9 minute read 2 Aug 2019
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How the Philippines is planning for a brighter future

Five experienced audit committee members discuss the impact of technological advances on their companies.

The Philippines has emerged in recent years as one of the more dynamic Asia-Pacific economies, defying stereotypes with some impressive economic fundamentals. It is the world’s 34th largest economy and the 13th largest in Asia, with the potential for considerable further growth. It is considered a “newly industrialized” country – one whose economy is transitioning from being based on agriculture to relying more on services and manufacturing.

The country has been one of Asia’s fastest-growing economies in recent years. According to Government figures, gross domestic product (GDP) increased by 6.9% in 2016, 6.7% in 2017 and 6.2% in 2018. (By way of comparison, GDP in Emerging Asia grew by 6.5% in 2017 and 6.6% in 2018, according to OECD data.) Per capita income increased by 17% between 2016 and 2018.

Meanwhile, unemployment has fallen, partly as a result of the jobs created by foreign direct investment (FDI), which reached an all-time high of US$10.05b in 2017 (up from US$6.64b in 2015) according to central bank figures. Analysts say the country has consigned its former reputation as the region’s economic laggard to history. Indeed, by April 2019, Standard & Poor’s and the Japan Credit Rating Agency had upgraded the Philippines’ credit rating to just one step below an “A” territory rating.

There are challenges facing the Philippines, though, reflecting a more difficult regional environment in 2019. “The economy slowed down in the first quarter of 2019, and the trade war between the US and China is having an effect,” says Joshua Kurlantzick, Senior Fellow for Southeast Asia at the Council on Foreign Relations, based in Washington, DC.

  • Philippines fact file

    Julie Brown is COO and CFO of Burberry and Audit Chair of Roche. She was previously Group CFO of Smith & Nephew and interim Group CFO of AstraZeneca.

    Dave Dillon is an independent director and Audit Committee Chair for 3M and Union Pacific. He is also a director of MRIGlobal. Previously he was Chairman and CEO of The Kroger Co

    Andrew Gambier is Head of Audit and Assurance within the Professional Insights team at global accountancy body ACCA. A qualified auditor, he leads ACCA’s policy on audit and assurance matters.

    Nasser Munjee is Audit Committee Chair of Cummins, ABB, HDFC, Tata Motors and Tata Chemicals. He is also Chairman of Tata Motors Finance and DCB Bank.

    Dr. Maurice Ngai is the founder and Group CEO of SWCS Corporate Services Group. He is Audit Committee Chair of China Communications Construction Company and several other listed companies in China.

    Steve West is an independent board director and Audit Committee Chair for Cisco. He also sits on the board of D-Wave Systems and is General Manager and Founding Partner of Emerging Company Partners LLC.

     

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Chapter 1

Strong demand

Why the Philippines is attractive to foreign investors

President Duterte has courted foreign investors, particularly in infrastructure, as part of a broader attempt to strategically rebalance the Philippines’ economy.
Joshua Kurlantzick
Senior Fellow, Council on Foreign Relations

She adds that mindset is critical to the successful application of data analytics to the auditing process. “Moving from traditional models of auditing and data capture does require a different set of skills and an understanding of how the outputs and the data can be used,” she says. “So it’s important to ensure that people are trained to treat data as a company asset, and that the teams in the business get behind the cultural shift so that the data pool can be harnessed in new and innovative ways.”

The pressure on companies to keep data safe explains why cyber risk is a prominent item on audit committee agendas. Steve West, Audit Committee Chair of US technology company Cisco, says the audit committee there reviews cyber risk at its “deep dive” meetings and monitors the cyber risk environment using a dashboard that it shares with the rest of the board. Cyber security is also a top priority for Munjee, who says: “Companies must have sufficient defenses, because they are going to be hacked, whether they like it or not.”

The potential of AI

Some companies are also starting to adopt artificial intelligence (AI). “It is being used,” West confirms, “but it seems to be a slow-as-you-go development.”

He believes AI is the “next frontier” for audit, after data analytics. One possible future use case for AI is the analysis of unstructured data such as emails, social media posts and conference call files to search for evidence of fraud. Another is the extraction of key information from large numbers of contracts, such as leases.

Dillon believes that AI is already adding more logic to the “reasonableness” test that examines the validity of accounting information. “In the past, auditors would look at statistical variances and ask, ‘Is that reasonable and can I explain why those variances occurred?’” he says. “Today, you can use AI to come up with more ‘reasonableness’ analyses than you could have in the past. That gives you a more thorough assessment of the quality of the data.”

Other emerging technologies that have the potential to transform the audit include robotic process automation, which can be used to generate audit-ready work papers, and drones, which can be an effective way for auditors to conduct inventory counts in remote locations.

Together with data analytics and AI, these technologies could bring about substantive improvements in audit quality in the future. “Auditors are trying extremely hard to see how they can use technology to improve their audits,” says Gambier.

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Chapter 2

Driving good behavior

How corporate governance standards are improving

In terms of corporate governance, standards in the Philippines are rising, with scores on the ASEAN Corporate Governance Scorecard improving in recent years. Particularly strong improvements have been seen in two categories: disclosure and transparency, and the responsibilities of the board.

The central bank, Bangko Sentral ng Pilipinas (BSP), has implemented consumer and investor protection standards that are expected to be embedded into the corporate culture of BSP-supervised institutions. It also expects that these reforms will drive good behavior and greater market discipline, addressing conflicts that are harmful to the interests of financial consumers.

Investors are supportive of government efforts on the corporate governance front. “By coordinating with basic company policy on corporate governance, and consulting accounting and legal advisors, Marubeni was able to set up an appropriate and reliable corporate governance strategy in the Philippines,” says Tago. “And as far as rules in the Philippines go, we comply with the corporate governance standard for businesses.”

The Philippines is an attractive country for foreigners to make an investment. It has such rich human resources and the mastery of English is a big factor.
Naoto Tago
President and CEO, Marubeni Philippines Corporation

The Philippines is at the forefront in advancing financial reporting standards in the region, having adopted IFRS as early as 2005. This makes it attractive to multinational companies that prefer to use IFRS rather than multiple domestic standards. The widespread use of English as a business language magnifies this attraction, especially when compared with other countries in the region where IFRS adoption is delayed by the needed for translation into the local language.

In addition, the Philippine Securities and Exchange Commission (SEC) introduced its SEC Oversight Assurance Review Inspection program in 2018 to promote high-quality audits and enhance confidence in the capital markets.

Tago says: “Back in 2005, in the Asia-Pacific region, it was only in the Philippines that we received a financial statement that meant we didn’t need to get another financial statement. In other countries, we would have needed to get the financial standard based on the domestic standard; then we would need to convert it to the international accounting standard in order to consolidate. But in the case of the Philippines, we didn’t need to use two accounting standards.”

For a Japanese trading firm, Tago adds, the situation in the Philippines is “very comfortable,” as the accounting standards are the same as back home: “Accountability is very high.”

The BSP is planning further steps to improve standards. It has also been strengthening its  anti-money laundering and “know your customer” policies for financial institutions, given the involvement of a local bank in the hacking of Bangladesh’s central bank in 2016. It has also increasingly made officers directly accountable for violations, with hefty fines imposed and the board replaced in that incident.

How technology is helping audit committees to see the bigger picture
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Chapter 3

What’s next?

How technology could help audit committees even more in the future.

Change is happening but the reality is that, while emerging technologies have the potential to further transform both the audit and the way the audit committee works, this transformation is still a work in progress. Technology does not yet have all the answers to the problems audit committees face. So what can’t technology do today that audit committees would ideally like it to do?

“Judgment,” answers Ngai swiftly. “There’s a lot of judgment involved with our work and technology could help with that. It could help us to uncover issues that may be critical to the future performance of the company so that we can prepare for it today, rather than wait until it happens. I also think timely communication with external auditors is another area where new technologies can help.”

Munjee is looking for simplification. “Things are too complex, and technological developments are moving too fast for the human mind to catch up with what is happening. Is there a tool that would simplify matters to allow us to see more clearly?”

If you’re on a board that’s not really looking at technology and understanding the impact of it, you’re in a world of hurt.
Steve West
Audit Committee Chair, Cisco

It is likely that audit committees will see technological tools that address these issues, and others, before too long.

“The rate of technological change is absolutely staggering,” says West. “I’ve been in this business for 30 years, since before the internet, and I think the rate of change is only going to increase. If you’re on a board that’s not really looking at technology and understanding the impact of it and how you may be disintermediated by technology, you’re in a world of hurt.”

Brown believes that, as the use of technology becomes more pervasive within organizations, and the risks of using emerging technologies are more widely understood, there may be a requirement to audit algorithms. Oversight of that auditing process would naturally fall within the remit of the audit committee. “I am sure this will be a key role for audit committees going forward,” she notes.

“Digital is evolving in audit as it is in every other part of the world,” Dillon concludes. “There’s no end game here. It’s just understanding where it is today and where it will be tomorrow.”

The views of third parties set out in this article are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

Summary

The Philippines is the world’s 34th largest economy, with the potential for considerable growth in the years ahead. Both the Government and the central bank have taken steps to make the country a more attractive destination for foreign investors. There are challenges to overcome, including bureaucratic obstacles, but the country is rightly planning for a brighter future.

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