How the SEC’s New 2026 AFS Threshold Affects Your Startup: Why You May No Longer Need an Independent Statutory Audit
For many Philippine startups and small subsidiaries, the costliest annual corporate compliance item is often the independent statutory audit required for the submission of Audited Financial Statements (AFS). In 2026, the Securities and Exchange Commission (SEC) issued rules that materially expanded the class of corporations that may submit unaudited financial statements instead of AFS, by increasing the audit threshold to over ₱3,000,000 in total assets or total liabilities. This regulatory relief can reduce compliance costs, but it does not remove other SEC reportorial obligations, and it does not excuse non-compliance with Philippine restrictions on foreign ownership.
This article explains (1) the legal basis for the SEC’s authority to adjust audit/reporting rules, (2) who benefits from the new threshold and how to comply, and (3) how foreign investors should avoid illegal “local proxy” arrangements while structuring corporate control within foreign equity limits.
Governing Laws and SEC Rules on AFS Submission
1) Revised Corporation Code (RCC) — baseline requirement to submit financial statements
The RCC requires corporations (domestic and foreign doing business in the Philippines) to submit reportorial requirements to the SEC, including annual financial statements that are generally audited by an independent CPA. The RCC also allows exceptions “as otherwise provided… in the rules issued by the Commission,” which is the statutory opening for SEC rulemaking on audit coverage and thresholds. (Revised Corporation Code of the Philippines, Republic Act No. 11232, 2019; Section 177)
2) SEC’s power to set accounting/reporting rules, including audit coverage
SEC Memorandum Circular No. 04, Series of 2026 cites the SEC’s authority under the Securities Regulation Code framework (and its rules) to formulate and revise accounting/reporting requirements for corporations under its supervision, including the audit threshold. (SEC MC No. 04, Series of 2026 dated 20 January 2026)
3) Supreme Court confirmation that SEC may impose audit-related accreditation requirements
In SEC v. 1Accountants Party-List, Inc. (2025), the Supreme Court recognized that the SEC has express and implied authority under the securities and corporate regulatory framework to require accreditation of external auditors for covered entities as a quality control measure, and that this does not unlawfully regulate the accountancy profession itself. The decision also underscored the RCC wording that permits the SEC to create exceptions and additional conditions through its rules. (Securities and Exchange Commission v. 1Accountants Party-List, Inc., G.R. No. 246027, 2025)
What Changed in 2026: The New ₱3,000,000 Audit Threshold
SEC MC No. 04, Series of 2026 increased the audit threshold from ₱600,000 to over ₱3,000,000 in total assets or total liabilities for purposes of audited financial statement submission under the SEC’s reporting rules. In effect, more micro and small corporations may now qualify to submit financial statements certified under oath rather than audited by an independent CPA, depending on the SEC’s applicable filing category and the corporation’s figures. (SEC MC No. 04, Series of 2026 dated 20 January 2026)
For One Person Corporations (OPCs): SEC MC No. 10, Series of 2026 applies the adjusted threshold to OPCs for fiscal years ending on or after 31 December 2025. Only OPCs with total assets or total liabilities exceeding ₱3,000,000 must submit an AFS; OPCs at or below that threshold may submit financial statements with a Statement of Management’s Responsibility signed under oath by the President and Treasurer. (SEC MC No. 10, Series of 2026 dated 16 February 2026; SEC MC No. 04, Series of 2026 dated 20 January 2026)
Who Benefits Most: Startups, MSMEs, and Small Foreign Subsidiaries
The largest immediate beneficiaries are corporations that:
- Operate at an early stage (low assets and low liabilities);
- Have straightforward transactions (few revenue streams, limited financing instruments);
- Would otherwise pay for an annual independent audit mainly to satisfy SEC filing requirements rather than lender or investor covenants; and
- Need to comply on time to avoid delinquency risk from repeated failures to file reportorial requirements. (Revised Corporation Code of the Philippines, Republic Act No. 11232, 2019; Section 177)
Small-to-medium foreign subsidiaries can also benefit—especially if their Philippine entity is still building operations and has not crossed the ₱3,000,000 asset/liability level. The savings can be material where audit fees, internal coordination time, and document production costs previously outweighed the compliance value for a small balance sheet.
What Still Does Not Change: You Still Have SEC Reportorial Duties
Raising the audit threshold does not remove the duty to file annual reportorial requirements; it adjusts whether the financial statements must be audited or may be certified under oath (depending on SEC rules and your classification). The RCC still requires submission of (among others) financial statements and a General Information Sheet (GIS), and authorizes the SEC to place corporations under delinquent status for repeated failure to submit reportorial requirements within the relevant period. (Revised Corporation Code of the Philippines, Republic Act No. 11232, 2019; Section 177)
Quick Comparison: Old vs. New Threshold (General Effect)
Summary table (general effect of SEC MC No. 04, Series of 2026):
| Item | Prior baseline referenced by SEC rules | 2026 adjustment |
|---|---|---|
| Audit threshold (total assets or total liabilities) | ₱600,000 | Over ₱3,000,000 |
| If below threshold | May file certified financial statements in lieu of AFS (subject to SEC rules) | Expanded coverage for non-audited filing |
| Immediate cost effect for small entities | Audit often required at low levels | Audit often no longer required at micro/small levels |
Authority cited: SEC MC No. 04, Series of 2026 dated 20 January 2026; Revised Corporation Code of the Philippines, Republic Act No. 11232, 2019 (Section 177).
Compliance Steps: How to Use the New Threshold Without Triggering SEC Issues
The specific filing configuration still depends on the SEC’s classification rules and the SEC’s annual filing schedules. As a general compliance sequence:
- Compute total assets and total liabilities based on your year-end financial statements, and identify whether you exceed ₱3,000,000.
- Confirm whether your entity is covered by special rules (for example, OPC-specific treatment under SEC MC No. 10, Series of 2026).
- If at or below threshold: prepare financial statements eligible for non-audit filing and complete the required sworn certification (and for OPCs, the Statement of Management’s Responsibility signed under oath by the President and Treasurer). (SEC MC No. 10, Series of 2026 dated 16 February 2026)
- File on time to avoid penalties and delinquency exposure for repeated non-filing. (Revised Corporation Code of the Philippines, Republic Act No. 11232, 2019; Section 177)
- If you exceed threshold: engage an independent CPA for the statutory audit and verify whether SEC accreditation requirements apply to your entity class, consistent with SEC rules upheld in jurisprudence. (Securities and Exchange Commission v. 1Accountants Party-List, Inc., G.R. No. 246027, 2025)
Foreign Equity Limits: Strict Boundaries and Why “Local Proxy” Structures Can Backfire
Foreign investment structuring should be treated separately from the AFS threshold. The new audit threshold reduces audit burden for smaller entities; it does not relax foreign equity limits in restricted industries, and it does not protect investors who attempt to simulate compliance through “local proxy” shareholders.
What the SEC/DTI monitors in foreign equity compliance
Under the IRR of the foreign investment reforms referenced in the search materials, the SEC or DTI monitors compliance with foreign equity participation requirements and related capitalization compliance, and corporate registration remains governed by the RCC and other laws implemented by the SEC. (IRR of Republic Act No. 11647, 2022; Sections 20–21)
Why unauthorized local proxy arrangements are high-risk
- Regulatory risk: Where foreign ownership caps apply, regulators may scrutinize ownership and control indicators (shareholding, rights, funding, side agreements) rather than accept labels at face value.
- Enforceability risk: Side arrangements that effectively transfer beneficial ownership or control to a foreign party despite a nominal Filipino shareholding may be challenged as designed to evade restrictions.
- Corporate governance risk: If control is informally exercised through undisclosed agreements, board actions and shareholder decisions can become legally vulnerable, especially in disputes.
How to Structure Corporate Control Legally Within Foreign Equity Caps (General Guidance)
Foreign investors commonly use the following compliant approaches, depending on the industry and what the law allows:
- Use permitted instruments: If minority foreign ownership is allowed, structure rights through lawful share classifications and governance provisions consistent with the RCC and the entity’s articles/bylaws.
- Control through contracts where allowed: Use management, services, or technology agreements that compensate fairly and avoid transferring prohibited ownership or reserved control.
- Choose an entity type aligned with your activity: Some activities may be open at 100% foreign ownership; others are capped. Registration and compliance are monitored by the SEC/DTI as applicable. (IRR of Republic Act No. 11647, 2022; Sections 20–22)
Based on internal knowledge of Philippine law. For a definitive structure, the determinative inputs are: (1) the specific line of business and whether it is in a restricted list; (2) target ownership percentage; (3) proposed investor rights; and (4) whether the business touches constitutional or statutory nationalized areas.
Typical Scenarios (Illustrations)
Scenario 1: Early-stage Philippine startup with modest assets
A domestic corporation ends the year with total assets of ₱2.2 million and total liabilities of ₱1.1 million. Under the 2026 adjustment, it may fall below the audit threshold and may be eligible to submit certified financial statements instead of an AFS, reducing audit spend—while still needing timely filing to avoid delinquency risk. (SEC MC No. 04, Series of 2026 dated 20 January 2026; Revised Corporation Code of the Philippines, Republic Act No. 11232, 2019; Section 177)
Scenario 2: OPC subsidiary of a foreign group, still small
An OPC has total liabilities of ₱2.8 million as of year-end. For fiscal years ending on or after 31 December 2025, it may submit financial statements with a sworn Statement of Management’s Responsibility signed by its President and Treasurer, instead of an AFS, if within the threshold. (SEC MC No. 10, Series of 2026 dated 16 February 2026)
Scenario 3: Startup crosses ₱3 million due to a funding round
A corporation raises cash, purchases equipment, and ends the year with total assets of ₱4.5 million. The entity may now be above threshold and must plan for an independent statutory audit for SEC filing, including checking whether its auditor needs SEC accreditation under applicable SEC coverage rules recognized as valid in jurisprudence. (SEC MC No. 04, Series of 2026 dated 20 January 2026; Securities and Exchange Commission v. 1Accountants Party-List, Inc., G.R. No. 246027, 2025)
Cost and Timing Notes for Startups and Foreign Subsidiaries
- Budgeting: If you expect to exceed ₱3,000,000 by year-end, allocate audit costs early and reserve time for confirmations and documentation.
- Investor expectations: Some VCs, parent companies, or lenders may still require audited statements even if the SEC does not.
- Delinquency exposure: Repeated non-filing remains a corporate status risk regardless of audit threshold changes. (Revised Corporation Code of the Philippines, Republic Act No. 11232, 2019; Section 177)
Conclusion: What to Do Next
SEC’s 2026 adjustment of the audit threshold to over ₱3,000,000 can reduce compliance costs for many startups and smaller entities, including small-to-medium foreign subsidiaries that remain below the threshold. Companies should still treat SEC reportorial compliance as non-optional, and should plan ahead when approaching the threshold (especially after funding rounds).
For foreign investors, compliance savings from reduced audit requirements should not distract from stricter issues: foreign equity limits are enforced through SEC/DTI monitoring, and “local proxy” structures can create serious regulatory and dispute risk. If the business falls in a restricted sector, obtain written advice on the permitted foreign ownership level and compliant control mechanisms before papering any shareholder arrangements. (IRR of Republic Act No. 11647, 2022; Sections 20–21)
About Nicolas and De Vega Law Offices
Nicolas and de Vega Law Offices is a full-service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website https://ndvlaw.com.
