Financial Disclosure, Post-Enron:

Applicable to Philippine Reform?

Victor S. Limlingan
*

The corporate crisis in the United States, precipitated by
the collapse of Enron Corporation, has evoked questions on
the state of fnancial disclosures in the Philippines, both
prior to and since Enron. On the basis of such questions,
e have taken a look at a spectru! of "# co!panies listed
in the Philippine Stock E$chan%e as an initial indication of
the i!pacts of the Enron scandal on fnancial disclosures
practices in the Philippines.
&'C()*OU+,
The 'sian fnancial crisis of "--. has put into question the
foundations of the East 'sian econo!ic !iracle. &efore the
crisis, East 'sia posted i!pressive and unprecedented
econo!ic %roth, but hen the crisis hit the re%ion hard,
doubts about the 'sian /!odels0 of %roth arose. 1eadin%
the pack of institutions ea%er to identify the causes of the
'sian fnancial crisis ere !ultilateral or%ani2ations such
as the 3nternational 4onetary 5und.
The 345 as in a particularly unco!fortable position, and
because it did not predict the crisis, found itself under
pressure. 3t found no readily available prescription to
peddle as a cure, and, in the case of 3ndonesia, ar%uably
!ade the situation orse. 's one Thai econo!ist beailed6
*
VIC!R "# $I%$I&'A&, D(A is the $u)o Foun)ation Professor of (usiness %ana*ement at
the Asian Institute of %ana*ement an) is a facult+ member of the Center for De,elopment
%ana*ement- .he is the proprietor an) mana*er of/ to*ether 0ith his 0ife, %arita, he mana*es
Re*ina Capital De,elopment Corporation, a member of the Philippine "toc1 E2chan*e- an) Vita
De,elopment Corporation, a ,enture capital compan+# he author 0oul) li1e to ac1no0le)*e the
contribution of researcher "tephen "antos to this article# his article 0as presente) in a public
lecture of the 'o,# 3ose (# Fernan)e4, 3r# Center for (an1in* an) Finance, &o,ember 5665#
/7o could Thailand be the !odel of sound econo!ic
!ana%e!ent as per 345 pronounce!ents and then after a
fe !onths of the crisis be declared a hotbed of crony
capitalis! and %overn!ent corruption by these sa!e
institutions80
3n response, the 345 and other !ultilaterals ascribed the
'sian crisis to poor %overnance. This resulted in increased
interest in %ood %overnance, hich as later transfor!ed
into the latest business fad. &ut co!panies and econo!ies
alike faced to %larin% contradictions 9 if 'sian co!panies
and %overn!ents had been practicin% poor %overnance, hy
ere they successful for about :; years prior to the 'sian
crisis8 3f %ood %overnance is directly related to econo!ic
perfor!ance, hy is China perfor!in% !uch better than
Sin%apore, 7on% (on%, or Taian8
Then ca!e the Enron scandal 9 a reprieve for !any 'sians
ho earily had to under%o pontifcations fro! 345
!issions hen these ca!e to ton. 4oreover, instead of
bein% an isolated case, Enron as discovered to be !erely
the tip of the iceber% of poor %overnance< other '!erican
co!panies quickly folloed suit. 3n the private sector, poor
%overnance e$tended to auditin% fr!s like 'rthur 'ndersen
and invest!ent bankers like 4errill 1ynch. The scandal also
per!eated the public sector hen 7arvey Pitt, the then
head of the Securities and E$chan%e Co!!ission, as
accused of bein% a /crony lobbyist.0
=ith the loss of the !oral ascendancy of the =estern /hi%h
priest0, co!es our te!erity in seekin% to revie the
'!erican )ood )overnance 4odel. =e can no consider
ith dispassion the theoretical fra!eork, test its
applicability to 'sian conditions, and propose an alternative
'sian )ood )overnance 4odel.
T7E 3SSUES O5 CO*PO*'TE )O>E*+'+CE
The '!erican )ood )overnance 4odel is %rounded on four
conceptual issues, hich, econo!ists ar%ue, !ust be
addressed under the '!erican econo!ic syste!. These
issues are identifed as6 the agency problem, the asymmetry
of information, high transaction costs, and the free rider
problem.
The agency problem occurs hen the principal and a%ent
are not the sa!e person or entity. 3n the '!erican econo!ic
syste!, especially a!on% listed co!panies, the principals
?shareholders@ are diAerent fro! the a%ents ?!ana%e!ent@.
Under this situation, the a%ency proble! is confronted
hen the principal has to ensure that the a%ent acts in the
principalBs interest and not his on.
To co!plicate !atters, the a%ent usually has %reater access
to infor!ation and so places the principal at a disadvanta%e.
The shareholder or principal could, of course, seek to obtain
!ore infor!ation to overco!e the asymmetry of
information 9 the bias toards !ana%e!ent in ter!s of
knoin% hat is %oin% on in the fr! C and after analy2in% it,
act on its basis. &ut doin% this ould incur high transaction
costs on the part of the principal. On the other hand,
transaction costs for the a%ent are shouldered by the
a%entBs e!ployer, thus addin% insult to inDury. rather than
directly.
To co!plicate !atters further, the principal is so!eti!es
not a sin%le entity but often a lar%e nu!ber of shareholders.
3f so!e of these shareholders start de!andin% that
!ana%e!ent be held accountable and act on the interest of
the shareholders, these fe shareholders ill have to run
the risk of bearin% the full costs of their !ove, should it fail.
On the other hand, should their advocated strate%y succeed,
the benefts have to be shared a!on% all shareholders, even
those ho did not e$ert eAort or e$pend resources in
support of the !ove 9 in other ords, free riders.
3n response to the proble!, hich ha!pered invest!ent
and hence the %roth of the capital !arkets, the United
States %overn!ent, to%ether ith the private sector,
developed specifc !echanis!s over ti!e.
T7E '4E*3C'+ 4O,E1
1ike their political syste!, hich is equipped ith checks
and balances to restrain hu!an a!bition, the '!erican
econo!ic syste! is equipped ith a si!ilar syste! to
restrain hu!an %reed. The '!erican )ood )overnance
4odel consists of the folloin% !aDor co!ponents6
Oversi%ht &odies
5inancial ,isclosures
*e%ulatory &odies
Stock Options
4arket ,iscipline
1e%al 'ction
The oversight bodies are co!posed of independent
directors, independent auditors, independent ratin%
a%encies, and the independent security analysts. )uided by
the adversarial syste! underpinnin% =estern culture,
oversi%ht bodies ere instituted to assure the faithful
perfor!ance of a%ents. )overn!ent facilitated the
environ!ent hich alloed these contendin% parties to
check on !ana%e!ent by !andatin% reports and fnancial
disclosures on the results of operations, the co!panyBs
prospects ?throu%h pro for!a proDections@, the
co!pensation of top !ana%e!ent, the co!panyBs dealin%s
ith related parties, and on any si%nifcant corporate
develop!ents.
Ulti!ately not content ith the independent bodies, the
federal %overn!ent after the "-E- !arket crash established
the !ain regulatory and supervisory body, the Securities
and E$chan%e Co!!ission. 3n addition, state attorneysC
%eneral, stock e$chan%es, and industry associations ere
%iven various re%ulatory functions.
3n the ords of the Senate Co!!ittee on )overn!ent
'Aairs, hich conducted hearin%s on Enron, /the public
relies on a partnership of both the SEC and the private
%atekeepers to keep tabs on the enor!ous capital !arket.
Under the partnership, the SEC, ith its s!all staA, relies
!ainly on private %atekeepers as the pri!ary and frst
restraint on corporate ron%doin% hile concentratin% its
eAorts on those ho have !ana%ed to slip throu%h the
private %atekeepers.0
7oever, all these elaborate procedures failed in the Enron
case. )iven the !any other cases since, this has led to the
conclusion that Enron as not an isolated case as clai!ed
by the defenders of '!erican )ood )overnance 4odel but 9
clai! the !ost severe critics 9 a syste!ic failure.
)OO, )O>E*+'+CE 3+ T7E P7313PP3+ES
=hile the '!erican )ood )overnance 4odel is under
critical revie in the United States, the Philippine
Securities and E$chan%e Co!!ission, under the spell of the
!ultilateral a%encies, has been busy adoptin% all its
features ithout any apparent re%ard for its applicability in
the Philippines.
3n the area of fnancial disclosures, for e$a!ple, the
Philippine SEC does not distin%uish beteen listed and
unlisted co!panies. =hen Enron hid its enor!ous losses
and declared handso!e profts, it had to pay inco!e ta$es
on those fctitious profts. &ut it did so to !aintain the
inFated price of the co!panyBs shares, the beneft fro! an
inFated share price in their case far outei%hin% the inco!e
ta$es paid. 3n the Philippines, unlisted co!panies have no
incentive to inFate their earnin%s. *ather, they are %uided
by the obDective of beautifyin% their balance sheets to cal!
the nerves of creditor banks. 5or this reason, fnancial
disclosure issues for the Philippines are entirely diAerent
fro! fnancial disclosure issues for the United States. Table
" belo shos the contrast beteen fnancial disclosure
issues in the Philippines and the United States.
T'&1E "
'4E*3C'+
CO+CE*+S
P7313PP3+E
CO+CE*+S
Stock Sap ,ebt 1evera%e
Guarterly 3nco!e 3nterest E$pense
Covera%e
OAC&alance 3te!s 'ppraisal 3te!s
Special Purpose
Enterprises
*elated Party
Transactions
Stock Options 5orei%n E$chan%e
1osses
3n contrast to the local Securities and E$chan%e
Co!!ission, the Philippine 3nstitute of Certifed Public
'ccountants ?P3CP'@ has shon a keener appreciation of
the fnancial disclosure issues in the Philippines. 4ore than
that, P3CP' has shon an inti!ate %rasp of public policy
dyna!ics and a deft hand at public policy advocacy.
T7E P3>OT'1 *O1E O5 P3CP'
's in the United States, the e$ternal auditor of a co!pany is
responsible for e$pressin% an independent opinion on the
reliability of a co!panyBs fnancial condition. 's
professionals, e$ternal auditors are e$pected to e$press
their opinion no !atter ho distasteful or destructive that
opinion ould be to their corporate client. That is the ideal.
3n reality, as corporate clients pay the professional fees of
e$ternal auditors, subtle 9 or even direct pressure C is
applied hen such an adverse opinion could lead to the
client en%a%in% instead the services of a co!petin% auditin%
fr!.
This /destructive co!petition0 dile!!a beco!es even !ore
challen%in% if the e$ternal auditor is concurrently the
corporate clientBs fnancial consultant. This is because hile
auditin% ork is costCbased, consultin% ork is beneftsC
based and is therefore !ore lucrative. Thus, in the case of
'rthur 'ndersen, the prospective loss of consulting inco!e
rendered the! !ore !alleable in issuin% their auditing
opinion on Enron.
P3CP' solved this /destructive co!petition0 dile!!a by
en%a%in% in /constructive carteli2ation0. Throu%h their
initiative, an 'ccountin% Standards Council co!posed of
representatives fro! the private and public sectors as
or%ani2ed. The 'ccountin% Standards Council defned its
obDective as6 raisin% accountin% standards in the Philippines
to orldCclass levels by confor!in% to 3nternational
'ccountin% Standards ?3'S@.
3n Septe!ber E;;", the local SEC for!ally adopted the
reco!!endations of the Council by !andatin% the adoption
of the 3'S on a pro%ra!!ed basis. Throu%h this !ove,
co!panies in the Philippines can no lon%er e$pect lenient
treat!ent of their fnancial transactions by chan%in% or
threatenin% to chan%e their auditors.
T7E P7313PP3+E 13STE, CO4P'+3ES
Philippine listed co!panies ere chosen for analysis in this
study because they, rather than unlisted fr!s, face the
sa!e pressure to inFate their inco!es as their '!erican
counterparts. 4oreover, bein% public, they are required by
the SEC to sub!it !ore detailed infor!ation on their
fnancial condition.
The "# Philippine listed co!panies chosen for this study are
enu!erated in Table E. 'd!ittedly, such a s!all sa!ple si2e
is of li!ited statistical validity< hoever, the obDective of this
study is not to reach defnitive conclusions, but rather to
%ain so!e initial insi%hts needed to fra!e the issues as
broadly and strate%ically as possible. The e$tent of fnancial
disclosure is defned ith respect to four sources of
infor!ation6
". The opinions e$pressed by e$ternal auditors<
E. The footnotes that ere %iven to assist in a %reater
appreciation of the fnancial condition of the co!pany<
:. The fnancial reports that the co!panies are required
to fle ith the Securities and E$chan%e Co!!ission<
and
#. 4ana%e!ent discussion and analysis as %leaned fro!
corporate reports.
A($E 5
&'+(3+)
". Equitable PC3 &ank
Corporation
E. Union &ank of the
Philippines
T*'+SPO*T'T3O+
:. =illia! )othon% and
'boiti2
#. 3nternational Container
Ter!inal Services, 3nc.
CO44U+3C'T3O+S
H. '&SCC&+ &roadcastin%
Corporation
I. Philippine 1on%
,istance Telephone
Co!pany
PO=E*
J. Petron Corporation
.. 4anila Electric
Co!pany
5OO,
-. *54 Corporation
";. Kollibee 5ood
Corporation
*E'1 EST'TE
"". C L P 7o!es 3nc.
"E. 4e%aorld
Corporation
":. Philippine *ealty
Corporation
7O1,3+) CO4P'+M
"#. 7ouse of 3nvest!ents,
3nc.
53+,3+)S
Surprisin%ly, there as no si%nifcant chan%e in the nu!ber
of qualifed opinions of auditors fro! E;;; to E;;", as
shon in Table :. Unqualifed opinions, hoever, increased
fro! J in E;;; to . in E;;". Of the re!ainin% I ith
qualifcations, E ere !inor. 3CTS and Kollibee ere
qualifed, as the principal auditors did not audit their
forei%n subsidiaries. To co!panies 9 P1,T ?!ore
accurately its subsidiary Piltel@ and CLP 9 ere qualifed
because they are technically in default of their loan
obli%ations, leavin% the auditor unable to assu!e that these
ill re!ain as %oin% concerns since creditors could seek
their dissolution at any ti!e.
T'&1E :
CO4P'+M 'U,3TO* E;;; E;;" C7'+)E
Equitable
PC3
S)> TG SG +e%ative
U&P S)> UG UG +one
=)' S)> UG UG +one
3CTS S)> TG TG +one
'&SCC&+ S)> UG UG +one
P1,T P=CNKC TG TG +one
Petron S)> SG SG +one
4eralco S)> UG UG +one
*54 S)> TG UG Positive
Kollibee S)> TG TG +one
CLP S)> TG TG +one
4e%aorld EMNP' UG UG +one
Philrealty (P4)N14 UG UG +one
73 S)> UG UG +one
"'V 7 "+cip 'orres 8 Vela+o
P9C 7 Price0aterhouseCoopers
3C 7 3oa:uin Cunanan
E; 7 Ernst 8 ;oun*
PA 7 Punon*ba+an 8 Araullo
$% 7 <<<<<<<<<<<<<<<<<<
"= 7 "i*nificantl+ :ualifie) opinion
= 7 echnicall+ :ualifie) opinion
>=7 >n:ualifie) opinion
The to si%nifcant qualifcations involved Equitable PC3
&ank and Petron. 3n co!pliance ith the ne and stricter
rules of the State!ent of 5inancial Standards rules adopted
by the 'ccountin% Standards Council and the SEC, Petron
had to !ark its inventory to !arket and therefore book a
loss of around E.H billion pesos. The !ore serious
qualifcation involved Equitable. 3n its report, the
independent e$ternal auditor qualifed its opinion by statin%
that6
/'s discussed in +otes J and . to the consolidated fnancial
state!ents, in E;;", the &ank set up additional alloance for
loan and other losses ?includin% a portion pertainin% to the
invest!ent and advances to a subsidiary in E;;; a!ountin% to
P#." !illion, net of deferred inco!e ta$@ totalin% P#.J billion,
net of deferred inco!e ta$, throu%h a char%e a%ainst surplus
instead of current operations.0
3n short, Equitable as clai!in% that it !ade a proft of
P"#; !illion after ta$ in E;;", but its auditor believed that
the bank instead suAered a loss of P#.I billion. This
si%nifcant diAerence in opinion raises the issue of hich of
the to clai!s should prevail. 3n addition, it is a knon fact
that Equitable &ank is under not only the SECBs purvie ?as
a corporation under Philippine la@, but also that of the
bankin% re%ulator, the &an%ko Sentral n% Pilipinas ?as a
licensed bank@ and the Philippine Stock E$chan%e ?as a
listed co!pany@. The deafenin% silence of these three
re%ulatory bodies has disappointed !any.
There as also an increase in the avera%e nu!ber of
fnancial footnotes fro! ". in E;;; to E: in E;;". This as
coupled ith an increase in the nu!ber of footnote pa%es
fro! ". in E;;; to E" in E;;". 'lthou%h these results are
indicative of stricter disclosure rules, further data is needed
to establish the relationship. =hat is interestin%, hoever, is
the variance in ter!s of quantity of disclosures ran%in%
fro! H# pa%es for P1,T to "E pa%es for Philrealty.
T'&1E #
CO4P'+M 5OOT+OTES
E;;" E;;; C7'+)E
+O. PP. +O. PP. +O. PP.
Equitable PC3 E; E# E" E# ?"@ ;
U&P E; "- E; "J ; E
=)' EI ": "I "E "; "
3CTS EE "J E; "I E "
'&SCC&+ EJ ". "J "E "; I
P1,T E# H# E; H# # ;
Petron E: "H ". ": H E
4eralco :; EI E; "J "; -
*54 EH E# EE E" : :
Kollibee E: "I "# - - J
CLP EE "I "J "H H "
4e%aorld "J "- "H "H E #
Philrealty "J "E "J ": ; ?"@
73 E- E" E" "I . H
'vera%e E: E" ". ". H :
' closer look on the content of the footnotes 9 hether it
indicated develop!ents, hich later on beca!e ra%in%
public issues C shoed that co!panies divul%ed these
infor!ation to so!e e$tent. 5or e$a!ple, 4eralco, a listed
co!pany, has been in the nes for its controversial
purchase of poer fro! a related co!pany as ell as for
the refund, hich the Supre!e Court ordered the co!pany
to !ake to its custo!ers. =e found that in both cases,
4eralco divul%ed these to !aterial pieces of infor!ation
?+otes ". and EI@6
+ote ".. *elated Party Transaction
3n the nor!al course of business, the Parent Co!pany
purchased poer fro! an aAiliate a!ountin% to PhP"#,"JH,JHE
and PhP.,J#H,;II in E;;" and E;;; respectively. The related
liabilities outstandin% as at the end of E;;" and E;;;
a!ountin% to PhPE,-:E,#"J and PhPE,;;E,HE", respectively, are
presented as part of /Trade 'ccounts Payables0 account. Other
transactions ith subsidiaries and aAiliates consist of purchases
of electrical equip!ent, contracted services, sharin% of facilities
and !aintenance of poer station and proDect advances. Total
transaction ith related parties for %oods and services provided
to the Parent Co!pany a!ounted to Php#H-,IE- in E;;",
Php:"#,-.H in E;;; and Php:-I,J;- in "---. On a consolidated
basis, after eli!inatin% interCco!pany transactions of
subsidiaries, total transactions ith aAiliates a!ounted to
Php";E,;-" in E;;", PhpH;,"#- in E;;; and Php "EI,":J in
"---.
+ote EI. Contin%ent 1iabilities
a@ The Parent Co!pany is contin%ently liable to refund Php"".:
billion to its custo!ers.
On 5ebruary "I, "--., the then E*&, in E*& Case O-:C"".,
rendered a decision orderin% the Parent Co!pany to refund to
its custo!ers PhP;."IJ per kiloattChour startin% ith the
Parent Co!panyBs billin% cycles be%innin% 5ebruary "--# until
its billin% cycles be%innin% 5ebruary "--., or correspondin%ly
credit the sa!e, in favor of the custo!ers a%ainst their future
consu!ption. The E*&Bs decision superseded and !odifed the
provisional relief of Php;.".# per kiloattChour that E*&
%ranted to the Parent Co!pany on Kanuary E., "--#.
The E*& clai!ed that the Parent Co!pany had e$ceeded the
!a$i!u! alloable rate of return of "EP. 3n co!putin% for the
Parent co!panyBs rate of return, the E*& disalloed, a!on%
others, inco!e ta$ as a part of the operatin% e$penses and
co!puted for the rate based usin% a !ethod opposed to the
avera%e !ethod bein% practiced by the Parent Co!pany.
On 5ebruary E;, "--., the Parent Co!pany fled ith the
Court of 'ppeals ?C'@ a petition for revie, hich stron%ly
disputed the E*& decision. 3n its petition, the Parent Co!pany
ar%ued that the E*& disre%arded certain basic le%al principles
in Public Utility 1a, particularly in rateC!akin%. The Parent
Co!pany has also contested other relatively !inor, valueCise,
disalloances !ade by E*&.
On 5ebruary EI, "---, the C' rendered a decision settin%
aside the afore!entioned E*& decision, insofar as it directed
the Parent Co!pany to reduce its rates and eAect a refund to its
custo!ers. On 4arch "., "---, the E*& fled a !otion for
reconsideration of the C' decision. On ,ece!ber E:, "---, the
C' denied the !otion fled by E*&. On 5ebruary E", E;;;, the
Parent Co!pany received a copy of petition fled ith the
Supre!e Court by the *epublic of the Philippines represented
by the E*& questionin% the aforesaid decision of the C'. '
si!ilar petition fled by the 1ayers '%ainst 4onopoly and
Poverty ?1'4P@ as received by the Parent Co!pany on 4arch
EE, E;;;. Co!!ents on the said petition ere fled by the
Parent Co!pany on 4ay E#, E;;; and October :;, E;;;,
respectively.
' sli%ht decrease in the nu!ber of pa%es fro! .H pa%es in
E;;; to .E pa%es in E;;" in ter!s of reports ?5or! "JC'@
fled as observed. The decrease could be e$plained by the
special case of Kollibee, hich in E;;; fled ith the SEC
::; pa%es of infor!ation and then reduced this to "#H
pa%es in E;;". E$cludin% Kollibee, the nu!ber of pa%es of
reports sub!itted increased fro! an avera%e of IJ pa%es in
E;;; to JJ pa%es in E;;", as shon in Table H.
T'&1E H
CO4P'+M SEC 5O*4 "JC' 5313+)S
E;;" E;;; C7'+)E
PP. PP. PP.
Equitable PC3 IE I# ?E@
U&P H. HH :
=)' HJ I: ?I@
3CTS I: H: ";
'&SCC&+ .J H# ::
P1,T EEI "J" HH
Petron ." .; "
4eralco ""J .: :#
*54 I" HH I
Kollibee "#H ::; ?".H@
CLP ## :. I
4e%aorld HE #- :
Philrealty #. H" ?:@
73 ## :. I
'vera%e .E .H ?:@
' ebsite is often considered the best ay of
co!!unicatin% to outsiders, alloin% for %reater
transparency. 7oever, of the "# co!panies under study,
four did not have a ebsite. Of the ten co!panies that had a
ebsite, four did not post a copy of their annual report.
This could be due to the co!panyBs reluctance to divul%e
corporate infor!ation or to the lack of aareness of the role
the 3nternet in corporate disclosure.
T'&1E I
CO4P'+M CO*PO*'TE =E&S3TE
3+>ESTO*
*E1'T3O+S
+E=S*OO
4
'++U'1
*EPO*TS
GU'*TE*1M
*EPO*TS
Equitable
PC3
M + M +
U&P M M + M
=)' M M M M
3CTS M M + M
'&SCC&+ M M M M
P1,T M M M M
Petron M M M M
4eralco M M M M
*54 M M + M
Kollibee M M + M
CLP + + + +
4e%aorld + + + +
Philrealty + + + +
73 + + + +
To su!!ari2e the results, e used a scorin% syste!
developed by dividin% three !aDor sources 9 SEC
require!ents, footnotes, and !ana%e!ent discussion and
analysis C into H: co!ponents under "" cate%ories, and
ratin% a co!pany a " or ; in each para!eter. The cate%ories
ere6
1. SEC requirements
o &usiness and )eneral 3nfor!ation
o Operational and 5inancial 3nfor!ation
o Control and Co!pensation 3nfor!ation
o E$hibits
2. Footnotes
o &usinessNOr%ani2ation Structure
o 5inancial State!ent 3te!s
o Si%nifcant 3nfor!ation
3. anagement !iscussion and "nalysis
o 4ana%e!ent Operation
o 4ana%e!ent E$ceptions
o E$panded ,isclosure
o Se%!entation N Se%!ent *eportin%
o ,ebt 4aturity Profles N ,ebt Proflin%
The results, %iven in Table J, sho P1,T as the clear
topnotcher a!on% the sa!ples. P1,TBs position can be
attributed to the fact that the co!pany is listed on the +e
Mork Stock E$chan%e and is therefore e$perienced in
!eetin% strin%ent fnancial disclosure require!ents.
PR!"PEC"
The drivin% force behind fuller fnancial disclosure has been
the 'ccountin% Standards Council. This Doint public and
private body has set the pace and prospects of future
fnancial disclosures. Their proDected i!ple!entation of
S5'S standards in E;;: and E;;# include the folloin%
prospectives6
5orei%n E$chan%e E$posure in E;;: *eports ?S5'S .@
Provisions, Contin%ent 1iabilities and Contin%ent
'ssets in E;;: *eports ?S5'S :J@
3ntan%ible 'ssets in E;;: *eports ?S5'S :.@
1eases in E;;# *eports ?S5'S "J@
T'&1E J
CO4P'+M SU44'*M O5 *ESU1TS
TOT'1
SCO*E
'PP13C'&1E
P'*'4ETE*S
?OUT O5 H:@
P1,T IH H:
Kollibee H: #-
U&P HE H;
Equitable PC3 H# HE
'&SCC&+ H; #-
4eralco H# H:
4e%aorld #. #.
=)' H; H"
Petron H; H"
73 H" H:
*54 H; H:
Philrealty #J H;
3CTS #J H"
CLP #H HE
'vera%e H" H"
Of these, S5'S . on 5orei%n E$chan%e should have the
%reatest i!pact, because it requires co!panies to reco%ni2e
their forei%n e$chan%e losses instead of si!ply deferrin%
the reco%nition of such loss by capitali2in% these6
S5'S .'. ,E5E**E, 5O*E3)+ EQC7'+)E ,355E*E+CES
?'+ '4E+,4E+T O5 'SC S5'S +O. ., 'CCOU+T3+) 5O*
T7E E55ECT O5 C7'+)ES 3+ 5O*E3)+ EQC7'+)E *'TES@
This standard eli!inates the deferral of forei%n e$chan%e
diAerences eAective for fnancial state!ents coverin% periods
be%innin% on or after Kanuary ", E;;:, ith earlier application
encoura%ed. 'n enterprise should account for the eAect of the
chan%e on a retroactive basis or, alternatively, it !ay a!orti2e
any re!ainin% deferred forei%n e$chan%e diAerences over a
toCyear period. 's of ,ece!ber :", E;;#, all deferred forei%n
e$chan%e diAerences should have been a!orti2ed.
&y calculatin% the percenta%e of the forei%n debt of the
listed co!panies to their total assets, as laid out in Table .,
a !ore detailed picture of the ne standardBs i!pact
e!er%es.
The results ran%e fro! a lo of 2ero to a hi%h of H:.#E
percent for P1,T. The hi%h level of forei%n debt of P1,T
could be Dustifed by its substantial dollar earnin%s. On the
other hand CLP, a real estate co!pany ill be hardCpressed
to service its forei%n debt, as it lacks a substantial source of
forei%n earnin%s. 4ore orriso!e thou%h is the absence of
such infor!ation on Equitable PC3 &ank Corporation and on
Union &ank.
T'&1E .
CO4P'+M ,O11'* ,E+O43+'TE, 1O'+S
?P O5 TOT'1 'SSETS@
E;;" ',KUSTE, E;;;
Equitable PC3
U&P
=)' ".IH E."H
3CTS ;.;; #..;- #J.-:
'&SCC&+ H..J J.;.
P1,T H:.#E HH.:: H#.-:
Petron :#.E: #;.EI :..J;
4eralco E;.J; "-.H-
*54
Kollibee ;.;; ;.;; ;.;;
CLP :".-# E..EI E..;I
4e%aorld
Philrealty ;.;; ;.;; ;.;;
73 ;.;; :.J.
S5'S . also states that co!panies !ust revise their
treat!ent of forei%n e$chan%e losses fro! capitali2in%
the!, to i!!ediately reco%ni2in% the!. &esides e$posure to
forei%n debt, ho forei%n e$chan%e losses are treated
should also be looked into. Table - shos hich of the
co!panies hed%ed its forei%n e$chan%e e$posure and ho
they treat forei%n e$chan%e losses.
4ost of the co!panies capitali2ed their forei%n e$chan%e
losses on capital e$penditures and half ?seven of the "#
co!panies here@ do not hed%e their forei%n e$chan%e
e$posure. On the positive side, the to banks, hich caused
orry due to the absence of data on their forei%n e$chan%e
e$posure, already follo S5'S ., char%in% all their forei%n
e$chan%e losses to operations. 4oreover, they also en%a%e
in hed%in% to protect the!selves a%ainst such losses.
T'&1E -
CO4P'+M PO13CM O+ 5O*E3)+
EQC7'+)E T*'+S'CT3O+S
C'P3T'1
EQP.
3+>E+TO*
M O+
7'+,
+O*4'1
OPE*'T3O
+S
7E,)3+)
Equitable PC3 Char%ed to operations Mes
U&P Char%ed to operations Mes
=)' Capitali Capitali Operatio +o
2ed 2ed ns
3CTS Char%ed to operations +o
'&SCC&+ Capitali2ed So!e
P1,T Capitali
2ed
Char%ed to
operations
+atural
7ed%e
Petron Capitali
2ed
Char%ed to
operations
So!e
4eralco Capitali
2ed
Char%ed to
operations
Mes
*54 Capitali2ed Operatio
ns
+o
Kollibee Char%ed to operations +o
CLP Char%ed to operations +o
4e%aorld Char%ed to operations +o
Philrealty Equity Char%ed to
operations
+o
73 Capitali
2ed
Char%ed to
operations
Mes
5inally, su!!ari2ed in Table ";, of these co!panies, three
have adopted the S5'S . rule< three have not adopted but
have hed%ed hile one plans to pass on the forei%n
e$chan%e losses to the custo!ers. 7alf of the co!panies
ho do not follo S5'S . at present ill i!ple!ent the rule
only in E;;H.
A($E ?6
CO4P'+M PO13CM O+ 'SC S5'S .
Equitable PC3 7ed%ed
U&P 7ed%ed
=)' Only hen eAective
?E;;H@
3CTS 'dopted
'&SCC&+ Only hen eAective
?E;;H@
P1,T 7ed%ed
Petron Only hen eAective
?E;;H@
4eralco Char%e to custo!er
*54 Only hen eAective
?E;;H@
Kollibee 'dopted
CLP 'dopted
4e%aorld Only hen eAective
?E;;H@
Philrealty Only hen eAective
?E;;H@
73 Only hen eAective
?E;;H@
3n su! then, e can conclude the folloin%6
"@ There ere no /Enron0 or />ictorias 4illin%0 type of
discoveries<
E@ There ere no transfer of e!barrassin% fnancial
infor!ation to the footnotes<
:@ 'dDust!ents !andated in E;;" 5inancial *eports due
to 'ccountin% *efor!s initiated by P3CP' and adopted
by the SEC have been faithfully carried out by the
listed co!panies<
#@ 5uture adDust!ents in 5orei%n E$chan%e 1osses ill
have the %reatest i!pact in ter!s of the fnancial
conditions of the listed co!panies.
PU&13C PO13CM 34P13C'T3O+S
"@ The '!erican )ood )overnance 4odel, ith its focus
pri!arily on capital !arkets rather than banks, is not
holly applicable to the Philippines<
E@ 'ny proposed Philippine )ood )overnance 4odel !ust
deal !ore ith a KapanClike situation centered around
creditorCbanks< and therefore
:@ 5inancial disclosures and %ood %overnance policies
!ust focus on the bankin% sector.
Several policyCrelated conclusions can be dran fro! these
reali2ations. 5irst, e ar%ue that the '!erican )ood
)overnance 4odel is not applicable to the Philippines for
the folloin% reasons6
"@ The independent director policy is 9 to put it very
bluntly 9 irrelevant, ineAective and i!!aterial<
E@ 'dvisory rather than oversi%ht ?adversarial@ bodies are
called for in any proposed Philippine )ood )overnance
4odel< and
:@ *esponsibilities of !aDority shareholders rather than
the ri%hts of !inority shareholders !ust be stressed in
any proposed Philippine )ood )overnance 4odel.
The independent director policy bein% stron%ly pursued by
the Securities and E$chan%e Co!!ission is irrelevant as
the a%ency proble! is relatively rare in the Philippines. The
principal is usually the sa!e as the a%ent. 3t is ineAective
si!ply because the independent director can never be the
equal of the co!pany onerNdirector. 3n the United States,
here both independent and co!pany directors are
professional !ana%ers, equality is possible. Conversely, no
independent director can be as concerned as a co!pany
onerNdirector about the elfare of the co!pany.
The independent director policy is i!!aterial in the
Philippines because independent directors are needed hen
a co!pany has trouble ith its shareholders. Unlike their
'!erican counterparts, 5ilipino co!panies are in trouble
ith their creditors and not ith their shareholders. 3n the
Enron case, no '!erican co!!ercial bank ran into
proble!s. 4eanhile, Philippine co!!ercial banks ere
the !ost adversely aAected in the >ictorias case.
"
*ather than the corporate structure of the United States,
our /fa!ily %roup0 structure rese!bles !ore the #eiretsu of
Kapan. Under this, the directors of the Kapanese co!pany
are usually also the !ana%e!ent of other co!panies
belon%in% to the sa!e #eiretsu. Thus, in that country, the
concept of an independent director does not e$ist. Under
our fa!ily %roup structure, the concept of an independent
director outside of !ana%e!ent or of the fa!ily %roup of
co!panies is an alien concept.
3nstead of pursuin% the adoption of the independent
director policy, Philippine public policy !akers should %ive
!ore focus to refor!in% the bankin% sector. The listed
co!panies ith qualifyin% audit opinions are either
co!panies in trouble ith their creditor banks or banks
hich are havin% trouble ith their borroers. 3nstead of
ti%htenin% rules on fnancial disclosures for banks, the
&an%ko Sentral n% Pilipinas is loosenin% the!. Special
purpose entities are no substitute for refor!in% the bankin%
syste!. 'fter all, they ere the !aDor !echanis!s by hich
Enron sou%ht to hide its horrendous losses.
1astly, our public policy !akers !ust take the stance of not
acceptin% fnancial state!ents that are qualifed by e$ternal
auditors as co!plyin% ith fnancial disclosure
require!ents. Only throu%h this can the independence of
e$ternal auditors be stren%thened and corporate
!ana%e!ent kept honest
OOO
?
In April ?@@A, Victorias %illin*, a su*ar refiner, collapse) un)er B556 million of )ebt that 0as
lent a*ainst assets 0orth appro2imatel+ B?66 million# Victorias, a ,enerable compan+ 0hich 0as
consi)ere) a blue-chip client, ha) ,enture) into propert+ )e,elopment 0hen profits from su*ar
)ippe), )ue to )ere*ulation# Complacent 0ith its ol) customer an) bus+ )ealin* 0ith ne0
business, a lar*e number of local ban1s 0ere also continuall+ assure) b+ au)it opinions that
cleare) VictoriasCs financial statements D 0hich later turne) out to contain assets 0hich )i) not
e2ist#