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Isabela City 2008 COA Audit Findings 7

July 1, 2010

DETAILS OF SIGNIFICANT FINDINGS
AND RECOMMENDATIONS

Finding No. 7
Withdrawal of supplies carried in stock from the warehouse of the City General Services Office valued in the books at P729,808.09 were made thru vales instead of the required Requisition and Issue Slip, contrary to Section 116 of the New Government Accounting System (NGAS). Its failure to report the issuance to the Accounting Office causes the inventory cost at year-end to be overstated.
Procedures under Section 116 of the New Government Accounting System for requisition of supplies carried in stock require that it shall be made thru the preparation by the department or office of the Requisition and Issue Slip (RIS). Once supplies are available, an Obligation Slip (OS) must be attached containing certification from the department head as to the necessity of the supplies for official use and the availability of appropriations from the Budget Officer. Approved RIS and OS are bases for the supply officer in charge of the custody of the supplies for the issuance to end-user.
An examination of stock inventory for supplies carried in stock disclosed that as of December 31, 2008, there were issuances thru vales that were made by the General Services Office without the duly approved RIS. There are vales that bear only the signature of staff employees hence, were not approved by the Head of Office or Department needing the supplies.

Total amount of supplies already withdrawn from the warehouse is valued at P729,808.09. Breakdown of the withdrawals as to who were the end-user and supply classification, are as follows:

Total Amount
Accounting Office
P     25,132.46
City Mayor’s Office
449,070.04
General Services Office
108,543.34
Tourism
31,929.59
Barangays
73,600.70
Treasurer’s Office
10,619.70
Dapitan City Resort Hotel
8,434.25
Human Resource Management Office
6,672.00
Sangguniang Panlungsod
5,733.00
Other Offices
10,073.01
TOTAL
P   729,808.09

The irregular withdrawal of supplies from stock without the prescribed approved requisition form overstated the inventory account as of December 31, 2008 because the usual Supplies and Materials Issued Report which consolidates all issuances of supplies coming from stocks, are not yet prepared for the purpose, hence, the same were not duly recorded in the books of accounts.
The uncontrolled and unauthorized issuances of supplies coming from stock of the General Services Office have to be properly reviewed by the City General Services Office in order to enhance proper accountability of those persons in charge of the custody, otherwise, losses to the city government will remain unchecked.
Management Comment:
The General Services Office justified that it decided to issue these supplies out of immediate necessity to end-users of the different offices in order not to hamper its normal operations. Nevertheless, the Requisition and Issue Slips are already routed for approval by concerned Department Heads.
Rejoinder:
The practice of stock issuances without duly approved RIS is devoid of any administrative policy and is a complete breakdown of existing control measures to safeguard its assets. This practice continues to thrive because preparation of requisitions of supplies needed by the departments or offices is made only as the need arise without observing the normal procurement processes, thus substantial delays could not be avoided.
Recommendation to Isabela City Government:
Direct the General Services Office to stop the practice of issuing stock unless an approved RIS is presented. Essential items may be issued only in exceptional cases such as emergency where vale maybe entertained provided an RIS will follow. Also require those personnel in charge in the custody of stocks to periodically reconcile stocks with records. Any variances should be looked into.
1. The Acting Accountant failed to submit paid disbursement vouchers and payrolls covering the period May- December 2008 for post-audit purposes in violation of the provisions of Section 107 of Presidential Decree No. 1445 and Article 218 of the Revised Penal Code, thus casting doubt on the propriety and legality of these transactions.
Provisions of Section 107 of PD. 1445 states:
“ In the absence of specific provision of law, all accountable officers shall render their accounts, submit their vouchers, and make deposits of money collected or held by them t such times and in such manner as shall be prescribed in the regulations of the commission”( underscoring supplied)
Provisions of Article 218 of Revised Penal Code:
“ Failure of accountable Officer to render accounts- Any public officer, whether in the service or separated therefrom by resignation or any other cause, who is required by law or regulation to render accounts to the Insular Auditor (now Commission on Audit) , or to  provincial auditor and who fails to do so for a period of two months after such accounts should be rendered, shall be punished by prision correccional in its minimum period, or by a fine ranging from 200 to 6,000 pesos, or both”
Despite several verbal follow ups made by our office to the Acting Accountant during the calendar year 2008, the disbursement vouchers/ paid payrolls  from the period May and June 2008 were not submitted to our office. He alleged that he is still checking if the supporting documents to the vouchers are complete including signatures to avoid receiving Notice of suspension from the Auditor’s Office. This is an indication that the Acting Accountant does not conduct pre-audit on the said vouchers during processing. Vouchers and Summary of Payrolls were not verified as to completeness, legality and correctness. He only checks if the requirements are complete after the vouchers had been paid resulting to delay in its submission to our office. This practice reflects poor internal control. Pre-audit should be done before payment and not after. The non-submission of vouchers resulted in the non-verification of transactions in the books of accounts, non-post-audit of transactions covering the period May to December 2008, thus casting doubt on the propriety and legality of the transactions.
During the exit conference last February 12, 2009, the Acting City Accountant reasoned out that the submission of disbursement vouchers for May 2008 to December

2008 was further delayed due to the instruction of the City Mayor to have all disbursement documents be photocopied before submission. The creation of the Internal Control Unit was also considered by the City Mayor to review all disbursements documents before payment thereof.
Recommendation to Isabela City Government:
We recommend that the Acting Accountant should submit the disbursement vouchers and paid payrolls covering the period May to December 2008 immediately to the Auditor’s Office and all subsequent transactions within 10 days of each month after it has been recorded in the books of accounts pursuant to Section 107 of PD. 1445 and. Furthermore, he should conduct pre-audit of transactions by checking its legality and completeness of the supporting documents during processing before payment will be effected as part of a sound internal control system. Otherwise, appropriate charges for Failure to Render Account under Article 218 of the Revised Penal Code shall be instituted against concerned accountable officer.
2. The outstanding balance of Advances to Officers and Employees, all funds, amounting           P 32,686,866.52  as of December 31, 2007 had increased to        P 42,596,307.85, or 30% as of September 30,  2008 due to poor monitoring system in place especially on the part of the Accountant to strictly impose the provisions of Section 4.1.2, 4.1.3, 4.1.4 and 5.1.3 of COA Circular No. 97-002 Dated  February 10, 1997 and Section 48 (k) of COA Circular No. 92-382 which resulted to overstatement of Cash/Receivable account and understatement of Expense account.
Stated below are the pertinent provisions of COA Circular No. 97-002:
“ 4.1.2- No additional cash advance shall be allowed to any official    or employee unless the previous cash advances given to him is first settled or a proper accounting thereof is made.
4.1.3- A cash advance shall be reported on as soon as the purpose for which it was given has been served.
4.1.4– Only permanently appointed officials shall be designated as disbursing officers. Elected officials may be granted a cash advance only for their official traveling expenses. “
5.1.3 -  Official Travel – within sixty (60) days after return to the Philippines in the case of foreign travel or within thirty (30) days after return to his permanent official station xxx
Failure of the AO to liquidate his cash advance within the prescribed period shall constitute a valid cause for the withholding of his salary and the institution of other sanction xxx

Section 48 (k) of COA Circular No. 92-382 states:
“ The cash advances shall be liquidated as follows:
* Salaries, wages, etc. – within 5 days after each 15 days/end of the month pay period.
* Petty operating expenses- within 20 days after the end of the year; subject to replenishment during the year.
* Foreign travel- within 60 days after return to the Philippines”
Provisions of Article 218 of the  Revised Penal Code:
“ Failure of Accountable Officer to render accounts- Any public officer, whether in the service or separated therefrom by resignation or any other cause, who is required by law or regulation to render account to the Insular Auditor (now Commission on Audit) or to provincial auditor and fails to do so for a period of two months after such accounts should be rendered, shall be punished by prision correccional in its minimum period, or by a fine ranging from 200 to 6,000 pesos, or both”
The Trial Balance of the General Fund, Trust Fund and Special Education Fund  as of September  30, 2008 disclosed  that  the consolidated balances of Advances to Officers and Employees account  amounted to P42,596,03.85 (See Annex “C”)  The Advances of Officers and Employees account includes cash advances for travel, catering services for ZPRAA athletic activities, purchase of vehicles, purchase of office equipment, freight and handling and other purposes of officials and employees which had remained unliquidated after their purposes had been served Most of the personnel have several outstanding cash advances which were not liquidated although they were issued demand letters by the Acting Accountant and this office. Some of the cash advances were granted way back 1995. The Acting Accountant failed to impose sanction on the erring officials and employees, instead they were still granted additional cash advances. The Schedule of  Advances to Officers and employees  of the  General Fund submitted as of September 30, 2008 amounting to P38,311,435.46 had not been   reconciled with the General Ledger balance of P 41, 161.738.76. Similarly, the Payroll Fund has still an outstanding balance of P19,723,834.00 as of the said date. This amount includes unliquidated cash advances for salaries and wages of the Officer-in- Charge amounting to P 296,120.94 and the outstanding balance of the previous city treasurer.   This practice is an indication of a poor monitoring system in place and management had not created strategy to address the problem.  The continuous increase in the balances of Advances to Officers and Employees would greatly affect the overall financial status of the city since it had overstated the Cash and Receivable accounts and understated the corresponding Expense accounts for current and previous years.

The City Mayor commented that she has already written the former City Treasurer regarding his unliquidated cash advances and sent demand letters to all city officials and employees for the immediate liquidation of their cash advances. She further stressed that she will stop granting cash advances to all officials and employees with outstanding cash advances and initiate a salary deduction scheme to apply on their long overdue accounts.
Recommendation to Isabela City Government:
Stop the practice of granting additional cash advances to officers and employees who still have outstanding cash advances. Require all personnel with unliquidated cash advances to settle the same immediately either by submitting the liquidation report or refunding the amount taken. In the event the officers or employee refuse to do so, the amount should be deducted from their salary or appropriate charges may be filed for failure to render accounts pursuant to Article 218 of the Revised Penal Code. Furthermore, the Acting Accountant should reconcile the total balance per schedule with the General Ledger.

3. The Bank Reconciliation Statements (BRS) required as proof of the accuracy and correctness of the Cash in  bank account were still not prepared and submitted by the Acting City Accountant in violation of 3.1, 3.2 and 3.3 COA Circular No. 96-011 dated October 2, 1996 which resulted to non-reconciliation of balances between the Cashbook, General Ledger (GL) and the Bank Statements (BS) .
Sections 3.1 and 3.2 of COA Circular No. 96-011provide that :
“ 3.1- The depository/servicing banks shall furnish the Local accountant with the Bank Statement(BS) including debit/credit memos (DM/CM), paid checks, etc, within five (5) days after the end of each month which shall be the basis for the preparation of  the monthly Bank Reconciliation Statements (BRS).
3.2- The local accountants shall within ten(10) days from the receipt of the Bank Statements, reconcile the same (BS)  with the General Ledger (GL) and prepare the BRS in five copies, xxx
3.3- the accountant shall draw journal vouchers to record all valid reconciling items that require adjustment and correction in the GL.
This finding is being reiterated from our CY 2005 audit report.  Despite the recommendation to require the Acting Accountant to prepare and submit BRS, he and his staff continuously failed to do so.Verification of records by the audit team was limited to  those for the CY 2005 to 2007 and records prior to CY 2005 were not verified. The non-preparation of the BRS resulted to the failure of the Acting Accountant to uncover that there were checks drawn from January 2005 to May 2007 totalling P 23,998,312.99 in the General Fund which were not recorded in the books. This deficiency was already
reported in the CY 2007 Annual Audit Report. The checks drawn represent those without lawful appropriations and those without duly approved disbursement vouchers. Had the Acting Accountant prepared the BRS on a monthly basis, this irregularity could have been prevented or detected and subsequently a reconciliation between the General Ledger, Cashbook and BRS can be effectively made. Also the Cash in Bank account as of Sept. 30, 2008 is overstated by P 23,998,312.99.
The Acting City Accountant alleged that their office is now in the process of preparing the adjustments for erroneous entries of the cash accounts. The bank reconciliation statement as of September 2008 for Trust fund was already submitted to the auditor. The Mayor further commented that she will recruit a CPA to assist the Accountant’s Office in the preparation of bank reconciliation statement.
Recommendation to Isabela City Government:
Require the Acting City Accountant to reconcile the records with the Treasurer’s Office from the last BRS to date to establish the correct balance of the Cash in Bank account especially in  the General Fund. Otherwise an administrative case may be charged against the accounting personnel concerned for the  continuous failure to submit the BRS pursuant to 3.9 of COA Circular No. 96-011 which states:
3.9- xxx , the Director concerned shall, after evaluation, recommend the filing of administrative charges against officials responsible for the delayed submission/non-submission, if warranted on the basis of the evidences/documents.
4. The present Bids and Awards Committee ( BAC)  did not conduct pre-procurement and pre-bid conferences to thresh out issues and concerns regarding problems in procurement with  observers from COA  and NGOs to   promote transparency in   the procurement proceedings in violation of IRR Sections 20.1, 20.1.3, 20.1.4,  22.1 & 22.2 and Section 13 of R.A 9184.
Sec. 20.1, 20.1(3) and 20.1(4) of IRR of RA 9184 states:

“ Section 20.1 – Prior to the advertisement or the issuance of the Invitation to Apply for Eligibility and to Bid  for each procurement undertaken through a public bidding, the BAC, through its Secretariat, shall call for a pre-procurement conference. The pre-procurement conference shall be attended by the BAC, the Secretariat, the unit or officials, including consultants hired by the procuring entity who prepared the technical plans, technical specifications, TORs, bidding documents xxx
20.1.3. Review, modify and agree on the criteria for eligibility

screening to ensure their fairness, reasonableness and that they are of   the “pass/fail” type and are written in such manner

20.1.4 Review, modify and agree on the criteria for evaluation of bids/ proposals to ensure their fairness,  reasonableness and applicability to the procurement at hand;”
Sections 22.1 & 22.2 IRR of R.A 9184 also states that:
Xxx At least one pre-bid conference shall be conducted for each procurement, unless otherwise provided in IRR. Subject to the approval of the BAC, a pre-bid conference may also be conducted upon the written request of any prospective bidder xx.
xxx  The pre-bid conference/(s) shall be held within a reasonable period before the deadline for receipt of bids to allow prospective bidders to adequately prepare their bids, xxx and
Section 13 of R.A 9184 states that:
“  xxx To enhance the transparency of the process, the BAC shall in all stages of the procurement process, invite in addition to the representative of Commission on Audit, at least two (2) observers to sit in its proceedings, one (1) from a duly recognized private group in a sector or discipline relevant to the procurement at hand and the other from a non-government organization; Provided, however. That they do not have any direct or indirect interest in the contract to bid out.  The observers should be duly registered with Securities and Exchange Commission xxx.”
The  BAC did not conduct pre-procurement and pre-bid conferences for procurement made by the City Government of Isabela even if the procurement of goods is  over one million pesos (P1,000,000.00). The Committee did not convene to clarify and /or explain any of the requirement, terms, conditions and specifications stipulated in the bidding documents, the technical and financial components of the contract to bid and for the procurement of goods, and  the eligibility requirements. Pre-procurement is important because at this stage, the BAC will determine the shortlist of suppliers and contractors who are qualified to bid. From the list, the canvasser will pick-up the prospective bidders based on their items offered for sale. The determination on the potential bidders should be from the shortlist set by BAC.  In no instances should the discretion be left to the canvasser. Furthermore, other observers from NGOs were not invited to attend the proceedings like opening of bids and pre-procurement/ pre-bid conferences to thresh out issues. Copies of the minutes of the BAC meeting were not furnished to the observer.

The BAC Chairman alleged  that the BAC has already conducted the pre-procurement and pre-bid conferences in CY 2008 after they received an Audit Observation Memorandum regarding the deficiency.  However, minutes of the conferences were not made available to us despite demands.
Auditor’s Rejoinder:
Despite the allegations made by  the BAC Chairman that the BAC is conducting pre-procurement  and pre-bid conferences, our office noted that the BAC only conducted conference  at the beginning of the  year for eligibility screening of suppliers. However, when there are additional suppliers who  participated in the bidding process during the year especially those from Manila and other places, no conferences were held to pre-qualify them or to thresh out problems in procurement before awarding of contract were made or Purchase Order were issued
Recommendation to Isabela City Government:
The BAC should conduct at least one pre-procurement / pre-bid conference or as the need arises to clarify terms and conditions and specifications stipulated in the bidding documents. The Committee should  set or create a shortlist of suppliers and contractors as a guide to canvassers on whom to serve canvass papers and invitation letters should be send to observers to witness/ attend the proceedings of the  conference and special meetings to enhance transparency,  in compliance with implementing rules and regulations of R.A 9184. The BAC should act independently free from pressure of any officials to effectively discharge its function.
5. Donations amounting to P 1,027,809.75  were paid through reimbursement with Reimbursement and Expense Receipt (RER) attached but  were not supported with the required Certificate of Indigency and Social Case Study Report in violation of Administrative Order No. 54 s. 2003.
Provisions of Administrative Order No. 54 s. 2003 provide that:
A. For request requiring funding assistance amounting to
P 2,000.00 or below:
1. General Intake Sheet
2. Certificate of Eligibility
B. For request requiring assistance of over P2,000.00 but
below P 5,000.00
1. General Intake Sheet
2. Certificate of Eligibility
3. Referral
4. Any proof of hospitalization or death if such is the
reason for requesting assistance

C  .For  requests requiring assistance P5,000.00 and over
1. General Intake Sheet
2.Certificate of Eligibility
3. Referral
4. Any proof of hospitalization or death if such is the reason for
requesting assistance
5. Social Case Study Report
Reimbursement and Expense Receipts (RER) ranging from P1,000.00 to P 7,000.00  were attached to the reimbursement voucher of the OIC, Treasurer’s Office representing financial assistance/donations granted to individuals without  conducting interview by the personnel of the City Social Welfare and Development Office to check on the eligibility of the clients. In most cases, the RER were not properly accomplished as to the printed name and the address of the persons asking for financial assistance/donations.  The ideal procedure is for the client to visit the CSWDO for interview and filling up of the required forms before approaching the mayor for approval of amount to be granted. However, in this practice, the CSWDO no longer interview clients since it is the Mayor or City Administrator doing the interviews and prepare immediately routing slips with the amount indicated which were forwarded directly to the OIC, Treasurer Office for filling up of RER and then cash is given to the client without preparing all the required supporting documents.  Although the practice entail  less time but the standard procedures and documents required to be accomplished for financial assistance to be given  were taken for granted  in violation of rules and regulations in the grant of financial assistance/donations.
Recommendation to Isabela City Government:
Strictly follow the step by step procedure in the grant of financial assistance/donations to ensure that only indigent can avail. All donations regardless of amount should be paid by check.

Management Comments:
The City Treasurer commented that the audit observations are well taken and that the audit recommendation will be properly observed.

6. Acquisition of construction materials thru takay system in the amount of P1,443,126.35 did not conform with the Rules and Regulations on Supply and Property Management in the Local Governments (COA Cir. No. 92-386), hence, quantity, specification and reasonableness of the cost could not be ascertained.
Provisions of COA Circular No. 92-386 state that:

“ Section 27. Public Bidding as the Primary Mode of Procurement. -Except as

otherwise provided herein, acquisition of supplies or property by local government units shall be through competitive public bidding.
Section 29. Procurement Organization. -In every province and city, the office of the general services officer shall exercise the function of acquiring for the province or city all its supply or property requirements. xxx
Section 114.a. Purchase made by the local government units must be inspected and verified by their authorized inspector for conformity with specifications in the order. Xxx
Section 115. Submission and Approval of, Inspection Reports.- The property inspectors of the local government units shall promptly submit reports of all inspections finished during the day to their supervisors for evaluation and approval. The approved inspection report and other documents pertaining to the inspection shall form part of the supporting papers of the disbursement voucher covering the payment of the purchases”.
The city implements all its infrastructure projects by administration.  One of the projects implemented during the first quarter of 2008 was the repair and rehabilitation of farm to market road at Calvario-Maligue, wherein the material requirements such as crushed stones, finger corals and filling/binder materials in the total amount of P1,443,126.35 were acquired through takay system. Audit of payments of materials delivered disclosed that the claims were supported with summary of payrolls and payroll jackets indicating the volumes of deliveries, the names of the laborers who made the deliveries and the corresponding amount. Based on the documents submitted, the Project Engineer and the City Engineer who supervised the implementation of the project, were also responsible in the acquisition/acceptance of materials. There was no bidding or competitive selection of   pakyaw labor. Also contract papers and  Inspection and Acceptance Report (IAR) were not submitted to establish that volume of the materials delivered and to determine whether what has been delivered meet the required quantity and specifications per program of work and were obtained at the lowest price possible, in violation of the above cited regulations. There was no evidence to show that the deliveries were inspected by property inspector from accounting department, which is the usual practice. The transaction is found to be irregular since only two (2) personnel were involved in the procurement and execution of the project. This practice if allowed to continue would result in the breakdown of internal control and contravene the main objectives of the government which is to ensure transparency, regularity and validity of the transactions.
The City Engineer reasoned out that upon receipt of the Audit Observation Memorandum (AOM) relative to procurement of materials through takay system, an inspectorate team composed of the personnel of the City Engineer’s Office was created. Moreover, the City Mayor commented that since the farm to market projects were already completed, she is requesting that the said projects be inspected to determine/establish the volume of the deliveries of materials. She also assured that the deficiencies noted will not be repeated.

Recommendation
Require the City Engineer and Project Engineer to explain in writing as to why the standard procedures on the procurement of construction materials were not followed. Furthermore, we recommend that management should strictly abide with the rules and regulations on supply and property management in the acquisition of materials use in the implementation of infrastructure projects by administration to avoid suspension or disallowance in audit.
VALUE FOR MONEY AUDIT:
7.  The city had collected P 2,208,585.29  on real property taxes or  merely 17.66% of its targeted collections amounting to P P12,500,000.00 due to the failure of the City Treasurer to intensify collection campaign.
It is the duty of the City Treasurer to see to it that the Statement of Income Projection certified by her in the Approved Annual budget are attainable and will be collected during the budget year. This is necessary in order to achieve  the programs and projects   lined up for implementation during the year.
Based on the CY 2008 annual accomplishment report submitted by the City Treasurer, it revealed that the total amount collected by that office for real property taxes for the year amounted to P 2,208,585.29 or 17.66% of the total projected income of P 12,500,0000.00. The total projected income includes real property taxes for current year, previous year and penalties amounting to P6,5M, P4M and P2M respectively. Due to the ordinance passed by the  Sangguniang Panglunsod which gave amnesty to delinquent taxpayers to boost collections, there was a slight increase of 7% compared to last year. However, the amount is still way below the estimated income to be collected. With the tax incentives given, the city could have collected at least 50% of the total project income on real property taxes.
The City Treasurer, in her letter dated February 11, 2009, stated that the low collection on real property tax was due to the prevailing economic crisis and that the projected income for CY 2008 includes the tax liability of Basilan Electric Cooperative in the amount of P6.5M which has remained unpaid during the year. She also gave her assurance to increase the tax collections in the coming year by way of viable strategies and to be more conservative in projecting revenue income.
Auditor’s Rejoinder:
The reason given by the Present City Treasurer was also cited by the previous city treasurer on why the collection efficiency of the city on real property taxes was so low compared to the certified income as per approved budget. This collectible may not yet be realized because of present financial condition of the electric cooperative.   Per analysis,
the projected income was bloated to make it appear that the city has enough income to fund/ justify the huge expenditures of the city.

Recommendation to Isabela City Government:
Require the City Treasurer to certify only in the Statement of Projected Income in the proposed budget the amount which are realistic and can be collected during the year so that the expenditures for the ensuing year will not be overstated for budget purposes and to intensify collections so that all programs and projects earmarked for the year can   be implemented.

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