Reaction Paper

San Miguel
Corporation:
Change of
External Auditors

Michael Angelo D. Santos

ACC19 302A

Prof. Antonio S. Abel

Jose Rizal University
Article from Philstar GLOBAL:
San Miguel Corporation replaces external auditors
By Zinnia B. Dela Pentilde | May 13, 2006

Food and beverage giant San Miguel Corp. said yesterday it has replaced its external
auditors in line with its policy of rotating auditors. In its annual stockholders meeting, San
Miguel appointed Laya Mananghaya & Co. as the new external auditors of the company for
fiscal year 2006, replacing SGV & Co.
San Miguel, in a statement sent to the Philippine Stock Exchange, said the change in
external auditors is also to ensure transparency and utmost impartiality in the ongoing
investigation initiated by the company on allegations of overstatement of sales by one of its
subsidiaries.
San Miguel said it received an anonymous and undated letter alleging overstated sales in
the Philippine Beverage Partners Inc. San Miguel said its audit committee has already
initiated an investigation into this case and other matters to be conducted by Price
Waterhouse Coopers.
The total sales of Philbey is about 2.1 percent of San Miguel; group wide sales of Php227
billion. The investigation has prompted San Miguel to defer the proposed $300-$400
million offering of preferred shares by its Cayman Islands-based subsidiary San Miguel
Funding Ltd.
The international offering will be callable in five years and at the end of each quarter
thereafter. Market sources said the securities have so far attracted more than $750 million
worth of orders.
While the issue size had yet to be fixed, the proposed offering will be the first hybrid issue
from an Asian company other than financial institutions.
Hybrid bonds are deeply subordinated, very long-dated or perpetual securities that allow
borrowers to boost their balance sheet without diluting existing shareholders; holdings,
while paying investors returns that are higher than those on senior bonds.
Reaction:

From this article, we can infer that San Miguel Corporation changed their external
auditors not only because of their policy of rotating auditors but because their former
external auditor, SGV & Co., were involved in the allegations that SMC overstated their
annual sales. The policy of rotating auditors is a great strategy or technique to ensure the
credibility of their financial statements where in it would reflect their companys
performance and financial position as a whole and the auditor will help ensure that their
financial statements, taken as a whole, comply with an identified financial reporting
framework. But if the external auditor himself is fraudulent, it would most definitely lead to
the unfaithful representation of the companys performance and financial position, thereby
committing fraud to the concerned users of the financial statements.
External auditors generally perform financial statements audits. An external auditor
is an independent CPA who offers his professional services to different clients on a
contractual basis. The auditors responsibility is to design the audit to provide reasonable
assurance of detecting material misstatements in the financial statements. The
misstatements may emanate from error, fraud and noncompliance with laws and
regulations. Error refers to unintentional misstatements in the financial statement,
including the omission of an account or a disclosure. Fraud refers to intentional act by
one or more individuals among management, those charged with governance, employees,
or third parties, involving the use of deception to obtain an unjust or illegal advantage.
The client (company) that will be audited must have an effective internal control.
Management is required to establish a control environment and to implement internal
control policies and procedures designed to ensure, among others, the detection and
prevention misstatements. Individuals charged with governance of an entity are also
required to ensure the integrity of an entitys accounting and financial reporting systems
and that the appropriate controls are in place.

References:
www.philstar.com/business/336346/smc-replaces-external-auditors