St. Vincent College COO Form 12: Good Governance Module - PDF

ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ COO – FORM 12 SUBJECT TITLE: GOOD GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL INSTRUCTOR: ANNA M...

ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ COO – FORM 12 SUBJECT TITLE: GOOD GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL INSTRUCTOR: ANNA MARIE VILLAMOR-GALFO, CPA SUBJECT CODE: GOV MIDTERM MODULE Topic 1: BOARD COMMITTEES AND INTERNAL CONTROL RESPONSIBILITIES LEARNING OBJECTIVES: At the end of this topic, the students are expected to: 1. Understand the functions of an audit committee; 2. Understand the functions of a corporate governance committee; 3. Understand the functions of a board risk oversight committee; 4. Understand the functions of a related party transaction committee; 5. Explain the internal control responsibilities of the board; and 6. Explain the significance of an internal audit function. NOTES: To support the effective performance of the Board’s functions, Board committees should be set up to the extent possible particularly with respect to the areas of audit, risk management, related party transactions, and other key corporate governance concerns, such as nomination and remuneration. The composition, functions and responsibilities of all committees established should be contained in a publicly available Committee Charter. The establishment of Board Committees allows for specialization in issues and leads to a better management of the Board’s workload. The type of board committees to be established by a corporation would depend on its size, risk profile and complexity of operations. 1.1 Audit Committee An Audit Committee enhances oversight capability of the Board over P a g e 1 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ the company's financial reporting, internal control system, internal and external audit processes, and compliance with applicable laws and regulations. The committee should be composed of at least three (3) appropriately qualified non-executive directors, the majority of whom, including the Chairperson, should be independent directors. All committee members must have relevant background, knowledge, skills, and/or experience in the areas of accounting, auditing and finance. The Chairperson of the Audit Committee should not be the Chairperson of the Board or of any other committees. The Audit Committee has the following duties and responsibilities, among others: a. Recommends the approval of the Internal Audit (LA) Charter, which formally defines the responsibilities, powers and authority of the IA Department, the audit plan of the IA Department, as well as oversees the implementation of the IA Charter b. Through the IA Department, monitors and evaluates the adequacy and effectiveness of the corporation's internal control system, integrity of financial reporting, and security of physical and information assets. Well-designed internal control procedures and processes that will provide a system of checks and balances should be in place in order to:  Safeguard the company's resources and ensure their effective utilization.  Prevent occurrence of fraud and other irregularities.  Protect the accuracy and reliability of the company's financial data.  Ensure compliance with applicable laws and regulations. c. Oversees the IA Department, and recommends the appointment and removal of an IA head as well as his qualifications, and grounds for appointment and removal. The Audit Committee should also approve the terms and conditions for outsourcing internal audit services, if applicable. d. Establishes and identifies the reporting line of the Internal Auditor to enable him to properly fulfill his duties and responsibilities. For this purpose, he should directly report to the Audit Committee. e. Monitors the Management's responsiveness to the Internal Auditor's findings and recommendations. f. Prior to the commencement of the audit, discusses with the External Auditor the nature, scope and expenses of the audit, and ensures the proper coordination if more than one audit firm is involved in the activity to identify proper coverage and minimize duplication of efforts. g. Evaluates and determines the non-audit work, if any, of the External Auditor, and periodically reviews the non-audit fees paid to the External Auditor in relation to the total fees paid and the P a g e 2 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ corporation's overall consultancy expenses. The Audit Committee should disallow any non-audit work that will conflict with the duties of an External Auditor or may pose a threat to his independence. The non-audit work, if allowed, should be disclosed in the corporation's Annual Report and Annual Corporate Governance Report. h. Reviews and approves the Interim and Annual Financial Statements before their submission to the Board, with particular focus on the following matters:  Any change/s in accounting policies and practices  Areas where a significant amount of judgment has been exercised  Significant adjustments resulting from the audit  Going concern assumptions  Compliance with accounting standards  Compliance with tax, legal and regulatory requirements i. Reviews the recommendations in the External Auditor's management letter. j. Performs oversight functions over the corporation's Internal and External Auditors and ensures their independence and unrestricted access to all records, properties and personnel to enable them to perform their respective audit functions taking into consideration relevant Philippine professional and regulatory requirements. k. Coordinates, monitors and facilitates compliance with laws, rules and regulations. l. Recommends to the Board the appointment, reappointment, removal and fees of the External Auditor, duly accredited by the Commission, who undertakes an independent audit of the corporation, and provides an objective assurance on the manner by which the financial statements should be prepared and presented to the shareholders. m. Performs the functions of the Board Risk Oversight Committee and/or Related Party Transactions Committee, in the event that such committees do not exist. n. Meets internally and with the Board at least once every quarter without the presence of the CEO or other Management team members, and periodically meets with the head of the IA. 1.2 Corporate Governance Committee The Corporate Governance Committee (CG Committee) assists the Board in the performance of its corporate governance responsibilities, ensuring compliance with and proper observance of corporate governance principles and practices. It also includes the functions that were formerly assigned to a Nomination and P a g e 3 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ Remuneration Committee as required by the Revised Code of Corporate Governance (2009). The committee should be composed of at least three members, majority of whom should be independent directors, including the Chairperson. The CG Committee has the following duties and functions: a. Oversees the implementation of the corporate governance framework and periodically reviews the said framework to ensure that it remains appropriate in light of material changes to the corporation's size, complexity of operations and business strategy, as well as its business and regulatory environments. b. Oversees the periodic performance evaluation of the Board and its committees as well as the executive management, and conducts an annual evaluation of the said performance. c. Ensures that the results of the Board evaluation are discussed, and that concrete action plans are developed and implemented to address the identified areas for improvement. d. Recommends the continuing education/training programs for directors, assignment of tasks/projects to board committees, succession plan for the board members and senior officers, and remuneration packages for corporate and individual performance. e. Adopts corporate governance policies and ensures that these are reviewed and updated regularly, and consistently implemented in form and substance. f. Proposes and plans relevant trainings for the members of the Board. g. Determines the nomination and election process for the company's directors and defines the general profile of board members that the company may need, and ensures that appropriate knowledge, competencies and expertise that complement the existing skills of the Board are adopted as standards and criteria for nomination and election. h. Establishes a formal and transparent procedure for determining the remuneration of directors and officers that is consistent with the corporation's culture and business strategy as well as the business environment in which it operates. The establishment of a Corporate Governance Committee does not preclude companies from establishing separate Remuneration or Nomination Committees, if they deem desirable or necessary. P a g e 4 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ 1.3 Board Risk Oversight Committee The Board Risk Oversight Committee (BROC) is responsible for the oversight of a company’s Enterprise Risk Management system to ensure its functionality and effectiveness. It should be composed of at least three members, the majority of whom should be independent directors, including the Chairperson. At least one member of the committee must have relevant thorough knowledge and experience on risk and risk management. The BROC has the following duties and responsibilities: a. Develops a formal ERM plan which contains the following elements:  Common language or register of risks,  Well-defined risk management goals and objectives,  Uniform processes of assessing risks and developing strategies to manage prioritized risks,  Designing and implementing risk management strategies,  Continuing assessments to improve risk strategies, processes and measures; b. Oversees the implementation of the ERM plan through a Management Risk Oversight Committee. The BROC conducts regular discussions on the company's prioritized and residual risk exposures based on regular risk management reports and assesses how the concerned units or offices are addressing and managing these risks. c. Evaluates the risk management plan to ensure its continued relevance, comprehensiveness and effectiveness. The BROC revisits defined risk management strategies, looks for emerging or changing material exposures, and keeps abreast of significant developments that seriously impact the likelihood of harm or loss. d. Advises the Board on its risk appetite levels and risk tolerance limits. e. Reviews at least annually the company's risk appetite levels and risk tolerance limits based on changes and developments in the business, the regulatory framework, the external economic and business environment, and major events which may have occurred in the company. f. Assesses the probability of each identified risk becoming a reality and estimates its possible significant financial impact and likelihood of occurrence. Priority areas of concern are those risks that are the most likely to occur and to impact the performance and stability of the corporation and its stakeholders. g. Oversees the Management's activities in managing credit, market, liquidity, operational, legal and other risk exposures of the corporation. This function includes regularly receiving information on risk exposures and risk management activities from Management. P a g e 5 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ h. Reports to the Board on a regular basis, or as deemed necessary, the company’s material risk exposures, the actions taken to reduce the risks, and recommends further action or plans, as necessary. 1.4 Related Party Transaction Committee The Related Party Transaction Committee (RPT Committee) is tasked with reviewing all material related party transactions of the company. It should be composed of at least three non-executive directors, two of whom should be independent, including the Chairperson. The RPT Committee has the following functions: a. Evaluates on an ongoing basis existing relations between and among businesses and counterparties to ensure that all related parties are continuously identified, RPTs are monitored, and subsequent changes in relationships with counterparties (from non- related to related and vice versa) are captured. Related parties, RPTs and changes in relationships should be reflected in the relevant reports to the Board and regulators/supervisors. b. Evaluates all material RPTs to ensure that these are not undertaken on more favorable economic terms (e.g., price, commissions, interest rates, fees, tenor, collateral requirement) to such related parties than similar transactions with nonrelated parties under similar circumstances and that no corporate or business resources of the company are misappropriated or misapplied, and to determine any potential reputational risk issues that may arise as a result of or in connection with the transactions. In evaluating RPTs, the following should be considered:  The related party’s relationship to the company and interest in the transaction.  The material facts of the proposed RPT, including the proposed aggregate value of such transaction.  The benefits to the corporation of the proposed RPT.  The availability of other sources of comparable products or services.  An assessment of whether the proposed RPT is on terms and conditions that are comparable to the terms generally available to an unrelated party under similar circumstances. The company should have an effective price discovery system in place and exercise due diligence in determining a fair price for RPTs. c. Ensures that appropriate disclosure is made, and/or information is provided to regulating and supervising authorities relating to the company’s RPT exposures, and policies on conflicts of interest or potential conflicts of interest. The disclosure should include information on the approach to managing material conflicts of interest that are inconsistent with such policies, and conflicts that P a g e 6 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ could arise as a result of the company’s affiliation or transactions with other related parties. d. Reports to the Board of Directors on a regular basis, the status and aggregate exposures to each related party, as well as the total amount of exposures to all related parties. e. Ensures that transactions with related parties, including write-off of exposures are subject to a periodic independent review or audit process. f. Oversees the implementation of the system for identifying, monitoring, measuring, controlling, and reporting RPTs, including a periodic review of RPT policies and procedures. 1.5 Internal Control Responsibilities of the Board To ensure the integrity, transparency and proper governance in the conduct of its affairs, the company should have a strong and effective internal control system. Internal control refers to the system established by the Board of Directors and Management to provide reasonable assurance about the achievement of an entity’s objectives with regards to the reliability of financial reporting, the efficient and effective operation of its business, the reliability of its financial reporting, and faithful compliance with applicable laws, regulations and internal rules. An effective internal control has five components, namely, control environment, entity’s risk assessment process, control activities, information system and monitoring. The control environment includes the attitudes, awareness, and actions of the Board of Directors and Management concerning the entity’s internal control and its importance in the entity. It sets the tone of an organization, influencing the control consciousness of its people. The Board’s attitude towards internal control is best described by its commitment to integrity, ethical values and competence. The actions of the Board and Management, together with the existing policies of the company, help reveal the level of commitment the company has towards effective internal control. The control environment of the corporation consists of a. The Board, which ensures that the corporation is properly and effectively managed and supervised. b. A Management, which actively manages and operates the corporation in a sound and prudent manner. c. The organizational and procedural controls supported by effective management information and risk management reporting systems. d. An independent audit mechanism, which monitors the adequacy and effectiveness of the corporation’s governance, operations, and P a g e 7 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ information systems, including the reliability and integrity of financial and operational information, the effectiveness and efficiency of operations, the safeguarding of assets, and compliance with laws, rules, regulations and contracts. 1.6 Internal Audit Function A separate internal audit function is essential to monitor and guide the implementation of company policies. It helps the company accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of the company’s governance, risk management and control functions. Internal audit is defined as an independent and objective assurance activity designed to add value to and improve the corporation’s operations, and help it accomplish its objectives by providing a systematic and disciplined approach in the evaluation and improvement of the effectiveness of risk management, control and governance processes. The functions of the internal audit include: a. Providing an independent risk-based assurance service to the Board, Audit Committee and Management, focusing on reviewing the effectiveness of the governance and control processes in (1) promoting the right values and ethics, (2) ensuring effective performance management and accounting in the organization, (3) communicating risk and control information, and (4) coordinating the activities and information among the Board, external and internal auditors, and Management. b. Performing regular and special audit as contained in the annual audit plan and/or based on the company’s risk assessment. c. Performing consulting and advisory services related to governance and control as appropriate for the organization. d. Performing compliance audit of relevant laws, rules and regulations, contractual obligations and other commitments, which could have a significant impact on the organization. e. Reviewing, auditing and assessing the efficiency and effectiveness of the internal control system of all areas of the company. f. Evaluating operations or programs to ascertain whether results are consistent with established objectives and goals, and whether the operations or programs are being carried out as planned. g. Evaluating specific operations at the request of the Board or Management, as appropriate. P a g e 8 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ h. Monitoring and evaluating governance processes. Depending on the company’s size, risk profile and complexity of operations, the Board may appoint a qualified Chief Audit Executive (CAE) who shall oversee and be responsible for the internal audit activity of the organization, including that portion that is outsourced to a third party service provider. In case of a fully outsourced internal audit activity, a qualified independent executive or senior management personnel should be assigned the responsibility for managing the fully outsourced internal audit activity. The Chief Audit Executive reports functionally to the Audit Committee and administratively to the CEO. His responsibilities are to: a. Periodically reviews the internal audit charter and presents it to senior management and the Board Audit Committee for approval. b. Establishes a risk-based internal audit plan, including policies and procedures, to determine the priorities of the internal audit activity, consistent with the organization’s goals. c. Communicates the internal audit activity’s plans, resource requirements and impact of resource limitations, as well as significant interim changes, to senior management and the Audit Committee for review and approval. d. Spearheads the performance of the internal audit activity to ensure it adds value to the organization. e. Reports periodically to the Audit Committee on the internal audit activity’s performance relative to its plan. f. Presents findings and recommendations to the Audit Committee and gives advice to senior management and the Board on how to improve internal processes. 1.7 Enterprise Risk Management Framework An adequate and effective enterprise risk management (ERM) framework help sustain safe and sound operations as well as implement management policies to attain corporate goals. An effective enterprise risk management framework typically includes activities such as the identification, sourcing, measurement, evaluation, mitigation and monitoring of risk. The risk management function involves the following activities: a. Defining a risk management strategy. b. Identifying and analyzing key risks exposure relating to economic, environmental, social, and governance (EESG) factors and the P a g e 9 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ achievement of the organization’s strategic objectives. c. Evaluating and categorizing each identified risk using the company’s predefined risk categories and parameters. d. Establishing a risk register with clearly defined, prioritized and residual risks. e. Developing a risk mitigation plan for the most important risks to the company, as defined by the risk management strategy. f. Communicating and reporting significant risk exposures including business risks (i.e., strategic, compliance, operational, financial and reputational risks), control issues and risk mitigation plan to the Board Risk Oversight Committee. g. Monitoring and evaluating the effectiveness of the organization's risk management processes. A Chief Risk Officer (CRO) should be appointed to perform the following functions: a. Supervising the entire ERM process and spearheads the development, implementation, maintenance and continuous improvement of ERM processes and documentation. b. Communicating the top risks and the status of implementation of risk management strategies and action plans to the Board Risk Oversight Committee. c. Collaborating with the CEO in updating and making recommendations to the Board Risk Oversight Committee. d. Suggesting ERM policies and related guidance, as may be needed. e. Providing insights on whether risk management processes are performing as intended; risk measures reported are continuously reviewed by risk owners for effectiveness; and established risk policies and procedures are being complied with. Exercises: 1. Which of the functions of an audit committee is the most important? 2. Explain why the chairperson of the audit committee is not allowed to chair other committees. 3. What are management’s responsibilities in relation to internal controls. 4. Distinguish between an internal audit from an independent audit. 5. How do companies handle or manage risk? END OF TOPIC 1 P a g e 10 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ Topic 2: CORPORATE REGULATION LEARNING OBJECTIVES: At the end of this topic, the students are expected to: 1. Distinguish between merit-based regulation and disclosure-based regulation; 2. Understand and explain the functions of the Securities and Exchange Commission; 3. Understand the application of Securities Regulation Code; 4. Describe the process in registering securities; 5. Explain the reportorial requirements for public companies; and 6. Explain the accreditation, operational, and reportorial requirements for external auditors. NOTES: 2.1 Merit-Based Regulation vs Disclosure-Based Regulation Corporate regulation systems are essential to provide adequate investor protection and regulate business practices or codes of conduct that reduces the risk of the entire financial system. The two basic models of regulatory system are the merit-based regulation and disclosure- based regulation. Merit-Based Regulation (MBR) Merit-based regulation refers to a regulatory system that authorizes the regulator to deny registration to a securities offering unless the substantive terms of the offering and the associated transactions ensure a fair relation between promoters and public investors, and provide public investors with a reasonable relation of risk to returns In other words, under the MBR model, the authorities (SEC) regulate the securities offering by ensuring that the offering of a company’s securities is judged by the authorities to be fair, just and equitable. In the process, the regulators would make an assessment regarding the company’s viability and the capabilities of the company’s management, and take into account the public interest before approving any issuance proposal regarding the company’s securities. Moreover, regulators review each transaction according to its perceived merits. The evaluation involves assessing the adequacy of disclosure and determining the merits of the transaction. MBR assumes that the market regulators are better informed than investors and can better decide the merits of transactions on their behalf. Under the MBR model, the issuers disclose all relevant information regarding the company’s business to the market regulators. This is necessary because the market regulator needs to approve first the securities before the investor can be allowed to invest in the company. P a g e 11 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ Of course, this model acts as a shield to protect the public investors from the risks involved in investing. In the securities market, the Securities and Exchange Commission (SEC) is also able to ensure that mechanism in place is working well in order to prevent deceitful and unethical practices in the issue or offer of the securities by companies, thereby minimizing the risk of losing one’s investments. On the other hand, when the SEC gives its approval of the merits of a particular company, it may create a perception on the part of investors that the corporation will definitely be an excellent investment as the SEC had given its approval after making some merits regarding the business of the company. This might lead the investors to rely heavily on the market regulators in making the research and evaluation instead of doing it themselves. Furthermore, MBR unnecessarily constraints the freedom of people to do business as they see fit, because such model limits the options available to investors in choosing the right investments since they can only select from among those companies whose securities offering were previously approved by the regulator. Disclosure-Based Regulation (DBR) Under disclosure-based regulation, the issuer is required by the regulatory framework to make full disclosure of its affairs to the investor, and it is then up to the investor to take responsibility for his own investment decision. This is often done through the use of prospectus which focuses whether the companies comply with the standard of disclosure required. The regulator no longer intervenes paternally in the issuer-investor relationship, but concerns himself with the design and enforcement of a framework that will empower the parties to negotiate fairly with one another. In making disclosures, companies are expected to follow the guidelines of disclosure of the information according to the regulator. The DBR model would likely result in a more transparent and informed market whereby companies have to improve their quality of disclosure to facilitate potential decision making by potential investors. Despite the many potential advantages of the disclosure-based regulation model, there are still questions being raised against it. There might be issues with regards the fairness of the disclosures, on whether any part of the information disclosed is misleading or whether any piece of important information is omitted. Excessive disclosures might be provided for some investors to understand. Also, many have doubts if indeed the fair negotiation between the issuer (seller) and investor (buyer) can be ensured under MBR. Currently, there is a world-wide trend to move from merit-based towards disclosure-based regulation of listed issuers. P a g e 12 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ 2.2 Functions of the Securities and Exchange Commission Securities and Exchange Commission The Securities and Exchange Commission or SEC is a collegial body composed of a Chairperson and four (4) Commissioners appointed by the President of the Philippines for a term of seven (7) years each and who shall serve as such until their successor shall have been appointed and qualified. A Commissioner, appointed to fill a vacancy occurring prior to the expiration of the term for which his/her predecessor was appointed, shall serve only for the unexpired portion of such term. The SEC Commissioners must possess the following qualifications: a. Must be natural-born citizens of the Philippines b. At least forty (40) years of age for the Chairperson and at least thirty-five (35) years of age for the Commissioners. c. Of good moral character, of unquestionable integrity, of known probity and patriotism, and with recognized competence in social and economic disciplines. d. Majority of Commissioners, including the Chairperson, should be members of the Philippine Bar. The Chairperson is considered as the chief executive officer (CEO) of the SEC. The Chairperson shall execute and administer the policies, decisions, orders and resolutions approved by the SEC and shall have the general executive direction and supervision of the work and operation of the SEC and of its members, bodies, boards, offices, personnel and all its administrative business. The SEC shall hold meetings at least once a week for the conduct of business or as often as may be necessary upon call of the Chairperson or upon the request of three (3) Commissioners. The notice of the meeting shall be given to all Commissioners and the presence of three (3) Commissioners shall constitute a quorum. In the absence of the Chairperson, the most senior Commissioner shall act as presiding officer of the meeting. For purposes of efficiency, the Commissioner may delegate any of its functions to any department or office of the SEC, an individual Commissioner or staff member of the SEC, except its review authority and its power to adopt, alter and supplement any rule or regulation. Powers and Functions of the SEC The Securities and Exchange Commission was created on October 26, 1936 with the purpose of strengthening the corporate and capital market infrastructure of the Philippines, and maintaining a regulatory system, based on international best standards and practices, that promotes the interests of investors in a free, fair and competitive business environment. In doing so, the SEC have the following powers P a g e 13 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ and functions: a. Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the Government. b. Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto. c. Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications. d. Regulate, investigate or supervise the activities of persons to ensure compliance. e. Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs. f. Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto. g. Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders. h. Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under the Securities Regulation Code. i. Issue cease and desist orders to prevent fraud or injury to the investing public. j. Punish for contempt of the SEC, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court. k. Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision. l. Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law. m. Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the SEC and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person P a g e 14 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws. n. Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the SEC to achieve the objectives and purposes of these laws. 2.3 Securities Regulation Code The Securities Regulation Code (SRC) was enacted with the following objectives: a. To establish a socially conscious, free market that regulates itself. b. To encourage the widest participation of ownership in enterprises. c. To enhance the democratization of wealth. d. To promote the development of the capital market. e. To protect investors. f. To ensure full and fair disclosure about securities. g. To minimize (if not totally eliminate) insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market. The Securities Regulation Code is administered by the Securities and Exchange Commission (SEC). Securities refer to shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture, and are evidenced by a certificate, contract, or instruments. These include: a. Shares of stocks. b. Bonds, debentures and notes evidences of indebtedness. c. Asset-backed securities. d. Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription. e. Fractional undivided interests in oil, gas or other mineral rights. f. Derivatives like option and warrants. g. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments. h. Proprietary or nonproprietary membership certificates in corporations. i. Other instruments as may in the future be determined by the SEC. 2.4 Registration of Securities Under the Securities Regulation Code, securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the SEC. Prior to such sale, information on the securities shall be made available to each prospective purchaser. However, the following securities are exempted from this registration requirement: P a g e 15 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ a. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. b. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, that the SEC may require compliance with the form and content of disclosures the SEC may prescribe. c. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. d. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue. e. Any security issued by a bank except its own shares of stock. Furthermore, the following transactions are also exempted from the aforementioned registration requirement: a. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. b. By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of the SRC, to liquidate a bona fide debt, a security pledged in good faith as security for such debt. c. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transactions of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. d. The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. e. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. f. The issuance of bonds or notes secured by mortgage upon real P a g e 16 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. g. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion. h. Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other trading market. i. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased. j. The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. k. The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. l. The sale of securities to any number of qualified buyers which include banks, registered investment houses, insurance companies, pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the BSP to engage in trust functions, investment company, or such other person as the SEC may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management. The SEC may audit the financial statements, assets and other information of a firm applying for registration of its securities whenever it deems the same necessary to insure full disclosure or to protect the interest of the investors and the public in general. Registration Statement All securities required to be registered under the Securities Regulation Code shall be registered through the filing by the issuer in the main office of the SEC, of a sworn registration statement with respect to P a g e 17 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ such securities, in such form and containing such information and documents as the SEC shall prescribe. The registration statement shall include any required prospectus. The SEC may require the registration statement to contain such information or documents as it may prescribe. The information required for the registration of any kind, and all securities, shall include, among others, the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership. The registration statement shall be signed by the issuer’s executive officer, its principal operating officer, its principal financial officer, its comptroller, principal accounting officer, its corporate secretary or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation. The written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed. Where the registration statement includes shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders shall also be filed. Upon filing of the registration statement, the issuer shall pay to the SEC a fee of not more than one-tenth (1/10) of one percent (1%) of the maximum aggregate price at which such securities are proposed to be offered. Notice of the filing of the registration statement shall be immediately published by the issuer, at its own expense, in two (2) newspapers of general circulation in the Philippines, once a week for two (2) consecutive weeks, or in such other manner as the SEC by rule shall prescribe. Such notice shall state that a registration statement for the sale of such security has been filed, and that the aforesaid registration statement, as well as the papers attached thereto are open to inspection at the SEC during business hours, and copies thereof, photostatic or otherwise, shall be furnished to interested parties at such reasonable charge as the SEC may prescribe. Within forty-five (45) days after the date of filing of the registration statement, or by such later date to which the issuer has consented, the SEC shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement. P a g e 18 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ The SEC may reject a registration under the following grounds: a. The issuer:  Has been judicially declared insolvent  Has violated any of the provisions of the SRC or any order of the SEC of which the issuer has notice in connection with the offering for which a registration statement has been filed.  Has been or is engaged or is about to engage in fraudulent transactions.  Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities.  Has failed to comply with any requirement that the SEC may impose as a condition for registration of the security for which the registration statement has been filed. b. The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading. c. The issuer, any officer, director or controlling person of the issuer, or person performing similar functions, or any underwriter has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the SEC or other competent judicial or administrative body for violations of securities, commodities, and other related laws. 2.5 Reportorial Requirements for Public And Reporting Companies SRC Rule 3 defines a public company as any corporation with: a. A class of securities listed for trading on an Exchange; or b. With assets in excess of Fifty million pesos (50,000,000.00) and has two hundred (200) or more holder each holding at least one hundred (100) shares of a class of its equity securities. A reporting company, on the other hand, is a corporation that has sold a class of its securities pursuant to a registration under Section 12 of the SRC, or a public company as defined above. Public and reporting companies shall file with the SEC the following: a. An annual report on SEC Form 17-A for the fiscal year in which the registration statement was rendered effective by the SEC, and for each fiscal year thereafter, within one hundred five (105) calendar days after the end of the fiscal year. b. A quarterly report on SEC Form 17-Q within forty-five (45) calendar days after the end of each of the first three quarters of each fiscal P a g e 19 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ year. The first quarterly report of the Issuer shall be filed either within forty-five (45) calendar days after the effective date of the registration statement or on or before the date on which such report would have been required to be filed if the Issuer had been required previously to file reports on SEC Form 17-Q, whichever is later. c. A current report on SEC Form 17-C, as may be necessary, to make a full, fair and accurate disclosure to the public of every material fact or event that occurs which would reasonably be expected to affect the investors' decisions in relation to those securities. In the event a news report appears in the media involving an alleged material event, a current report shall be made within the period prescribed herein in order to clarify the said news item which may create public speculation if not officially denied or clarified by the concerned company. The disclosure shall be made by the company in accordance with the following guidelines:  Promptly to the public through the news media.  If the Issuer is listed on an Exchange, to that Exchange and to the SEC within ten (10) minutes after the occurrence of the event and prior to its release to the public through the news media; Provided that, disclosure by the Issuer to the Exchange may be deemed as filing with the SEC pursuant to a Memorandum of Agreement between the Exchange and the SEC; Provided further that, the Memorandum of Agreement shall provide for the ability of the SEC to download and upload the same information made available to the Exchange.  If the issuer is not listed on an Exchange, to the SEC through SEC Form 17-C within five (5) calendar days after the occurrence of the event reported, unless substantially similar information as that required by Form 17-C has been previously reported to the SEC by the Issuer. 2.6 Securities regulation Code (SRC) Rule 68 SRC Rule 68 prescribes the requirements applicable to the form and content of financial statements to be filed with the SEC by corporations which meet the threshold. Such corporations include: a. Stock corporations with total assets or total liabilities of P600,000 or more. b. Non-stock corporations with total assets or total liabilities of P500,000 or more. c. Branch offices / representative offices of stock foreign corporations with assigned capital in the equivalent amount of P1,000,000 or more. d. Branch offices / representative offices of non-stock foreign corporations with total assets in the equivalent amount of P1,000,000 or more. P a g e 20 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ e. Regional operating headquarters of foreign corporations with total revenues in the equivalent amount of P1,000,000 or more. Financial Statement Presentation The financial statements that must be prepared and filed by entities covered by SRC Rule 68 shall be in accordance with the financial reporting framework as prescribed below: a. Large Entities  Total assets of more than P350 million or total liabilities of more than P250 million. b. Public Interest Entities  Are required to file financial statements under Part II of SRC Rule 68.  Are in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market.  Are holders of secondary licenses issued by regulatory agencies.  Such other corporations that the SEC may consider in the future as imbued with public interest regardless of the lack of a requirement to obtain a secondary license from the SEC and may fall under the following criteria: Those grantees of legislative franchises. Those engaged in nationalized or partly nationalized activities. Those grantees or recipients of public funds. Those regulated by other government agencies other than the BSP and IC. Large and /or public interest entities shall use the Philippine Financial Reporting Standards (“PFRS” or “Full PFRS”) as their financial reporting framework. However, a set of financial reporting framework other than the PFRS may be allowed by the SEC for certain sub-class (e.g., banks, insurance companies) of these entities upon consideration of the pronouncements or interpretations of the (a) primary regulator of the entities concerned (e.g., BSP); (b) Financial Reporting Standards Council; or (c) International Accounting Standards Board. c. Medium-Sized Entities  Total assets of more than P100 Million to P350 Million or total liabilities of more than P100 Million to P250 Million.  Are not required to file financial statements under Part II of SRC Rule 68.  Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market.  Are not holders of secondary licenses issued by regulatory agencies. P a g e 21 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ Medium-sized entities shall use Philippine Financial Reporting Standards for SMEs (“PFRS for SMEs”) as their financial reporting framework. However, the following medium-sized entities shall be exempt from the mandatory adoption of the PFRS for SMEs and may instead apply, at their option, the full PFRS:  A medium-sized entity which is a subsidiary of a parent company reporting under the PFRS.  A medium-sized entity which is a subsidiary of a foreign parent company which will be moving towards International Financial Reporting Standards (“IFRS”) pursuant to the foreign country’s published convergence plan.  A medium-sized entity, either as a significant joint venture or associate, is part of a group that is reporting under the full PFRS.  A medium-sized entity which is a branch office or regional operating headquarter of a foreign company reporting under the full IFRS.  A medium-sized entity which has a subsidiary that is mandated to report under the full PFRS.  A medium-sized entity which has a short term projection that show that it will breach the quantitative thresholds set in the criteria for a ME. The breach is expected to be significant and continuing due to its long-term effect on the company’s asset or liability size.  A medium-sized entity which has a concrete plan to conduct an initial public offering within the next two (2) years.  A medium-sized entity which has been preparing financial statements using full PFRS and has decided to liquidate.  Such other cases that the SEC may consider as valid exceptions from the mandatory adoption of PFRS for SMEs. d. Small Entities  Total assets of between P3 Million to P100 Million or total liabilities between P3 Million and P100 Million.  Are not required to file financial statements under Part II of SRC Rule 68.  Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market.  Are not holders of secondary licenses issued by regulatory agencies. Small entities shall use Philippine Financial Reporting Standards for Small Entities (“PFRS for SEs”) as their financial reporting framework. However, the following medium-sized entities shall be exempt from the mandatory adoption of the PFRS for SMEs and may instead apply, at their option, the full PFRS or PFRS for SMEs:  A small entity which is a subsidiary of a parent company reporting under the full PFRS or PFRS for SMEs. P a g e 22 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ  A small entity which is a subsidiary of a foreign parent company which will be moving towards IFRS or IFRS for SMEs pursuant to the foreign country’s published convergence plan.  A small entity, either as a significant joint venture or associate, is part of a group that is reporting under the full PFRS or PFRS for SMEs.  A small entity which is a branch office or regional operating headquarter of a foreign company reporting under the full IFRS or PFRS for SMEs.  A small entity which has a short term projection that show that it will breach the quantitative thresholds set in the criteria for a small entity. The breach is expected to be significant and continuing due to its long-term effect on the company’s asset size.  A small entity which has been preparing financial statements using full PFRS or PFRS for SMEs and has decided to liquidate.  Such other cases that the SEC may consider as valid exceptions from the mandatory adoption of PFRS for SEs. e. Micro Entities  Total assets and liabilities are below P3 Million.  Are not required to file financial statements under Part II of SRC Rule 68.  Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market.  Are not holders of secondary licenses issued by regulatory agencies. Micro entities have the option to use as their financial reporting framework either the income tax basis or PFRS for SEs, provided however, that the financial statements shall at least consist of the Statement of Management’s Responsibility, Auditor’s Report, Statement of Financial Position, Statement of Income and Notes to Financial Statements, all of which cover the two-year comparative periods, if applicable. Management’s Responsibility for the Financial Statements The financial statements filed with the SEC are primarily the responsibility of the management of the reporting company and therefore, the fairness of the representations made therein is an implicit and integral part of the management’s responsibility. The Board of Directors, in discharging its responsibilities, reviews and approves the financial statements before these are submitted to the shareholders. Consequently, the audited financial statements shall be accompanied by a Statement of Management’s Responsibility for Financial Statements (SMR) when filed with the SEC. An example of such statement is shown below: P a g e 23 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of (name of reporting company) is responsible for the preparation and fair presentation of the financial statements including the schedules attached therein, for the year(s) ended (date), in accordance with the prescribed financial reporting framework indicated therein, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. The Board of Directors (Trustees) is responsible for overseeing the Company’s financial reporting process. The Board of Directors (Trustees) reviews and approves the financial statements including the schedules attached therein, and submits the same to the stockholders or members. (Name of auditing firm), the independent auditor appointed by the stockholders, has audited the financial statements of the company in accordance with Philippine Standards on Auditing, and in its report to the stockholders or members, has expressed its opinion on the fairness of presentation upon completion of such audit. Signature Printed Name of the Chairman of the Board Signature Printed Name of Chief Executive Officer Signature Printed Name of Chief Financial Officer Signed this day of The Chairman of the Board, Chief Executive Officer (CEO) and Chief Finance Officer (CFO) shall sign the Statement of Management’s Responsibility. However, in case of branch offices or regional operating headquarters of foreign corporations, the SMR shall be signed by its local manager who is in charge of its operations within the Philippines. P a g e 24 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ 2.7 External Audit The Board is primarily accountable to the shareholders. It should provide them with a balanced and comprehensible assessment of the corporation’s performance, position and prospects on a quarterly basis, including interim and other reports that could adversely affect its business, as well as reports to regulators that are required by law. Thus, it is essential that Management provide all members of the Board with accurate and timely information that would enable the Board to comply with its responsibilities to the shareholders. In the process, management should consider its responsibility to prepare financial statements of the corporation in compliance with the financial reporting requirements of the SEC and the applicable financial reporting framework (e.g., PFRS). The Board, after consultations with the Audit Committee, shall recommend to the shareholders an external auditor who shall undertake an independent audit of the corporation, and shall provide an objective assurance on the manner by which the financial statements shall be prepared and presented to the shareholders. The Audit Committee should have a robust process for approving and recommending the appointment, reappointment, removal, and fees of the external auditor. The appointment, reappointment, removal, and fees of the external auditor should be recommended by the Audit Committee, approved by the Board and ratified by the shareholders. The shareholders’ ratification clarifies or emphasizes that the external auditor is accountable to the shareholders or to the company as a whole, rather than to the management whom he may interact with in the conduct of his audit. Audit of Financial Statements by Independent Auditors Financial statements of registered corporations covered by Revised Rule 68 are required to be accompanied by an auditor’s report issued by an independent auditor who is duly registered with the Board of Accountancy (BOA) of the Professional Regulation Commission (PRC). A corporation with financial statements audited by an independent auditor who is not registered with the BOA shall be subject to appropriate fines. As an additional requirement, the following regulated entities shall have independent auditors accredited by the Securities and Exchange Commission (SEC) under the appropriate category:  Group A Issuers of registered securities which have sold a class of securities pursuant to a registration under Section 12 of the SRC except those issuers of registered timeshares, proprietary and non-proprietary membership certificates which are covered in P a g e 25 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ Group B. Issuers with a class of securities listed for trading in an Exchange. Public companies or those which have total assets of at P50,000,000 or such other amount as the SEC shall prescribe, and having 200 or more holders each holding at least 100 shares of a class of its equity securities. Clearing agency and clearing agency as depository. Stock and securities exchanges and other self-regulatory organizations  Group B Issuers of registered timeshares, proprietary and nonproprietary membership certificates. Investment Houses. Brokers and Dealers of securities. Investment companies that are not in the process of registering securities or have no registered securities yet. Government Securities Eligible Dealers (GSEDs). Universal Banks Registered as Underwriters of Securities. Investment Company Advisers. Special Purpose Corporations registered under the Securitization Act of 2004 and its implementing rules. Such other corporations which may be required by law to be supervised by the SEC.  Group C Financing Companies whose assets in the preceding year are above P10,000,000. Lending Companies whose assets in the preceding year are above P5,000,000. Transfer Agents. Non-stock, non-profit corporations including foundations which solicit or receive annual donations or contributions and/or with fund balance amounting to more than P25,000,000 andP100,000,000, respectively, over the preceding 3 years, or such higher amount that the SEC may set through order or guidelines. Such other corporations that the SEC may consider as imbued with public interest regardless of the lack of a requirement to obtain a secondary license from the SEC. 2.8 Accreditation, Operational, and Reportorial Requirements for External Auditors Accreditation Requirements The auditing firms, including their signing partners, who shall be engaged by companies under Groups A, B and C must be accredited by the SEC. Sole practitioners may be accredited by the SEC and may be engaged by Group C companies as long as they can prove their capability and resources. P a g e 26 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ The accreditation of an independent auditor and/or auditing firm shall expire or be automatically delisted after three (3) years from the date of approval of the accreditation, unless an application for its renewal is filed not later than thirty (30) business days before its expiration. For Individual Independent Auditors or Signing Partners:  General requirements The applicant shall be registered and licensed with the BOA. At the time of application, the applicant shall have at least five (5) years of experience in external audit. The audit experience shall have been acquired as an in-charge, manager or partner or its equivalent. The applicant shall have adequate policies and procedures related to the elements of a system of quality control provided for under the PSAs.  Specific Requirements The applicant shall have sufficient knowledge on the regulatory requirements, operations and functions of companies under Group A, B or C for which he is applying for accreditation. He shall have completed thirty (3) units of trainings and seminars on relevant topics within the last 3 years. The quality of audit work based on the evaluation of the financial statements of clients shall be acceptable. At the time of application, the applicant shall have the following track record:  For Group A applicant, he shall have had a minimum of five (5) corporate clients with total assets of at least P50 million each, or such amount as may be prescribed by the SEC.  For Group B applicant, he shall have had a minimum of three (3) corporate clients with total assets of at least P20 million each, or such amount as may be prescribed by the SEC.  For Group C applicant, he shall have had a minimum of three (3) corporate clients with total assets of at least P5 million each, or such amount as may be prescribed by the SEC. For Auditing Firms: The auditing firm shall be accredited with the BOA. At the time of application, it shall have at least two (2) signing independent auditor who is accredited under the same category as the firm is applying for. P a g e 27 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ It shall have adequate policies and procedures related to the elements of a system of quality control provided for under the PSAs. The auditing firm shall submit a disclosure under oath attesting to its independence. Operational Requirements In performing an audit of financial statements, the firm and/or independent auditor shall comply with the following: a. Terms of its engagement letter and its undertakings. b. Philippine Standards on Auditing (PSAs) and other issuances of the Auditing and Assurance Standards Council (AASC) and/or the SEC. c. Code of Ethics for Professional Accountants which includes independence rules. d. Applicable provisions of the SRC Rule 68 and other relevant regulations and circulars of the SEC. e. Other pertinent laws, rules and regulations. Reportorial Requirements The independent auditor is required to submit his findings to the regulated client company’s Audit Committee or Board of Directors: a. Any finding of violation of SRC Rule 68; offering of securities without prior registration with the SEC under the SRC; or engaging in the business of financing or lending without a secondary license. b. Any material findings involving fraud or error. c. Losses or potential losses the aggregate of which amounts to at least ten percent (10%) of the consolidated total assets of the company. d. Any finding to the effect that the consolidated assets of the company, on a going concern basis, are no longer adequate to cover the total claims of creditors. e. Material internal control weaknesses which may lead to financial reporting problems. The audit committee of companies under Groups A, B and C shall report to the SEC its action on a report of its independent auditor pertaining to any item enumerated above within five (5) business days from the date the report is submitted by the independent auditor. For companies under Group A, the report shall be in a SEC Form 17-C. For companies under Groups B and C, the report shall be in the form of a letter signed by the Chairman of the Board or Chairman of the Audit Committee. In case the audit committee fails to submit the report required above, the independent auditor shall, within thirty (30) business days from the submission of his findings to the entity, file a report (SEC Form Au- Rep) to the SEC. P a g e 28 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ 2.9 Audit Reports of Independent Auditors The auditor's report shall: f. Identify the financial statements covered by the report. g. State whether the examination was made in accordance with Philippine Standards on Auditing. h. State clearly the opinion of the independent auditor on the fairness of presentation in conformity with the prescribed financial reporting framework for the company. i. Be dated. j. Be signed by the certifying independent auditor. In the case of an auditing firm, the certifying partner shall sign his own signature and shall indicate that he is signing for the firm, the name of which is printed the report. k. State the signing accountant's License, Tax Identification and PTR numbers, and registration number with BOA including its expiration date. l. Indicate the signing auditor/partner’s SEC accreditation number, category and expiration of accreditation (for audit of regulated companies). m. State the complete mailing address of the client and the auditor. In addition, the external auditor of a company which has incurred a capital deficiency, shall provide in the audit report an emphasis paragraph indicating the following information: The fact that the company has incurred a capital deficiency that raises an issue on its going concern status. A brief discussion of a concrete plan of the company to address the capital deficiency and reference to the note to financial statements that provides a complete disclosure of the said plan. A statement that the auditor conducted sufficient audit procedures to verify the validity of the aforementioned plan. In case the company fails to present to the external auditor a concrete plan or sufficient supporting documents to address the capital deficiency, the auditor shall provide an emphasis paragraph indicating that the company is no longer a going concern and should use liquidation basis in the preparation of its financial statements. The requirement mentioned above shall not apply to a company that incurred a capital deficiency due to any of the following reasons: The entity is at pre-operating stage and has incurred capital deficiency due to higher pre-operating expenses than its initial capitalization. Projected financial statements indicate that it will generate net income once it starts commercial operations. Significant losses incurred in prior years but has generated positive results (net income) from operations over the current period due to developments in the business or regularization of its operation. P a g e 29 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ An entity has incurred capital deficiency during the current period only due to a significant adjustment arising from the adoption of new financial reporting framework or occurrence of non-recurring transaction for the period. Such other cases which the SEC may consider as valid ground for considering the company as a going concern. Any company covered by any of the exemptions shall provide in Note 1 of its audited financial statements a discussion on the reason for its capital deficiency and a concrete plan to address the same. As an additional requirement, independent auditors of stock corporations filing under SRC Rule 68 shall also issue a Supplemental Written Statement, as shown below: SUPPLEMENTAL WRITTEN STATEMENT OF AUDITOR To the Stockholders and the Board of Directors Name of Company Address I/We have audited the financial statements of (name of company) for the year ended , on which I/we have rendered the attached report dated. In compliance with the Revised Regulation Code Rule 68, I/we are stating that the said company has a total number of stockholders owning one hundred (100) or more shares each. (Name of the firm, as applicable) Name and Signature of the Independent auditor BOA Accreditation No. PRC License No. SEC Accreditation (if any) PTR No., issue date and place Date 2.10 Insider Trading It is considered unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: a. The insider proves that the information was not gained from such relationship; or b. If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: That he disclosed the information to the other party, or That he had reason to believe that the other party otherwise is also in possession of the information. P a g e 30 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ A purchase or sale of a security of the issuer made by an insider, or such insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for market to absorb such information. Information is considered "material nonpublic" if: a. It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or b. Would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security. Exercises: 1. Discuss the process in registration of securities with the SEC. 2. Are the accreditation procedures for independent auditors too difficult to comply with? Explain. 3. Why is it that insider trading is deemed prohibited? 4. Which between the merit-based and disclosure-based regulation model is better and why? 5. Why is it that public companies need to comply with numerous regulatory requirements? END OF TOPIC 2 P a g e 31 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ Topic 3: GOOD GOVERNANCE FOR BANKS LEARNING OBJECTIVES: At the end of this topic, the students are expected to: 1. Understand the functions of the Bangko Sentral ng Pilipinas; 2. Explain the qualifications and functions of the Monetary Board; 3. Explain the duties and responsibilities of the board of directors of banks and other similar institutions; 4. Explain the qualifications of the officers of banks and other similar institutions; and 5. Understand the external and internal audit functions for banks and other similar institutions. NOTES: 3.1 The Bangko Sentral ng Pilipinas and the Monetary Board The Bangko Sentral ng Pilipinas (BSP) provides policy directions in the areas of money, banking, and credit. It exercises supervision over the operations of banks and such regulatory powers as provided in the New Central Bank Act and other pertinent laws over the operations of finance companies and non-bank financial institutions performing quasi-banking functions, hereafter referred to as quasi-banks, and institutions performing similar functions. Banks are classified into: a. Universal banks b. Commercial banks c. Thrift banks Savings and mortgage banks Stock savings and loan associations Private development banks d. Rural banks e. Cooperative banks f. Islamic banks g. Other classifications of banks as determined by the Monetary Board of the BSP The primary objective of the BSP is to maintain price stability conducive to a balanced and sustainable growth of the economy. It shall also promote and maintain monetary stability and the convertibility of the peso. Monetary Board The powers and functions of the BSP are exercised by the Monetary P a g e 32 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ Board. It is composed of seven (7) members, appointed by the President of the Philippines, for a term of six (6) years. No member of the Monetary Board may be reappointed more than once. The seven (7) members of the Monetary Board are: a. The Governor of the BSP, who shall be the Chairman of the Monetary Board. He must be head of a department and his appointment shall be subject to confirmation by the Commission on Appointments. In case the Governor is unable to attend a meeting of the Board, he shall designate a Deputy Governor to act as his alternate, provided that in such event, the Monetary Board shall designate one of its members as acting Chairman; b. A member of the Cabinet to be designated by the President of the Philippines. Whenever the designated Cabinet Member is unable to attend a meeting of the Board, he shall designate an Undersecretary in his Department to attend as his alternate. c. Five (5) members who shall come from the private sector, all of whom shall serve full-time. Of the members first appointed, three (3) shall have a term of six (6) years, and the other two (2), three (3) years. Any vacancy in the Monetary Board is filled by the appointment of a new member to complete the unexpired period of the term of the member concerned. The Monetary Board meets at least once a week. The Board may be called to a meeting by the Governor of the BSP or by two (2) other members of the Monetary Board. The presence of four (4) members constitute a quorum as long as the Governor or his duly designated alternate is among the four (4). Unless otherwise required, all decisions of the Monetary Board require the concurrence of at least four (4) members. Qualifications of the Members of the Monetary Board The members of the Monetary Board must: a. Be natural-born citizens of the Philippines. b. At least be thirty-five (35) years of age, with the exception of the Governor who should at least be forty (40) years of age. c. Be of good moral character, of unquestionable integrity, of known probity and patriotism, and with recognized competence in social and economic disciplines. P a g e 33 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ However, a member of the Monetary Board is disqualified from being a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank or any other institution which is subject to supervision or examination by the BSP. In such case, said member shall resign from, and divest himself of any and all interests in such institution before assumption of office as member of the Monetary Board. The members of the Monetary Board coming from the private sector are not allowed to hold any other public office or public employment during their tenure. A person is disqualified from becoming a member of the Monetary Board if he has been connected directly with any multilateral banking or financial institution or has a substantial interest in any private bank in the Philippines, within one (1) year prior to his appointment. Also, no member of the Monetary Board shall be employed in any such institution within two (2) years after the expiration of his term, except when he serves as an official representative of the Philippine Government to such institution. Furthermore, the President may remove any member of the Monetary Board for any of the following reasons: a. If the member is subsequently disqualified under the provisions of the New Central Bank Act. b. If he is physically or mentally incapacitated that he cannot properly discharge his duties and responsibilities and such incapacity has lasted for more than six (6) months. c. If the member is guilty of acts or operations which are of fraudulent or illegal character or which are manifestly opposed to the aims and interests of the BSP. d. If the member no longer possesses the qualifications specified in the New Central Bank Act. Powers and Functions of the Monetary Board In the exercise of its authority, the Monetary Board: a. Issues rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested upon the Monetary Board and the BSP. Said rules and regulations must be reported to the President and the Congress within fifteen (15) days from the date of their issuance. b. Directs the management, operations, and administration of the BSP, reorganizes its personnel, and issues such rules and regulations as it may deem necessary or convenient for this purpose. The legal units of the BSP shall be under the exclusive supervision and control of the Monetary Board. P a g e 34 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ c. Establishes a human resource management system to govern the selection, hiring, appointment, transfer, promotion, or dismissal of all personnel. d. Adopts an annual budget for and authorize such expenditures by the BSP as are in the interest of the effective administration and operations of the BSP in accordance with applicable laws and regulations. e. Indemnify its members and other officials of the BSP, including personnel of the departments performing supervision and examination functions against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit or proceedings to which he may be, or is, made a party by reason of the performance of his functions or duties, unless he is finally adjudged in such action or proceeding to be liable for negligence or misconduct. Members of the Monetary Board who willfully violate the New Central Bank Act or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or failure to exercise extraordinary diligence in the performance of his duties shall be held liable for any loss or injury suffered by the BSP or other banking institutions as a result of such violation, negligence, abuse, malfeasance, misfeasance or failure to exercise extraordinary diligence. BSP Governor The Governor, the chief executive officer of the BSP, has the following powers and duties: a. Prepare the agenda for the meetings of the Monetary Board and submit for the consideration of the Board the policies and measures that he believes are necessary to carry out the purposes and provisions of the Central Bank Act. b. Execute and administer the policies and measures approved by the Monetary Board. c. Direct and supervise the operations and internal administration of the BSP. d. Appoint and fix the remunerations and other emoluments of personnel below the rank of a department head in accordance with the position and compensation plans approved by the Monetary Board, as well as to impose disciplinary measures upon personnel of the BSP. Any removal of personnel must be approved by the Monetary Board. e. Render opinions, decisions, or rulings, which shall be final and executory until reversed or modified by the Monetary Board, on matters regarding application or enforcement of laws pertaining to institutions supervised by the BSP and laws pertaining to quasi- P a g e 35 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ banks, as well as regulations, policies or instructions issued by the Monetary Board, and the implementation thereof. f. Exercise such other powers as may be vested in him by the Monetary Board. 3.2 Responsibilities of the Board of Directors of Banks/Quasi- Banks/Trust Entities BSP Circular No. 283-2001, as amended by BSP Circular No. 456- 2004, was issued to stress the powers and authority of the board of directors of banks/quasibanks/trust entities. Good corporate governance is a reflection of collective values and competence of the board of directors and senior management team. The corporate powers of a bank/quasi-bank/trust entity shall be exercised, its business conducted and all its property shall be controlled and held by its board of directors. Directors shall include: a. Directors who are named as such in the articles of incorporation. b. Directors duly elected in subsequent meetings of the stockholders. c. Those elected to fill vacancies in the board of directors. BSP Circular No. 283-2001 states that the board of directors is primarily responsible for the corporate governance of the bank/quasi- bank/trust entity. To ensure good governance of the bank/quasi- bank/trust entity, the board of directors should establish strategic objectives, policies and procedures that will guide and direct the activities of the bank/quasi-bank/ trust entity and the means to attain the same as well as the mechanism for monitoring management’s performance. While the management of the day-to-day affairs of the institution is the responsibility of the management team, the board of directors is responsible for monitoring and overseeing management action. A bank may be organized with not less than five (5) or more than fifteen (15) incorporators. In case there are more than fifteen (15) persons initially interested in organizing and investing in the proposed bank, the excess may be listed among the original subscribers in the Articles of Incorporation. The number of members of the board of directors of the bank shall not be less than five (5) nor more than fifteen (15) and shall always be in odd numbers and at least two (2) of the directors are independent directors. However, the number of directors may be increased up to twenty-one (21) if there is a bank/quasi-bank/trust entity merger or consolidation. An independent director shall mean a person who: a. Is not or has not been an officer or employee of the bank/quasi- bank/trust entity, its subsidiaries or affiliates or related interests P a g e 36 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ during the past three (3) years counted from the date of his election. b. Is not a director or officer of the related companies of the institution’s majority shareholder. c. Is not a majority shareholder of the institution, any of its related companies, or of its majority shareholder. d. Is not a relative within the fourth degree of consanguinity or affinity, legitimate or common-law of any director, officer or majority shareholder of the bank/quasibank/trust entity, or any of its related companies. e. Is not acting as a nominee or representative of any director or substantial shareholder of the bank/quasi-bank/trust entity, any of its related companies or any of its substantial shareholders. f. Is not retained as professional adviser, consultant, agent or counsel of the institution, any of its related companies or any of its substantial shareholders, either in his personal capacity or through his firm; is independent of management and free from any business or other relationship, has not engaged and does not engage in any transaction with the institution or with any of its related companies or with any of its substantial shareholders, whether by himself or with other persons or through a firm of which he is a partner or a company of which he is a director or substantial shareholder, other than transactions which are conducted at arms-length and could not materially interfere with or influence the exercise of his judgment. At least two-thirds (2/3) of the members of the board of directors of any commercial bank shall be Filipino citizens; at least a majority of the members of the board of directors of any thrift bank shall be Filipino citizens; and all members of the board of directors of a rural bank shall be Filipino citizens. No appointive or elective public official, whether full-time or part-time, shall at the same time serve as officer of a commercial bank or a thrift bank except in cases where such service is incident to financial assistance provided by the government or a government-owned or controlled corporation to the Bank. Specific Responsibilities of the Board of Banks/Quasi- Banks/Trust Entities The board of directors of bank/quasi-bank/trust entities have the following specific duties and responsibilities: a. To select and appoint officers who are qualified to administer the bank/quasibank/trust entity affairs effectively and soundly and to establish adequate selection process for all personnel. P a g e 37 | 50  ST. VINCENT COLLEGE LEGANES, ILOILO POTOTAN, ILOILO IVISAN, CAPIZ b. To establish objectives and draw up a business strategy for achieving them. c. To conduct the affairs of the institution with high degree of integrity. d. To establish and ensure compliance with sound written policies. e. To prescribe a clear assignment of responsibilities and decision- making authorities, incorporating a hierarchy of required approvals from individuals to the board of directors. f. To effectively supervise the bank’s/quasi-bank’s/trust entity’s affairs. g. To monitor, assess and control the performance of management. h. To adopt and maintain adequate risk management policy, which shall include:  A comprehensive risk management approach.  A detailed structure of limits, guidelines and other parameters used to govern risk-taking.  A clear delineation of lines of responsibilities for managing risk.  An adequat