BIR Audited Financial Statements, when mandatory?

By this post, let us answer the question of SMEs on whether or not financial statements to be attached to their annual income tax returns (ITR) in Philippines are mandated to be audited by an independent Certified Public Accountant.

Section 232 of the Tax Code, as amended provides, and hereunder quoted:

“Section 232. Keeping of Books of Accounts. – (A) Corporations, Companies, Partnerships or Persons Required to Keep Books of Accounts. – All Corporations, Companies, Partnerships or persons required by law to pay internal revenue taxes shall keep a journal and a ledger or their equivalents: Provided, however, That those whose quarterly sales, earnings, receipts, or output do not exceed Fifty thousand pesos (P50,000) shall keep and use simplified set of bookkeeping records duly authorized by the Secretary of Finance where in all transactions and results of operations are shown and from which all taxes due the Government may readily and accurately be ascertained and determined any time of the years: Provided, further, That corporations, companies, partnerships or persons whose gross quarterly sales, earnings, receipts or output exceed One Hundred Fifty Thousand Pesos (P150,000) shall have their books of accounts audited and examined yearly by an independent Certified Public Accountants x x x.”(Emphasis supplied)

Under the Section 71 of the TRAIN Law, Section 232 has been amended to update amount to PhP3M as follows:

Section 71. Section 232 of the NIRC, as amended, is hereby further amended to read as follows:

“Sec. 232. Keeping of Books of Accounts.—

“(A) Corporations, Companies, Partnerships or Persons Required to Keep Books of Accounts.— All corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall keep and use relevant and appropriate set of bookkeeping records duly authorized by the Secretary of Finance wherein all transactions and results of operations are shown and from which all taxes due the Government may readily and accurately be ascertained and determined any time of the year: Provided, That corporations, companies, partnerships or persons whose gross annual sales, earnings, receipts or output exceed Three million pesos (₱3,000,000), shall have their books of accounts audited and examined yearly by independent Certified Public Accountants xxx. (Emphasis supplied)

From the above, individual and corporate taxpayers with gross quarterly sales, earnings, receipts or output exceeding P150,000.00 (Updated by TRAIN Law:  exceeding P 3,000,000 gross annual sales) are mandated to file a FINANCIAL STATEMENTS audited by an INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT (CPA). It does not however require each of all the four (4) quarters in a year to reach more than the P150,000 (Updated by TRAIN Law:  exceeding P 3,000,000 gross annual sales) for mandatory audit to apply. For as long as one quarter exceeded the P150,000 (Updated by TRAIN Law:  exceeding P 3,000,000 gross annual sales), then, it becomes mandatory. Bureau of Internal Revenue (BIR) may refuse filing unaudited financial statements as an attachment to the income tax return (ITR) if it would not comply, and may impose penalties upon failure to file or late filing, or worst, if a taxpayer will fraudulently fail to file, BIR may assess based on presumptive fraud within the period of ten (10) years from discovery.

However, under the regulations implementing Optional Standard Deduction (OSD), Revenue Regulations No. 16-2008 & 16-2010, individuals who avail of the OSD are no longer required to file audited financial statements. Thus, it becomes optional for sole proprietorships to undergo the audit and if we are to be asked, we would humbly recommend audit for the benefits that it normally brings such as the following:

a. It serves as check and balance over the work of the bookkeeper, in-house or retainer-paid;

b. Proper valuation of the accounts – assets, liabilities, and equity; and,

c. Audited financial statements becomes readily available in case of need (say, securing a loan from banks, presentation to potential clients, and more)

For corporate taxpayers, they are required by the SEC to file audited financial statements regardless of the above rule. This is a mandatory reportorial requirement every year, and SEC will not accept filing unless the same is stamped filed by the BIR. For individuals however, it is only with the BIR that the financial statements are to be prepared and not required to be filed with the SEC so the P150,000 (Updated by TRAIN Law:  exceeding P 3,000,000 gross annual sales) rule applies.

Notably, not all CPA’s can do the audit and sign on the financial statements. In general, a CPA must be duly accredited by the Board of Accountancy-Philippine Regulation Commission (BOA) and by the BIR as tax agent. In some industries like banks and financial institutions, accreditation of the Securities and Exchange Commission (SEC), or cooperatives, accreditation by the Cooperative Development Authority (CDA), or insurance and related companies, accreditation by the Insurance Commission.

If the audited financial statements would be signed by a non-accredited CPA, the taxpayer will be penalized and the CPA may be reprimanded, or worst, license could be revoked. The taxpayer could not rely heavily on the misrepresentation of the CPA, if any that it is duly accredited, so it has to exert effort to assure that the CPA is indeed, duly accredited.

Note: Article published prior to TRAIN or R.A. No. 10963 effective Jan. 2018 and updated based on later amendment/s like the TRAIN law.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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