Accounting Trouble Cases in the Philippines – Beginner Level

In accounting practices, the basic methods in Japan and the Philippines are largely similar. However, there is said to be a difference in compliance awareness, and relying solely on the local accounting norms in the Philippines can sometimes lead to unexpected pitfalls.

In this section, we will introduce actual trouble cases reported by Japanese companies that used local accounting firms in the Philippines.

Monthly financial statements (Balance Sheet / Profit & Loss) are not prepared.

Many companies assume it’s fine to leave accounting and taxation to a local accounting firm, and generally, that’s correct. However, some accounting firms do not actually prepare monthly financial statements.

In some cases, accounting firms only calculate taxes monthly, inform the Japanese expatriates of the amounts, and complete the filing and payment, while preparing the financial statements only once at the end of the fiscal year.

Even if the year-end financial statements are completed and the Japanese expatriates review them for the first time, it is difficult to recall the details of transactions from several months ago. As a result, accounting errors could go unnoticed and be processed without raising any red flags.

If the outsourced accounting firm does not prepare monthly financial statements, it indicates a lack of minimum professional standards as an accounting expert, which means there could already be existing tax risks. To mitigate such risks, it is advisable to switch to a different accounting firm that provides proper monthly reporting.

Preparation of financial statements is delayed by several weeks to several months.

It is not uncommon for local accounting firms to share financial statements with clients significantly later than the reporting month.

In particular, since tax filings are due by the 10th of the following month, firms often rush the tax processing first and then prepare the financial statements later, sometimes at the end of the next month or even several months after.

When the Japanese parent company consolidates the financial statements of its Philippine subsidiary, delays in receiving the monthly statements from the Philippine subsidiary are frequently reported. However, earlier preparation is possible in the Philippines as well.

Monthly financial statements are an important management tool, so it is advisable to work with the accounting firm and continue efforts to accelerate their preparation without compromise.

The cash and bank balances in the accounting books are inconsistent with the bank balances, etc.

There are cases where the cash balances in the accounting books differ from bank balances or petty cash. Delays in processing checks at banks or with business partners are common, and this is not a problem if the situation is understood.

However, if the accounting books are forcibly adjusted to match the bank balances, it can result in unexplained entries, omissions, or even unauthorized outflows of cash. Therefore, it is essential to regularly reconcile bank and petty cash balances with the accounting books and identify the cause of any discrepancies.

Having a third-party professional review can help minimize losses and prevent the risk of fraud.

Accounting is being done on a cash basis

In the Philippines, accounting must also be conducted on an accrual basis. However, there are cases where accounting staff record transactions on a cash basis.

Specifically, for example, office rent paid at the end of each month may not be recorded in the correct month if the payment spans two months, resulting in two months’ rent being recorded in the following month. Similarly, for a project with a six-month duration, revenue should be allocated across each month, but in some cases, it is recorded as a lump sum upon receipt of payment.

For tax calculations, taxes are sometimes computed based on actual cash inflows and outflows. However, financial statements must be prepared on an accrual basis, so the correct treatment is to record transactions in the appropriate period regardless of cash movements.

Similarly, for recurring monthly expenses, if invoices are received late and not recorded in the month they pertain to, profits and losses will fluctuate on a monthly basis, complicating analysis. Therefore, it is essential to consistently apply the accrual basis of accounting.

Payroll calculations are incorrect.

Payroll calculation errors seem to occur frequently in the Philippines. They often come to light when employees report receiving lower-than-expected salaries or inquire about the details of their pay. Naturally, employees are highly attentive to their salaries and have a strong incentive to ensure accuracy, so they are likely aware of discrepancies and want a clear explanation.

When checking with the local accounting firm responsible for payroll, there are cases where employees cannot get clear explanations and disputes arise. In the Philippines, labor law and the Department of Labor and Employment (DOLE) place strong emphasis on worker protection, so any treatment that disadvantages employees can create significant risks. Careful attention is therefore essential. Additionally, payroll errors sometimes serve as a trigger to review overall accounting records, and in many cases, this review uncovers multiple other mistakes.

The accounting process is wrong.

Accounting mistakes and their causes are various. They include simple mistakes such as “double-recording of expenses” and “a number being wrong by one digit,” as well as mistakes caused by lack of information, such as “recording all deposits other than revenue as sales,” “recording disbursements not linked to expenses as advance payments,” and “accounting not reconciling after the resignation of the accounting staff.”

All of these can be prevented if internal controls are functioning, third parties or multiple people review them, and appropriate communication is maintained. However, since there is usually no staff within the company who understands internal controls, temporarily engaging external experts to reduce accounting errors is also an effective measure.

As mentioned above, even in the Philippines, there are many cases where troubles occur even when accounting work is outsourced to accounting firms. The content introduced in this document does not pertain to detailed tax procedures, so it is possible for Japanese companies to conduct daily monitoring through accounting software and financial statements. Additionally, having a review conducted once by external experts, including our firm, can help ensure reliability and reduce risks.

If you have any questions or matters for consultation, please feel free to contact us via the inquiry form.