The filing of the Audited Financial Statement in the Philippines is just around the corner for many PH businesses! Time to consider your company’s financial reporting obligations!
Unless your business is an exempt business under Philippine law, you will be required to prepare, audit and file audited financials, in the form of an Annual Financial Statement, with both the BIR and the SEC every year.
The deadline for filing the 2021 Financial Statement for many PH businesses is in April 2022! This means that “audit season” in the Philippines has well and truly started!
Is your PH business audit-ready?
Below, we provide an in-depth Explainer on the Audited Financial Statement for Philippine companies, explore what “Audit Season” actually means and we identify some of the key items that PH businesses must be aware of to ensure that their Audited Financial Statement is filed by the April BIR deadline!
- 1 What is Audit Season?
- 2 Why is it called “Audit Season”?
- 3 Filing the Audited Financial Statement in the Philippines
- 4 What’s the Difference Between Audit Season and a BIR Audit?
- 5 When does “Audit Season” start?
- 6 Which Companies Need to Submit an Audited Financial Statement?
- 7 When is the Deadline for Filing the AFS in the Philippines?
- 8 How To File the AFS with the BIR and the SEC
- 9 Preparing for AFS Filing – Engaging an Auditor
- 10 Key Items to Consider Before Engaging an Auditor
- 11 Audit Management and Audit Field Work
- 12 CloudCfo‘s Role During Audit Season in the Philippines
What is Audit Season?
Every year in the Philippines, at a particular time of the year, all non-exempt businesses will be required to prepare and submit a number of key financial documents to both the BIR and the SEC. One of these documents is the Audited Financial Statement (see below).
The period leading up to the deadline by which the Audited Financial Statement must be submitted is generally referred to as “Audit Season”.
The audit process (i.e. the preparation activity that happens during audit season) is a mandatory statutory requirement imposed under Philippine law and monitored by the two key regulating agencies for finance and tax compliance of businesses in the Philippines – the BIR and the SEC.
The statutory audit is actually quite a standard method of regulation adopted and implemented by many countries and governments around the world. It allows governments to monitor a) if companies are practising robust financial management during each financial year and b) if companies are following the local compliance and reporting requirements of the particular country or jurisdiction in which the company is registered.
Imposing a requirement on companies to submit specific reports regarding their financial activities each year helps governments to ensure a greater level of corporate governance throughout the country and also, helps to ensure a higher level of tax compliance from businesses.
Why is it called “Audit Season”?
Good question! There are two primary reasons why the audit process, culminating in the submission of the Audited Financial Statement, is referred to as a “season”.
First of all – the audit process will come around every year and at the same time every year (assuming that a company does not change the official dates of its financial year!).
So, if your PH business has designated a financial year that runs from 1 January to 31 December, then your management team should be aware that Audit Season will generally start during the last few months of one year and will last up until mid-April of the following year! See further below for specific timelines and deadlines.
Secondly, the audit process does not take just one day! The entire process can take a period of time – days, weeks and even months, depending on the size of the business and whether or not good finance and compliance management was practised by the company during the relevant financial year.
Starting with engaging an auditor, to collating all of the necessary financial information, to answering auditor queries and requests for information – the process can take time. Not to mention the fact that the audit firm must then carry out the audit, certify the audited financials and the audited financials must then be submitted to the BIR and SEC.
Filing the Audited Financial Statement in the Philippines
As mentioned above, there a number of key finance-related documents that must be submitted during Audit Season. One of these is the Annual Income Tax Return, or AITR. Another one of these key documents is the Audited Financial Statement, commonly known as – the AFS!
As described above, the main purpose of the submission of the AFS is to ensure that PH businesses provide a clear and accurate picture of the company’s financial and compliance activities to two of the primary regulators of businesses in the Philippines.
However, in order to provide a clear and accurate picture of a company’s financials, the BIR and SEC will want to ensure that this picture has been independently certified, or audited, by an independent party – in this case, an auditor or audit firm! So, once a company has prepared their yearly Financial Statements, before submitting to the BIR, and then to the SEC, the Financial Statement must first be audited, certified and signed off by an independent Auditor.
The Financial Statement will be prepared by the company in the first instance. It will then be reviewed by the Auditor in order to ensure that the company’s financials have been prepared in accordance with local PH tax and compliance requirements.
Once your Auditor is happy that the Financial Statement is a true and accurate portrayal of the financial transactions and activities undertaken by the business during the financial year in question, the Auditor should then be able to sign off on the Financial Statement, deeming it certified.
The Auditor is effectively certifying that the finances of the company, for the particular year, are accurate and were prepared in accordance with the proper financial reporting standards, practices and principles in the Philippines.
Once the Financial Statement has been audited, it can then be referred to as an Audited Financial Statement, or AFS, and submitted to the various government agencies.
What’s the Difference Between Audit Season and a BIR Audit?
When people speak about “Audit Season” in the Philippines, it is usually safe to assume that they are referring to the statutory requirement to submit an Audited Financial Statement – which comes around each year (as mentioned above). To reiterate, this is a mandatory requirement under law that companies undergo at the same time each financial year.
However, a reference to a “BIR Audit” generally means something quite different!
In short, the BIR can, at any stage, use its discretion to examine or investigate the financial and tax compliance practices of a company in the Philippines. The purpose of this is to ensure that companies are practising robust finance and tax management and are adhering to their BIR compliance obligations!
Before the BIR commences with an investigation, they will issue a Letter of Authority, commonly referred to as an LOA. The LOA confirms that a business has been identified and selected for audit by the BIR. The BIR will then commence engaging with the business, including an investigation of the company’s accounting, bookkeeping, financial and tax compliance activities.
It’s essential for business owners, managers and founders to understand the key differences between the yearly requirements of Audit Season and the ad-hoc requirements of a BIR Audit. So make sure to speak to your accountant or bookkeeper in the Philippines to understand the requirements of each type of audit.
Finally and as always, if you receive an LOA from the BIR – make sure to inform your accountant immediately!
When does “Audit Season” start?
Good financial practice would say that companies should start preparing for their audit a number of months prior to the deadline by which they need to file their Audited Financial Statement with the BIR.
During this time, companies will start collecting financial information and documentation from the prior financial year, preparing the financial statement and engaging and liaising with their selected Auditor.
At CloudCfo, we believe that companies should, in theory, start preparing for the audit at the very start of the financial year that is being audited! What does that mean? As mentioned in more detail below, an efficient and successful audit process will usually be more likely in circumstances where a company’s books and accounts are well managed during the financial year! When audit season rolls around each year, the company will then have an excellent foundation (and preparation) for engaging with the auditor!
However – let’s talk about now! In short, if your PH business is required to submit its Annual Income Tax Return and Audited Financial Statement during April 2022, you should already be commencing your plans for engaging an auditor and preparing the relevant information and documents to enable the auditors proceed with auditing your financial statements!
Which Companies Need to Submit an Audited Financial Statement?
Audit and financial reporting requirements can differ depending on a number of matters. This might include the size of a business, the value of the assets/liabilities of a business and even the type of corporate entity operating a business (e.g. foreign corporations, company branches, representative offices, partnerships, etc).
Below are the general requirements regarding which PH businesses need to submit an Audited Financial Statement. However, as each case might differ, you should always speak with your accountant to understand your company’s obligations when it comes to the preparation and submission of the AFS!
Unless exempt, corporations, partnerships or individuals with gross annual sales of more than PHP3million are required to submit an AFS to the BIR each year.
The AFS will be filed as an attachment to the company’s annual income tax return, or AITR.
The SEC also has specific thresholds defining which companies are required to file an Audited Financial Statement with the SEC. Again, each company will have different circumstances and requirements. However, below are the companies required to submit an AFS to the SEC in accordance with Revised SRC Rule 68:
- Stock corporations with total assets or total liabilities of Php600,000 or more;
- Non-stock corporations with total assets or total liabilities of Php600,000 or more;
- Branch offices/representative offices of stock foreign corporations with total assets in the equivalent of Php1million or more;
- Branch offices/representative offices of non-stock foreign corporations with total assets in the equivalent of Php1million or more;
- Regional operating headquarters of foreign corporations with total revenues in the equivalent amount of Php 1million or more.
In light of the above, there may be cases wherein a taxpayer may not be required to file an AFS with the BIR (based on the filing threshold), but may actually still have to file an AFS with the BIR if they are required to file an AFS with the SEC (as the SEC requires that an AFS be stamped as filed by the BIR prior to submission with the SEC).
When is the Deadline for Filing the AFS in the Philippines?
In short, the deadline for filing the AFS with the BIR will depend on the registered financial year of the company.
In the Philippines, the Annual Income Tax Return, or AITR, must be filed by the 15th day of the fourth month after the company’s financial year-end date. This will be the trigger for the filing of the Audited Financial Statement.
It is quite common for companies in the Philippines, and indeed, internationally, to align their financial year with the regular calendar year (i.e. 1 January to 31 December).
As such, companies in the Philippines with financial calendars that align with their calendar year in 2021 will be required to submit their AITR with the BIR by 15 April 2022.
If a company’s financial year is different from the calendar year, the deadline for filing will be different. For example, if your company’s financial year ended on 31 March 2022, the AITR will have to be filed by 15 July 2022.
Where the AITR is filed electronically with the BIR, either through eFPS or eBIRForms, the Audited Financial Statement can and should be filed on or before 30 April 2022.
The filing with the SEC will always come after the filing with the BIR. Generally, companies are required to file their AFS with the SEC in accordance with deadlines based on the last numerical digit of a company’s SEC registration numbers or licence numbers. The SEC will usually release a memorandum in December or January confirming the specific filing deadlines for each category of SEC registration/licence numbers.
How To File the AFS with the BIR and the SEC
When it comes to the mechanism for filing the AFS with the two government agencies, things have changed a little bit in recent years in the Philippines as a result of the COVID-19 pandemic.
There are now different requirements for filing the AFS with each of the different regulator agencies.
Filing with the BIR
As mentioned above, in terms of priority, the AFS must be filed first with the BIR.
At present, the AFS can be filed with the BIR manually or online. Filing manually means physically attending at your local Regional District Office (RDO) of the BIR and filing hard copies of the AFS at the counter. Filing digitally can also be done via the BIR’s online filing portal. Be sure to check with your local BIR office, in advance, to confirm if they will be open to receiving the AFS (and AITR) via manual filing!
Depending on how the business is registered with the BIR, many accounting/bookkeeping providers will be able to help their clients by registering for and then filing via the BIR’s online filing system. So make sure to ask your accountant or bookkeeper on the most efficient method for filing the Audited Financial Statement in 2022!
Filing with the SEC
Once the AFS has been filed with and stamped as officially received by the BIR, the AFS can then be filed with the SEC in accordance with the designated filing deadlines for the SEC (see above).
With the emergence of the COVID-19 pandemic, the SEC transitioned to a fully online system for filing various annual reports, including the Audited Financial Statement.
As such, per SEC MC No. 3 s2021, starting in 2021, the submission of the Audited Financial Statement to the SEC must be done online using the SEC’s Online Submission Tool, or OST.
Unless subject to a specific exemption, the SEC will no longer accept hard copies of Annual Financial Statements. Submission via email, mail, courier, and dropbox will no longer be allowed and/or accepted (again, unless subject to an exemption).
In line with this, all corporations registered with SEC are also required to enrol (if not already enrolled) with the SEC OST in order to access and submit the Audited Financial Statement (and other financial reports) through the OST.
Preparing for AFS Filing – Engaging an Auditor
The volume of work required to collect and prepare the information required to successfully complete the audit process in the Philippines and submit the AFS will depend largely on how carefully and diligently a company has been maintaining and managing their Books of Account and general finances throughout the particular financial year.
If your books are in good shape and have been well maintained by your accountant or bookkeeper, the audit process should run efficiently and smoothly, with limited clarifications or queries required from your Auditor on the information provided.
In short, the better shape your books are in, the more efficient the audit!
A key step required to prepare for and comply with the statutory audit each year is selecting an Auditor for the business.
Key Items to Consider Before Engaging an Auditor
Below are just some of the key factors that a company in the Philippines should consider when selecting an Auditor for your business!
- Qualification: The Audit Firm that your business engages should be a licensed and accredited audit firm here in the Philippines. So make sure to receive the credentials of the Audit Firms you are exploring prior to engaging the audit firm!
- Independent: It is a statutory requirement for the Audit Firm to be independent from the company. So make sure to explore and clear any form of potential conflicts of interest that might arise between your company and the Audit Firm before the audit process commences!
- Communication and Engagement: It is important to establish clear lines of communication with your audit firm. Your company will also be concentrating on running the business at the same time as the ongoing audit. So, it’s important that both the company and the audit firm are proactive, enforce timeline monitoring and clearly define issues for clarification in a timely manner. See below for further information on audit planning!
- Reputation: Requesting references and experiences with former clients from your audit firm will help to understand the level of expertise and experience of an audit firm.
- Cost: Make sure to agree a project fee for the audit process with the Audit Firm before commencing the audit. Understand what is included and what is not included in the audit service!
If your company’s financial year will be ending on 31 December 2021 and you haven’t yet started considering engaging an Auditor for your business for the 2022 Audit Season, make this a top priority for you and your business in the coming days!
Audit Management and Audit Field Work
Remember – engaging an audit firm is just the first step of the process – Audit Season has only just started at this point!
As mentioned above, the audit process can be a cost and time consuming process!
It is for this reason that we believe it to be an essential requirement to ensure that there is a robust audit management plan in place from the very outset of the audit process.
The key concept here is “audit planning”!
It can be extremely helpful and practical for a company and audit firm to set specific timelines for each step and task within the audit process.
It will also be important to identify an “audit manager” within both the company and the audit firm to ensure that the the project is being managed and aligned for both parties and also that there is a clear point of contact to ensure optimum collaboration.
Who will be responsible for completing the audit process and submitting the Audited Financial Statement? The statutory onus to submit the Audited Financial Statement is on the company. However, the audit firm is being engaged (and paid) to provide a service within a specified deadline.
In short, the audit process requires constant and proactive collaboration between the company and the audit firm at all times!
CloudCfo‘s Role During Audit Season in the Philippines
CloudCfo is not, however, an audit firm. Meaning, we do not act as an auditor or perform audit services for either our clients or other companies in the Philippines. CloudCfo does, however, support the audit process for our clients in many ways!
When managing the books and accounts for our 120+ clients here in the Philippines, our services are performed in line with clear and transparent processes, streamlined tasks and 100% traceability on communications and document exchange throughout the financial year.
Arising from this, we ensure that, when Audit Season does come around, your business is prepared and ready to engage an audit firm and move through the audit process as efficiently as possible!
Visit Our Website or contact us directly at firstname.lastname@example.org to understand how we can support your accounting and financial reporting requirements and ensure that each year when audit season comes around, your business and your team are prepared and ready!