Section 2 and 4(4) of Presidential Decree No. 1445 states that the Head of the Agency, as well as those who exercise authority over financial affairs, transactions and operations of the agency, shall take care that all resources of the government are managed, expended or utilized in accordance with law and regulations, and safeguarded against loss or wastage through illegal or improper disposition with a view to ensuring efficiency, economy and effectiveness in the operation of the government.

Audit revealed that a number of expenditures totalling P 8,285,882.20 out of the cash advances granted to designated Special Disbursing Officers were found to be extravagant and grossly excessive for lack of restraint or prudence, judicious or economy and exceeded the bounds of propriety. (Annex

Meals and snacks served during the celebration amounted to P 2,767,343.18 notwithstanding the fact that the city government had paid P 472,233.25 for hotel accommodations that include meals and snacks for guests and visitors. (Annex 9) Among these visitors were thirteen (13) officers from the Department of Tourism and twelve (12) crafts demonstrators wherein meal allowances were also granted to them in the amount of P 113,750.00 and P 84,000.00 respectively. It was further noted that each participating Local Government Units received P 5,000.00 for meal allowances aside from the participation fee/honorarium of P 10,000.00 each for non-winning LGUs. Participating barangays also received P 5,000.00 each excluding consolation prizes of P 10,000.00 each for non-winning barangays. Apparently, the city government spent more on meals and snacks despite the fact that almost everybody was already given enough meal allowances.

Honorarium spent amounted to P 945,750.00 for the following persons and found to be excessive considering that it’s numerous in number. (Annex 10)

Cell cards costing P 63,510.00 were consumed during the celebration. Consumption of said cards were quite extravagant for six Special Disbursing Officers with an average usage of twenty cell cards at P 500.00 for a month celebration. Besides, the concerned Special Disbursing Officers were already entitled to P1,500.00 cell cards monthly chargeable against the Maintenance and Other Expenses of their respective offices.

Various medicines and drugs costing P 1,100,000.00 were procured without public bidding. These items were used during the Medical and Dental Outreach of the city. Procurement was made directly to Pharmaceutica Filipina de Visayas and payment was made out of the cash advance of the Special Disbursing Officer. Other Expenses accounted were likewise procured without bidding whereby most advantageous price could have been obtained by the city, as follows:

ParticularsAmountConstruction materials used for Booths-P 923,080.75Costumes, Gowns, T-shirts & Uniforms-879,091.02Fireworks-450,000.00Trophies, replicas and souvenirs-264,530.00Brochures, flyers and posters-122,414.00Plastic chairs and tables-59,180.00Communication Equipment-22,500.00Camera-18,500.00 TotalP 2,739,295.77

The obtaining conditions were attributed to non-adherence to fiscal responsibility on cash advances granted to designated Special Disbursing Officers.

As a consequence, the city government was deprived of utilizing optimally government funds to other purpose beneficial to its constituents.

Management concurs with the audit observations.

Recommendation

Enjoin all designated Special Disbursing Officers to adhere on the rules and regulations relative to the utilization of government funds with the end view of economy, efficiency and effectiveness. In like manner, conduct public bidding in all procurement transactions be it through cash advance or direct payments.

Instruct all designated Chairmen to prepare a detailed budgetary proposal before the activity commences so that ample time for review by higher authorities be made and to ensure that all items/supplies needed for any activity or grand affair of the city will pass through a competitive public bidding.

The city’s 2006 Annual Investment Plan to be funded out of the 20%Development Fund was made in accordance with the Department of the Interior and Local Government (DILG) and Department of Budget and Management (DBM) Joint Memorandum Circular No. 01 s. 2005 dated September 20, 2005. It has a total annual budget of P 51,031,392.91 to finance various socio-economic development projects and environmental management programs of the city. The total budget was divided among the three main programs are as follows:

Social development program-P 30,269,990.91Economic development program-7,710,926.00Environmental management program-13,050,476.00 TotalP 51,031,392.91

Specific projects/activities with the corresponding budget were itemized under each program. It aims to achieve socio-economic development and environmental outcomes thru investment and capital expenditures taking into consideration cost recovery and entrepreneurship.

Records disclosed that management gave priority on funding for the projects/activities of the 250th Grand Anniversary Celebrationof El Fuerte de la Concepcion del Triunfo out of the 20% Development Fund. It was increased from the original budget of P 12,958,970.00 to P 15,881,590.19. Additional funds were taken out of IRA monetization and realigning funds from other projects. (Annex 7) During the year, expenses in connection with the celebration amounted to P 15,851,590.19 which covers 31.06% of the total expenditures of the 20% Development Fund.

The city government through the energetic innovation of the Local Chief Executive by restoring the historical site of Fort Santiago (Cotta) in some way promotes tourism and investments of the city. However, the month-long activities programmed for its 250th Grand Anniversary Celebration entailed substantial amount to carry out its various activities without considering limit and control of the disbursements of each activity.

As a consequence, prompt implementations of various projects were not effected. (Annex 7)

Management concurs with our audit observation.

Recommendation

Instruct the City Planning and Development Officer to give priority in the implementation of all programmed activities funded by 20% Development Fund to ensure that the ultimate beneficiaries can avail of those projects, as programmed. In like manner, utilization of funds to a particular program/project must be limited and controlled to utmost economy.

Do not approve/allow elected officials from drawing cash advance for whatever purpose aside from their official traveling expenses.

Instruct all Disbursing Officers to use their cash advance solely for the specific purpose for which the cash advance was granted to avoid disallowance in audit.

Instruct the City Accountant to strictly require the Disbursing Officers to submit detailed estimate of expenses to support their cash advance. For initial cash advances, require the submission of authority to draw cash advance and the approved bond application as special disbursing officer.

Enjoin all Special Disbursing Officers to adhere all the rules and regulations on the utilization and liquidation of cash advances:

7.1 Special Disbursing Officer shall not act as procurement officer.

7.2 Special Disbursing Officer shall pay only for duly approved vouchers/payrolls. Being custodian of government funds out of their cash advance for specific activity, all disbursements/procurements shall pass through proper procedures and that corresponding disbursement vouchers together with all supporting documents must be properly accomplished and approved by authorized officials.

7.3 Special Disbursing Officer shall prepare Report of Disbursements incorporating thereon all paid vouchers and payrolls for submission to the City Accountant together with the approved Disbursement Vouchers, payrolls and supporting documents as liquidation of their cash advance.

Require the City Accountant to observe the segregation of cash custody from recording function as an internal control measure.

Various disbursements amounting to P3,555,443.92 were erroneously classified under Other Maintenance & Operating Expense account which resulted to overstatement of said expense and understatement of various asset accounts by P 587,790.80 and other specific expense accounts by P2,967,653.12, thus the financial statements did not present the true financial position of the city.

Financial statements are representation of management’s financial position and results of operations. It should provide information that is reliable, accurate and complete as these serve as tools for management and other financial statements’ users in arriving at a decision. Hence, accounting information shall be analyzed, summarized and reported in accordance with prescribed state accounting standards to ensure reliability of financial information.

In line with the afore-cited principles, COA Circular No. 2004-008 dated September 20, 2004 prescribed the updated description of accounts under the New Government Accounting System to facilitate identification of transactions to ensure proper account classification and presentation in the financial statements.

Verification of transactions disclosed that various disbursements with specific account amounting to P 3,555,443.92 were erroneously classified under Other Maintenance and Operating Expense account (969). These expenses were incurred during the 250th Anniversary Celebration of the city and were paid out of the cash advances of the Special Disbursing Officers. Most of these transactions were for the purchase of uniforms, costumes, t-shirts, trophies, souvenirs, medicines, plastic chairs, office supplies, cell cards, gasoline, construction materials, furniture & fixtures, equipment and payment of rentals. (Annex 6)

The celebration was funded out of the 20% Development Fund. However, it was also learned that no detailed budget proposal was submitted by the City Planning and Development Officer for incorporation in the Annual Budget of the city. Otherwise, public biddings might have been conducted for the procurement of items for each activity long way before the big celebration. But the granting of cash advances to various designated disbursing officers was resorted as facilitative tool. On the contrary, audit revealed that appropriations of the appropriate accounts were exhausted and since expenses were paid out of the cash advance, these expenses were accounted as direct expense under Other Maintenance & Operating Expense account (969). It was further noted that almost all expenses for the 250th Anniversary Celebration were erroneously accounted as direct expense and without capitalizing some of the expenditures that are necessary for proper accounting thereof.

The deficiency resulted to overstatement of Other Maintenance and Operating Expense account in the amount of P 3,555,443.92 with corresponding understatement of asset accounts by P 587,790.80 and other specific expense accounts of P2,967,653.12. (Annex 6)

Recommendation

Record expenditures to appropriate asset and expense accounts as they occur.

Require the City Accountant to effect the necessary adjustments for the erroneous classification of items/supplies used during the 250th Anniversary Celebration using the following entry:

Other Supplies Inventory487,610.80Furniture & Fixtures59,180.00Communication Equipment14,000.00Military Police Equipment8,500.00Other Machinery & Equipment18,500.00 Prior Years’ Adjustments587,790.80

To record the cost of costumes, gowns, plastic chairs, tables, radio antenna, siren patrol, camera and construction materials erroneously charged under Other Maintenance & Operating Expense (969).

COA Circular No. 97-002 provides among others, rules and regulations on the granting, utilization and liquidation of cash advances, as follows:

Sec. 3.2 – Special Cash Advance are those granted on the explicit authority of the Head of Agency only to duly designated disbursing officer or employees for other legally authorized purpose.

Sec. 4.1.1 – No cash advance shall be given unless for a legally specific purpose.

Sec. 4.1.2 – No additional cash advance shall be allowed to any official or employee unless the previous cash advance given to him/her is first settled or a proper accounting thereof is made.

Sec. 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.

Sec. 4.1.7 – The cash advance shall be used solely for the specific legal purpose for which it was granted. Under no circumstance shall it be used for encashment of checks or for liquidation of a previous cash advance.

Sec. 4.4.3 – The cash advance shall be supported by the following documents:

Copy of authority by the Agency Head (attachment to the initial cash advance)

Copy of the approved application for bond (attachment to the initial cash advance)

Budget for COE of the Agency activity.

Sec. 5.2 – The Accountable Officer (Special Disbursing Officer) shall prepare the Report of Disbursements in three copies and submit the same with duly accomplished vouchers/payroll and supporting documents to the Accountant. For payments based on receipts and invoices only, he shall prepare a liquidation voucher which shall be submitted with the report and supporting documents to the Accountant. He shall ensure that receipt of the report is properly acknowledged by the Accountant. The Accountable Officer shall be deemed to have complied with the requirements or proper accounting for the cash advance upon the receipt by the Accountant of the liquidation documents.

Furthermore, Section 124 of Presidential Decree No. 1445 provides that it shall be the direct responsibility of the agency head to install, implement and monitor a sound system of internal control.

In line with the afore-cited provision, Section 123 defines internal control as the plan of the organization and all coordinated methods and measures adopted within the organization or agency to safeguard its assets, check the accuracy and reliability of its accounting data and encourage adherence to prescribed managerial policies.

Audit disclosed that the City Government of Ozamiz has set aside P20 million pesos for the 250th Anniversary Celebration of El Fuerte de la Concepcion del Triunfo. It was observed that the flow of transactions in commemorating for the said activities were facilitated through cash advances. Each Committee Chairman was designated as Special Disbursing Officer (SDO) that authorized him/her to make cash advance.

Verification disclosed that out of the P20 million budget, P14,056,917.00 was released as cash advances to finance various expenses to carry out said celebration. (Annex 1) However, audit revealed some observations that contravened to the existing rules and regulations on the granting, utilization and liquidation of said cash advances, which are summarized as follows:

Of the P14,056,917.00 budget for the 250th Anniversary Celebration, P7,865,920.00 was released to other LGU officials who are not Special Disbursing Officers and who were only authorized to make cash advance being the Committee Chairman in violation of Section 3.2 of the aforecited COA Circular. (Annex 2)

There were cash advances granted to Special Disbursing Officers and other LGU officials without indicating the specific purpose of the cash advance. The purpose indicated in the Disbursement Voucher was quite broad, that is, for the 250th Anniversary Celebration. The designation of Special Disbursing Officer was for a specific assigned activity, hence, the purpose of the corresponding cash advance granted should likewise be specific and not just merely stipulating the 250th Anniversary Celebration. Said deficiency contravened Section 4.1.1 of said COA Circular. (Annex 3)

Additional cash advances were granted to designated Special Disbursing Officers and other LGU officials even if the previous cash advance is not settled and had remained outstanding for a period of two to four months contrary to Section 4.1.2 of said COA Circular. Records showed that concerned SDOs have unliquidated cash advances amounting P332,255.40. (Annex 4)

Cash advances at P 20,000.00 each were granted to Mr. Fortunato Saquin, ABC President and Mr. Jun Francisco, SK Chairman who are not permanently appointed officials in violation of Sec. 4.1.4 of said COA Circular.

Cash advances amounting to P 815,000.00 were used other than the specific purpose for which they were granted contrary to Section 4.1.7 of said COA Circular. (Annex 5)

Various cash advances were not supported with detailed list of expenses to support the amount of cash advance and the initial cash advances were not supported with Authority and approved bond application. Some were not properly bonded as Special Disbursing Officers, yet they were allowed to draw cash advance contrary to Section 4.4.3 of said COA Circular. (Annex 1)

The prescribed procedures as to the utilization of cash advance for special project were not followed because payments were directly made to the suppliers by the Special Disbursing Officer. As such, transactions did not pass through its proper procurement procedures whereby the Special Disbursing Officer shall only pay duly approved vouchers for expenses chargeable against their cash advances. Besides, there were no Reports of Disbursements prepared as liquidation to the cash advance since the official receipts and other forms of evidence of payments were just attached to the liquidation voucher as the liquidation of the cash advance which is contrary to Section 5.2 of said COA Circular.

The City Accountant, who is responsible for recording all financial transactions of the city, was also allowed to draw cash advances being the Chairman on Search for Ms. Tourism 2006, contrary to a sound internal control system.

The above-cited deficiencies were attributed to non-adherence to prescribed rules and regulations and failure to adopt control measure on the granting, utilization and liquidation of cash advances.

As a consequence, a number of designated Special Disbursing Officers incurred expenses without undergoing the normal process of disbursement, hence this situation opened the opportunity to commit fraud or conceal any irregularities.

Management Comment

Management justified the deficiency for the reason that no official will accept sole responsibility of huge amount of cash advance. As such, a number of officials and employees were granted cash advance with the contention that this would facilitate all transactions that may eventually contribute to the success of the occasion.

Recommendation

Refrain from granting cash advances to LGU officials who are not designated as Special Disbursing Officers for a particular activity.

Instruct the City Accountant to require that the specific purpose of the cash advance be indicated in the Disbursement Voucher.

Section 321 of Local Government Code (RA 7160) provides that budgetary proposals shall be included and considered in the budget preparation process. After the local chief executive concerned shall have submitted the executive budget to the sanggunian, no ordinance providing for a supplemental budget shall be enacted except when supported by funds actually available as certified by the local treasurer or by new revenue source.

Audit revealed that the Local Finance Committee certified Supplemental Budget No. 4 for CY 2004 dated December 22, 2004 without available funds for the following expenses:

Personal ServicesExtra Cash GiftP 4,205,000.00 Salaries and Wages for Casual Employees

3,853,856.00Maintenance & Other Operating Expenses

367,598.00Capital Outlay266,800.00Non-OfficeFirearms959,080.50Charter Anniversary 200,000.00Honoraria for – MOMPO, CVOs, BHW & BNS

3,964,200.00TotalP 13,816,534.50

It was noted that one of the sources of funds of Supplemental Budget No. 4 was itemized as “Bridge Financing as replenishment for funds used on infrastructure projects and counterparts of various foreign assisted projects” will be generated out of bank loan from the Philippine National Bank Ozamiz City Branch in the amount of P 10,000,000.00 which unfortunately was not received by the city as of year end.

In effect, unpaid expenditures amounting to P5,896,625.00 was incurred and were not recorded as payables in the books of accounts, broken down as follows (Annex 3):

Salaries and Wages for Casual EmployeesP 2,075,425.00Honoraria for MOMPO, CVOs, BHW & BNS3,821,200.00Total unrecorded payablesP 5,896,625.00

When interviewed, the City Accountant justified that loan proceeds of the Bridge Financing will be used to pay the said expenditures.

It is emphasized to management that availment of the loan could not be made in the absence of projects. In case management availed of a loan, the same could not be used to pay the above accounts.

Recommendation:

The Local Finance Committee should ensure that sufficient funds are available before certifying any proposed supplemental budget. The City Accountant is advised to seek from the Sanggunian Panglungsod authority to charge against CY 2005 appropriations the payment of the unpaid obligations amounting to P 5,896,625.00.

One of the basic features of the New Government Accounting System (NGAS) is the provision of Special Accounts in the General Fund with complete subsidiary ledgers for public utilities and other economic enterprises.

In relation thereto, Section 107 of the New Government Accounting System (NGAS) provides that special accounts shall be maintained through the use of complete subsidiary ledgers. In case the local government unit maintains a number of the same economic enterprise, each shall have its own set of subsidiary ledger (eg. 8 markets – 8 subsidiary ledgers for the market).

Audit disclosed that during the year, the City Government generated a total income of P 10,890,455.88 from the following operations:

Account

CodeAmountIncome from Markets636P 4,640,288.52Income from Slaughterhouse6372,800,150.88Hospital6313,447,756.44Income from Cemetery6332,260.00 TotalP 10,890,455.84

Verification of the account revealed that only income of the markets, slaughterhouse, hospital, and cemetery operations were accounted in the books of accounts of the City. It was observed further that the City Accountant did not maintain Special Accounts complete with subsidiary records/ledgers that will show the income and expense transactions of each enterprise.

The management justified that the expenses incurred were accounted for and recorded in the appropriate expense account in the general fund.

The inadequacy of subsidiary records/ledgers for special accounts had made the determination of the profitability of each enterprise difficult.

Management concurs with our audit observation.

Recommendation:

Advise the City Accountant to maintain Special Accounts in the General Fund with complete subsidiary ledgers for the operations of markets, slaughterhouse, hospital and cemetery for the easier determination of the profitability of each of the economic enterprise.

Advise also the department heads concerned to prepare separate individual budgets for each economic enterprise.

Records revealed that generally, Revenue Collection Clerks assigned in the Public Market and that of the Integrated Bus/Jeepney Terminal (IBJT) failed to remit their respective collections daily as required. It was further noted that remittance of daily collections totaling P 221,959.59 was delayed from three to sixty five days. (Annex 2)

The recurring deficiency was attributed to the laxity in monitoring collections made by collecting officers. They were allowed to keep cash for a longer period of time.

Management concurred to our audit observation as well as the Liquidating Officers. They assured us that said deficiency will be corrected in the ensuing year.

Recommendation:

Instruct all Revenue Collection Clerks to remit their collections daily, as required. Likewise, the City Administrator as well as Division Chiefs shall closely supervise and monitor the remittance of collections and to enforce appropriate administrative sanctions in case of repeated failure to comply.

COA Circular No. 2002-003 dated June 20, 2002 as updated under COA Circular Nos. 2003-001 and 2004-002 dated June 23, 2003 and September 4, 2004, respectively, prescribing the New Government Accounting System (NGAS), provides for the specific accounts for particular government transactions. Account 969 was provided to be used for expenses not otherwise classified under the specific maintenance and other operating expenses accounts.

Verification of various transactions disclosed that expenses with specific accounts in the amount of P 1,837,473.74 were charged to Other Maintenance and Operating Expenses (969) account. Most of the transactions which involved different offices of the local government were; payments of vehicle insurance premiums, gasoline/diesoline, rental, traveling expenses, telephone bills and procurement of office supplies and spare parts. (Annex 1)

Initial inquiry revealed that most of the transactions with erroneous charges were those with appropriations already exhausted during the year. Subsequent claims were charged to Other Maintenance and Operating Expenses account instead of requesting first for realignment of the funds from account 969 to the particular specific accounts.

The deficiency resulted to the overstatement of Other Maintenance and Operating Expense account in the amount of P 1,837,473.74 with the corresponding understatement by same amount of expenses in other appropriate accounts.

The City Accountant justified that their office received late the copy of Chart of Accounts on the updated NGAS hence, the expenditure accounts did not jibe with the new updated Chart of Accounts. She further explained that due to time element involved in the passage of resolutions for realignment, accounts with exhausted appropriations were readily charged to Account 969. However, she was amenable to the cited deficiency and she had brought the matter to the various department heads and recommended for the early request for realignment of balances to appropriate accounts to avoid occurrence of said deficiency in subsequent transactions.

Seminars on NGAS were conducted on the second semester of 2002 and agency personnel especially from the City Accountant’s Office had attended said seminars and were provided with the Manual on NGAS for LGUs which contained the Updated Chart of Accounts. Hence, the City Accountant should not use for the late receipt of Chart of Accounts as the reason. Moreover, it is the responsibility of the City Accountant’s Office to require the offices concerned to request for realignment of their budget.

Recommendation:

Advise all the department heads concerned to limit expenditure within the budget ceiling. In case realignment of expenses is necessary, require them to do it before the need arises in order not to hamper operations and not violate laws, rules and regulations. To enforce proper implementation, the City Accountant shall not approve the Obligation Slip if there are no more appropriations for the transaction.

Remittance of daily collections in the amount of P 221,959.59 was delayed from three to sixty five days due to laxity in enforcing Section 29 of the New Government Accounting System

Section 64 of the New Government Accounting Manual defines prepayment as advance payment of expenses not yet incurred. A payment of annual insurance premium is an example of prepayment. The payment is treated as an asset rather than an expense.

Verification of records disclosed that not all payments of insurance premium were recorded under Prepaid Insurance, an asset account. The total amount paid for insurance premium was P 1,878,032.25, however the amount recorded in the subsidiary ledger as Prepaid Insurance is only P 1,202,657.50. Further verification disclosed that the difference of P 675,374.55 was directly recorded to the expense account using Other Maintenance and Operating Expenses, which is not the proper account. The unexpired portion of the insurance premium recorded under the latter account was P 509,654.10. Thus the amount was not recognized as an asset, but an expense in the financial statements. The prevailing condition can be fully explained/illustrated in the Analysis of Accounts, as presented below:

Per BookPer AuditVarianceBeginning BalanceP 478,022.97P 478,022.97P 0.00Add: Payments during the year

724,634.73

1,400,009.28

675,374.55TotalP 1,202,657.70P 1,878,032.25P 675,374.55Less: Expired portion1,074,705.321,240,425.77165,720.45Ending BalanceP 127,952.38P 637,606.48P 509,654.10

The deficiency was a result of insufficient appropriation for insurance expense.

The erroneous recording of the transaction resulted in the overstatement of expenses in the Statement of Income and Expenses and understatement of asset and government equity accounts in the Balance Sheet by P 509,654.10.

When the audit observation was presented to management, the latter concurred.

Recommendation:

Instruct the City Accountant to debit Prepaid Insurance and Credit Prior Years’ Adjustments Accounts for P 509,654.10. She shall be advised to record the transactions in their appropriate accounts.

Due to non-availability of subsidiary records, 69% or P 4,350,788.42 of the Other Prepaid Expenses year-end account balance of P 6,315,522.23 could not be validated, thereby its accuracy and reliability could not be ascertained.

Financial statements are representation of management’s financial position and results of operations. It should provide information that are reliable, accurate and complete as these will serve as tools for management and other financial statements’ readers in arriving at decision related to financial affairs.

Audit revealed that 69% or P 4,350,788.42 of the Other Prepaid Expenses year-end account balance of P 6,315,522.23 represents converted accounts from Other Assets – Miscellaneous Assets and Deferred Charges accounts (8-73-000), which could not be validated due to lack of subsidiary records. The bookkeeper also failed to keep the source documents as basis in the computation of the expired portion of the prepayments.

Precisely, the city was not able to recognize the expense portion of the prepayments over a number of years that overstated its assets and equity accounts. Besides, the accuracy and reliability of the account balance of Other Prepaid Expenses in the amount of P 4,350,788.42 could not be ascertained.

The City Accountant justified the deficiency that the above accounts had remained outstanding for several years prior to its conversion in December 2001 with the implementation of the New Government Accounting System.

Management confirms our audit observation.

Recommendation:

Instruct the City Accountant to maintain subsidiary records and files of source documents that needs schedule. Reconstruct records on affected Other Prepaid Expenses account and make appropriate adjustments to arrive at accurate balance.