Audit Requirement for Lending Company Financial Statements (Philippines)

Educational overview; not legal advice. Rules change and SEC/BIR calendars vary per year. For deadline-sensitive filings, consult counsel or your auditor.

1) Who is covered

Lending companies organized under R.A. 9474 (Lending Company Regulation Act) and licensed by the SEC are regulated entities distinct from banks/financing companies.
In practice, all SEC-licensed lending companies are expected to prepare annual audited financial statements (AFS) and file them with the SEC, regardless of size, as part of ongoing compliance with their primary license and special reporting to the SEC’s Financing & Lending Division.

Even if general corporate thresholds might exempt small corporations from audit in other contexts, lending companies are treated as always subject to audit due to their regulated status and public-interest risk profile.

2) Legal/Regulatory backbone (plain-English map)

R.A. 9474 & IRR – creates the regulatory framework for lending companies and empowers the SEC to set reporting/audit requirements and to sanction non-compliance.
Securities Regulation Code (SRC) & Rule 68 – prescribes financial statement content, auditor accreditation/independence, and form/attestation requirements submitted to the SEC.
PFRS / PFRS for SMEs / PFRS 9 – Philippine GAAP for recognition, measurement, and disclosure (credit losses, interest revenue, impairment).
NIRC (Tax Code) & BIR rules – require books of accounts, AFS attachment to annual income tax returns, and record-keeping.
AMLA & IRR – lending companies are covered persons (KYC, CTR/STR filing, 5-year record retention); AML controls interact with audit evidence and disclosures.
Data Privacy Act – governs customer data used in financial reporting and audit.

3) What must be audited and how the AFS should look

Statements:

Statement of Financial Position, Profit or Loss & OCI, Changes in Equity, Cash Flows, and Notes (including significant accounting policies).
Comparatives (prior year) and management responsibility statement signed by authorized officers.
Independent auditor’s report (unmodified, qualified, adverse, or disclaimer), signed by a BOA- and SEC-accredited CPA/firm.

GAAP focal points for lending companies:

Financial instruments (PFRS 9):
- Classification/measurement of loans receivable (usually amortized cost).
- Expected Credit Loss (ECL) methodology (12-month vs. lifetime ECL, staging, significant increase in credit risk).
- Write-offs vs. recoveries; interest recognition on non-performing loans (effective interest method; non-accrual policies in notes).
Revenue recognition: Interest income via effective interest rate; fees (origination, service, late fees) – distinguish those treated as part of EIR vs. separate revenue.
Allowance & credit risk disclosures: aging of receivables, movements in loss allowance, concentrations, collateral policies.
Related-party disclosures: funding from owners/affiliates, shared services, guarantees.
Liquidity & capital: maturity analyses, lines of credit, regulatory capital (if any set by SEC for lending companies), going-concern assessment.
Taxes: current/deferred tax, reconciliation of effective tax rate.
Leases (PFRS 16), Provisions/Contingencies (PAS 37), Events after reporting (PAS 10).

Supplementary schedules typically expected by regulators/auditors:

Aging of loans receivable and ECL movement tables.
Top borrowers/credit concentration (where material).
Breakdown of interest and fee income by product.
Related-party balances and transactions.
Regulatory compliance checklist (often maintained, even if not filed).

4) Auditor qualifications & independence

Firm and signing partner must be Board of Accountancy (PRC)–licensed and SEC-accredited for reporting entities under the SEC.
Independence: comply with the Code of Ethics for Professional Accountants (network/fee dependence, gifts, management involvement prohibited).
Partner rotation: follow SEC rotation rules (typical pattern: 5-year maximum continuous engagement as signing partner, with a cool-off period before returning).
Engagement letter: scope under PSA/ISA standards; management’s responsibility for internal control and financial statements must be acknowledged in writing.

5) Filing & where AFS goes

SEC filing: AFS (with auditor’s report and notes), plus General Information Sheet (GIS) and any industry-specific reports required by the SEC for lending companies. Filing windows are calendarized annually by SEC (staggered by registration number); deadlines change year to year.
BIR: Attach audited FS to the Annual Income Tax Return for corporations; ensure consistency between SEC and BIR versions and stamping requirements.
Local government units may request AFS during business permit renewals.
AMLC: not an FS filing, but the audit trail should evidence AML controls; auditors may review AML compliance that can affect the report/management letter.

Practical rule: Close your books promptly, finalize the audit early, and align SEC and BIR timelines. Always check the current year SEC circular for the exact filing calendar.

6) Internal control & governance expectations

Credit policy & underwriting controls (KYC, affordability, scoring, approvals, overrides).
Collections & restructuring controls, impairment triggers, collateral management.
Cash management & treasury: segregation of duties, reconciliations, bank confirmations.
IT controls over loan management systems (access, change management, backups).
Related-party governance: board approvals, arm’s-length terms.
Compliance function: AMLA, consumer protection, data privacy, and complaints handling.

Auditors commonly issue a management letter highlighting control gaps; boards should minute remedial actions.

7) Special accounting & disclosure pain points (and how to nail them)

ECL Modeling
- Define segmentation (product, risk grade, days-past-due buckets).
- Document PD/LGD/EAD assumptions, forward-looking overlays, and back-testing.
- Reconcile ECL movement (opening, charge, write-offs, recoveries, closing).
Interest income on impaired loans
- Clarify when to suspend accrual and how to recognize cash basis income thereafter.
Fee accounting
- Separate origination fees amortized via EIR vs. service/penalty fees recognized when earned.
Restructurings & modifications
- Assess substantial modification vs. non-substantial; derecognition vs. adjustment of gross carrying amount; disclosure of TDRs.
Related-party
- Disclose terms and pricing; avoid thin cap pitfalls; ensure board approval.
Going concern
- If reliant on shareholder support or concentrated funding, include support letters and transparent disclosures.

8) Deadlines, late filing, and penalties (how regulators usually treat this)

SEC may impose monetary penalties for late or non-filing, require explanations, place the company on non-compliant lists, and in serious/continuing cases suspend or revoke the lending company’s primary license.
BIR imposes surcharges, interest, and penalties if returns/attachments (including AFS) are late or inconsistent.
Directors/officers can face administrative liability within SEC’s powers for governance failures tied to non-compliance.

9) Year-end compliance timetable (practical template)

T-3 months to YE: Lock accounting policies; validate ECL models; inventory related-party transactions; plan tax.
T-1 month to YE: Hard close/dry run; fix reconciling items; prepare audit PBC list.
YE to +30 days: Post closing entries; draft notes; board review of going concern; provide AML evidence pack.
+30 to +60 days: Fieldwork; bank/legal/AR confirmations; resolve review notes.
+60 to +90 days: Finalize FS; board approval and signing; auditor report signed.
Before SEC/BIR deadlines: File SEC AFS (per SEC’s current calendar), GIS, BIR AITR with AFS, and retain stamped copies.

10) Documentation you should have ready for the audit

Trial balance, lead schedules, and reconciliations (cash, loans, interest).
Loan master file with origination data, terms, and status; aging and ECL workings with assumptions and overlays.
Collections & write-off policies, charge-off approvals, recovery evidence.
Bank statements, confirmations, cash counts (if any).
Board minutes, credit committee minutes, policy manuals.
Related-party agreements and approvals.
Tax computations/returns; reconciliation of accounting vs. taxable income.
AMLA KYC samples, CTR/STR evidence, training logs (supports control assertions).

11) Common pitfalls (and fixes)

Inadequate ECL documentation → Build an auditable model paper with data lineage and management judgments.
Recognizing interest on NPLs without basis → Adopt a non-accrual policy; disclose cash-basis recognition.
Fee misclassification → Map each fee to EIR or service income; be consistent.
Thin working papers → Maintain permanent files (charter, licenses, policies) and current files (year-specific workings).
Missing auditor accreditation → Verify your auditor’s SEC accreditation annually.
Deadline slippage → Start early; follow the SEC calendar for the current year.

12) Board & management responsibilities

Ensure tone at the top for accurate reporting and regulatory compliance.
Approve accounting policies and sign the responsibility statement.
Oversee remediation of audit findings and monitor compliance KPIs (on-time filings, zero late-filing penalties).

13) Record retention (typical expectations)

Books and source documents: at least 10 years is a conservative practice (BIR minimums are shorter, but audits/tax and AML needs justify longer).
AMLA records (KYC/transactions): 5 years from transaction/closure, whichever is later.
Audit evidence and working papers: per auditor policy and professional standards (company should retain its copies indefinitely while licensed).

14) Quick compliance checklist (printable)

Auditor is BOA + SEC accredited; engagement letter signed.
FS prepared under PFRS/PFRS for SMEs; PFRS 9 ECL documented.
Required statements + notes + management responsibility statement complete.
Aging and ECL movement schedules ready and reconciled.
Related-party disclosures compiled and board-approved.
Going-concern assessment and support letters (if needed).
AFS consistent across SEC and BIR; stamping requirements met.
SEC filing (AFS + GIS) completed per current calendar; proof kept.
AMLA documentation available; deficiencies remediated.
Post-audit action plan for control findings approved by the board.

Bottom line

If you operate as a lending company in the Philippines, treat the annual audit as mandatory and regulatory-critical. Use PFRS, document credit loss methods, mind auditor accreditation & independence, and file SEC/BIR submissions on time. Robust controls and transparent disclosures reduce regulatory risk and keep your license in good standing.