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.
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.
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.
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 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.
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.
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.