EXECUTIVE SUMMARY

A. INTRODUCTION

The Armed Forces of the Philippines (AFP) started with the creation of the
Philippine Army on March 22, 1897 and was later reorganized under Executive Order
(EO) No. 389 dated 23 December 1950. The organizational structure of the AFP, which
consists of the General Headquarters (GHQ); the Major Services, namely: the Philippine
Army, the Philippine Air Force and the Philippine Navy; and other existing units,
services and commands of the AFP, was provided for under EO No. 292, the
Administrative Code of 1987.

The GHQ, AFP is headed by a Chief of Staff who oversees the operation of three
Major Services, six Unified Commands (UCs) throughout the country, three Key
Budgetary Units (KBUs) and 14 AFP Wide Support and Separate Units (AFPWSSUs)
responsible in providing support services including headquarters, training of officer
candidates, command and staff education, technical reserve forces development,
intelligence support, administration of AFP peacekeeping operations, civil-military
operations, joint special operations, munition control, doctrine development, and peace
and development.

The Chief of Staff of the AFP during the year was General Eduardo M. Año. The
civilian personnel complement of GHQ, AFPWSSUs, UCs and KBUs as of December
31, 2016 was composed of 2,543 regular plantilla positions, 202 coterminous with the
incumbent and 33 Contracts of Service.

B. OPERATIONAL HIGHLIGHTS

The highlights of the accomplishments of the AFP under the following mission areas
covering the period 01 January - 31 December 2016 are:

a) Mission Area 1: Territorial Defense, Security and Stability (TDSS)

 Conducted a total of 402,028 ground operations against various threat groups at

different levels.

 A total of 474 Bayanihan Team Activities (BTAs) were completed in CNN

affected barangays. On the other hand, 1,117 BTAs were also completed in
unaffected barangays. On normalization of provinces, 6 provinces were declared
Conflict-Manageable and Ready for Further Development (CMRFD).

 In support to Internal Security Operation (ISO) the Unified Commands conducted

a total of 14,720 air missions with 16,436 flying hours as support to ground

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 operations. Likewise, a total of 4,436 surface patrol operations accumulating
36,128 hours of steaming time covering 319,398 nautical miles were conducted.

 Signed a Memorandum of Understanding on “Maritime Safety and Security

Traffic Decongestion” together with DOTC, DILG, DND, PNP, PCG, ARMM,
BFAR, MMDA, OTS, MARINA, PPA and LTFRB.

 Signed a Joint Declaration on Immediate Measures to Address Security Issues in

the Maritime Areas of Common Concern among Indonesia, Malaysia and the
Philippines.

 Crafted a new Fragmentary Order (FRAG-O) to guide the AFP units in the final
push of its Campaign Plan for Internal Security Operations (IPSP “Bayanihan”).

 Facilitated the signing of the Joint Letter of Instruction which prescribes the
mission, concept, tasks, and other responsibilities of the PNP and the AFP in
support to Anti-Illegal Drugs operations and assists in the Barangay Clearing
Operations to suppress the drug problems in the country.

b) Mission Area 2: International Defense and Security Engagement/Peace

Support Operations (IDSE/PSO)

 Participated in different bilateral, regional, and global engagements as well as

participation in United Nation Peacekeeping missions. Among the international
engagements of the AFP were PH-US MDB/SEB Combined Planning and
Assessment Group (CPAG) and Executive Committee (EXECOM) Meeting in
Honolulu, Hawaii; Balikatan 2016 International Observers Program; Chief of
Defense Conference 2016 which was hosted by the AFP; the 7th INDO
DEFENCE EXPO 2016 in Jakarta, Indonesia; hosted the 4th PH-Vietnam Senior
Officers‟ Exchange Visit Program (SOEVP); among others.

 Deployed 143 personnel in various missions for peace support operations and 46
military personnel under foreign posting.

c) Mission Area 3: Humanitarian Assistance and Disaster Response (HADR)

 Crafted contingency plans to address the 7.2 magnitude earthquake, one of which
is the AFP Contingency Plan “Pagyanig” dated 29 July 2014 which was further
enhanced through the new Contingency Plan “Pagligtas”.

 Performed various Disaster Response Operations nationwide such as 159 rescue

operations were recorded saving 493 individuals and 39 families, 155 evacuations
with a total of 5,377 individuals and 80 families evacuated and 3,209 relief
operations were assisted and initiated by the AFP with around 292,967 lbs. of
goods, and 1,505 sacks, 1,026 boxes, 48,804 pieces, and 6,800 packs of assorted
relief goods distributed in 244,377 individuals and 11,644 families.
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  The AFP issued various HADR equipment donated by the Republic of Korea to
Philippine Army, AFP Medical Center, and Office of the Quarter Master General
(OTQMG). Further, the completed projects under the AFP Modernization
Program, such as the C-130 under Program 2 and Civil Engineering Equipment
under Program 4, are expected to contribute to the enhancement of the HADR
capability of the AFP.

d) Mission Area 4: Force Level Command & Control and Training Support
(FLC2TS)

 AFP personnel strength was registered at 99% over-all personnel fill-up based on
the approved Authorized Troop Strength (ATS) CY 2015.

 Conducted organizational inventories and inspection to RRUs/DRRUs and ARUs.

 Completed 131 accumulated projects under Bases Support Systems Development

(BSSD) Project.

 Conducted, facilitated and crafted the AFP Civil Military Operation (CMO) Best
Practices handbook.

 Conducted the 3rd AFP Social Summit to enhance network building with the
civilian counterparts for AFP social media managers, and the establish
mechanisms to synergize and harness the AFP‟s social media effort with that of
partner institutions to achieve organizational and national goals.

 The AFP Education and Training (E/T) offices and units executed several
activities that were intended to improve and synergize the E/T systems and
processes.

 Conducted 62 doctrine conferences and 83 doctrines committee/board

deliberations that paved way to the promulgation of 16 doctrine manuals.

C. FINANCIAL HIGHLIGHTS

The financial position, financial performance, and sources and application of

funds, in thousand pesos, are shown below:

Financial Position

Increase
Group of Accounts 2016 2015 (Decrease)
Assets P120,102,326 P84,257,661 P35,844,665
Liabilities 3,334,725 3,439,311 (104,586)
Net Assets/Equity 116,767,601 80,818,350 35,949,251

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 Financial Performance

Increase
Group of Accounts 2016 2015 (Decrease)
Revenue P323,628 P342,537 (P18,909)
Current Operating Expenses:
Personal Services 40,180,851 38,258,964 1,921,887
Maintenance and Other Operating
Expenses 3,677,992 3,505,411 172,581
Financial Charges 26 31 (5)
Direct Costs 59 - 59
Non-Cash Expenses 2,835,301 1,429,836 1,405,465
Total Current Operating Expenses 46,694,229 43,194,242 3,499,987
Surplus (Deficit) from current
Operations (46,370,601) (42,851,705) (3,518,896)
Net Financial Assistance/Subsidy 60,470,373 57,203,653 3,266,720
Gains 63,967 57,131 6,836
Losses (67) (4) (63)
Surplus (Deficit) for the Period 14,163,672 14,409,075 (245,403)

Sources and Application of Funds

Increase
Group of Accounts 2016 2015 (Decrease)
Appropriation P78,800,984 P62,704,013 P16,096,971
Allotment Received 55,024,874 58,536,366 (3,511,492)
Obligations Incurred 51,867,316 52,664,081 (796,765)
Unexpended Balance 3,157,558 5,872,285 (2,714,727)

D. SCOPE OF AUDIT
The audit covered the operations and financial transactions of the AFP Program 4
for CY 2016.

E. AUDITOR’S REPORT

The Auditor rendered a qualified opinion on the fairness of the presentation of the
consolidated financial statements of the GHQ, AFP in view of the accounting errors and
deficiencies shown in the Matrix on the Analysis of the effects on the misstatements on
the Financial Statements marked as Annex 1 and are enumerated below together with the
recommendations.

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1. The Cash in Bank account balance of P9,707,933,298.48 is inaccurate and unreliable
due to: (a) non-adjustment of 416 stale checks of P6,882,415.00, reconciling items of
P55,480,107.48 and unclaimed pension benefits totaling P1,793,666.14; (b) presence
of dormant/non-moving, unreconciled and negative SL balances of P407,724,582.34;
(c) non/delayed submission of Bank Reconciliation Statements (BRS); and (d) non-
remittance of P6,709,540,391.50 unutilized balances of various LCSA and LCCA
bank accounts and P551,851.55 interest income to the Bureau of the Treasury,
contrary to Philippine Public Sector Accounting Standards (PPSAS) 1, Government
Accounting Manual (GAM) Section 7, General Provisions of 2016 GAA, Executive
Order 388 and Department of Finance (DOF) Circular No. 001-2015. Moreover,
Management failed to require the AGDBs to submit reports on the share of AFP
Modernization on the interest earned on the DLCs opened and to recognize the same
in the book of accounts. (Observation No. 1)

We recommended and Management agreed to: a) require the Chief Accountant to

prepare the necessary adjustments to record the stale checks, reconciling items and
unclaimed pension benefits to reflect the correct balances of Cash in Bank accounts;
b) require concerned officials to coordinate with the banks to submit supporting
documents to identify the debits and credits shown in the bank statements for proper
recording in the books accounts; c) direct the TWG to establish the details of the
dormant/non-moving, negative and unreconciled SL balances and continue the
review, analysis, and reconciliation being made on the account and submit a record
of all accomplishments and the minutes of meetings done to the Office of the Auditor
within 5 days from the said meeting; d) enroll the bank accounts in iAccess and
PVB@eBanking for LBP and PVB bank accounts, respectively, to effectively
monitor bank transactions of each bank account and allow the timely preparation of
BRS; and e) remit immediately to the National Treasury all unutilized cash balances
of trust accounts and interest earned from the bank accounts and financial institution.

2. The receivable accounts in the total amount of P2,341,221,027.84 could not be relied
upon due to: (a) variances between book balances and confirmed amount; and
between General Ledger (GL) and Subsidiary Ledger (SL) balances; (b) unrecorded
hospital bills; unauthorized write-off; (c) erroneous recording of pension recovery and
unrecorded overpayment of pension benefits; and (d) undelivered, unrecorded and
dormant affecting the accounts. (Observation No. 3)

We recommended and Management agreed to: a) direct the Accountant to

periodically reconcile the balances of the Due from NGAs/Due from GOCCs account
with the records of the respective agencies by securing the Statement of Account in
order that transactions are recorded in the period for which they relate; ; b) require the
Office of the Registrar to submit SOAs together with the Promissory Note to the
Accountant for the timely recognition of the Accounts Receivables and the related
income account in the books of the agency; c) require the Office of the Medical
Service School (MSS) and the V. Luna General Hospital (VLGH) to provide
explanation why they have recommended and approved the write-off of the unsettled
hospital bill without securing an authority from COA. Moreover, reinstate the balance
of written off accounts; d) require the AFPFC to enforce the recovery of overpaid
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 pension benefits; e) require the Chief, Processing, Bonding and Collection Branch,
AFPFC, and the Commanding Officer, Pensioners Assistance Unit, AFPPGMC, to
prepare regular reports on overpaid pension benefits to deceased pensioners with data
on the recovered and unrecovered amounts to be submitted to the Chief, AFPPGMC,
for proper guidance; f) direct the Accountant to recognize the overpaid pension
benefits for recovery by debiting Other Receivables account and crediting
Accumulated Surplus account to ensure the accuracy and reliability of the balances of
the affected accounts; g) direct the Office of the SAO to immediately submit to the
Office of the Accountant the delivery receipts including the inspection and
acceptance report pertaining to the unrecorded deliveries made by PS DBM in order
that necessary adjusting entries be made to correct the balance of the Due from NGAs
account and its affected accounts as of December 31, 2016; h) require the GHQ
Accounting Center to coordinate and send demand letters to the NGAs/GOCCs and
OUs concerned to liquidate or refund the outstanding balance of the receivable,
whichever is applicable; and i) direct concerned offices to submit to the Office of the
Auditor the accomplishment report of the TWG tasked to resolve the issues of
dormant and unreconciled accounts for monitoring purposes.

3. The recorded balance of Property and Equipment for Distribution amounting to

P4,731,540,221.46 as of December 31, 2016 was misstated due to non-recognition of
issued and/or transferred property and equipment contrary to Section 48 of GAAM
Volume III and GAM Volume III. (Observation No. 4)

We recommended and Management agreed to: a) require the SAO to ensure timely
submission of all pertinent documents pertaining to the receipt, purchase, issuance
and transfer of property and equipment to the Accountant for proper recording; and b)
direct the Accountant to recognize the issuance/transfer of the property and
equipment for distribution to reflect the accurate balances of the related accounts.

4. The reported balances of Inventory accounts totaling P6,068,756,340.45 as of

December 31, 2016 is inaccurate/unreliable due to management’s : (a) failure to
conduct/complete physical count of inventory and submit the Report on Physical
Count of Inventory (RPCI); (b) unreconciled balances between the RPCI and General
Ledger (GL); (c) unrecorded issuances of inventory items totaling to
P256,424,864.51; and (d) presence of “Unreconciled” balances in Subsidiary Ledgers
(SLs) of P603,533,578.45); thereby, understating the expense account and overstating
the assets accounts by at least P859,958,442.96. (Observation No. 5)

We recommended and Management agreed to: a) require the SAO to conduct

physical count of inventories and submit the Report on Physical Count of Inventories
and reconcile it with the Accounting unit to assure correctness and reliability of
Inventory accounts as presented in the financial statements; b) require the GHQ
Accounting Center and SAO to maintain SLCs and SCs, respectively, and regularly
reconcile the reports with the GL and RPCI after each physical count; c) require the
Accountant to effect adjustments on unrecorded issuance of inventory and to
immediately record the issuances upon submission of RSMI; d) require the
Accountant to review and analyze the balances of the Subsidiary Ledgers of the
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 Inventory accounts with caption "Unreconciled" and make the necessary adjustments;
and e) require the TWG in coordination with the Chief Accountant to exhaust more
efforts to look into the details and existence of the dormant/non-moving inventory
accounts under the CAFGU-CO fund. If all possibilities were exhausted but still
proved futile, follow the guidelines set forth in COA-Circular No. 97-001 dated
February 5, 1997 and the provisions of COA Circular No. 2016-005 dated December
19, 2016 on the proper disposition/closure of dormant funds and/or accounts of
National Government Agencies.

5. The balance of Property, Plant and Equipment (PPE) of P55,618,842,312.12 as of

December 31, 2016 is unreliable due to: (a) erroneous valuation, reporting,
presentation and disclosure; (b) non-conduct/unfinished physical count and non-
submission of Report of the Physical Count of Property Plant and Equipment
(RPCPPE); (c) non-maintenance/non-updating of, and incomplete PPE records; d)
variances of P37,905,842.52 between GL and RPCPPE; (e) non-adjustment of CIP
account for completed projects to the appropriate PPE account; and (f) non-
conveyance of ownership of 13 motor vehicles found in station totaling
P12,208,509.60, contrary to the provisions of P.D. No. 1445, Section 2 of P.D. No.
1445 and Government Accounting Manual. (Observation No. 6)

We recommended and Management agreed to: a) direct the Accountant concerned: i)

to determine the details of the PPE account with notation “Unreconciled” and assign
staff to handle the necessary reconciliation; ii) to coordinate with donor agencies for
proper documentation of donated MVs and recognize the cost, accumulated
depreciation and depreciation expense related to the same; and iii) and the SAO to
maintain and update the property records to effectively monitor acquisition, issue,
transfer and disposal of property and to reconcile their records on a periodic basis to
facilitate recording of any required adjustments and to monitor any variances; b)
create/enjoin the Inventory Committee to conduct/complete the physical inventory
count, submit the results thereof to the Accountant, and coordinate with the latter to
reconcile the same with property records; g) submit the RPCPPE to the Office of the
Auditor for verification; and h) require the concerned officials to submit the pertinent
documents to the Accountants to reclassify the recorded CIP to the appropriate PPE
account.

F. OTHER SIGNIFICANT OBSERVATIONS AND RECOMMENDATIONS

1. The existence of cash balance of Fund 170 or BCDA of P1,602,774,243.27 could not
be ascertained due to absence of records at the BTr that will prove its existence. In
addition to this, lack of periodic reconciliation of records between the agency and BTr
render the balance of Treasury/Agency Cash Accounts unreliable, contrary to Section
7, Chapter 19 of the Government Accounting Manual Volume 1. Moreover, proceeds
of closed bank accounts and unutilized foreign donation totaling P62,009,565.24 were
not reverted to the General Fund of the BTr contrary to the provisions of Sec 11,
General Provisions of Republic Act 10717. (Observation No. 2)

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 We recommended and Management agreed to: a) reconcile the account’s balance
with the BTr to determine the nature of the remaining balance of the account in the
SL and prepare the proper adjusting journal entries to close the balance; and b) remit
the funds of P62,009,565.24 to the General Fund account of the Bureau of Treasury.

2. Cash advances (CAs) totaling P110,281,382.89 were not liquidated at year end or
within the prescribed period pursuant to Section 89 of PD 1445 and COA Circular
No. 97-002 dated February 10, 1997. Moreover, the granting of additional cash
advances while previous cash advances were not yet fully liquidated resulted in such
accumulation. (Observation No. 7)

We recommended and Management agreed to: a) strengthen its controls in the grant,
liquidation and monitoring of the cash advances by: i. enforcing strictly the
liquidation of advances within the prescribed period, especially for prior year
balances; ii. sending demand letters to all accountable officers concerned; iii.
requiring the Accounting Unit to closely monitor the timely liquidation of cash
advances and refrain from granting additional cash advances to accountable officers
unless the previous ones are fully liquidated; iv. imposing the sanctions and penal
provisions specified in COA Circular 97-002; and b) pursue/follow up the speedy trial
and issuance of resolution for the possible conviction of 1LT Fandiño for
malversation case filed before RTC Branch 60, Lucena City; and immediately apply
with the AFP Higher Headquarter for the forfeiture of his unclaimed benefits, once a
resolution is issued and apply the same to the amount malversed.

3. The balance of the Deposit on Letters of Credits (DLC) account of

P34,061,341,395.26 could not be relied upon since it includes balances pertaining to:
a) goods and services with complete and partial deliveries in the amount of
P7,562,475,197.36 and P1,098,619,339.24 respectively; b) residual balances of
P29,088,452.78; (c) terminated contracts/expired DLC totaling P701,523,249.11; d)
unreconciled balance of P4,195,269.40 between Subsidiary Ledger and General
Ledger. (Observation No. 8)

We recommended and Management agreed to: a) direct the AFP Accounting Center
to coordinate with AFPPC and DND DAO and the AFP Supply Accountable Officer
(SAO) to account the submitted reports of liquidation with all the supporting
documents for fully and partially completed projects and effect the immediate
recognition of all relevant transactions affecting the DLC account pursuant to COA
Circular No. 2013-002; b) direct the SAO, AFPPC, DAO to ensure timely submission
of all pertinent documents relating to the delivered and accepted goods and/or
services to enable the GHQ Accounting Center in the timely recording of
transactions; c) require close coordination among the Offices of the DAO DND,
AFPPS and AFPMFO and direct the specific office to regularly monitor the
application of payment and balances of letters of credit and report the same to the
AFP Accounting Center for appropriate recording in the books of accounts; d) direct
the concerned officials to make representation with the respective banks on the
immediate cancellation/termination of all outstanding letters of credit for all
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 terminated/expired projects as well as the return of the residual balances of all
outstanding LCs for all completed projects/contracts and remit the same to the Bureau
of Treasury; e) instruct the AFP Accounting Center to coordinate with AFP
Procurement Service, Resource Management Office, Management and Fiscal Office
and GHQ SAO to account for the unreconciled subsidiary ledger balance of
P4,195,269.40; and f) revisit the functions of all offices responsible for the
implementation of the AFP modernization program and come up with a concrete
internal policy guideline that will promote transparency, accountability and efficiency
in the effective reporting of all transactions affecting the disbursement of funds.

4. The reported balance of Guaranty Deposits account of P6,116,813,616.35 in

AFPMATF books as of December 31, 2016 is unreliable due to unrecorded
application of deposits and/or deliveries totaling P1,710,281,336.39 and erroneous
recording of prepayment amounting to P315,173,795.74. (Observation No. 9)

We recommended and Management agreed to: a) direct the Supply Accountable

Officer, AFP Procurement Service (PS)/Center (PC) and OJ4 to ensure timely
submission of all pertinent documents relating to the delivered and accepted goods
and/or services to enable the AFP Accounting Center in the timely recording of
transactions affecting the guaranty deposit account in the books of the Agency; b)
require close coordination among the Offices of the OJ4, AFP PC/PS and AFPMFO
and direct the specific office to regularly monitor the application of deposits and
balances of guaranty deposits and report the same to the AFP Accounting Center for
appropriate recording in the books of accounts; and c) direct the Chief Accountant to
adjust the advance payment to Petron Corporation amounting to P315,173,795.74
erroneously recorded as guaranty deposit to its appropriate account.

5. The presence of dormant/non-moving, unreconciled and negative SL balances of

P15,392,857.62 render the balances of Due to NGAs and Due to GOCCs unreliable as
of December 31, 2016. Likewise, Management failed to submit status report of
unutilized balances of completed projects totaling P78,570,105.16 representing funds
received from the source agency which have been long outstanding in GHQ books.
(Observation No. 10)

We recommended and Management agreed to: a) direct the GHQ Accounting Center
to determine the proper SL account to which the payments to KIA beneficiaries made
in previous years should be recorded and if properly identified adjust the debits made
to SL accounts Off-base Housing and Unreconciled balance; b) instruct the GHQ
Accounting Center to explain the differences noted on the balances of the fund
received from PMS per computation, per SL and per confirmation reply, and prepare
adjustments to reflect the correct balance; c) direct the GHQ Accounting Center to
prepare the proper entry to adjust the erroneous entry made in OP-PSF (OR#377365
Ck.# 230705); d) require the units concerned to prepare the status report of the
projects/activities undertaken for submission to the COA-GHQ for further
verification and validation; e) instruct the GHQ Accounting Center to verify and
analyze the long outstanding unliquidated funds and determine the unutilized balance

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 of the SL account and submit the results to the Office of the Auditor for validation;
and f) determine the nature/details of the SL of Due to GOCCs marked Unreconciled
amounting P145,000.00.

6. With the 11 retired military dogs and five more expected to retire in CY 2018, the
prime duty of the PSG in securing the safety of the President may not be effectively
carried out. (Observation No. 11)

We recommended and Management agreed to direct the: a) the OG4 to facilitate

immediate action on the request by the SRU for the acquisition/procurement of 11
Military Working Dogs (Bomb Dogs) essential for bomb detection operations during
presidential engagements; b) the SRU and OG4 to ensure a reasonable inventory of
effective military working dog complement necessary in supporting the Command’s
operations critical to bomb detection through proper planning and utilization as well
timely disposal and acquisition; and c) the SRU, OSAO and OG4 to ensure proper
and timely disposal of retired military dogs, pursuant to AGPCR2, SOP Nr. 07 dated
September 3, 2007 and other existing rules and regulations on property disposal. We
further recommend that Management make representations with the General
Headquarters as well as the Department of Budget and Management for the inclusion
in the CY 2018 Capital Outlay budget appropriation/allocation of the Agency
provision for the procurement of military working dogs necessary in the protective
security operation for the President and other VVIPs.

7. Weak monitoring and controls in the monitoring of AFP-GHQ Standard Operating

Procedures No. 10 dated April 16, 2014 resulted in the overpayment of pension
benefits to deceased pensioners of which P105,329,980.51 has yet to be recovered.

We recommended and Management agreed to: a) strengthen control and monitoring

of pension funds through strict implementation of the laws, policies and regulations to
minimize undetected payments of pension benefits to deceased and unqualified
pensioners and avoid wastage of government resources; b) monitor closely the
balance of overpayment yet to be recovered and immediately remit the collection to
the BTr.; and c) require the Collecting Officer, Processing, Bonding and Collection
Branch, AFP Finance Center to remit the amount of P127,108,906.31 to the National
Treasury; and thereafter, to remit regularly and promptly the collections of the same
nature to the National Treasury.

Other equally significant audit observations and recommendations were also

noted and discussed in detail under Part II of this report.

The above findings and recommendations contained in the report were discussed
with the concerned officials of the agency in the exit conference conducted on
June 9, 2017. Management views and reactions were considered in the report, where
appropriate.

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G. IMPLEMENTATION OF PRIOR YEARS’ AUDIT RECOMMENDATIONS

We validated the actions taken by the agency on the prior years’ audit
recommendations. Out of the 54 audit recommendations contained in the 2015
Consolidated Annual Audit Report, 25 were fully implemented, 24 were partially
implemented, and 5 were not yet implemented.

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