BIR Ruling

August 11, 1970 Messrs. Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati, Rizal Gentlemen : This refers to your request for the reconsideration of the ruling of this Office contained in its letter dated February 16, 1970 to Mr. Enrique M. Zafra reading as follows: "An actuary of an accounting firm cannot be considered an independent actuary within the purview of Revenue Regulations No. 1-68 with respect to actuarial reports he prepares on the retirement plans of employers of whom the accounting firm is the external auditor. This is for the reason that an actuary employed by an accounting firm actually prepares the report not in his individual capacity but for the firm wherein employed. "In effect, it is the opinion of this Office, that a person cannot be both an independent accountant and actuary of the same client." The word 'independent' means "free from the influence, control, or determination of another or others; free from influence, persuasion or bias" (Webster's Dictionary, College Ed.) It is in this sense that the word 'independent' is used in Revenue Regulations No. 1-68. To be really independent, therefore, a consulting actuary must, in the exercise of his profession be free from influence, control, persuasion or bias. The mere fact of employment may bring about the loss of such freedom although not always. An employee-actuary may qualify as an independent consulting actuary but his privilege to exercise his profession independent of his employment is of course a matter that purely concerns himself and his employer. Thus, duly accredited actuaries employed in insurance companies, banks or in any other entity may prepare the actuarial report or statement of actuarial assumptions and certify the same in connection with the determination of the costing of retirement plans provided that he or his employer bears to the employer whose retirement plan is under consideration, no business or professional relationship which may in my way affect the free exercise of his professional actuations. But where an actuary is employed by a firm of certified public accountants which is the external auditor of the employer whose retirement plan is also being prepared or formulated by said firm, the actuarial report or statement of actuarial assumptions to be prepared by the actuary would in effect be prepared by him for his firm as an employee discharging functions requiring the application of his knowledge and not in his individual capacity as a professional. In such situation, there can be no doubt that the actuary may not be free from influence or bias or persuasion as the relationship of his employer to the client are factors that affect his freedom as an actuary. However, an actuary of an accounting firm may prepare the actuarial report as regards the costing of pension plans of employers of which the firm is not the external auditor. Financial interest and management participation are not all inclusive criteria that affect the freedom to exercise and apply one's profession. In fact, even the Accountancy Law and the rules of the Board of Accountancy admit this. As 'independence' is generally conceded as a state of mind, it can be said that any and all factors that tend to affect such independence can and should be considered and taken into account in appreciating the independence of an actuary, such as employment. It is the essence of the law and the implementing regulations that the costing of retirement plans should be fixed and predetermined in accordance with sound actuarial assumptions. It is for this reason that the regulations require that the assumptions should be certified by an 'independent consulting actuary'. It is not for the employer to determine at will how much he should contribute depending on his profits; otherwise, the requirement on the submission of the actuary's certification of actuarial assumptions would be an empty gesture. As regards your contention that an actuary, like a lawyer, will be guided by the ethics of his profession, suffice it to say that ethics of professional practice should be disassociated from the appreciation of 'independence'. An accountant or actuary may indulge in unethical practices, yet his independence stand. On the other hand, such accountant or actuary may act strictly within the ethics of his profession and yet may not be considered independent. aisadc In view of all the foregoing, this Office is not inclined to modify or revoke the ruling in question. Accordingly, your request for the reconsideration of the same has to be as it is hereby denied. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue