Doubts hound KPMG following 2GO accounting scandal

 

MANILA, Philippines – The reputation of KPMG RG Manabat & Company, one of the top 5 auditing firms of listed companies, is on the line over alleged inflated financial statements of 2GO Group Incorporated, which are now being investigated by the Securities and Exchange Commission (SEC).

Other than 2GO, KPMG RG Manabat has also been the auditor of 34 other listed firms – such as San Miguel Corporation – over the last few years.

Other firms being audited by KPMG include Asian Terminals Incorporated, Cosco Capital Incorporated, DoubleDragon Properties Corporation, Macay Holdings Incorporated, and PhilWeb Corporatiion.

In a statement released on Tuesday, July 11, KPMG RG Manabat said it is confident that its audit was "in compliance with the Philippine Standards on Auditing."

"Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements," it added. (READ: 2GO management, auditors may face over P1-M fine)

Required reports

Companies with securities registered with SEC as well as those pubicly listed are required to disclose annual and quarterly financial reports. These are important documents that investors and stockholders examine when making a business decision to partner with or invest in a company. 

Rule 68 of the Securities Regulation Code also requires publicly-held companies to file financial reports that are accurate, truthful, and complete and prepared according to a set of "Internationally Accepted Principles of Accounting."

Under SEC rules, these must also be examined and reported by internal and independent auditors to ensure that details in reports are accurate and true.

"Financial statements originate from the company’s finance officials. Aside from external auditors, they will also be held liable if proven there is fraudulent misrepresentation, or even deficiencies, meaning they failed to comply to international financial reporting standards. That's under Rule 68," SEC chairperson Teresita Herbosa said on the sidelines of an event in Makati City on Tuesday.

Roberto Manabat, a local partner of KPMG, should be well aware of this as he was the first General Accountant of SEC. In this capacity, Manabat helped to put in place standards for the review of financial statements submitted by listed companies.

What's being investigated?

2GO last week restated its 2015 and 2016 financial statements, after a special audit requested by the firm's new management – a development that is turning out to be a major accounting scandal.

The restated financials pruned a whopping 90% off 2GO's net income in 2015 to P109.131 million. It also turned out that its 2016 net income should have been 74% lower than what was reported.

The special audit conducted by SGV & Company also showed that in the 1st quarter of 2017, there was a net loss of P264.86 million, instead of the earlier reported net income of P267.562 million.

Sharon Dayoan, vice chairperson and head of audit of KPMG RG Manabat, told Rappler on Thursday, July 13: "The restatements that you now see in the news are essentially relating to items of judgment and estimates made by (2GO's) management. When we did our audit, it was an audit on the judgment and estimates made by management at the time that we had to deliver our opinion." 

But questions now persist as to whether the buy-in price of the group of Dennis Uy and SM Investments Corporation – which recently acquired stake in 2GO – was bloated, too, assuming the financial reports were inflated.

The restated financial statements came after SM Investments Corporation acquired a 34.5% stake in 2GO's parent company for $124.50 million. Coincidentally, Manabat has also been an advisor to the board of SM Investments Corporation for good corporate governance since 2016. (READ: How SM Investments acquired stake in 2GO)

Market share

Data from the Philippine Stock Exchange (PSE) showed that the top 5 external auditing firms as of December 2016 are the following:

Together, these 5 external auditing companies cater to 86%, or 261 of the 304 total companies listed on the local bourse. (Editor's note: KPMG RG Manabat is the auditor of Rappler)

The remaining 14% of PSE-listed companies are audited by 23 other external auditing companies.

Data from the PSE likewise showed that more than half of the listed firms’ financial statements – 54% to be exact – are checked by SGV.

This means that SGV double checks the numbers and overall financial performance of a majority of the country’s most valuable companies, which include those led by the likes of the Sys, Ayalas, Gokongweis, Aboitizes, Lopezes, and Manuel V. Pangilinan.

KPMG RG Manabat and Punongbayan & Auraullo follow SGV, auditing a combined 24% of listed companies.

Moreover, KPMG RG Manabat and Punongbayan split this evenly with about 12% of PSE-listed companies audited by each.

SGV and breakaway groups

In the case of 2GO, SGV used to be its external auditor. However, in 2014, the Board of Directors of 2GO replaced SGV with KPMG.

Former 2GO chief Sulficio Tagud Jr told Rappler the decision was because of a "major disagreement with SGV on the matter of treating the deferred tax asset during a 2013 audit."

This issue was escalated up to the level of the SEC, Tagud said.

SGV used to be the go-to accounting firm of almost all listed firms in the local exchange.

Washington Sycip, an icon of Philippine business who founded the local accounting firm after World War II, has a vast network of clients, especially Who’s who in Philippine business.

However, infighting in SGV led to partners putting up their own firms. The local partners of KPMG – Roberto Manabat and Emmanuel Bonoan, as well as their predecessors, Mario Mananghaya and Jaime Laya – and the founders of other industry competitors are mostly or all SGV alumni.

The collapse of Enron, which was audited by SGV’s former foreign partner, Arthur Andersen, also shook up the local industry as global giant Ernst & Young decided to drop its local partner, Punongbayan & Araullo, to join forces with the dominant SGV.

As the Philippine economy grew and as more multinational companies set up shop here, SGV’s competitors aligned with Ernst & Young’s global rivals, further reducing SGV’s dominance over the years.

KPMG RG Manabat has been among the beneficiaries of these shifts.

Due process

When it comes to choosing an external auditor to go over the financial performance and details of a company, a company’s board and management has the power to choose who it employs to carry out this task.

Below is a list of external auditors most frequently chosen by the 304 listed companies.

For now, the investing public needs a firm answer as to whether there are deficiencies in 2GO's earlier financial statements. – Rappler.com 

Sofia Tomacruz

Sofia Tomacruz covers foreign affairs, the overseas Filipino workers, and elections. She also writes stories on the treatment of women and children. Follow her on Twitter @sofiatomacruz. Email her at sofia.tomacruz@rappler.com.

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