all know hardlv anvone among us bother to claim such deposits or utilities while our rental deposits are reunded onlv when we leae the rented premises. Does this mean then that we should all zero out these deposits in our inancial statements because thev are essentiallv worthless in todav`s monev terms
Another critical issue is the matter o BSP rules and regulations. more commonlv known as Regulatorv Accounting Principles. as well as other tax rules and regulations that do not ollow the Generallv Accepted Accounting Principles or GAAP. lor instance. the BSP allows the staggered booking o the proision or doubtul accounts. In some instances. it een allowed the charging o doubtul accounts directlv to surplus. 1his practice does not conorm to GAAP. nor does it complv with IAS and Basel II.
One last example. under the new IAS 12. income taxes and deerred income tax are required to be recognized or realuation o assets. I. or example. vou decide to appraise ixed assets in order to relect the realued amounts in vour balance sheet to improe stockholder`s equitv. vou will now hae to consider that vour realuation increment in equitv will hae to be reduced bv the amount o deerred income tax accruing rom such realuation increment. I that does not sound conusing enough. IAS 12 also proides that depreciation on appraisal increase which used to be accounted or as a permanent dierence in computing or deerred income tax will now be also subject to deerred income tax. 1o urther compound the issue. selectie realuation is no longer allowed. Ouite recentlv. manv companies hae receied inquiries rom the SL( asking whv not all o their assets hae been realued een i the companv has stated that it has adopted this as its accounting policv.
1hese are just the most urgent and most demanding o the present issues we ace as practicing accountants. whether in corporate settings or in public practice. I know that we are poised to encounter more issues and diicult questions as we moe orward with aligning our accounting practices in the Philippines with international standards. 1he Banker`s Association o the Philippines and the Pre-need industrv hae written the SL( asking or postponement o certain international accounting standards. It will be interesting to note how the SL( will respond to these requests. 1hat response will gie us an indication on whether ull adoption o International linancial Reporting Standards IlRS, will be seriouslv monitored and implemented. Obiouslv. we are ar rom the end o the road. 1his thought brings me back to what I said at the beginning and that is. that we must begin rom ourseles. 9
1he experience o the accounting proession oer the last three or our vears is or me like a journev into the night. earul and with a lot o struggle against our own demons. imagined and otherwise. Now. we are emerging into the light. waking up to a new dav and a new beginning. And with this resh start. we hae redeined ourseles into the guardians o good goernance.
CPAs: Leading the Way for Good Corporate Governance
\hen the going gets tough. the tough get going.` we oten sav when we need to prime ourseles or demanding challenges ahead. 1he Accounting Proession is now in such a time and we must heed the call to lead the wav to good goernance. Accounting inormation is inariablv used in a arietv o market transactions and all stakeholders o business relv on the reliabilitv. uniormitv. and releance o inancial inormation presented to them. 1hev assume that the disclosures are adequate. the igures realistic. and the credentials and reputation o the (PA preparing the inancial statements are impeccable. 1he demand on (PAs todav is to be like (easar`s wie - aboe reproach.
1o be air. it must be said that the accounting scandals were not the onlv cause o the redeinition o the accounting proession. Accounting rules and practices are likewise shaped bv economics and politics. and to some extent bv social norms. Recent deelopments that hae equallv prompted the re-examination and change in the proession are the progressie globalization o the markets in which accounting reports are used. and the heightened internationalization o the political inluences on accounting. particularlv the growth o eorts among nations to coordinate their regulation o capital markets.
1o all o these deelopments. the response o the accounting proession as a whole and o the indiidual (PA in particular. whether he is in the academe. the goernment. business. or public practice. has been highlv commendable. 1he (PA has moed on rom the stigma o the accounting scandals to addressing what is wrong. to correcting the errors. to adopting new and more stringent accounting and auditing standards. to remodeling the accounting curriculum. and to attracting the best and the brightest. so that once again the (PA will the role model or all the proessions. Like the mvthical phoenix rising rom the ashes to lie again. the accounting proession is not onlv redeeming itsel but is going een another step urther: lL IS LLADING 1lL \A\ 1O GOOD GOVLRNAN(L!
In closing. I would like to paraphrase rom the Good Book: \hat does it proit a man i he gains the whole world and loses his soul in the process` It is the indiidual`s integritv. proessionalism. and ethical practice that make the dierence. At our shop we trv erv hard to learn bv doing. to preach bv practicing. and to abide bv such timeless principles: IN1LGRI1\. OUALI1\. LX(LLLLN(L!.....loping that in the end we are able to redeine our partnership. with our people. with our clients. with the business communitv. with our proession.
10 Again. thank vou or making me a part o this eent and mv wishes to the organizers and all the participants or a successul completion o this conerence.