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Butuan City 2008 COA Audit 8

. VALUE FOR MONEY AUDIT1. The constructed one (1) unit two-storey building and one (1) unit 4-storey building on the D.O. Plaza Regional Government Center, which was financed by the bonds floatation of P140M, still remained an idle investment contrary to the provisions of Section 299 of R. A. No. 7160 and the non-implementation of Presidential Proclamation No. 250.      Section 299 of Republic Act No. 7160 provides that:      “Bonds and Other Long-Term Securities –Subject to the rules and regulations of the Central Bank and the Securities and Exchange Commission, provinces, cities and municipalities are hereby authorized to issue bonds, debentures, securities and collaterals, notes and other obligations to finance self-liquidating, income-producing development or livelihood projects pursuant to the priorities established in the approved local development plan or the public investment program. The sanggunian concerned shall, through an ordinance approved local development plan or the public investment program. The sanggunian concerned shall, through an ordinance approved of all its members, declare and state the terms and conditions of the bonds and the purpose for which the proposed indebtedness is to be incurred.” (Underscoring ours)      Presidential Proclamation No. 250 dated February 29, 2000 states:      “To operationalize the CARAGA Regional Government Center on a ONE-STOP-SHOP BASIS, the City Government of Butuan has offered to donate freely a 1,000 square meter lot to each agency of the National Government to enable it to construct its office building and other infrastructure needs therein.” (Annex 10)      A study done by the consultants on the project disclosed:      “The sources of revenues would be basically the rentals or advance payment or deposit from the interested tenants from the office spaces of the proposed first phase of the D.O. Plaza Regional Center. The rental rates would be based on the existing rental fees being charge in the city to different establishments and offices.”      “Rental rates would be a conservative assumption ranging from P200.00 to P600.00 pesos/sq. meter.”      The 4-Storey building has a total floor area of 1,933.05 square meters or 35 total no. of office spaces with an average size of 55.23 square meters. While, the 2-Storey building has a total floor area of 954.75 square meters or 17 total no. of office spaces with an average size of 56.16 square meters.      The following projected annual rental collection per year with an assumed rental rate of P400.00 per square meter is presented below:      1.)  4-Storey bldg.=1,933.05 sq. m. @ P400.00/sq. m.=P9,278,640.00      2.)  2-Storey bldg.=   954.75 sq. m. @ P400.00/sq. m.=P4,582,800.00      The above projected income from the project were not realized until now since there were no tenants interested to rent the office spaces of the two buildings.      The buildings were completed last September 2007, which were supposed to be rented by the different regional offices within the CARAGA region on a “lease-to-own basis”. However, interview revealed that there were no interested parties to rent the office spaces due to the impassable road from the main highway. Besides, the area is remote and the commercial center is still in the city proper where convenience to most of the employees is catered.      Meantime, more than a year after its completion, the buildings are now starting to physically depreciate with the glass windows broken and steel frames rusting, the investment still remained idle and practically does not immediately serve its intended purpose, which is supposed to be self-liquidating, income producing development, productivity enhancement, job generation and poverty alleviation. The plan might be feasible only in about 10 to 15 years from now except where effective strategies to attract lessors are in place.      The study made by the consultants also included other revenue sources for the development of the D.O. Plaza Regional Center such as the pre-selling of lots for commercial purposes, housing subdivision and regional offices. If the pre-selling of lots was undertaken before or during the construction of the two (2) buildings (first phase), revenues could have been generated to finance the project. The price of land would range from P500.00 to P2,000.00 per square meter. Projections on the proceeds from the sale of the land at P500.00 per sq. meter would be at around P100 Million, if the rate would be at P1,250.00 per square meter proceeds would be about P250.5 Million and to as high as P400.8 Million at P2,000.00 per square meter. But, no lots were sold yet.      Moreover, had the City Government implemented the Presidential Proclamation No. 250 to donate lots of 1,000 square meters to each national government agency, there might be progress by now.      The project for the construction of the Main Road to D.O. Plaza Regional Government Center was implemented in 2002 and reported to be 95.20% completed but per Inspection Report by the COA-RTSO dated July 31, 2003 disclosed that accomplishments was only 71.90% or a disparity of 23.32% against the Agency’s reported accomplishment.       Audit Observation Memorandum No. 2003-007 dated August 8, 2003 was sent to the Office of the former City Mayor regarding the deficiencies noted in the COA-RTSO Inspection Report but until to date no reply was received by our Office.      Interview conducted revealed that there was a problem of the right-of-way which was still under negotiation until now.  In our AOM No. 2003-007, the Auditor explained that “the right-of-way problem as a reason for the suspension of the project could not be a justifiable reason considering that this is supposed to be settled during the detailed engineering which is a pre-requisite before the start of the project.”      Until now, the main road was still unfinished and impassable/ inaccessible. Moreover, the construction of the 21-meter bridge was not included in the development plan of the D.O. Plaza Regional Government Center funded under the bond floatation or in the annual investment plan for the years 2002-2008.      Furthermore, the City Government has already paid three-years interest on the bond floatation from April 2006 up to December 2008 and the payment of the principal started in April 2008 in semi-annual equal amortizations of P14,000,000.00 for 5 years, as follows: (Annex 11)Interest                Principal                   Total      04/28/08    –   5,759,020.17   +   14,000,000.00    =   19,759,020.17      10/28/08    –   6,315,073.80   +   14,000,000.00    =   20,315,073.80      Loans Payable-Domestic and Other Long-Term Liabilities have reached P253,024,652.22 as of December 31, 2008 plus the balance of the DBP-Bond Floatation of P112,000,000.00 equals a total loans payable of P365,024,652.22. (Annex 12)      The City Government spent government funds for the construction of D.O. Plaza Regional Government Center which were contrary to its immediate purpose to be self-liquidating and income generating which might not help achieve the mission of the LGU that is productivity enhancement, job generation and poverty alleviation for the interest of the public service and enhance the delivery of basic services to the people.      In its feasibility study it was indicated that the project would incur operating losses on the first two years or during the construction period and due to the high interest payments to be paid for the Bonds in the early years and also on the first four years of operation.      It might be true that the above project would incur operating losses on the first two years or during the construction period but not just being left idle more than a year after the construction was completed on the two buildings, which are depreciating faster due to non-occupancy/maintenance. Meanwhile, the Bonds Floatation was not really intended to be traded in the stock exchange/market, which should have been a self-liquidating investment and not a liability, however, the Bonds Payable was just a simple loan, with no intentions to gain profit from the proceeds of the “Butuan Balanghay Bonds” which was used to finance what is now still remained an idle project/investment.      The above audit observation is a reiteration of CY 2007 Annual Audit Report VFM audit finding, there being no action taken on our recommendations by the LGU until todate.Recommendation for Butuan City Government:      Strategize and prioritize an intensive marketing drive for the rental of the 2 buildings constructed to pay for the interests and its semi-annual amortizations and resolve the right-of-way problem as early as possible before the construction of the 21-meter bridge to make the road passable.      Refrain from incurring additional loans which would not generate income or even self-liquidating projects to avoid further depletion of funds of the LGU and find measures to pay the loans by not just being dependent to the use of the Internal Revenue Allotment in payment of loans.2.     Had the program of works been prepared based on actual preliminary engineering works and projects been properly supervised in their implementation, savings in contract cost totaling P1,216,663.74 could have been realized in compliance with the provisions of Section 3 and Annex “A” of IRR of R. A. 9184.      Section 3 of the Implementing Rules and Regulations (IRR) of Republic Act No. 9184 requires that:       “The implementation of awarded contracts shall be monitored with the end in view of guarantying that all these contracts are performed strictly according to specifications.”      Likewise, Annex “A” thereof provides that:         “No program of work for any project shall be approved without detailed engineering.”      Records showed that per evaluation and inspection of the four (4) projects by the Regional Technical Services Office (RTSO), COA-RO No. XIII, Butuan City a total deficiency of P1,216,663.74 were noted, as follows:Name of Project                              Amount of Deficiency                1. Construction of Dumalagan Road                                 P  1,129,818.24       2. Construction of Multi-Purpose Covered                                          26,633.25Court at Brgy. Cabcabon       3. Concreting of 2nd Street-Pareja Subd.                  3,000.00Barangay Bayanihan       4. Concreting of Road of Left Portion of                                          57,212.25Elloso Street w/ drainage canal                            ____________                                                                                       Total                    P 1,216,663.74      These projects had already been accepted and contract cost fully paid but the amounts of deficiencies noted were not yet recovered at the disadvantage of the City Government. The computations of the deficiencies noted totaling P1,216,663.74 were shown in the COA-RTSO Technical Evaluation Reports for Infrastructure Projects. (Annex 13)      Had the Agency prepared the program of works based on actual detailed preliminary engineering works and properly supervised the implementation of these projects, the deficiencies could have been avoided or minimized, thus savings in contract cost realized.Recommendation for Butuan City Government:      Direct the concerned contractors of the projects to strictly adhere to the recommendations of the COA-Technical Audit Specialist and/or settle immediately the deficiencies noted to recover the loss suffered by the government. Direct the City Engineer’s Office to conduct detailed preliminary engineering activities before execution of any project. Likewise, require the Project Engineer to properly supervise their men on the field to guarantee that the project is executed in accordance with specifications.

Butuan City 2008 COA Audit 7

7. Financial Assistance granted to Non-Governmental Organizations (NGOs)/People’s Organizations (PO’s) resulted to an unliquidated amount of P8,913,193.95 as of December 31, 2008 contrary to the provisions of COA Circular No. 2007-001 in the granting and subsequent liquidation of funds, thus transparency was not promoted, monitoring of accountability and utilization of this fund was not undertaken, further exposing it to misuse.      COA Circular No. 2007-001 dated October 25, 2007 embodies the guidelines for the acquisition, utilization, accounting and reporting of the financial assistance granted by the government to the NGO’s/PO’s which the Government Organization and the NGOs/PO’s should be aware. (Annex 9)      Verification of the disbursement vouchers showed that the financial assistance funds/grants were released without the necessary required documents pursuant to COA Circular No. 2007-001, which provides among others:     4.4 Requisites for entitlement to government funds4.4.1-Certificate of Registration with the Securities and          Exchange Commission (SEC), and/or either the          Cooperative Development Authority (CDA) or the          Department of Labor, as the case may be x.x.x.x.x.x.          to ensure that the NGO/PO has a legal personality;           has officers who are responsible for and accountable          for its operations x.x.x.x.x.x.  4.4.2-Authenticated copy of the latest Articles of          Incorporation, or the Articles of  Cooperation as the          case may be, showing the original          incorporators/organizers and the Secretary’s           certificate for incumbent officers, together with the          Certificate Filling with the SEC/Certificate of          Approval by the CDA or DOLE.4.4.3-Financial reports, audited by an independent Certified         Public Accountant, for the past three years preceding         the date of project implementation, to ensure that it         has a stable financial condition and that the funds         provided by the GO shall not be its sole source of         funds. For NGO/PO which has been in operation for         less than three years, report of accomplishment or any          equivalent proof certified by its President and          Secretary that it had previously implemented similar                   projects shall be required, in addition to financial          reports for the years it has been in operation.4.4.4-Disclosure by the NGO/PO of other related business,           if any, and extent of ownership therein;4.4.5-Work and Financial Plan and Sources and Details of          Proponents Equity Participation in the project. 4.4.6-Complete project proposal approved/signed by its          officers which shall include the objectives, target          beneficiaries, feasibility studies, risk assessment,          designs, plans, blueprints, charts, etc.      We have observed that the disbursement vouchers were only accompanied by letters requesting for funds and not be the required supporting documents mentioned above. There were also no Memorandum of Agreement (MOA) between the NGO/PO and the Government Organization (GO), which shall embody the terms of reference, as follows:a. Project name, intended beneficiaries, benefits to be delivered, project cost estimates, a brief description of the project and its site/location;b. Systems and procedures to implement the project such as, but not limited to, the procurement of goods and services by the NGO/PO…c. Time schedules for the release of funds, periodic inspection/ evaluation, reporting, monitoring requirements, date of commencement and date of completion;d. Submission of the required periodic financial and physical status report;e. Specific period to liquidate the funds granted to the NGO/PO, with the GO…      Further verification revealed that the release of the funds for the program and activities to be implemented did not qualify for the required types of projects that may be granted government funds.a. Types of projects which may be granted government funds:Types of projects that may be granted government funds shall be those that are beyond the capability of the GO, which shall be clearly defined in the Memorandum of Agreement (MOA). These projects shall include, but shall not be limited to the following types:4.3.1  Livelihood development4.3.2  Manpower development4.3.3  Sports development4.3.4  Cooperative development4.3.5  Delivery of basic services4.3.6  Environmental protection4.3.7  Agricultural and fisheries diversion4.3.8  Rural industrialization4.3.9  Development of local enterprises4.3.10  Social services in areas that would not be ordinarily             undertaken by the private sector4.3.11 Construction, maintenance operations and management of            infrastructure projects, such as, but not limited  to the            following:o Housing projects for the poorest of the pooro School buildings for schools with inadequate classrooms      The grants/funds were used instead for seminars, inductions of officers, district conferences, advertisements, foundation anniversaries, alumni homecoming and/ or just plain cash assistance which were contrary to the provisions of COA Circular No. 2007-001.      Our review also disclosed that the financial assistance granted to the NGOs/PO’s was not liquidated as mandated by the above-mentioned COA Circular. Some of the reasons identified were:1. Majority of the beneficiaries thought that since most of the funding sources were PDAF or CDF of Congressmen, the grants/funds released to them need not be liquidated.2. The Internal Control Office/Unit failed to remind the beneficiaries on the documentary requirements during the processing of vouchers for the release of funds and the need to liquidate the grants because they were not aware of the provisions of COA Circular No. 2007-001.3. There were no MOA between the NGO/PO and the GO which should have indicated the manner and time of liquidation of the funds received.4. There was no person/employee designated by the GO to monitor the implementation of the project and the liquidation of the released funds.5. The Bookkeepers thought that the issuance of Official Receipts by the NGOs/PO’s was already sufficient to liquidate the funds.                We also noted that there were gross irregularity incurred with the improper release of checks drawn in the name of person only and not through the association/cooperative as required under existing laws, rules and regulations.      However, Paragraph 9.0 of COA Circular No. 2007-001 provides legal sanction to remedy any irregularity/violation incurred, as follows:      “9.0 SANCTION – Legal remedies pursuant to existing laws, rules and regulations applicable for violation by any party of any of the provisions of these guidelines shall be imposed/charged by the GO, the COA, or any aggrieved/interested party.”        This observation is a reiteration of CY 2007 Annual Audit Report. In the exit conference conducted last February 2008, Management promised to follow the provisions of COA Circular No. 2007-001 and even asked for a copy for their guidance and reference in granting the financial assistance fund but their promise was not fulfilled until now. Recommendation for Butuan City Government:      Strictly adhere to the provisions and guidelines set under COA Circular No. 2007-001 to promote transparency, proper monitoring of accountability and the utilization of the financial assistance granted. Designate a particular employee/person responsible in monitoring the implementation of the project and liquidation of the funds released. Require the submission of complete documents from the recipient before the release of funds. Carefully review each project proposal to ensure that the funds would be used solely for its intended purpose pursuant to the requirements under the above-mentioned COA Circular.      Likewise, release financial assistance only to the registered name of the NGOs/PO’s, associations or cooperatives for proper control in the utilization of the fund.

Butuan City COA Audit 6

Of the total collections of P9,595,755.43, the total amount of P4,753,555.00 was erroneously charged to Due from Other Funds (424) account when remitted to the General Fund which should have been to either Account No. 439/139 or 501 accounts in the Trust Fund Books. The remaining collections of P4,842,203.43 were not transferred at year-end, thus understating income under the General Fund by the same amount. (Annex

6. There were still some collections for CY 2008 accruing to the General Fund totaling P9,595,755.43 which were receipted under the Trust Fund contrary to the provisions of Section 64 of P. D. No. 1445, thereby understating the income by the same amount.      Records showed that some collections for Calendar Year 2008 from business taxes, community taxes, sale of tender documents, repayments of subdivision lots and other revenues accruing to the General Fund totaling P9,595,755.43 were receipted under the Trust Fund contrary to the provisions of Section 64 of Presidential Decree No. 1445 which provides that:      “Accrual of Income to UNAPPROPRIATED SURPLUS of the General Fund – (1) Unless otherwise specifically provided by law, all income accruing to the agencies by virtue of the provisions of law, orders and legislations shall be deposited in the National Treasury or in any duly authorized government depository, and shall accrue to the unappropriated surplus of the General Fund of the Government.”      These collections were recorded in the Trust Fund books as a credit to either of the following accounts:       Due to LGUs   (418)       Due to Other Funds  (424)       Other Payables   (439)       Government Equity  (501)      Of the total collections of P9,595,755.43, the total amount of P4,753,555.00 was erroneously charged to Due from Other Funds (424) account when remitted to the General Fund which should have been to either Account No. 439/139 or 501 accounts in the Trust Fund Books. The remaining collections of P4,842,203.43 were not transferred at year-end, thus understating income under the General Fund by the same amount. (Annex 8)      Further verification of records also disclosed that some of these collections were directly used to pay agency expenditures or obligations incurred during the year, thereby depleting the funds to be transferred to the General Fund.      The City Accountant when interviewed said that he had no hand in using these funds because they were done at the City Treasurer’s Office. His responsibility was just to prepare the corresponding journal and journal entry voucher (JEV) to record the collections. He was not aware of the reasons why the collections were still receipted under the Trust Fund.      This observation is a reiteration of CY 2007 Annual Audit Report which was already discussed by the Audit Team during the exit conference made last year.Recommendation for Butuan City Government:      Direct the City Treasurer to remit the amount of P4,842,203.43 representing the amount due to the General Fund in order that the affected income accounts can be adjusted and correct the remittance erroneously charged to Due from Other Funds in the amount of P4,753,555.00 to reflect a fair presentation of the financial statements. Henceforth, all collections except those received for specific purpose shall be receipted under the General Fund.

Butuan City COA Audit 5

5. Trust Liabilities account totaling P31,935,699.04 were still not remitted on time to the concerned government agencies and different barangays contrary to the provisions of Section 271 (d) of R. A. No. 7160, which might result to imposition of penalties and legal sanctions to the City Government.       Trust Liabilities are to be remitted monthly to the concerned government agencies.  The shares in the collections of the Real Property Tax (RPT) and Community Tax Certificate (CTC) are due to the barangays at the end of each quarter.      Section 271 of Republic Act No. 7160 provides among others:       “Distribution of Proceeds – The proceeds of the basic real property tax, including interest thereon, and proceeds from the use, lease or disposition, sale or redemption of property acquired at a public auction, xxxxx .”       “(d) The share of each barangay shall be released, without need of any further action, directly to the barangay treasurer on a quarterly basis within five (5) days after the end of each quarter and shall not be subject to any lien or holdback for whatever purpose.”      Trust Liabilities which were not remitted as of December 31, 2008 are composed of the following: (Annex 7)Due to BIR(withholding taxes)(412)-P17,941,031.26Due to GSIS(premiums/contributions(413)-4,405,019.09Due to Pag-IBIG Fund(contributions)(414)-95,697.42Due to PHILHEALTH(contributions)(415)-243,804.15Due to LGUs(RPT/CTC Brgy. Shares)(418)-9,250,147.12Total
P31,935,699.04       Verification of records disclosed that of the total trust liabilities of P98,253,268.63, only P66,317,569.59 were remitted to the concerned government agencies as of December 31, 2008, leaving a balance of P31,935,699.04 still unremitted contrary to the provisions of Section 271 specifically paragraph (d) of Republic Act No. 7160, otherwise known as the Local Government Code of 1991, which might result to imposition of penalties and legal sanctions to the City Government because of delayed or non-payment/remittance of contributions/ shares/taxes due.      It was learned from the City Accountant’s Office that the Disbursement Vouchers covering the supposed remittances of these obligations were already forwarded to the City Treasurer’s Office for preparation of checks but most of them were obviously not paid.      The City Treasurer’s Office promised to religiously remit these obligations on due dates during the exit conference held last February 2008 but was not fulfilled thus, reiterating this observation since the trust liabilities accounts have not been reduced instead it had substantially increased by P2,258,464.85 over that of CY 2007. The balances as of December 31, 2008 of the trust liabilities account/s must show the current month’s balance only.Recommendation for Butuan City Government:      Direct the City Treasurer to remit the trust liabilities when they become due and work for the immediate payments of prior months/period accounts to avoid imposition of penalties and legal sanctions.

Butuan City COA Audit 4

4. Extraordinary and Miscellaneous Expenses were continuously granted/ paid to the Chiefs of Offices, SP Members and Vice Mayor of the City Government of Butuan since CY 2004 despite lack of legal basis per DBM Legal Opinion No. L-B-2001-10 and as disallowed in the budget review by DBM-Caraga and contrary to City Budget Memorandum No. 25-2007 approved by the City Mayor.      “The grant of Extraordinary & Miscellaneous Expenses is without legal basis, as issued by the DBM under Legal Opinion        No. L-B-2001-10.”      Verification of records revealed that the City of Butuan continued to grant/pay Extraordinary and Miscellaneous Expenses to its Chiefs of Offices, the Vice Mayor and SP Members despite the DBM legal opinion that the grant is without legal basis and the COA Notice of Disallowance No. 2006-001 (2004) dated January 12, 2006 issued by the Regional Cluster Director, Regional Legal and Adjudication Office, COA-RO XIII, this City.      Several audit observation memoranda were issued by this Office and received by the LGU over the years recommending to stop the payment or granting of the unauthorized claims, hence, the City Mayor in his Budget Memorandum No. 25-2007 dated September 13, 2007, approved the stoppage of payment effective by the year 2008 (Annex 5), but not implemented.      Moreover, the appropriations for Extraordinary and Miscellaneous expenses for the Chiefs of Offices, SP Members and the Vice Mayor included in the annual budget of the city government of Butuan submitted to the DBM-Caraga for review had always been disallowed for lack of legal basis whether in the regular or supplemental budget since it was granted in 2004.      Verification of records showed that there were still disbursements pertaining to claims of extraordinary and miscellaneous expenses amounting to P2,281,793.86 for the calendar year 2008. (Annex 6)      Payment of extraordinary & miscellaneous expenses started from calendar year 2004 up to the present with total disbursements of P10,660,587.51, as follows:   Extraordinary Expenses Miscellaneous Expenses     Total2004 –     P             P        P       973,409.092005 – 152,000.00   2,817,605.30            2,969,605.302006 – 702,796.11   1,740,860.65             2,443,656.762007 –       538,150.00           1,453,972.50            1,992,122.502008 –      643,316.60           1,638,477.26            2,281,793.86 Total       P 2,036,262.71           P 7,650,915.71           P 10,660,587.51      ==========         ==========         ==========       Persistent disregard of laws, rules and regulations by the Officials and SP Members of the City Government of Butuan made the laws appear ineffective and futile and those national government agencies whose functions are to oversee whether the laws are being followed and properly implemented appeared to be inoperative and unfunctional.      This observation is a reiteration of CY 2007 Annual Audit Report due to the non-implementation by the LGU of our recommendation and its own Budget Memorandum No. 25-2007. Also, the non-compliance by the LGU with the DBM budget review disallowing the appropriations for Extraordinary and Miscellaneous expenses for its selected employees included in the budget.Recommendation for Butuan City Government:      Stop immediately the granting/payment of Extraordinary and Miscellaneous Expenses to selected employees due to lack of legal basis, otherwise, secure authority from the DBM to grant such benefit. Implement immediately the City Budget Memorandum No. 25-2007. Enforce immediate collection/refund of the unauthorized claims of Extraordinary and Miscellaneous Expenses by the concerned employees.

Butuan City 2008 COA Audit 3

3. Purchases of supplies, materials and equipment totaling P17,672,114.70 were done on “as the need arises” basis thus, shopping were resorted to instead of public bidding as required under Section 10 of the Implementing Rules and Regulations of R.A. No. 9184.      Pursuant to Section 10 of the Implementing Rules and Regulations (IRR-A) of Republic Act No. 9184 provides that:      “Competitive Bidding – All Procurement shall be done through Competitive Bidding, except as provided for in Article XVI (Alternative Methods of Procurement particularly Section 48 [48.1-48.2]) of this Act.”      The City Government of Butuan is mandated to purchase their supplies, materials and equipment thru competitive public bidding to obtain the price most advantageous to the government.      However, a test of their purchases from January to March 2008 disclosed that majority of their supplies, materials and equipment in the total amount of P17,672,114.70 were procured on “as the need arises” basis through shopping instead of competitive public bidding as required under Section 10 of the Implementing Rules and Regulations of R. A. No. 9184. (Annex 4)        It was learned that the City failed to follow the approved CY 2008 Annual Procurement Program prepared by each department/office. Had this been done, the City could have procured their supplies, materials and equipment on a quarterly basis through competitive public bidding, thus availing the price most advantageous to them.       The above observation may result to undue wastage of City funds contrary to COA Circular No. 85-55A on the presentation of irregular, unnecessary and excessive expenditures of public funds or property.Recommendation for Butuan City Government:      Require the City General Services Office to consolidate all the quarterly requirements of supplies, materials and equipment of every department/office embodied in the Approved Annual Procurement Program and procures them through Competitive Public Bidding as mandated under Section 10 of IRR-A of R. A. No. 9184. This is to be done to prevent incurrence of excessive expenditure of public funds pursuant to COA Circular No. 85-55A.

Butuan City 2008 COA Audit 2

2. The balance of the inventory account at year-end totaling P100,501,445.67 includes prior years’ balances which were already issued and consumed but not recorded/posted to its proper expense account thus, misleading the financial statement presentation.       Section 121, Volume I of the New Government Accounting System (NGAS) states that:       “The General Services Officer or the Local Treasurer, as the case may be, shall consolidate weekly the Requisition and Issue Slip (RIS) for which supplies and materials were issued using the Summary of Supplies and Materials Issued (SSMI). The SSMI together with the original copy of the RIS shall be submitted to the Chief Accountant, who shall compute the cost of supplies issued and ending inventory using the moving average method. Based on the SSMI, a JEV shall be prepared to record the expenditures using the appropriate expenditure accounts.”      Verification of the subsidiary ledgers showed that all of the inventory accounts (151 to 169)  have prior years’ balances from 1998 up to 2007 (Annex 2) that have accumulated without the necessary adjustments into its proper expense account, thereby bloating the inventory accounts and misleading the presentation of the Financial Statements.       Of the P100,501,445.67 total inventory as of December 31, 2008, P71,764,175.74 (Annex 2 & Annex 3) was from previous years which were already issued and used/consumed but not booked as expense. Further verification also disclosed that of the total inventory of P100,501,445.67 as at year-end, only the Medical, Dental and Laboratory Supplies Inventory (152), Spare parts Inventory (167) and Construction Materials Inventory (168) accounts in the amounts of P5,422,582.24, P1,636,751.68 and P8,347,772.57, respectively, may still have a little balance on hand. The exact actual balance of these three (3) inventory accounts could not be ascertained due to the failure to conduct actual physical inventory.      All other inventory items aside from the above-mentioned inventory accounts could be considered consumed and non-existing, which could be adjusted into its proper expense accounts.      Interview conducted disclosed that the cause of the problem on the accumulation of inventory account balances was a flaw/defect in the procedures/process of transactions in the City General Services Office (CGSO). Under NGAS, all deliveries should be coursed through the CGSO, and they will be the one to issue the items requested by each office through the use of the RIS. In actual practice, the deliveries were directly delivered to each office, which resulted to the failure of accomplishing the RIS by the CGSO. At year-end, the Accounting Office would send notices to each office to make a “supplies adjustment”, which was simply just accomplishing the RIS and submit it, as the basis to adjust the inventory accounts.      Some offices would comply with the request of the Accounting Office but majority do not heed this request, thus, resulting in the accumulation of the inventory accounts as at year-end.Recommendation for Butuan City Government:      Require the City General Services Office to follow strictly Section 121, Volume I of the NGAS Manual specifically in the consolidation of RIS and the timely submission of SSMI to the Accounting Office to avoid or minimize the accumulation of balances of the inventory accounts for items which were already used or consumed.       Require the City Accountant to adjust the prior years’ balances of the inventory accounts by compelling the concerned offices/departments to submit the necessary RIS to the CGSO for consolidation, preparation of SSMI and immediate submission of the same to the City Accounting Office as their basis in the adjustments and to support the JEV.

Butuan City 2008 COA Audit 1

DETAILED FINDINGS AND RECOMMENDATIONSI. Financial and Compliance Audit1. Some collections in January 2009 amounting to P7,786,974.69 were included as collections in December 2008 contrary to the provisions of Section 112 of P. D. No. 1445, thus overstating income in CY 2008 by the same amount.      Section 112 of Presidential Decree No. 1445 provides:      “That each government agency shall record its financial transaction and operations conformably with generally accepted accounting principles and in accordance with pertinent laws and regulations”.      The audit disclosed that there were 3,516 Official Receipts issued in January 2009 amounting to P7,786,974.69 that were considered as collections in December 2008. As a result, these collections were also taken up in the books of account as income in December 2008 contrary to the provisions of Section 112 of Presidential Decree No. 1445. (Annex 1)      One of the generally accepted accounting principles is the matching principle, thus it is imperative that revenues and related expenses must be reported in the period they were earned or incurred. The inclusion of the January 2009 collections in December 2008 practically contradicts the matching principle of accounting resulting in the overstatement of the income account in CY 2008.      This observation is a reiteration of CY 2007 Annual Audit Report which deficiency increased by P4,050,758.70. Last year it was only P3,736,215.99 but it became P7,786,974.69 this year.      In the exit conference conducted last February 2008, Management commented that though there were such collections in 2008 included in 2007, it was not very material. They promised not to do the same again next year. However, that promise was only skin deep and not acted upon. In fact, the amount of collections in January 2009 that were included in December 2008 had substantially increased.Management Comment:      The City Treasurer commented that their collection of Real Property Tax last December that is intended for CY 2009 is in accordance with Section 251 of R. A. No. 7160 which provides for bigger incentives or discounts if advance payments are made and implemented by S. P. Ordinance No. 2211-99 dated July 23, 1999,  giving  20%  tax  discount  to  taxpayers  who  are  paying  in  advance.      He further commented and we quote: “our collection is legal and did not violate Section 112 of P. D. No. 1445, if collection was taken up as Deferred Credits to Income for advance payment of P7,786,974.69, since it will accrue to the next calendar year or for CY 2009. However, if it was taken up as part of income for the year 2008, then it violates the matching principle of accounting, resulting in overstatement of income.”      In conclusion, the City Treasurer stated that “this matter shall be referred to the accounting office so that they will be able to correct their mistakes if any, and promised that this will not be repeated in the next December or year end collection and the proper accounting procedure must be observed.” Auditor’s Rejoinder:      We are commenting on the date of the issuance of Official Receipts during the cash count because we found out that collections received in January 2009 were receipted December 2008 per date on the Official Receipts verified. Thus, collections were recorded in the Accounting Office as income for December 2008 and not as Deferred Credits as alleged by the City Treasurer. These collections should have been recorded as income in January 2009 had the actual date of collection been reflected on the Official Receipts issued.   Recommendation for Butuan City Government:      Instruct the City Treasurer to stop the practice of including collections of the current year into the prior year. All income must be recorded in the books of accounts in the year they were earned pursuant to the provisions of Section 112 of P. D. No. 1445.      Likewise, direct the City Accountant to effect the necessary adjustments in order to reflect the correct presentation of the financial statements.