Only certified public accountants (CPAs) accredited by the Securities and Exchange Commission (SEC) can conduct external audits of the annual financial statements of companies that issue registered securities, the Supreme Court (SC) ruled.

In a full court resolution written by Associate Justice Ricardo R. Rosario, the SC said that the Philippine Accountancy Act (Republic Act No. 9298) does not limit the regulation of the practice of accountancy to the Professional Regulatory Board of Accountancy (BOA).

It upheld the validity and constitutionality of Rule 68, paragraph 3 of the Implementing Rules and Regulations of RA 8799 (Securities Regulation Code) and the 2009 SEC Memorandum Circular No. 13 which required CPAs serving as external auditors for corporations issuing registered securities to obtain SEC accreditation.

Among other things, registered securities are bonds, debentures, notes, evidences of indebtedness, shares in a company preorganization certificates or subscriptions, investments contacts, certificates of interest or participation in a profit-sharing agreement, collateral trust certificates, and certificates of deposit for a security.

The SC’s Office of the Spokesperson (SC-OS) said the High Court noted that “the Securities Regulation Code (RA 8799) and the Revised Corporation Code (RA 11232) give the SEC powers to implement the State policy to protect investors, ensure full and fair disclosure of securities, and minimize insider trading, which harms the free market.”

It also said that “Section 5(d) of the Securities Regulation Code gives the SEC the power to regulate, investigate, or supervise the activities of persons, including individual auditors of annual financial statements of corporations.”

Thus, it said, the SC also noted that “the Securities Regulation Code imposed the accreditation requirement under Rule 68 to serve as a quality control mechanism or quality assurance review on the work of external auditors.”

It also said: “This accreditation requirement is not a regulation of the accountancy profession but the specific activity of auditing. Thus, CPAs engaged merely for bookkeeping or other non-audit services are not required to be accredited by the SEC.”

At the same time, the SC-OS said the SC clarified that “the accreditation requirement does not replace the Board of Accountancy’s authority over the registration and practice of accountancy.”

“Instead, it adds layers of supervision to meet stricter standards for external auditors, who serve as financial ‘gatekeepers’ and must have a deeper understanding of financial statements than those who prepare them,” it said.

It also said:

“The SC also emphasized that Rule 68 aligns with international best practice, which requires independent auditors to meet global auditing, ethical, and independence standards.

“Additionally, other laws, such as the General Banking Law of 2000, the Insurance Code, and the Philippine Cooperative Code of 2008 reflect the State’s policy of allowing different regulators to accredit external auditors.

“Hence, the SEC’s accreditation of external auditors, whether it stems from an express or implied power, is a logical extension of existing regulatory practices aimed at promoting consistency, efficiency, and financial integrity across different sectors. Centralizing the accreditation process under the auspices of the SEC will enhance regulatory oversight, streamline compliance requirements, and reinforce investor protection within the securities market ecosystem. 

“If other financial sector regulators have the express authority to accredit external auditors within their respective domains, it is certainly not unreasonable to read the law as granting, at the very least, an implied authority to the SEC to likewise accredit external auditors within its domain.”

The SC resolution granted the appeal made by the SEC on the High Court’s 2022 decision that the SEC’s authority applied only to corporations and not to individual CPAs.

In its appeal, the SEC pointed out that it has legal authority to require accreditation under the Securities Regulation Code and the Revised Corporation Code.

The dispositive portion of the resolution in GR No. 246027:

“Accordingly, petitioner Securities and Exchange Commission’s second motion for reconsideration is granted.  The Court’s June 21, 2022 Decision and June 27, 2023 Resolution are reversed and set aside.

“On the grounds raised in the pleadings, Rule 68, paragraph 3 of the Implementing Rules and Regulations of Republic Act No. 8799, as amended, and Securities and Exchange Commission Memorandum Circular No. 13, series of 2009 are declared valid and not unconstitutional. So ordered.”