Finding No. 3 of COA Annual Audit Report 2005

July 25, 2008

3. The full and final payment of mobilization cost amounting P1,879,689.54 for the Design and Construction of 150-bed, Third-Level Referral Provincial Hospital located at Malaybalay City was debited to “Construction in Progress – Agency Assets” instead of the “Advances to Contractors” account, inconsistent with the Manual on the New Government Accounting System for Use in Local Government Units and, thus, causing overstatement on the former account and inverse understatement of the latter account.

The procuring entity shall, upon written request of the contractor which shall be submitted as a contract document, make an advance payment to the contractor in an amount equal to fifteen percent (15%) of the total contract price, to be made in lump-sum (amount) or, at most, two installments according to a schedule specified in the instructions to Bidders and other relevant Tender Documents. This advance payment shall be repaid by the contractor by deducting fifteen percent (15%) from his periodic progress payments. (c.f. Annex E of IRR of RA 9184).

The Manual, as revised and amended, defines “Advances to Contractors” as the account used to record the payment authorized by law (RA 9184) to be made in advance to contractors upon submission of the required bond or standby letter of credit. The same further prescribes that “during the construction period, agency assets and public infrastructures shall be taken up in the books as “Construction in Progress” with appropriate asset classification.”

On March 24, 2004, the Agency entered into a Contract Agreement for the Design and Construction of Provincial Hospital of Third Level Referral Hospital, 150-Bed Capacity, located at Malaybalay City, Bukidnon, with J.M. Luciano Construction, Inc. in the amount of P112,531,263.60. Short of the formal letter request from the contractor claiming advance payment as evidenced on the payment voucher, the Agency paid on April 27, 2004 the sum of P15 Million as first and partial installment of the mobilization costs of P16,879,689.54 allowable from the contract. The second and final installment of P1,879,689.54 was paid to the same contractor on July 1, 2004. Both payments were debited to the “Construction in Progress – Agency Assets” account. The contract works will be completed within 730 calendar days from date of receipt by the contractor of the Notice to Proceed on March 24, 2004.

Aware of the errors committed in recording the advance payments, the Accounting Department corrected, among others, the affected Construction in Progress accounts by crediting it and debiting the “Advances to Contractors “ (181) account. But, the second and final installment of the progress payment referred to above was inadvertently omitted in the correction. As such, it remained as debit to the Construction in Progress – Agency Assets account.

In effect, the Construction in Progress – Agency Account (264) was overstated by P1,879,689.54 with an inverse understatement in the Advances to Contractors account. If not corrected further, it will result to abnormal balance (negative) in the subject prepayment account after full recovery of the advances.

Management Comment/Action:

The Accounting Department acknowledged the recommendation and appropriate Journal Entry Voucher (JEV No. 10006010680 dated January 31, 2006) was prepared and recorded in the books of accounts; that the affected accounts were accordingly corrected.

Recommendation:

We recommend that the Accounting Department thoroughly review the proposed accounting entries in the journal vouchers to effect adjustments or correction of erroneous accounting entries prior to their recording in the books of accounts to prevent or minimize misstatements in the financial statements of the agency.

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Written by admin · Filed Under Bukidnon, Commission on Audit