How the SEC’s New ₱3 Million AFS Threshold Affects You: Why Your Startup Might No Longer Need an External Auditor
Introduction: Why the ₱3 Million Threshold Matters for Startups and Small Corporations
For many startups and small corporations, the annual requirement to submit an Audited Financial Statement (AFS) to the Securities and Exchange Commission (SEC) has been one of the most recurring compliance costs. In 2026, the SEC issued a rule change increasing the audit threshold to ₱3,000,000 in total assets or total liabilities, meaning some corporations that previously needed an independent external audit may now file financial statements without an auditor’s report, subject to conditions.
This article explains what changed in 2026, who is covered, what must be filed instead of an AFS, and when an external auditor may still be required.
Governing Legal Rules: RCC Reportorial Requirements and SEC Authority to Set Exceptions
Under the Revised Corporation Code of the Philippines (Republic Act No. 11232, 2019), corporations doing business in the Philippines must submit reportorial requirements to the SEC, including annual financial statements. The general rule is that these annual financial statements are audited by an independent certified public accountant, but the statute expressly allows exceptions as may be provided in the Code or in SEC rules.
The Supreme Court has affirmed that the SEC may validly require additional conditions (such as accreditation of external auditors for covered entities) as part of its regulatory and investor-protection mandate. In Securities and Exchange Commission v. 1Accountants Party-List, Inc. (G.R. No. 246027, 2025), the Court explained that the SEC’s authority under the corporate regulatory framework includes formulating exceptions and implementing measures related to statutory audits for entities under SEC jurisdiction, without regulating the accountancy profession itself.
What Changed in 2026: The Audit Threshold Was Raised to ₱3,000,000
In 2026, the SEC increased the threshold for mandatory submission of audited financial statements. Under SEC Memorandum Circular No. 04, series of 2026 (2026), corporations with total assets or total liabilities at or below ₱3,000,000 are generally not required to submit audited financial statements. Instead, they may submit financial statements accompanied by a sworn Statement of Management’s Responsibility (SMR).
For One Person Corporations (OPCs), SEC Memorandum Circular No. 10, series of 2026 (2026) confirms that—effective for fiscal years ending on or after 31 December 2025—OPCs exceeding ₱3,000,000 in assets or liabilities must submit an AFS, while those at or below the threshold may submit financial statements with the SMR signed under oath by the required officers.
Who Benefits: Corporations That May Stop Hiring an External Auditor
As a general rule, your corporation may qualify for the exemption if:
- Total assets are ₱3,000,000 or less, or
- Total liabilities are ₱3,000,000 or less, and
- You are not otherwise classified by SEC rules as an entity that must undergo audit regardless of size.
This is most relevant to early-stage startups that are pre-revenue or early revenue, and whose balance sheets remain below ₱3,000,000 in either assets or liabilities at fiscal year-end.
What You File Instead: Financial Statements Plus the Statement of Management’s Responsibility (SMR)
If your corporation is within the ₱3,000,000 threshold and not otherwise covered by mandatory audit rules, the SEC allows submission of financial statements together with an SMR signed under oath. Under SEC Memorandum Circular No. 04, series of 2026 (2026), the SMR must be signed as follows:
- Stock and non-stock corporations: Chairman of the Board, President/CEO, and Treasurer/CFO (duly authorized by the Board), or a properly delegated substitute signatory where allowed by the circular.
- OPCs: President and Treasurer.
The signatories assume responsibility for the accuracy, completeness, and truthfulness of the submitted financial statements. The SEC circular also states that incomplete, inaccurate, false, or misleading financial statements may trigger penalties, and the SEC may still require audited financial statements when needed for investor protection, enforcement, or public interest reasons.
Important Exceptions: When You May Still Need an AFS Even Below ₱3,000,000
The ₱3,000,000 threshold is not an across-the-board exemption for all corporations. Under SEC Memorandum Circular No. 04, series of 2026 (2026), the exemption does not apply to certain entities (including those classified under Groups referenced in SEC rules) and may not apply to corporations that the SEC determines are vested with public interest through subsequent issuances.
Also, even if you are below the threshold, the SEC retains authority to require an audit where circumstances warrant it (for example, where there are enforcement concerns or investor-protection considerations), as expressly recognized in the circular.
How to Check If You Are Within the Threshold (Common Scenarios)
Below are typical startup scenarios showing how the threshold works. These examples assume there is no other rule requiring an audit for your entity type.
| Scenario | Total Assets | Total Liabilities | Likely SEC Filing |
|---|---|---|---|
| Bootstrapped startup with minimal equipment | ₱1,200,000 | ₱200,000 | FS + SMR (no AFS), per SEC MC No. 04, s. 2026 (2026) |
| Startup with investor funds parked in bank (cash is an asset) | ₱2,900,000 | ₱50,000 | FS + SMR (no AFS), per SEC MC No. 04, s. 2026 (2026) |
| Startup with a significant payable or loan | ₱1,500,000 | ₱3,500,000 | AFS required (liabilities exceed ₱3,000,000), per SEC MC No. 04, s. 2026 (2026) |
| OPC with assets slightly above threshold | ₱3,200,000 | ₱500,000 | AFS required, per SEC MC No. 10, s. 2026 (2026) |
Compliance Procedure: What to Do Before You Decide Not to Engage an External Auditor
Before dropping an external audit for SEC filing purposes, most corporations should do the following:
- Confirm year-end totals of assets and liabilities from your books, and verify which figure applies at fiscal year-end.
- Check your classification if your business falls under categories subject to special SEC requirements or public interest treatment under SEC issuances.
- Prepare SEC-ready financial statements even if unaudited, because the SMR signatories are swearing to their truthfulness.
- Secure board authority for the proper corporate officers to sign the SMR where required by the circular.
- Keep supporting schedules and documentation (bank statements, schedules of payables/receivables, invoices, contracts) in case the SEC requires clarification or an audit later.
Implications for Startups: Cost Savings, But Higher Officer Accountability
The regulatory relief can reduce recurring costs, since audit fees are often significant relative to early-stage budgets. However, the shift from AFS to SMR-backed financial statements transfers more compliance risk to management and signatories.
Two points stand out:
- Lower filing cost does not mean lower responsibility. The SMR is sworn, and the SEC circular expressly warns of penalties for misleading submissions.
- Fundraising and banking may still demand audited statements. Even if the SEC no longer requires an AFS, some investors, lenders, or grant providers may still request audited accounts as a condition for funding or credit.
What This Means for OPCs (One Person Corporations)
OPCs follow similar reportorial logic, but with OPC-specific signatories. The Revised Corporation Code (Republic Act No. 11232, 2019) provides OPC reportorial requirements, and SEC issuances implement how those requirements are satisfied. Under SEC Memorandum Circular No. 10, series of 2026 (2026), OPCs with assets or liabilities of ₱3,000,000 or less may file financial statements with an SMR signed under oath by the President and Treasurer, while OPCs above the threshold must submit an AFS.
Separately, OPC owners should remember that the law places special attention on separateness of assets and adequate capitalization, and piercing-the-corporate-veil principles apply to OPCs as well under the Revised Corporation Code (Republic Act No. 11232, 2019).
Judicial Support for SEC’s Power to Impose Audit-Related Conditions
The 2026 threshold relief operates within a broader principle: the SEC can set audit-related requirements for entities under its jurisdiction when the enabling law allows rulemaking and exceptions. In Securities and Exchange Commission v. 1Accountants Party-List, Inc. (G.R. No. 246027, 2025), the Supreme Court upheld SEC authority to require accreditation of external auditors for covered entities, emphasizing that such regulation is tied to SEC oversight of corporate reporting and statutory audits.
This context matters because it explains why audit obligations can expand or relax through SEC circulars, as long as those circulars remain within the authority contemplated by the Revised Corporation Code (Republic Act No. 11232, 2019) and related regulatory statutes.
Final Observations and Recommendations
If your startup is within the ₱3,000,000 assets/liabilities threshold, the 2026 SEC rules may allow you to file financial statements without an external audit, replacing the AFS with a sworn Statement of Management’s Responsibility. This can reduce recurring compliance expenses, but it also increases the importance of clean bookkeeping and internal controls, because officers are swearing to the truthfulness of the submission.
Recommended next steps:
- Compute assets and liabilities at fiscal year-end early so you can decide whether to budget for an audit.
- Prepare the SMR signatories for accountability by tightening documentation and approval flows for disbursements, revenue recognition, and accruals.
- Align SEC compliance with investor expectations; consider a voluntary audit if you anticipate fundraising, credit applications, or due diligence.
About Nicolas and De Vega Law Offices
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