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By Arthur S. Cayanan

CORPORATE GOVERNANCE AND FINANCIAL REPORTING OF PHILIPPINE BANKS: PRIVATE BANKS VS GOVERNMENT BANKS. By Arthur S. Cayanan. Objectives of the Study. To determine if Philippine listed and government banks are subject to the same financial reporting standards.

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By Arthur S. Cayanan

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  1. CORPORATE GOVERNANCE AND FINANCIAL REPORTING OF PHILIPPINE BANKS:PRIVATE BANKS VS GOVERNMENT BANKS By Arthur S. Cayanan

  2. Objectives of the Study • To determine if Philippine listed and government banks are subject to the same financial reporting standards. • To determine the degree of compliance of Philippine listed and government banks with financial reporting standards.

  3. Objectives of the Study • To determine the quality of the external audits performed for Philippine listed and government banks • To identify areas for improving financial reporting standards and practices should some weaknesses and financial reporting violations are uncovered

  4. Sample • 42 annual reports (36 listed and 6 gov’t) • 17 of the 18 listed Philippine banks (2002-03: 2005) • 2 government banks (2002-03; 2005)

  5. Focus of the Review • Presentation of accounts expected to be received or due within a year because banks do not present classified balance sheets. • Reporting of provision for bad debts. • Presentation of the breakdown of loan portfolio, i.e. as to sector and as to whether secured or unsecured.

  6. Focus of the Review • Disclosure of the value of nonperforming loans. • Disclosure of contingent liabilities. • Disclosure of related party transactions, e.g. DOSRI accounts. • Disclosure of segment information

  7. Findings- Listed Banks • 7 of the 36 – Qualified • Basis of qualification - direct charging of provision for bad debts to surplus - staggered recognition of bad debts

  8. Findings – Listed Banks • Questionable accounting policies which led to income overstatement - reporting of ASS and TAS at cost. - long amortization for goodwill (40 years when rules allowed only 20 and BSP only 10) - direct charging of provision for bad debts to surplus - staggered recognition of provision for bad debts

  9. Findings- Listed Banks • Non-presentation of accounts expected to be received or due within a year (4). • Nondisclosure of the non-performing accounts (2) • Nondisclosure of the amounts of guarantees (8) • Lack or inadequate disclosures on related party transactions (2)

  10. Findings – Listed Banks • Non-consolidation of subsidiaries due to materiality issues (3) • Lack or inadequate segment information (10) • Questionable audit opinion (10

  11. Findings- Listed Banks (Questionable Audit Opinion) • Revenue recognition policy on interest income was vague. It goes as follows “Interest on loans is recognized on a basis which essentially complies with the criteria of the supervisory authorities on the reporting of revenue to be closed to the equity balance.” Revenue recognition policy on other income was based on cash which is non-GAAP.

  12. Findings- Listed Banks (Questionable Audit Opinion) • Accounting policy for trading account securities which was based on cost was non-GAAP. Investment and trading securities account 32.17% of the total assets. • There was no accounting policy on cash and cash equivalents. • There were no disclosures of amounts expected to be received or due within a year and beyond in an unclassified balance sheet.

  13. Findings- Listed Banks (Questionable Audit Opinion) • There was no segment information provided. • There were no disclosures of amounts related to contingent liabilities such as guarantees. • There were no details of EPS computations provided. • There were no disclosures on related party transactions especially DOSRI accounts. • Disclosures on trust assets were inadequate. There were no amounts provided. • There were no disclosures on the financial impact of SFAS/IAS 12 and 17.

  14. Findings- Government Banks • Missing Statement of Management’s Responsibility on Financial Statements (2) • Deferral of the recognition of loss from the sale of NPA (1) • Breakdown of loan portfolio by sector (2) • Lack of disclosures on segment information (2)

  15. Findings- Government Banks • Non-consolidation of subsidiaries (1) • Nondisclosure of the amounts of guarantees (1) • Inadequate disclosures on retirement benefits • Improper accounting for investments in associates- accounted for at cost (1)

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