Amando M Tetangco, Jr: Accounting reforms towards good corporate
governance
Speech by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines, at the 3rd
Asian Accounting Firms (ASNAF) Conference, Makati City, 11 November 2005.
* * *
Distinguished guests, ladies and gentlemen, good morning.
I am deeply honored to be part of this gathering of accounting experts from the Asia Pacific Region. I
understand there are also delegates from Europe, particularly France and Belgium. I wish to join
ASNAF Chair Cherry Bernaldo in welcoming all of you to Manila. This is a rare opportunity to be with
the movers in the profession who are at the forefront of the crusade of coping with the accounting
evolution happening globally. To the men and women who continue to heed the call to serve in this
noble undertaking, we salute you.
The accounting profession has truly evolved into a vital catalyst of global convergence particularly with
the adoption of the International Financial Reporting Standards (IFRS). The twin objectives of the new
standards of promoting transparency and comparability in financial reporting transcends all regional
boundaries and redounds to a greater cause of enhanced corporate governance and oversight.
The Philippines believes in the cause of adopting uniform accounting standards across the globe. We
have expressed an unyielding commitment to the international community that these standards will be
implemented in the country for the year 2005 and the Bangko Sentral ng Pilipinas is spearheading its
adoption in the financial industry.
Let me share with you our valuable experiences in adopting the standards in the financial industry.
Adoption of IFRS in the financial industry- the Philippine experience
It is fitting to say that the new accounting standards are a phenomenon. The changes infiltrated the
backbone of financial reporting, which affected the way transactions are recorded and reported. The
old school's concept of conservatism and materiality were overshadowed with new thoughts on fair
valuation and substance over form. The new accounting standards modified our paradigm in
evaluating the financial position and performance of institutions.
In addition to the already difficult task of adopting the standards, the BSP also has to contend with the
difference in perspective between the principles of IFRS and the regulatory bodies. A popular
example of which is the concept of loan provisioning wherein the IFRS provides losses on financial
assets based on an incurred loss concept while the regulators provide losses based on incurred and
expected loss concepts. Another contentious provision of the standards is the fair value option, which
has been the subject of criticisms from the regulatory community.
The BSP has taken bold steps on these issues. At the onset, we emphasized that all financial
institutions under BSP supervision should comply with the provisions of the new standards in all
respects in preparing their audited financial statements. However, we remained steadfast in our
position that financial institutions should provide for both incurred and expected losses. In this regard,
they have to comply and reflect the BSP recommended valuation reserves in the prudential reports or
in the reports submitted to BSP.
On the other hand, considering the amendments of the iasb on the fair value option provisions, we
allowed financial institutions to use the said classification, subject to certain regulatory conditions such
as:
• Having an appropriate risk management system prior to initial application of the fair value
option for a particular activity or purpose and on an ongoing basis.
•
The fair value option may only be used for instruments for which fair values can be reliably
estimated; and
•
Financial institutions should provide BSP with supplemental information as may be
necessary, to enable BSP to assess the impact of the financial institution's utilization of the
fair value option.
The adoption of the standards does not only call for alignment of existing regulations with the
provisions but also necessitates the establishment of the infrastructure for prudential financial
reporting. In this respect, we have revised the manual of accounts and developed a new reportorial
requirement for banks. The advantage of going through this exercise is that we, as regulators, were
given an opportunity to design the reportorial structure to create a common platform serving all our
information requirements. The amount of information that we will be able to generate from the new
reporting structure will enhance our off-site supervision capabilities.
The Philippine transition to IFRS is a consultative process involving the regulators, industry players
and external auditors. The different perspectives shared in this endeavor helped us in understanding
the principles behind the standards and the impact of adoption on our interrelated functions.
Disclosures and good governance
One of the key features of the standards is the overwhelming amount of disclosure requirements. This
has made financial reporting a complex process. However, looking at the upside of it, these disclosure
requirements will empower the stakeholders in making relevant decisions.
The BSP believes that this uncovering of more information, will help us realize our vision of full
transparency, which is one of the pillars of good corporate governance. Disclosures along with the
other reforms that we have implemented such as requiring the board of directors to create corporate
governance and audit committees, imposing more stringent fit and proper standards for the
qualification and disqualification of bank directors, and requiring at least two independent directors in
the board, among others, are keys in strengthening the confidence of the public in the financial
industry. We believe that gaining the public's trust is the cornerstone of development.
Trust is what binds the components of an economy together. It creates a level playing field for all
market players, which fosters an environment conducive to investments. Trust bestowed upon a
system goes beyond the basic economic infrastructure. It gives an unwavering assurance that through
progress or crisis, the public would remain committed to pull the strings for development.
Challenges
The adoption of the standards only provides the gateway to achieving good governance. Several other
hurdles will bask along the way as we strive to reach this goal. Each discipline in the accounting
profession would have its share of issues to resolve and responsibilities to carry out that would be vital
for corporate oversight.
Auditors would play a more expansive role in this undertaking. They would give us an independent
view on how the risk exposures and other activities of the business ultimately affect the financial
statements. They would keep watch over compliance with the standards and maintaining fairness and
accuracy in the reports. Accountants in the academe are handed with the noble task of passing on
the learning from one generation to the next to keep the same passion seamlessly running through
time. Corporate accountants would document the evidence of evolution in accounting through their
books and financial reports. The regulators on the other hand, would anchor the industry on prudent
grounds amidst the changing standards and practices.
An even greater challenge is to channel this harmonious interplay of responsibilities to a regional effort
of establishing a common set of regulations similar to the Sarbanes-Oxley Act in the United States or
the EC 8th Directive in Europe. This vision may already be in the drawing boards in some of the
countries represented here or better yet this may stir a united stance to echo a regional commitment
on corporate governance.
Conclusion
We are in the middle of a monumental evolution of accounting standards and other best practices.
Let us not focus on the difficulties and complexities of change, rather let us take this opportunity to
correct the mistakes done in the past, strengthen our fortress for growth and seize the chance for
global convergence.
I would like to congratulate the organizers of this event for this worthwhile endeavor. Thank you and I
wish you all a successful conference.