Under Section 162 of the Revised Corporation Code (RCC), any person who “willfully certifies” a report required under the Code, knowing that it contains “incomplete, inaccurate, false, or misleading information or statements,” shall be punished with a fine ranging from P20,000 to P200,000; but that, when injurious or detrimental to the public, the fine shall range from P40,000 to P400,000.

Although Section 162 defines the criminal act as one that constitutes “willful certification,” it nevertheless uses criminal measurements that are overly broad, thus, “incomplete,” “inaccurate,” or “misleading.” To drive home the point, if the Securities and Exchange Commission (SEC) rules require that the taxpayer identification numbers of directors and officers should be included in the General Information Sheet (GIS), and the Corporate Secretary unfortunately forgets to include the same in the report filed with the SEC, does that constitute a criminal offense under Section 162 to have certified to an “incomplete” GIS?

When does the “inaccuracy” of information or a statement in a report rise to the level of being criminal or malicious? Whose point of view shall be determined when a report item is “misleading” as to rise to a criminal offense? In short, the subjective and broad language used to describe the essential requisites of the offense defined under Section 162 may constitute a denial of the accused director’s, trustee’s, or officer’s right to due process of being properly informed of the offense that he had supposedly committed.

It would be possible to involve the Corporate Secretary or a reporting officer in prolonged criminal litigation to be able to prove whether the criminal acts under Section 162 should be considered mala in se (wrong or evil in and of itself) rather than mala prohibita (conduct that constitutes an unlawful act only by virtue of statute). The inaccurate Section 162 can be a real source of harassment suits against directors, trustees, and officers.

Finally, when the corporation or its business activities are not vested with public interest, it would be difficult to show how the reports had been especially injurious or detrimental to the public as to warrant the increased penalty provided under Section 162 of the RCC.

SEC’S RESTATEMENT OF SECTION 162 OFFENSE
SEC Memorandum Circular No. 16-2020, entitled “Guidelines on Authentication of Articles of Incorporation in Applications for Registration of New Domestic Corporations,” restates Section 164 of the RCC by providing under Section 7 as follows:

SECTION 7. Willful Certification of Incomplete, Inaccurate, False, or Misleading Statements or Reports. — Willfully certifying a report required under the RCC, knowing that the same contains incomplete, inaccurate, false, or misleading information or statements, shall be punished with a fine ranging from P20,000 to P200,000. When the wrongful certification is injurious or detrimental to the public, the responsible person may also be punished with a fine ranging from P40,000 to P400,000.

It is pretty clear that the SEC is not defining an administrative offense through the foregoing provision in its memorandum circular, since the fines imposed are beyond the amounts authorized under Section 158 of the RCC, and that both the language and amounts tract the language of Section 162 (Willful Certification of Incomplete, Inaccurate, False, or Misleading Statements or Reports; Penalties) of the Code. Certainly, the SEC cannot in the exercise of quasi-legislative powers complete the parameters of an inadequately defined statutory offense, especially not in a memorandum circular pertaining to the filing of the articles of incorporation, which does not fall within the coverage of “reports” under Section 162 of the RCC.

Consequently, SEC Memorandum Circular No. 16-2020 fails to define an offense that can be the subject of an administrative sanction, nor can it complete the inadequacies of the language of Section 162 of the RCC to comply with rudiments of criminal due process.

INDEPENDENT AUDITOR’S CRIMINAL COLLUSION
Under Section 163 of the RCC, an independent auditor who, “in collusion with the corporation’s directors or representatives,” certifies the corporation’s financial statements (FS) despite its incompleteness or inaccuracy, its failure to give a fair and accurate presentation of the corporation’s condition, or despite containing false or misleading statements, shall be punished with a fine ranging from P80,000 to P500,000.

In addition, Section 163 provides that when the statement or report certified is fraudulent, or has the effect of causing injury to the general public, the auditor or responsible officer may be punished with a fine ranging from P100,000 to P600,000.

The use under Section 163 of the term “An independent auditor who … certifies the corporation’s financial statements,” is quite unfortunate and misses the professional role of the independent auditor. An independent auditor’s professional obligation is to undertake auditing procedures on the financial and other records of the corporation in accordance with generally accepted auditing standards that would allow him render an “opinion that the audited financial statements present fairly, in all materials respects, the corporation’s financial position (as of a given date) and its financial performance (for the covered period).”

When the independent auditor finds through his audit procedures that the FS do not fairly present the corporation’s financial condition and/or performance, he issues an “adverse opinion” to that effect in his report. Unless the engagement agreement provides otherwise, it is not the purpose of the auditing procedures to detect fraud in the operations of the company, although when fraud is detected, it is the professional responsibility of the auditor to so indicate this in the report. On the other hand, when the audit procedures cannot be completed because of the state of the financial and corporate records to allow the rendering of the opinion, the independent auditor renders a “no opinion” report, explaining its reasons. An independent auditor, therefore, does not certify, but actually renders a professional opinion on the fairness in material respects (not in the details) of the audited FS.

ESSENCE OF SECTION 163 OFFENSE
Section 163 of the RCC defines an offense that can only be committed by the corporation’s independent auditor but specifically done “in collusion with the corporation’s directors or representatives.” It has no application to a situation where the independent auditor wrongfully certifies a corporation’s FS on the basis of professional incompetence, i.e., when no collusion is shown to exist with the directors or representatives of the corporation.

Since demonstrating that the wrongful certification of the audited FS must be part of a collusion with the corporation’s directors or representatives, no conviction of the independent auditor may be obtained under Section 163 without showing that the directors or representatives of the corporation have sought to achieve the wrongful certification of the corporation’s audited FS to achieve a wrongful end. Although the primary guilt must necessarily lie with the corporation’s directors or representatives, the latter cannot be held liable with the independent director under Section 163 of the RCC which specifically applies only to the independent auditor.

Section 162 of the RCC which covers “willful certification of incomplete, inaccurate, false or misleading statements or reports,” may be applied in tandem with Section 163 since it is now the practice that the particular officers render a “statement of management responsibility” on the FS of the corporation.

Section 165 of the RCC on “fraudulent conduct of business” is likewise a provision in the Code that supports an accusation against the directors or representatives of the corporation for seeking to collude with the independent auditor to wrongfully certify the corporation’s audited FS. However, as discussed below, there are due process considerations that make conviction under Section 165 difficult.

What is clear is that when the essential element of “certification in collusion with the corporation’s directors or representatives” is not proven, no conviction of the independent auditor under Section 163 may be obtained, even when the other elements of “false or wrongful certification of audited FS” are proven. As will be shown by the succeeding discussions, the element of “certification in collusion with the corporation’s directors or representatives” is the most defining element for the offense covered by Section 163 of the RCC, without which the other elements would have no criminal significance to stand on.

FALSE OR WRONGFUL CERTIFICATION OF AUDITED FS
In defining the offense of false or wrongful certification of an audited FS by an independent auditor, Section 163 of the RCC uses criminal measurements that are either too subjective (subject to various interpretations) or overly broad, as to constitute a denial of the criminal due process right of the accused independent director to be informed, thus: a.) “incompleteness or inaccuracy” of the audited FS; b.) the audited FS “fail… to give a fair and accurate presentation of the corporation’s condition:” or, c.) the audited FS contains “false or misleading statements.”

In providing for each of the afore-quoted elements, Section 163 does not use the term “knowingly” in reference to the independent auditor, but rather substitutes the criminal term “certification in collusion with the corporation’s directors or representatives.”

INCOMPLETE OR INACCURATE AUDITED FS
Section 163 of the RCC does not indicate what aspect of the audited FS’ “incompleteness or inaccuracy” would rise to the level of being malicious and criminal on the part of an independent auditor. Since the section does not define the mala prohibita offense, not every incompleteness or inaccuracy of the audited FS would rise to be level of being malicious and criminal.

Auditing standards do not impose an obligation on the part of external auditors to certify to the “completeness” or “accuracy” of the audited FS, since auditing procedures involve representative testing on key areas of corporation’s operations and record keeping in order to render an opinion; they do not involve examination of all the transactions, supporting documents, and book entries that go into the figures appearing in the audited FS. In fact, the independent auditor’s report essentially expresses an “opinion that the accompanying FS present fairly, in all material respects, the financial position of the company,” as of a given date or period.

Unless it is done in collusion with the directors or representatives of the corporation (which has substituted the term “knowingly” as to contain the element of malice), the independent auditor who has undertaken the proper audit procedures, cannot really be held accountable, much less criminally liable, for certifying an audited FS that turns out to be incomplete or inaccurate.

FAIR, ACCURATE PRESENTATION OF FINANCIAL CONDITION
When the independent auditor has undertaken proper audit procedures and renders an opinion that the corporation’s FS presents fairly, in all material respects, the financial condition of the corporation as of a given date, outside of showing collusion with the corporation’s directors or representative to commit fraud, would the judge be in a position to substitute his honor’s own assessment that in fact the FS did not fairly present the corporation’s financial condition based on perhaps another auditor’s financial findings? In addition, the very nature of auditing standards do not require that the independent directors certify that the audited FS “accurately” reflects the financial condition and performance of the corporation.

The requisite quantum of evidence to establish guilt beyond reasonable doubt for conviction under Section 163 would mean that outside of proving “collusion with the corporation’s directors or representatives” who must be shown to have committed fraud, the prosecution would be hard-pressed in obtaining a conviction.

FALSE OR MISLEADING FS
What amount of “falseness” in the audited FS would lead to criminal malice under Section 163 of the RCC? From whose point of view would the judge determine how “misleading” the FS are?

It must be emphasized that the corporation’s FS, even when audited, is not the “work” or the “product” of the independent auditor. The relationship of the independent auditor to the corporation’s FS is to express an opinion — officially called “Independent Auditor’s Report” — that they fairly present, in all material respects, the financial position and performance of the corporation. Outside of when he colludes with the directors or representatives of the corporation who are proven to have committed fraud, an independent director cannot be held criminally liable for rendering an opinion on a FS which contains false or misleading statements.

HIGHER CRIMINAL PENALTIES
Section 163 of the RCC provides for higher criminal penalties on “the auditor or responsible officer” when “the statement or report certified is fraudulent, or has the effect of causing injury to the general public.”

Section 163 imposes criminal penalties on an “independent auditor,” whether such auditor is a natural person or a partnership; in the case of the latter, the penalty of a fine is imposed upon the partnership as a separate juridical person. Therefore, when Section 163 authorizes the imposition of higher penalties on the “responsible officer,” whom does it actually cover?

Certainly, it cannot be the responsible officer of the corporation whose FS is being audited since the crime defined under Section 163 pertains solely to the independent auditor. Also, it cannot be the “responsible officer” of the auditing firm because the penalty is imposed on an independent director of which the auditing firm as a partnership is the very one indicated as “auditor.”

The term “fraudulent” is not defined, and may include all sorts of accusations such as when the statement or report tends to defraud the government of the right amount of taxes that would have been paid by the corporation, to that of depriving the shareholders of the rightful amount of dividends that could have been declared from the unrestricted retained earnings, to that of luring banks to extend loans to the corporation at a premium rate, to that of luring investors to invest in the corporation, all based on the statements or the report that was verified.

Under the principles of criminal due process, no matter how fraudulent any act or report is, it cannot be criminally penalized unless the fraudulent act itself is defined as a criminal offense by law.

This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.

Attorney Cesar L. Villanueva is co-chair for Governance of the MAP ESG Committee, the chair of the Institute of Corporate Directors, the first chair of the Governance Commission for GOCCs, a former dean of the Ateneo Law School, and a founding partner of Villanueva Gabionza & Dy Law Offices.

map@map.org.ph

cvillanueva@vgslaw.com

http://map.org.ph