Ethical Dimension of Financial Accounting with Respect to Keeping Two Sets of Records

Ethical Dimensions of Financial Accounting with Respect to the Keeping of Two sets of Records

Financial Accounting is concerned with providing accounting information both for the managers of the Company and external parties to the Company (Investors or Shareholders, Creditors, regulators like Securities and Exchange Commission, Bureau of Internal Revenue and Local Government Units and the general public).  This includes preparation of financial reports (Statement of Financial Position, Statement of Comprehensive Income and Statement of Cash Flows). For managers, these reports are important to assist them in business decision making purposes. On the hand, the external parties or outside parties to the Company also use the financial reports or financial statements, in case of the Bureau of Internal Revenue; such is being used to determine the correct taxes that the Company should pay.

 When we hear two sets of records, what’s come to our mind is that a particular Company maybe attempting to hide certain financial transactions from outside parties by having a set of fraudulent accounting records. This maybe for BIR purposes, their net income maybe understated so that the taxes to be paid will be lower.

As a CPA in public practice, I have already encountered some clients or taxpayers wherein the management/accountants prepare different financial statements for BIR purposes in order to reduce their taxes. Their main reasons are the following:

1. Even if they will declare or remit the correct taxes, they cannot see any major improvements in our country but rather the money is just being pocketed by many politicians.
2. Even if they pay the correct taxes, in case of BIR tax examinations, they are still paying deficiency taxes due to bloated assessments by the BIR examiner (also only the portion of additional tax payment will be receipted). Mostly, Small to Medium sized Company cannot go for filing in the Court of Tax Appeal up to the Supreme Court to dispute the assessment due to additional cost for lawyers and filing fees and therefore, they just go for compromise settlement.

 However, having two sets of books are also being made by some Company especially if there are difference in Financial Reporting and Tax Reporting.  There are items or transactions wherein the measurement basis is different, for Financial Reporting, these are based on Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS) and for Tax Reporting such is based on National Internal Revenue Code or NIRC and all Revenue Regulations. One common example is the depreciation methods. Also, there can be differences on when revenue is recognized (e.g. rental income, unrealized gain, etc.) or whether some expenses can be considered deductible (e.g. bad debts). Such differences will result in what we call Deferred Tax Assets or Deferred Tax Liability.