COA Circular No. 2004-008 dated September 20, 2004 provided the updated description of accounts under the New Government Accounting System. It described Other Assets as cost/appraised value of serviceable assets not used in operation and those waiting for disposal.

Sections 165 and 167 of COA Circular 92-386 prescribed that unserviceable properties with scrap values shall be sold in public auctions, whenever applicable.

During the year 2005, the city had reported 592 units unserviceable properties costing P4,532,390.26. Accounting records however, showed that these were not transferred to Other Assets account but were automatically dropped from the books.

In the 2004 Annual Audit Report, 128 unserviceable properties costing P1,057,407.64 were also recommended for transfer to Other Assets account, however, the same were also dropped from the books.

Verification and inspection disclosed that 37 of these assets costing P4,397,281.79 although were already reported as unserviceable, still have scrap values and were recommended for auction. (Annex 3)

Accounting Office personnel alleged that they inadvertently effected the dropping of the properties from the books using as basis the Inventory and Inspection Report of Unserviceable Properties (IIRUP) they received. They failed to consider the recommendation of the inspectorate team.

This practice resulted in the understatement of Other Assets in the financial statements and possible loss of income from sale of scrap.

The management however, promised to correct this transaction next year.

Recommendation

Require the City Accountant to prepare the necessary adjusting entry to restore to Other Assets account those properties previously dropped but have scrap values. Drop the account after the assets are sold or disposed.

Section 325 (a) of R. A. 7160 provides that the total appropriations, whether annual or supplemental, for personal services of an LGU for one (1) fiscal year shall not exceed forty-five percent (45%) in the case of first to third class provinces, cities, and municipalities, and fifty-five percent (55%) in the case of fourth or lower class provinces, cities, and municipalities, of the total annual income from regular sources realized in the next preceding fiscal year.

Local Budget Circular 79 dated April 1, 2005, provides guidelines for the implementation of the revised rates of RATA in Local Government Units. Section 3 thereof, expressly provides that the grant of the revised rates is subject to the 45%/55% limit on allowable personal services expenditure prescribed under Republic Act No. 7160 or the “Local Government Code of 1991.”

Verification of records showed that with the issuance of Local Budget Circular No. 79, the increase of RATA rates was implemented by the city at the 90% category. It paid the new rates to authorized officials effective April 2005. The Local Sanggunian enacted Supplemental Budget No.6 under Resolution No. 2005-06 to support the funding requirement of the increase.

In the budget review, however, the Provincial Budget Officer-designate disallowed the additional appropriation for the RATA differential in view of already exceeded PS.

Management failed to consider in its Annual Budget, the limitation on personal services expenditure, which exceeded by 24%. (Annex 2) Contrary to the provisions of Sections 325 (a) and 331 (b) of R.A. 7160, the 45% PS limit for component cities was not followed. The implementation of increase in RATA rates had already exceeded allowable PS expenditure wherein additional PS cost of P535,392.50 was incurred.

The City Budget Office informed that the annual budget exceeded the PS limitation as a continuing implementation of the salary standardization law. There being no disallowance in its review, they believe it is within the bounds of law, thus, omitted the PS limitation in the computation of the increased RATA rates. With this observation, they promised to strictly implement the rules on budgeting.

Recommendation

Require the Budget Officer to adhere to the 45%/55% Personal Services limitation in formulating budgets. Refrain from implementing increases that may cause incurrence of excess PS expenditure and disallowance. Require the officials and employees concerned to refund the amount of RATA received in excess of the budget ceiling for personal services.

Section 50 of COA Circular No. 2002-003 requires that property, plant and equipment acquired through purchase or construction shall be recorded in the books of accounts immediately as asset. Section 113 provided the categories of assets to which the acquisitions should fall. COA Circular 2004-008 further provided the proper classification of assets acquired.

Records show that in April 2003 the City acquired the buildings and equipment of Mindeva Coco-Coir Industries, Inc. (MCCI) for P880,000.00. The Deed of Absolute Sale was attached together with a list of properties acquired (Annex 1). The transaction was recorded as a debit to Other Structures (code 215). Verification also revealed that these assets were not included in the city’s Inventory Report of Property, Plant and Equipment.

The entry to record the purchase was in lump sum and not in accord with Sections 50 and 113 of COA Circular No. 2002-003, and COA Circular 2004-008. As a result, details of the accounts are not reflected in the respective property ledger cards neither in the inventory report of Property, Plant and Equipment.

A memorandum of agreement was entered into by and between the City of Oroquieta and DLMR Coconut Products Industry as investor for the use of the whole MCCI compound in January 2004. Included in the conditions are the following:

a.)The INVESTOR shall, at all time, keep the premises of the compound hygienic, sanitary, clean and unpolluted, thereby protecting the environment, including the provision of safety and precautionary measures, equipments, pharaphelnias, and tools necessary in the secured (such as from fire, conflagration, combustion), safe and sound operation of the factory, including its surroundings and vicinity.

b.)The INVESTOR shall not allow nor tolerate, at any time, any other persons, entity, or firm to use and/or utilize any part of the compound without the consent and authority of the LGU.

The ocular inspection of the site, however, disclosed that:

Another group of workers had used some machinery for free but stopped when power supply was cut due to non-payment of electric bills.

A few of the workers of the previous coir industry reside in the vicinity for free.

Some of the properties were left unsecured and exposed to the heat of the sun and rain.

On the count of properties, results showed:

Classification

QuantityInventory as of April 2003Ocular Inspection

Condition as of December 31, 2005FunctionalJunkFunctionalJunk/DestroyedMissing

Building

7

7

5

2Other Land Improvement

2

2

2Machinery & Equipment

89

32

57

24

10

55Farm Equipment

4

3

1

2

1

1Transportation Equipment

8

8

7

1Furniture & Equipment

23

23

9

9

5

Total

133

67

66

42

29

62

Improper recording and use of these properties may cause its destruction and loss.

Management affirmed this observation and had planned for proper action on the recommendation.

Recommendation

Form a committee to appraise the values of MCCI properties per asset classification. Require the City Accountant to draw the journal entry voucher to correct the asset classification recorded as Other Structures. Require the General Services Officer to take this up in the property ledger cards after valuation. Provide security measures to protect the properties from loss and deterioration.

Review the memorandum of agreement entered into by the city and the DLMR Coconut Products Industry. See to it that all provisions are followed and observed. Also settle the use of the site by persons other than the investor.

Section 20 of COA Circular No. 2002-003 requires RPT/SET Receivables to be established at the beginning of the year based on Real Property Tax Account/Taxpayer’s index cards. The Treasurer shall furnish the Chief Accountant of a duly certified list showing the name of taxpayers and the amount of tax due each and collectible for the year. Based on the list, the Chief Accountant shall draw a Journal Entry Voucher (JEV) to record the debit to Real Property Tax Receivable/Special Education Tax Receivable and crediting to Deferred Real Property Tax Income/Deferred Special Education Tax Income.

Verification of accounting records showed that Real Property Tax Receivables was booked at the beginning of every year. Amounts recorded were based on the Assessor’s Report on Real Property Assessments instead of on Real Property Tax Account Register/Taxpayers’ index cards or the City Treasurer’s list of taxpayers showing taxable amounts due.

The amounts booked in the General and Special Education Funds were 1% of the total assessed values of taxable properties as of December 2004 assessor’s report:

FUNDTotal Assessed ValuesPercent of Tax AppliedRPT/SET ReceivableGeneralP243,949,5401%P2,439,495.40Special Education243,949,5401%2,439,495.40

In the absence of the City Treasurer’s list of taxpayers showing taxable amounts due, the City Accountant informed that it was their agreement long before to use the Assessor’s Report on Real Property Assessments of setting RPT/SET Receivables.

The City’s practice of recording RPT/SET Receivables based on the Assessor’s report violated the provisions of Section 20 of COA Circular No. 2002-003, hence, financial statements could be misstated.

When confronted with this observation the City Treasurer commented they have started the job, however, they could not finish it as of now because of its volume and office constraints.

Recommendation

Require the City Treasurer to complete his list of taxpayers and their tax dues to serve as the City Accountant’s basis of recording amounts of tax receivables due every year. Provide physical and financial support to facilitate the job.

Section 84(2) of Presidential Decree No. 1445 had mentioned that Trust Funds shall not be paid out of any public treasury or depository except in fulfillment of the purpose for which the trust was created or funds received.

Examination of the Trust Fund account, particularly Due to Other National Government Agencies disclosed that there were funds received by the City Government in the form of advances from these agencies for a specific purpose. Further verification of the account revealed that the intended purpose had already been served but the records showed that they had still balances totaling P146,470.54. (HYPERLINK “OroquietaCity04_Annexes.xls” \o “Annexes 1 – 4″Annex 4)

Management had even prepared and submitted the corresponding status reports of disbursements to concerned agencies as these are subject to liquidation. However, management was not able to remit the balances due to said agencies.

The non-remittance of the unused balance of the fund showed that there was no full liquidation of the account to the trustor.

Management confirmed this observation and consented to rectify the deviation.

Recommendation

Require the City Accountant and the City Treasurer to remit to the national government the unexpended balance of trust funds for which the purposes were already been achieved. Otherwise, request agencies concerned for an authority to use the fund balances for local projects.

Section 140 of COA Circular No. 2002-003 dated June 20, 2002 described Other Assets as an account used to record the value of obsolete and unserviceable assets as well as other assets still serviceable but no longer used. These items are not subject to depreciation.

In the course of our verification, it was noted that several properties totaling P 1,057,407.46 were included in the inventory and inspection report of unserviceable property prepared and submitted by the General Services Officer. (HYPERLINK “OroquietaCity04_Annexes.xls” \o “Annexes 1 – 4″Annex 3) These properties consisted of office equipment, furniture and fixtures, IT equipment and software, communication equipment, hospital equipment, other machinery and equipment and motor vehicles. These properties, which were acquired some years ago were already unserviceable and were waiting for proper disposition. These assets are supposed to be transferred already to Other Assets but they are still carried in the books as Other Property, Plant and Equipment.

The inclusion of these unserviceable properties in the Other Property, Plant and Equipment account resulted in the overstatement of the account and understatement of Other Assets account.

When this deficiency was presented to management, the officials and employees involved readily agreed to improve its existing system.

Recommendation

Require the City Accountant to prepare the necessary adjusting entry in order to reflect the correct presentation of these accounts in the financial statements.

2. Inventory accounts with balances totalling P 11,341,813.23 some of which had already been consumed are still carried in the books due to the failure of the offices concerned to keep adequate records of its issuance in violation of Section 114, Vol. I of the New Government Accounting System Manual.

Verification of the accounting records showed that as of the end of the year, the following balances of inventory accounts which represent 90.19% of the total inventories appeared. (HYPERLINK “OroquietaCity04_Annexes.xls” \o “Annexes 1 – 4″Annex 2)

Office Supplies Inventory-P 1,017,981.68Drugs and Medicine Inventory-3,586,409.73Agricultural Supplies Inventory-2,833,394.43Spare Parts Inventory-3,904,027.39TotalP 11,341,813.23

Further verification showed that most of the items were already consumed long before. The supplies ledger cards for each type of supplies were not properly maintained by the General Services Office and the Accounting Office. Hence, the Summary of Supplies and Materials Issued supported by the Requisition and Issue Slips, could not be prepared weekly by the General Services Officer. These records/reports are the basis of the City Accountant’s Office in recording supplies and materials issued.

The General Services Officer commented that the Requisition Issue Slips pertaining to a certain transaction were attached to the Disbursement Voucher as one of the supporting documents which shall be the basis of the accounting department to make the necessary journal entries.

Although, a copy of Requisition Issue Slip was attached to the Disbursement Voucher, but the weekly Summary of Supplies and Materials Issued together with the original copy of the Requisition and Issue Slip shall be the basis of the Journal Entry Voucher.

Responsible officials and employees concerned admitted the shortcomings and provided assurance to improve the existing condition.

Recommendation

Require the General Services Officer to submit the Weekly Summary of Supplies and Materials together with the Requisition and Issue Slips as basis of the City Accountant to adjust the accounts accordingly. Thereafter, require semestral conduct of physical inventory of supplies as well as the keeping of updated stock cards and supplies ledger cards.

Section 8 of the 1993 revised Manual on Certificate of Settlement and Balances provides, among others, the responsibilities of the Chief Accountant, Bookkeeper or other authorized official performing accounting and/or bookkeeping functions of the audited agency. They are as follows:

He shall ensure that the audit charges and disallowances including their settlements are properly monitored; and

He shall also ensure that the subsidiary ledgers/records are maintained and properly updated for each official/employee determined to be liable for the amount disallowed/charged.

Verification of records showed that disallowances to barangay officials of P599,250.00 have no subsidiary ledgers. The Commission Proper affirmed the disallowances on August 20, 2002 per COA Decision No. 2002-167.

By not maintaining a subsidiary ledger of persons liable, management may encounter problems later. The identification of the persons liable may not be easily traced. On the other hand, officials and employees having disallowances of P59,975.00 were cleared from money accountability, allowing them to retire without paying the city government their obligation arising from the disallowance.

Settlements made during the year on the disallowances either thru payroll deduction or outright refund amounted to only P 711,940.00 or 29.80% out of P2,388,457.90, thus leaving a balance of P 1,676,517.90. (HYPERLINK “OroquietaCity04_Annexes.xls” \o “Annexes 1 – 4″Annex 1)

Had Management enforced settlement of the amount of audit disallowances, the city government could have available fund for its use.

The management promised however, to correct its lapses.

Recommendation

Require the City Accountant to keep and maintain updated subsidiary records of each person determined to be liable to facilitate close monitoring and collection of accounts. Advise from time to time concerned persons the status of their account balances and enforce settlement thereof. Advise also the Pre-Audit Section to process claims of persons intending to leave government service, only upon submission of unconditional clearance from money accountability otherwise, they will assume the liability.