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Philippines feature: A matter of control

The Philippines accounting firm, Sycip, Gorres, Velayo & Co, has been in the middle of a debate about national protectionist laws ever since Ernst & Young formed its East Asia practice. Asian correspondent David Hayes investigates and profiles the nation’s largest firm and talks to partner, Wilson Tan.

Sycip, Gorres, Velayo & Co (SGV) has been in the headlines this year over an internal dispute about whether the firm’s membership of Ernst & Young (E&Y) contravenes the Philippines Constitution, which bans foreign accountants and lawyers from practising in the country.

Although SGV’s management says the firm is fully compliant with Philippines law and the Securities Exchange Commission (SEC) has not disputed the firm’s assertion, the issue of SGV’s membership of E&Y is still being resolved.

SGV’s internal dispute recently received national media coverage when the firm announced that 14 partners, including vice-chairman Roman Felipe Reyes, were leaving after refusing to sign the “integral agreement” that E&Y had asked SGV to commit to as a condition of remaining a member of the Big Four firm.

The 14 partners said the proposed agreement with E&Y would effectively make them “dummies” in violation of the Anti-Dummy Law. The Anti-Dummy Law punishes the evasion of laws on the nationalisation of certain rights, franchises or privileges.

The departure of 14 out of 84 partners came two weeks after former managing partner David Belangue left SGV for the same reason. The exit package that the departing partners left with includes a one-year “no compete” clause prohibiting them from joining another audit firm during that period.

“The partners who left had a difference of opinion. We have not violated the Philippines Constitution, according to our lawyers,” says SGV partner Wilson Tan, who is head of SGV’s IFRS desk and the firm’s industry and market sector leader.

“In our agreement with E&Y, anything that violates Philippines local law is inoperable. We have all local partners at SGV. No foreign national is allowed to sit the Philippines CPA exam.

“The 14 partners left as they thought there was a risk of contravening the Anti-Dummy Law, but 80 percent of the partners believe our lawyers that there is no risk. There was a difference of opinion. It is a shame it came to that.”

Back to the drawing board

Following the highly publicised departures and subsequent discussions with E&Y, SGV is drawing up an operating model for the firm’s membership of the global network that is compliant with local legal requirements.

“We will put on paper our local practices. The Securities Exchange Commission acknowledges our global affiliation with E&Y otherwise they would have questioned us,” Tan points out.

“We are a member firm of E&Y that is locally controlled with no foreign partners. The operating model that we follow now will be finalised and that is a local practice with local partners.

“We want this issue closed and not to come back in a few years. E&Y will not do anything in the Philippines that will violate local laws. They have said that would be inoperative.”

While SGV’s internal dispute has made headline news, other leading accounting practices in the Philippines are thought to be affected by issues surrounding their membership of international accounting networks, including Isla Lipana & Co, which is a member of PricewaterhouseCoopers.

In fact, SGV’s internal dispute is not the only development that is keeping accountancy in the news. The Association of Southeast Asian Nations (ASEAN), of which the Philippines is a member, recently announced plans to introduce a mutual recognition agreement (MRA) that would allow accountants, doctors and dentists who are citizens of an ASEAN country to practice their professions in other ASEAN member countries.

Given the constitutional ban on foreign accountants and lawyers practicing in the Philippines, the government is expected to become involved in MRA negotiations. However, any move to change the law banning foreign accountants from practicing in the Philippines is likely to be linked to the parallel ban on foreign lawyers. With less than a year to go before presidential elections, the MRA issue is one the government is unlikely to take on in a hurry.

The ASEAN MRA proposal is designed to facilitate the flow of professional expertise among ASEAN countries. For some countries, such as the Philippines, which supplies accountants to the Middle East and other regions, the MRA proposal represents a new opportunity to export professional accounting skills.

“The ASEAN MRA opens an opportunity to send people to other markets. Theoretically, we can accept other accountants coming here, maybe in special areas that we do not have staff for here,” Tan says. “It depends if there is a market here for those skills. We are affiliated with E&Y. If we need help we can call on them.”

SGV seconds a number of staff to other E&Y country offices in the Far East.

“We are part of E&Y Far East. Our managing partner is part of the E&Y Far East Board,” Tan notes. “We want to partner more with E&Y. Opportunities include sending people out from here on secondment. We can send IFRS trained staff to E&Y offices. Growth is in our regional play.

“We have staff in E&Y Thailand and we will send staff to the E&Y Kuala Lumpur office. Our staff like secondments. We are being asked to help E&Y offices in Indonesia, Malaysia and Thailand with IFRS because of our expertise.”

SGV is looking to expand the pool of staff that can be seconded to other E&Y offices. Opportunities for seconding staff are expected to include China in future.

“We are targeting Mandarin Chinese speakers who are proficient in English. We have good IT specialists and we are good in audit,” Tan says. “We overhire staff here as E&Y regionally needs people from us. That is why we continue to hire staff to have a buffer reserve. Before this economic crisis started we targeted 75 to 100 people to work around the region at senior associate level. These are single people in their mid to late 20s.

“Other E&Y offices want accountants from the Philippines. Most secondments are in the Far East because of IFRS. Also, there are some risk advisory secondments.”Sycip, Gorres, Velayo & Co

One reason that SGV is developing its secondment programme is to retain staff who otherwise might leave the practice to seek accounting positions overseas. While relatively few qualified staff leave to join other accounting firms, a substantial proportion of those leaving take positions in the commercial and industrial sector. Others leave to work abroad.

Because of its size, SGV operates the largest Big Four recruitment programme in the Philippines. The firm hired 400 newly qualified CPAs in 2008 and is looking to recruit about 300 to 400 newly qualified CPAs this year.

“Usually we hire 300 to 500 new staff a year. Normally we have a fast turnover but not this year because of the economy,” Tan comments.

Leader of the pack

Sycip, Gorres, Velayo & Co (SGV) is the largest accounting firm in the Philippines with 2,300 professional staff, including 72 partners, of which 38 are audit partners. The firm employs about 1,750 CPAs in total, including 1,500 in audit.

Headquartered in the Makati financial district in Manila, SGV has eight offices in the Philippines. About 90 percent of all staff are based in Manila on the main island of Luzon.

Two other offices cover the north and south of Luzon, two offices cover the central Visayas region while three offices cover the major cities of southern Mindanao Island.

Audit accounts for the majority of the SGV’s fee split (see pie chart), although the firm is attempting to move into more advisory work.

SGV audits 78 of the top 100 corporations in the Philippines and about 500 of the country’s top 1,000 companies. Clients include Metrobank, the largest private bank in the Philippines and Meralco, the country’s largest private power company, which supplies Manila and the surrounding area.

Established 63 years ago, SGV’s former partners include former ministers of finance and trade. The currently governor of the Philippines Central Bank, Amando M Tetangco, is a former SGV partner, as is the chairman of the Financial Reports Standards Council.

Move towards global standards provides a silver lining

New accounting regulations and the adoption of IFRS have generated a significant proportion of accounting firms’ increased work load in recent years, as the Philippines’ economy has adjusted to a number of structural changes.

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