A Comparative Analysis of the SOX, the Proposed Philippine Corporate Reform Act (2004) and the SEC's Code of Corporate Governance

By Atty. Juris Bernadette M. Tomboc

September 16, 2005

I. Introduction

Corporate America came tumbling down with the case of Enron. Andersen, an established auditing firm, earned huge profits as a consultant of Enron while at the same time serving as its external auditor. A jury has found Arthur Andersen guilty of obstructing justice.

As of the date of this writing, the prosecutors in the case of Enron have ended their rebuttal of defendants’ evidence and will begin the presentation of their closing arguments. The case of Enron will be presented to the jury for its decision next week.

The defendants in the case of Enron are charged with participating in alleged schemes to make Enron's broadband venture appear profitable when it never emerged past testing stages. Three of the five defendants in the Enron case are accused of conspiring with others to lie to Wall Street and other investors about supposed capabilities of Enron's broadband network and operating software so that they could pocket millions of dollars from sales of hype-inflated stock.

The prosecution presented numerous witnesses who said the network was in disarray and the operating system was still merely a concept at the time that the defendants touted both as up and running in a gathering. Enron shares jumped up from $54 to $72 within two days from the date of the conference.

The other two defendants are accused of conspiracy and fraud for allegedly faking $111 million in earnings from a supposed video-on-demand deal. A prosecution witness testified that the transaction to sell future revenues from the said deal to investors so that Enron could book immediate earnings was a sham because the investors were promised that they would be bought out and wouldn't lose money. The defendants, on the other hand, testified that the deal was legitimate but that, however, early discussions of a buyout guarantee dissolved because it would have violated accounting rules.

Fastow, the Enron’s former chief financial officer, was sentenced earlier this year to a 10-year prison term under a plea deal in which he agreed to cooperate with the prosecution.

Also as of the date of this writing, Ebbers, the founder and former chief executive of WorldCom, who was found guilty of fraud, has offered a deal to surrender nearly all of his personal fortune amounting to about $40 million to investors who lost billions when the telecommunications company spiraled into bankruptcy almost three years ago.

The deal was concluded in advance of Ebbers' sentencing in the criminal case, which was scheduled for July 13, 2005. Prosecutors have asked the judge overseeing the case to sentence Ebbers to 85 years in prison for masterminding the $11 billion WorldCom fraud, the largest in U.S. corporate history.

At the height of the telecommunications mania about five years ago, Ebbers was worth $1 billion on paper. He got into financial trouble when he borrowed against his WorldCom stock to invest in real estate and other businesses. When the WorldCom stock collapsed, his company then loaned him hundreds of millions of dollars to pay off the loans backed by his WorldCom shares.

Ebbers’ assets include $5 million in cash, a prospective "multimillion dollar" tax refund, about 300,000 acres, or 120,000 hectares, of timberland in Mississippi, as well as interests in a major trucking business, a marina and golf course, a hotel and other real estate ventures. He and his wife will also be required to vacate their multimillion- dollar home in Clinton, Mississippi, by October.

Hevesi, the lead plaintiff in the WorldCom securities litigation, has earlier collected more than $6.1 billion from a handful of the company's former investment banks and its former auditor, Arthur Andersen. Of the said amount, almost $25 million came from the personal holdings of WorldCom's twelve former directors. The proceeds will be distributed to the hundreds of thousands of investors, including mutual funds, insurance companies and individuals, who lost money in buying WorldCom’s bonds and stocks in the years leading to its collapse.

Last month, 80-year-old John Rigas, former CEO of Adelphia Communications, the U.S. 6th largest cable company, was sentenced to a fifteen-year prison term. He was convicted of bank and securities fraud and conspiracy that led to the company’s bankruptcy. Forty-nine-year-old Timothy Rigas, John Rigas’ son and former CEO of Adelphia was sentenced to a twenty-year prison term for his part in the fraud. Father and son were found guilty of obtaining improper cash advances totaling about $50 million and buying $1.6 million securities using Adelphia’s funds.

In the Philippines, a similar scandal involved deposed Philippine president Joseph Ejercito Estrada, accused of owning BW Resources Corporation jointly with Mr. Dante Tan who was facing charges of insider trading. The rapid rise and fall in the market value of BW Resources Corporation shares of stock caused large losses to the Social Security System (SSS) as it had invested heavily in the said shares. As a result of the said scandal, in addition to other cases against him involving alleged plunder, President Estrada was forced by the public to resign from the presidency.

Indeed, capitalism without conscience, as Pope John Paul II puts it, is dead. Profit is good, but it should not be made and spent at the expense of stockholders and the general public.

A. The U.S. Sarbanes-Oxley Act of 2002

The U.S. government passed the Sarbanes-Oxley Act (SOX) in 2002 in response to the above-described cases and other major corporate and accounting disgraces involving prominent U.S. companies which resulted in a loss of public trust in accounting and reporting practices. The Act, sponsored by U.S. Senator Paul Sarbanes and Representative Michael Oxley, is intended to strengthen corporate governance and restore investor confidence.

The SOX is wide ranging and establishes new and/or enhanced standards for all U.S. public company boards, management, and public accounting firms. The Act contains eleven (11) titles, or sections, ranging from additional corporate board responsibilities to criminal penalties. It requires the U.S. Security and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law.

The SOX establishes the following: new standards for corporate boards and audit committees; new accountability standards and criminal penalties for corporate management; new independence standards for External Auditors; and, a Public Company Accounting Oversight Board (PCAOB) under the Security and Exchange Commission (SEC) to oversee public accounting firms and issue accounting standards.

B. The Proposed Corporate Reform Act of 2004

In light of the corporate scandals that have taken place abroad and, likewise, in the Philippines, Congressman Jesli A. Lapus, of the Philippine House of Representatives, proposed House Bill No. 5260, otherwise known as the Corporate Reform Act of 2004. The proposed Act seeks to promote transparency and accountability, as well as regulate corporate abuses, by providing, among others, for the following:

1. Ban on the provision by accounting firms to their client companies of consulting services that would impair their independence as external auditor;

2. Rotation of the accounting partner overseeing the audits of a specific company at least once every five (5) years;

3. Certification by CEOs on the accuracy of their company’s financial reports with the imposition of a sanction in case of violation;

4. Prohibition on loans to executives of publicly-listed companies and companies imbued with public interest such as pension and educational pre-need companies;

5. Punishment of securities fraud, defined as any "scheme or artifice" to defraud investors, with up to 20 years imprisonment; and

6. Punishment on shredding or altering of a company’s records while it is under investigation with imprisonment of up to 20 years.
With the exception of certain provisions that are applicable only to the American legal setting and the modification of penalties imposed for violation of the SOX and other related U.S. laws, the proposed Philippine Corporate Reform Act of 2004 reproduces, in substance, the major provisions of the SOX.

In the Philippine Senate, Senator Sergio R. Osmeña III proposed Senate Bill No. 209. The Bill is a condensed version of SOX, but its objectives are similar to that of the latter and of Philippine House Bill No. 5260.

C. The Philippine SEC’s Code of Corporate Governance

In accordance with the State’s policy to actively promote corporate governance reforms aimed at raising investor confidence, developing the capital market, and helping achieve a high sustained growth for the corporate sector and the economy, the Philippine Securities and Exchange Commission (SEC), in its Resolution No. 135, Series of 2002, dated April 4, 2002, approved the promulgation and implementation of the Code of Corporate Governance. The Code is applicable to corporations whose securities are registered or listed, corporations that are grantees of permits, licenses and secondary franchise from the SEC, and public companies. The Code also applies to branches or subsidiaries of foreign corporations operating in the Philippines whose securities are registered or listed.

Under the Philippine SEC’s Code of Corporate Governance, boards of directors and management of corporations are advised to look into certain key areas of compliance covering directors, audit committees, nomination and compensation committees, auditors, and disclosure and transparency.

Provisions in the Code of directors include: the composition and qualifications of the board of directors; directors’ duties, functions and responsibilities; restriction on the number of directorships of a director; directors’ remuneration; directors’ training; and requirement for public companies to have at least two independent directors, or twenty percent of the board, whichever is lesser.

Audit committee provisions include: composition of the audit committee (at least three board members), qualifications of audit committee members, committee’s duties and specific functions covering internal and external audits, risk management, internal control, financial reporting, and compliance; and reporting relationship of the chief audit executive to the audit committee.

Nomination and Compensation Committee provisions include: composition of the nomination and compensation committees and the committee’s duties and responsibilities.

Internal auditor provisions include: submission of an annual report on internal audit to the audit committee and senior management; conduct of internal audit activities in accordance with the Standards for Professional Practice of Internal Auditing; and internal auditor’s reasonable assurance to the board of directors that key organizational and procedural controls have been complied with and are effective.

External auditor provisions, on the other hand, include: independent audit by a duly-accredited external auditor; external auditor’s objective assurance on the manner of preparation and presentation of financial statements; no non-audit work that will be in conflict with the external auditor’s functions; rotation of handling partner or external audit firm every five years; and disclosure of the reason/s for the resignation, dismissal or cessation from service of an external auditor.

Finally, disclosure and transparency provisions include: (a) disclosure of all material information, i.e., anything that could potentially affect share pricing, including earnings results, acquisition or disposal of assets, board changes, shareholdings of directors, and changes in ownership; and (2) other information that should always be disclosed, including remuneration of all directors and senior management, corporate strategy, and off-balance sheet transactions.

II. Comparison between the Provisions of the SOX, the Proposed Philippine Corporate Reform Act, the Code of Corporate Governance, and Other Relevant Philippine Laws

The following is an analysis of the key provisions of the SOX as compared to the Senate Bill No. 209 and House Bill No. 5260 (Corporate Reform Act of 2004), the Philippine SEC’s Code of Corporate Governance, and other laws relevant to the topic of governance of public corporations.

A. Public company accounting oversight board

Section 101 of the SOX provides for the creation of the U.S. Public Company Accounting Oversight Board (hereinafter referred to in this paper as the “Board”). The Board has a specialized function, which is to oversee audits of all public companies that are subject to securities laws.

The Board was created to protect the interests of the investing public by ensuring that financial reports of public companies are informative and accurate with respect to their true financial conditions, results of operations, sources and uses of funds, and disclosures of other information that may influence the market prices of shares of stock. The Board is also tasked with ensuring that audit companies and their partners have no other financial interest in their client companies, which may affect the quality of their audit reports.

There is currently no similar provision under Philippine law on a board to oversee the audit of public corporations, in particular. The Philippine Regulatory Commission’s Board of Accountancy is tasked under the Revised Accountancy Law of 2004 to supervise, control and regulate of the practice of accountancy, in general.

Provisions for the creation of a Public Company Accounting Oversight Board have been included in both Senate Bill No. 209 and House Bill No. 5260 (Philippine Corporate Reform Act of 2004).

B. Auditor independence

1. Services outside of the scope of practice of auditors

Section 201 of the SOX prohibits firms performing audits of public companies from engaging in other financial services for the latter. Prohibited activities include bookkeeping, financial system design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing services, management or human resources consultancy, investment advising, and legal and other expert services, even if they are not connected to the audit.

The purpose of the prohibition is to prevent audit firms from acquiring other financial interests in their client companies, aside from the external audit, which may, in turn, influence the quality of their audit reports. The exception is when the non-audit service has been pre-approved by the public company’s audit committee, provided, that the aggregate amount of all such non-audit services shall not exceed five percent of the total audit fees to be paid by the company to its auditor for the fiscal year during which the non-audit services are to be provided.

The Code of Ethics for Professional Accountants in the Philippines prohibits firms performing audits of public companies from entering, with their client companies, into other engagements that are directly related to the preparation of financial statements such as bookkeeping, information technology and actuarial services.

A provision similar to Section 201 of the SOX is included in House Bill No. 5260 and Senate Bill No. 209.

2. Audit partner rotation

A corollary provision with respect to auditor independence is Sec. 203 of the SOX providing for the rotation of audit lead (or coordinating) partners every 5 years. This may also translate to the replacement by public companies of their external auditors or audit firms every 5 years.

The provision is intended to discourage external auditors from becoming interested in maintaining a permanent relationship with client companies, which may adversely affect their independence and, in turn, the quality of their audit reports. However, a weakness of this provision is that it will not deter external auditors from soliciting, during the conduct of the audit, future non-audit engagements with the public company that may commence after the termination of the audit engagement.

The Code of Ethics for Professional Accountants in the Philippines requires the rotation of audit lead partners in audits of public corporations. It also recommends such practice with respect to the conduct of external audits of all other companies, in general.

Both House Bill No. 5260 and Senate Bill No. 209 contain provisions similar to Sec. 203 of the SOX requiring audit partner rotation.

3. Conflicts of interest (prohibiting the employment by public companies of audit team members)

Section 206 of the SOX prohibits the hiring of an audit firm if the public company’s chief executive officer, controller, chief financial officer, or any person serving an equivalent position was employed by the audit firm and participated in any capacity in the audit of the listed company within a one-year period preceding the audit. The provision aims to deter public companies from hiring influential audit team members in order to secure favorable audit opinions.

The Code of Ethics for Professional Accountants in the Philippines directs auditors to consider whether the employment by a public corporation of a former audit team member will be a threat to their independence.

Both Senate Bill No. 209 and House Bill No. 5260 contain conflicts of interest provisions similar to Section 206 of the SOX prohibiting the employment by public corporations of audit team members.

C. Corporate responsibility

1. Public company audit committees

Section 301 of the SOX requires the creation of board audit committees in public companies and specifies their composition and functions. The SOX requires all the members of the board audit committee to be independent from the public company.

Independence means that the audit committee members must not have accepted any other consulting, advisory, or compensatory fee from the public company and that they are not affiliated to the company or any of its subsidiaries.

Independence by the audit committee is crucial since they are responsible for supervising the work of external auditors, including appointing and fixing their compensation, and since they function as the intermediary between the external auditors and the public company.

The Philippines’ Securities Regulation Code (Section 38) and the SEC’s Code of Corporate Governance (Chapter II, 1) provides for the inclusion of two independent directors, or at least twenty percent, whichever is lesser, of the total of five but not more than fifteen members, in the board of directors of public corporations.

Further, the Code of Corporate Governance (Chapter II, 9) also requires the board of directors of public corporations to constitute audit committees composed of at least three Board members, preferably with accounting or finance background, one of whom should be an independent director while another should have related audit experience. However, requiring only one out of three directors in the audit committee to be independent may not be sufficient to ensure the committee’s independence.

Both Senate Bill No. 209 and House Bill No. 5260 contain provisions similar to Section 301 of the SOX requiring all members of the audit committee be independent.

2. Corporate responsibility for financial reports

Sections 302 and 404 of the SOX aim to improving corporate governance through effective internal controls. Section 302 requires certification by the principal executive officer or officers, and principal financial officer or officers, or persons performing similar functions, that public companies’ quarterly and annual financial statements and other published financial information are fairly presented, and that they contain no untrue facts or omissions. Further, the CEO and CFO are required to establish and maintain disclosure controls and procedures for disclosing material changes in internal control and disclose to auditors and to the audit committee if control deficiencies, material weaknesses, or fraud exist.

Under Section 404, the CEO and the CFO are required to issue an internal control report in the company’s 2004 annual report and certify quarterly as to effectiveness of internal controls over financial reporting beginning year 2005. The CEO and the CFO are required to include a report in the Annual Report indicating that: they have designed and maintained a system of internal controls for financial reporting using a recognized internal control framework; they have tested internal controls and found them to be designed and operating effectively; and the auditor has evaluated the design and effectiveness of the company’s internal controls and found them to be operating effectively. Further, effective on the first quarter of year 2005, the CEO and the CFO are required to certify quarterly that there were no significant changes to internal controls for financial reporting using a recognized internal control framework.

The accounting firm, on the other hand, is required to issue two opinions on internal controls over financial reporting in the company’s 2004 Annual Report, namely: management's assessment process and effectiveness of the company’s internal controls over financial reporting.

Thus, under the SOX, CEOs and CFOs expressly assume responsibility for the correctness and accuracy of annual and/or quarterly reports. Their certification likewise assures the integrity of public companies’ system of internal controls, as well as the sufficiency of disclosures of all material information and corrections made to deficiencies in internal controls.

The purpose of the SOX in requiring such certifications is to clearly set forth the CEO’s and the CFO’s accountability and responsibility for information contained in public companies’ periodic reports.

The Philippines’ SEC has released a Financial Disclosures Checklist summarizing the disclosures required by SRC Rules 68 and 68.1 and the current Statement of Financial Accounting Standards issued by the Accounting Standards Council in effect as of January 1, 2004.

In the said checklist, the Statement of Management’s Responsibility must certify that: (a) financial statements have been prepared in conformity with generally accepted accounting standards; (b) management maintains a system of accounting and reporting which provides for the necessary internal controls; (c) management has disclosed to the audit committee and to its external auditor significant weaknesses in internal controls; (d) its board of directors has reviewed the financial statements; and (e) independent auditors were appointed by the stockholders

The certifications required in the checklist are of a similar nature to those required under the SOX, although the latter is more detailed and specifically points responsibility to the CEO and the CFO, while the Philippines’ SEC checklist is couched in more general terms and distributes responsibility for financial statement to the entire management, including the board of directors, of public corporations.

Both Senate Bill No. 209 and House Bill No. 5260 contain provisions that are similar to Sections 302 and 404 of the SOX.

D. Enhanced financial disclosures

1. Disclosures in periodic reports

Section 401 of the SOX requires financial reports of public companies to include a statement of all material correcting adjustments and off-balance sheet transactions, arrangements, obligations, and other relationships of the issuer that may have a material current or future effect on the company. The requirement is intended to provide material information on all things affecting public companies available to the public.

U.S. SEC regulations define "off-balance sheet arrangements" as the means through which companies incur risks of loss that are not fully transparent to investors. The term includes: (a) certain guarantee contracts; (b) retained or contingent interests in assets transferred to an unconsolidated entity; (c) derivative instruments that are classified as equity; and (d) material variable interests in unconsolidated entities that conduct certain activities. The concept of when the disclosures might be material and, therefore, require disclosure is very broad, in order not to leave anything to doubt.

The amendment contains a principle-based requirement that a public company must provide such other information that it believes to be necessary for an understanding of its off-balance sheet arrangements and their specified material effects. In addition, they include a requirement for public companies to disclose, in a tabular format, the amounts of payments due under specified contractual obligations, summarized by category of contractual obligation, for specified time periods.

In the Philippines, the SEC’s Code of Corporate Governance requires disclosure of “off-balance sheet transactions” and other arrangements that may have a material effect. However, the Philippines’ Accounting Standards Council (ASC) currently requires disclosure only of all significant accounting policies (SFAS No. 15 1986) and all related-party transactions (SFAS No. 16 1986), while the SEC’s Financial Disclosures checklist recommends disclosure only of correction of all fundamental errors and, likewise, related-party transactions, not yet of “off-balance sheet transactions”. The Philippines’ ASC is, however, currently working on the adoption of international accounting standards by 2005.

Both Senate Bill No. 209 and House Bill No. 5260 contain provisions similar to Section 401 of the SOX requiring disclosure of material “off-balance sheet transactions.”

2. Prohibition on personal loans to executives

Section 402 of the SOX makes it unlawful for any public company, directly or indirectly, to extend and/or maintain credit or arrange for the extension of credit in the form of a personal loan to or for the benefit of any director or executive officer. This prohibition on loans is broadly worded and may cover a variety of circumstances that are ordinarily not thought of as "loans". Business travel, corporate credit cards, and other cash advances used for business purposes of the corporation will not be considered as personal loans if such advances do not exceed acceptable per diem rates, in the case of business travel, or the reasonable cost of the anticipated business expense, and are repaid timely and promptly.

The prohibition is intended to prevent directors and other company executive officers from taking advantage of their position in public companies to the prejudice of the public, considering the case of WorldCom where company funds were loaned to its CEO to be used in paying off the latter’s personal bank loans, that were collateralized by the company’s shares of stock, when the price of the hype-inflated stock fell.

Directors in Philippine companies were previously prohibited under the Corporation Code from receiving compensation as such. They may only receive reasonable per diems. The prohibition has been modified by the Philippine SEC’s Code of Corporate Governance, which now allows payment of remuneration to directors of public companies. As a safeguard, directors are prohibited from participating in decisions involving their own compensation. Further, all compensation paid to directors must be disclosed. The board may constitute a remuneration committee composed of at least three members, of which at least one should be an independent director.

Directors receiving compensation for services rendered to a corporation in another capacity are still subject to the requirements for approval of contracts with self-dealing directors provided under Sections 32 and 33 of the Philippine Corporation Code (Batas Pambansa Blg. 68).

There is no similar prohibition on personal loans to directors and executives under Philippine law. However, both Senate Bill No. 209 and House Bill No. 5260 contain provisions similar to Section 402 of the SOX on prohibition of loans to executives.

3. Code of ethics for senior financial officers

Section 406 of the SOX prescribes the adoption of a Code of Ethics for public companies’ senior financial officers. Although the provision is directive in nature and there is no sanction attached for its non-fulfillment, it is nevertheless an attempt to shape the attitudes by senior financial officers of listed companies. Legislation may not always foresee and cover all the possible ethical issues that may arise in business. However, an honest and ethical environment may compensate for what is lacking in the law. There can be no other more encompassing guide for directors and officers of public corporations than their own honest and ethical conduct.

Although the Philippines SEC’s Code of Corporate Governance enumerates the general and specific duties of directors, it has yet to come up with a Code of Ethics for directors and senior financial officers. House Bill No. 5260 contains a provision similar to Section 406 prescribing the adoption of a Code of Ethics for senior financial officers. However, a similar provision is noticeably absent from Senate Bill No. 209.

4. Disclosure of audit committee financial expert

Section 407 of the SOX requires public companies to disclose whether or not the board committee has at least one member who is a financial expert. A financial expert is defined as one who possesses an understanding of audit committee functions and generally accepted accounting principles and financial statements. He must also possess experience with respect to the preparation or audit of financial statements of similar companies, including the application of accounting principles with respect to estimates, accruals and reserves (usually required to be disclosed in notes to financial statements) and internal controls.

Section 407 aims to ensure that the board audit committee will be qualified for its task of supervising both internal control and external audit functions. This requirement has been criticized for being expensive to implement.

The Philippine SEC’s Code of Corporate Governance requires at least one board audit committee member, to have related audit experience, although he is not necessarily required to be a financial expert unlike under Section 407 of the SOX. The Code of Corporate Governance gives preference to those with accounting or finance background for membership in the said audit committee.

Both Senate Bill No. 209 and House Bill No. 5260 contain provisions similar to Section 407 of the SOX requiring disclosure of whether a public corporation has at least one member who is a financial expert.

5. Real-time disclosures

Section 409 of the U.S. Sarbanes-Oxley Act of 2002 requires disclosures of changes in the financial condition and operations of public companies on a rapid and current basis. The requirement is intended for the protection of the public’s interest in connection with transactions involving traded shares. Any delay in disclosure of material relevant information may result in undue gain by insiders to the prejudice of the public.

There is nothing in Philippine law that requires real-time disclosures of material information affecting public companies. Instead, the decision on whether or not to use inside information is left to the discretion of individuals. Section 27 of the Securities Regulation Code (SRC) declares as unlawful the selling or buying by an insider of any security while in possession of material information that is not generally available to the public.

However, under the same Section (27) of the SRC, an insider may avoid liability if he/she can show that the information was not gained from such relationship, or that the same had been disclosed to the other party, or that there is reason to believe that the other party was also in possession of such information.

The Philippine Stock Exchange (PSE), a private institution, requires real-time disclosure of material information affecting listed companies, according to its president, Atty. Francis Ed. Lim. Trading of shares of a listed company shall be temporarily suspended for two working days following the disclosure to allow the public time to absorb the information. Violation of this requirement shall be imposed a fine equivalent to three times the value of the transaction in question.

E. Corporate and criminal fraud accountability

1. Criminal penalties for altering documents

Section 802 of the SOX imposes a fine and a maximum imprisonment of twenty years for the destruction, alteration or falsification of records in Federal investigations. The same section imposes a fine and a maximum imprisonment of ten years for the destruction of corporate audit records and work papers that are required to be kept for a period of five years from the end of the fiscal period in which the audit or review was conducted. The penalties imposed under the SOX are higher than those imposed for similar offenses under Philippine law.

Section 172 of the Philippines’ Revised Penal Code imposes a fine of P5,000 and the penalty of prison correctional in its medium and maximum periods (ranging from two years, four months and one day to six years) for the crime of falsification and the use of falsified documents. Falsification of documents is considered as a “less grave felony” under Art. 9 and is, thus, imposed only a correctional penalty.

Section 235 of the Philippine’s National Internal Revenue Code of the Philippines, in relation to 203 and 222, requires corporations to keep books of accounts and other accounting records for a period of three years. However, in case of fraud or fraudulent return with intent to evade tax, or of failure to file a return, the assessment may be made at any time within ten years from the discovery of the fraud, falsity or omission.

The penalties in case of violation of a general provision in the National Internal Revenue Code, under sections 256 and 275 thereof, is a fine of not more than P1,000.00 or imprisonment of not more than six (6) months, or both, in the case of individuals, and a fine of not less than P50,000.00 but not more than P100,000, in the case of corporations.

Both Senate Bill No. 209 and House Bill No. 5260 contain provisions similar to Section 802 of the SOX imposing enhanced criminal penalties for altering documents in relation to an investigation of public corporations. A fine of P100,000.00 to P500,000.00 and imprisonment of ten to twenty years may be imposed for destruction, alteration, falsification or concealment of records with intent to impede an investigation in relation to the said Bills.

The same Bills provide an enhanced fine of not less that P100,000.00 and/or imprisonment of two to five years in case of knowing or willful violation of any rule or regulation promulgated by the Philippine SEC for retention of corporate records. Section 144 of the Philippine Corporation Code (Batas Pambansa Blg. 68) contains a similar provision for violations of the code, in general, i.e., imprisonment of from thirty days to five years and/or fine of not more than P10,000.00.

2. Criminal penalties for defrauding shareholders of publicly traded companies

Section 807 of the Sarbanes-Oxley Act imposes a fine and imprisonment of not more than twenty-five years on whoever executes, or attempts to execute, as scheme or artifice to defraud any person in connection with registered securities. The same penalty is imposed on any person who obtains, by means of fraud or fraudulent pretenses, money or property from a person in connection with the purchase or sale of any publicly traded security.

On the other hand, Section 73 of the Philippines’ Securities Regulation Code (SRC) imposes a fine of not less than P50,000.00 nor more than P5,000,000.00, or imprisonment of not less than seven years nor more than twenty-one years, or both, in the discretion of the court, for any violation of the said Code, in general. In case of fraud, Section 58 of the SRC requires payment of damages sustained by the injured party.

Both Senate Bill No. 209 and House Bill No. 5260 contain provisions similar to Section 807 of the SOX imposing enhanced criminal penalties for defrauding shareholders of publicly traded corporations. A fine of not less than P100,000.00 and imprisonment of ten to twenty years may be meted for defrauding, or attempting to defraud, any person in connection with registered securities.

F. White-collar penalty enhancements

1. Criminal penalties for violation of the Employee Retirement Security Act of 1974 (U.S.)

Section 904 of the SOX increased the fine from $5,000.00 to $100,000.00, and imprisonment from one year to ten years, in case of violation by a natural person, and from $100,000.00 to $500,000.00 in case of violation by a corporation, of Section 501 of the Employees Retirement Security Act (ERISA).

Section 501 of the ERISA applies to all willful violations, including violations involving the duty of disclosure and reporting, plan descriptions, annual reports, filing and furnishing of information, reporting of participants’ benefit rights, and retention of records. The imposition of heavier penalties took into consideration the potential injury to public welfare of any violation of disclosure and reporting requirements under the ERISA.

The Philippines has no law similar to the ERISA requiring disclosure and reporting, setting of standards of conduct of plan administrators, protection of beneficiaries by vesting of accrued interests, setting minimum standards of funding, and requiring termination insurance of employee benefit plans.

2. Corporate responsibility for financial reports

Section 906 of the SOX provides criminal penalties for certifying a misleading or fraudulent report. CEOs and CFOs may be fined not more than $1,000,000.00 and imprisoned for not more than ten years for certifying periodic financial statements or reports, knowing that they do not comply with statutory requirements.

The penalty is higher, a fine of not more $5,000,000.00 and imprisonment of not more than twenty years, in case of willful certification, although the same did not result in a material misstatement or omission. There is no similar penalty provision under Philippine law for false certification by the CEOs and CFOs of public companies.

Under the Philippines’ National Internal Revenue Code, a financial officer shall be subject, upon conviction, to a fine of not less than P50,000.00 but not more than P100,000.00 and imprisonment of two to six years, in case of willful falsification of any report or statement bearing on any examination or audit for tax purposes by any financial officer. The same penalties are imposed in case of certification of financial statements containing essential misstatement of facts or omission in respect of their transactions, taxable income, deduction and exemption.

Both Senate Bill No. 209 and House Bill No. 5260 contain provisions similar to Section 906 of the SOX imposing criminal penalties to CEOs and CFOs for certifying false or misleading reports. However, they do not distinguish between simple and willful certifications and, further, the imposable penalties are lighter, i.e., a fine of not less than P100,000.00 and imprisonment of two to five years.

G. Corporate fraud accountability

Section 1106 of the SOX increased the penalties for violation of the U.S. Securities Exchange Act of 1934, as amended, from $1,000,000.00 to $5,000,000.00 and the duration of imprisonment from ten to twenty years. The same penalties are imposed on the making of any false or misleading statement in any document or report that is required to be filed under the said Securities Exchange Act. The fine was also increased from P2,500,000 to $25,000,000 in case of violations committed by corporations.

As mentioned earlier, Section 73 of the Securities Regulation Code imposes a lower fine of not less than P50,000.00 but not more than P5,000,000.00, or imprisonment of not less than seven to twenty-one years, or both, in the discretion of the court, for any violation of the said Code.

Neither Senate Bill No. 209 nor House Bill No. 5260 contain any provision similar to Section 1106 of the SOX increasing further the penalties for violations, in general, of the provisions of the Philippines’ Securities Regulation Code. In any case, they may no longer be necessary.

III. Conclusion

In the planning meeting by the Institute of Corporate Directors (ICD) in Manila, Philippines held in February 2000, the organization characterized the corporate sector as still tightly controlled by majority shareholders with significant, often overwhelming, influence over corporate strategy and management decisions. This condition is changing gradually as scattered minority shareholders are being invited to invest in the equity of corporations. The ICD believes that it is crucial that minority stockholders be given access to proper and adequate information. They must also be given a voice outside of the annual stockholders’ meeting where their involvement is likewise still “pro forma”. Thus, for instance, considering current realities where the largest twenty stockholders control close to three-fourths (3/4) of the shares of publicly listed companies, the minimum vote for corporate actions requiring the ratification of stockholders should be increased from two-thirds (2/3) to three-fourths (3/4).

The ICD also believes that disclosure of related-party transactions should be improved significantly. The penalties on self-dealing should also be made heavier and more severe.

According to the ICD, the Board of Directors should be properly empowered according to the spirit and letter of law. Its accountability has to be made clear. Its composition has to be improved. There should be a limit on the number of directorships that a corporate director can accept so that he/she can live up to his/her duty of care and attention. There should likewise be a minimum number of outside, independent directors in publicly listed companies. Further, a framework of competencies expected out of a corporate director should be formulated.

The Philippines is on the same track in terms of improving standards of corporate governance with: (a) move by the Philippines ASC to adopt international accounting standards by 2005l (b) SEC’s issuance of the Code of Corporate Governance; and (c) filing of Senate Bill No. 209 and House Bill No. 5260.

Specific areas for improvement that may be gathered from the paper’s review of key provisions of the SOX and Philippine law on corporate governance include issues concerning: (a) the composition of the board audit committees in publicly traded companies; (b) auditor independence; (c) corporate responsibility for financial reports; (d) disclosures in periodic reports; (e) timeliness of disclosures; (f) laxity of the law in protecting investors; and (g) lack of a particular law that addresses the need for improvements in the current legal framework of corporate governance.

Likewise, there is apparent lack provision for a system of periodic reporting and disclosure by retirement and social security funds that is necessary for the protection of the public.

IV. Recommendation

From the foregoing, it can be seen that there is a need for close legislative review and serious consideration of the approval of the proposed Corporate Reform Act of 2004 in order to improve the current standards of governance of Philippine public companies and provide statutory basis for the SEC’s issuance of implementing rules and regulations. Modifications, however, may still be incorporated for the purpose of further safeguarding auditor independence.

There is likewise a need to look into the provision of a system of periodic reporting and disclosure by retirement and social security funds in order to safeguard the public’s interest in them.

Bibliography

Act No. 3815, as amended (1930). Revised Penal Code of the Philippines.

Batas Pambansa Blg. 69 (1980). Corporation Code of the Philippines.

Board of Accountancy (2004). Code of Ethics for Professional Accountants in the Philippines. Professional Regulation Commission.

Estrada v. Desierto, et al. (2001). G.R. Nos. 146710-15. Supreme Court of the Philippines.

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House Bill No. 5260 (2004). Corporate Reform Act. Manila: House of Representatives.

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Republic Act No. 8424 (1997). National Internal Revenue Code of 1997.

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Securities Regulation Code Rule 68 (2003). Rules and Regulations Covering Form and Content of Financial Statements. Securities and Exchange Commission.

Shurtz and Pett (2004). Staying Out of Jail Under ERISA’s Bulked-Up Criminal Penalties. Benefits Law Journal. New Shurtz and Pett (2004). Staying Out of Jail Under ERISA’s Bulked-Up Criminal Penalties. Benefits Law Journal. New York.

Tomboc, J. (2002). A Study of the U.S. Sarbanes-Oxley Act in relation to Philippine Law on Corporate Governance. CBE Working Paper Series 2004-5. Manila: DLSU.

List of Reference Websites

http://www.dfw.com/mld/startelegram/news/state/12088184.htm

http://www.blackenterprise.com/yb/ybopen.asp?section=ybbf&story_id=74939679&ID=blackenterprise

http://www.nationalledger.com/scribe/archives/
2005/06/adelphia_commun.shtml

http://sixsigmatutorial.com/SOX/sarbanes-oxley.aspx?ref=aw

http://www.sgv.com.ph/issues&perspec/sgvbull/corpo_govern.pdf

http://www.outsourcing-law.com/sarbanes_off_balancesheet122_2003.htm

http://www.cooley.com/news/alerts.aspx?id=37610420

http://www.haynesboone.com/knowledge/knowledge_detail.asp?groupid=all&page=pubs&pubid=821&bio=yes

Both Senate Bill No. 209 and House Bill No. 5260 contain provisions similar to Section 409 of the SOX requiring real-time disclosures.