What the new CPA audit threshold means for small businesses
- Cristina Joy D. Cancela
- 2 days ago
- 4 min read
ON Jan. 20, 2026, the Securities and Exchange Commission (SEC) issued Memorandum Circular 4, Series of 2026, introducing a subtle but impactful shift in corporate financial reporting. The circular raised the threshold at which companies must submit audited financial statements. Applicable to fiscal years ending on or after Dec. 31, 2025, the adjustment is designed to ease compliance burdens for micro and small corporations while maintaining oversight for larger, higher-risk entities.
Under the new rules, corporations with total assets or total liabilities not exceeding P3 million are no longer automatically required to submit audited statements unless they are classified as publicly accountable or fall into other public-interest categories such as listed companies, financing companies and regulated financial entities. Instead, these companies may submit unaudited statements accompanied by a statement of management’s responsibility (SMR) certifying the accuracy and completeness of the financial information presented. Previously, only stock and nonstock corporations with total assets or liabilities less than P600,000 were exempted from mandatory audit.
For many small businesses, this change represents more than just regulatory relief — it can be a lifeline. Audits are often expensive and resource-intensive, requiring specialized personnel and significant administrative time. By increasing the threshold, the SEC has allowed micro enterprises to redirect funds toward operations, staffing, or growth initiatives rather than compliance costs that may outweigh their scale.
Small companies rarely grow in a straight line. Revenue streams can fluctuate, systems may be under development and accounting personnel may be limited. Premature audit requirements can create unnecessary strain, forcing businesses to allocate time and resources before internal processes become fully mature.
By deferring mandatory audits until companies surpass the revised threshold, the SEC ensures that financial reporting practices evolve in step with business maturity. This approach provides flexibility while helping businesses gradually build the financial rigor needed to support more complex operations in the future.
While the increased threshold offers relief, it comes with trade-offs. Independent audits provide more than verification — they encourage stronger documentation, robust internal controls and disciplined financial management. Companies operating below the threshold must remain diligent, maintaining effective internal reporting standards to protect credibility and stakeholder confidence, particularly as they approach the limit for mandatory audits.
For management, this means balancing operational efficiency with governance responsibility. While they may save on audit costs, the duty to produce accurate and reliable financial statements does not diminish. The SMR offers accountability, but it does not replace the assurance that comes with an external audit.
Investors, lenders and other users of financial statements need to adapt to the new framework. Unaudited statements, even when accompanied by an SMR, do not offer the same level of assurance as a full audit. Evaluating companies near the threshold will require greater scrutiny, particularly for those considering investment or extending credit.
At the same time, reducing compliance burdens can support business viability and encourage broader participation in the economy, particularly among micro enterprises. Investors and creditors may need to weigh the trade-off between lower reporting rigor and the potential for higher operational resilience among small companies.
The raised threshold may also reshape the audit landscape. With fewer small entities requiring audits, the focus of audit firms may shift toward larger, more complex organizations with sophisticated financial systems. While the overall volume of audit engagements may decrease at the lower end of the market, companies approaching the threshold are likely to invest earlier in audit readiness, strengthening accounting policies and internal controls.
In this way, the timing of assurance-related activities may change even if their overall importance does not. Companies may adopt a more proactive approach to financial governance, preparing for eventual audits, while taking advantage of the temporary relief offered by the new rules.
SEC Memorandum Circular 4 exemplifies a broader regulatory philosophy: proportionality. By linking audit obligations to company size and public-interest considerations, the SEC acknowledges that compliance costs are not uniform across the corporate spectrum. At the same time, entities with significant public exposure — those handling public funds or operating in regulated sectors — remain subject to full audit requirements. This ensures that oversight is aligned with risk, complexity, and stakeholder impact.
The revised audit threshold represents a careful, measured adjustment rather than a fundamental policy shift. It provides small companies with room to grow and operational flexibility, while reinforcing the need for transparency and accountability. Its long-term effectiveness will depend on responsible application by management and continued vigilance in financial reporting.
Ultimately, the circular reflects an evolving approach to audit requirements — one that seeks to balance credible financial reporting with practical regulatory design. Small businesses gain the breathing room to focus on growth and operations, while investors and regulators retain mechanisms to monitor financial integrity.
By aligning oversight with company size and public interest, the SEC is sending a clear message: regulatory frameworks can support economic growth without compromising accountability. The increased threshold for independent CPA audits may be subtle in form, but its impact on micro and small businesses and the broader corporate ecosystem — could be substantial.
-------------------------------------------------------------------------------------------------------------------------
Cristina Joy D. Cancela is a senior partner and head of operations of Paguio, Dumayas & Associates, CPAs (PrimeGlobal Philippines).
Comments