SEC tightens auditor rules for government contractors

MANILA — The Securities and Exchange Commission has tightened financial reporting rules for government contractors by requiring accredited external auditors for major public contracts and raising qualification standards for auditing firms and independent auditors.

The new rules are intended to strengthen scrutiny over companies handling large amounts of public money, with the SEC saying stronger audit standards can improve accountability, reduce financial reporting risks, and help protect government funds and investors.

The commission issued SEC Memorandum Circular No. 26, Series of 2026, on Sept. 1, introducing amendments to its accreditation guidelines for auditing firms and external auditors.

The circular amends provisions governing the accreditation of independent auditors of SEC-regulated entities under Revised Rule 68 of Republic Act No. 8799, or the Securities Regulation Code.

The revised framework expands oversight to government contractors, raises qualification and track-record standards, and introduces a more rigorous evaluation process for auditors seeking accreditation.

“High-quality audits serve as a foundation of transparency in capital markets, fostering public trust in the financial system,” SEC Chairperson Francis Lim said.

“By tightening our accreditation standards and extending oversight to auditors of major government contractors, we are reinforcing accountability, ensuring that public funds and investors’ hard-earned money are protected by rigorous and independent financial reporting,” he added.

The rules covering audits of annual or interim financial statements will take effect for fiscal years or periods ending on or after June 30, 2027.

All other requirements under the memorandum circular will take effect after the issuance is duly published.

The SEC accredits auditing firms and independent auditors for quality assurance review under three categories: Groups A, B, and C.

Group A covers issuers of registered securities, except timeshares and membership certificates.

It also covers listed companies whose securities are traded on an exchange.

Public companies with assets of at least PHP 50 million and 200 or more holders, each holding at least 100 shares, also fall under Group A.

The category further includes clearing agencies, clearing agencies acting as depositories, stock exchanges, and other self-regulatory organizations.

Group B covers investment houses, brokers and dealers of securities, investment companies, government securities eligible dealers, and universal banks registered as underwriters.

The category also includes issuers of registered timeshares and membership certificates.

MC 26 expands the coverage of Group A and Group B auditors to government contractors involved in the procurement or acquisition of goods and consulting services, as well as infrastructure projects.

The coverage applies to contracts involving the national government and its instrumentalities, including government-owned or -controlled corporations, state universities and colleges, and local government units.

Corporate general contractors with a single government contract worth more than PHP 750 million will be required to engage Group A independent auditors.

Group A auditors will also be required when a contractor has cumulative government contracts totaling more than PHP 1 billion.

Contractors with a single government contract worth PHP 400 million to PHP 750 million must engage Group B independent auditors.

Group B auditors will likewise be required for contractors with cumulative government contracts worth PHP 500 million to PHP 1 billion.

The accredited external auditor must remain engaged until the covered projects have been fully completed or delivered.

To strengthen oversight, covered corporations will be required to submit a notarized schedule disclosing project descriptions, costs, and status.

The disclosure must also be covered by an auditor’s report.

The SEC has also increased track-record requirements across all accreditation groups to ensure that auditors handling regulated entities have sufficient experience.

Applicants for Group A accreditation must now have at least five corporate clients with total assets of at least PHP 100 million each.

The previous Group A requirement was PHP 50 million in assets for each client.

Group B applicants must now have at least five corporate clients with assets of at least PHP 50 million each.

Previously, Group B applicants needed three corporate clients with total assets of at least PHP 20 million.

Applicants for Group C accreditation must now have at least five corporate clients.

The previous requirement for Group C applicants was three corporate clients.

Each Group C client must have assets of at least PHP 5 million.

MC 26 also expands the grounds for the outright denial of accreditation applications.

Existing grounds include gross negligence in audit work.

They also include conducting an audit despite lacking, or subsequently losing, independence as required under the Code of Ethics for Professional Accountants in the Philippines.

Another existing ground involves providing non-audit services to statutory audit clients without implementing safeguards to reduce threats to the auditor’s independence.

The new circular adds nine more grounds for outright denial.

Among these are misrepresentation or concealment of information during the evaluation process.

Another ground is expressing an unqualified opinion even when a client uses an incorrect accounting framework that results in material misstatements.

The discovery of six or more material findings in a single set of financial statements can also lead to outright denial.

Failure to maintain independence is another ground, including cases in which the auditor directly prepared the financial statements.

For Group A or Group B applications, an applicant’s audit work may qualify for five-year accreditation only when the evaluation of the audited financial statements of each client shows no material findings.

For Group A accreditation, minor findings must not exceed two items for each set of audited financial statements.

For Group B accreditation, acceptable deficiencies are limited to minor findings that do not exceed three items for each set of audited financial statements.

The tougher standards broaden the SEC’s financial-reporting oversight beyond capital-market entities to companies undertaking major government contracts, linking the quality of private-sector audits more directly to the safeguarding of taxpayer-funded projects.