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09-PCSO2019 Part2-Observations and Recomm

1) The Philippine Charity Sweepstakes Office (PCSO) did not recognize guaranteed minimum monthly retail receipt (GMMRR) shortfalls totaling PHP13.905 billion and PHP6.305 billion for 2017-2018 and 2019 respectively from authorized agent corporations, resulting in understated income, receivables, retained earnings, expenses and overstated other income in its financial records. 2) Settlements of GMMRR shortfalls due were inconsistently recorded in other income accounts instead of income from gaming operations, overstating other income by PHP1.718 billion and understating receivables by PHP6.980 billion as of end-2019. 3) Failure to properly recognize

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0% found this document useful (0 votes)
179 views40 pages

09-PCSO2019 Part2-Observations and Recomm

1) The Philippine Charity Sweepstakes Office (PCSO) did not recognize guaranteed minimum monthly retail receipt (GMMRR) shortfalls totaling PHP13.905 billion and PHP6.305 billion for 2017-2018 and 2019 respectively from authorized agent corporations, resulting in understated income, receivables, retained earnings, expenses and overstated other income in its financial records. 2) Settlements of GMMRR shortfalls due were inconsistently recorded in other income accounts instead of income from gaming operations, overstating other income by PHP1.718 billion and understating receivables by PHP6.980 billion as of end-2019. 3) Failure to properly recognize

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PART II - OBSERVATIONS AND RECOMMENDATIONS

A. FINANCIAL

1. The Guaranteed Minimum Monthly Retail Receipts (GMMRR) Shortfalls for


calendar years (CYs) 2017-2018 and 2019 in the total amounts  of P13.905 billion
and P6.305 billion and the corresponding amounts of Shortfalls due to PCSO
(receivables) totaling P5.617 billion and P3.081 billion, respectively, were not
recognized in the books of PCSO despite being valid revenues and receivables
from the Authorized Agent Corporations (AACs), as defined under the Philippine
Accounting Standard (PAS) 1 and the Conceptual Framework for Financial
Reporting (CFFR), resulting in the understatement of Income from Gaming
Operations-Small Town Lottery (STL), Receivables – STL, Retained Earnings,
Expenses and Payables accounts by P6.305 billion, P6.980 billion, P2.331 billion,
P4.696 billion and P4.757 billion, respectively, and overstatement of Other
Business Income and Miscellaneous Income accounts in the amounts of P1.055
billion and P663.001 million, respectively.

1.1 This is a reiteration with updates of the prior year’s observation as Management
did not implement the corresponding recommendations.

1.2 One of the obligations of the Authorized Agent Corporations (AACs) embodied in
the 2019 Revised Implementing Rules and Regulations (RIRR) for the Small
Town Lottery (STL) was compliance with the agreed Guaranteed Minimum
Monthly Retail Receipts (GMMRR) and the remittance to the PCSO of the
amount corresponding to the revenue allocation provided therein. The GMMRR
refers to the amount offered and voluntarily committed by any STL proponent or
applicant in a given area, which represents assured minimum monthly gross
retail receipts or guaranteed total monthly ticket sales to be remitted to the
PCSO in the event that actual gross retail receipt is lower than the GMMRR.

1.3 Review of the accounting reports and statements of account furnished by the
Accounting and Budget Department (ABD) and Branch Operations Sector (BOS)
as of December 31, 2019 disclosed that several AACs did not meet the required
GMMRR and had incurred net GMMRR shortfalls of P6.305 billion during CY
2019 with equivalent shortfalls due to PCSO amounting to P3.081 billion.

1.4 Verification, however, disclosed that the said shortfalls were not recognized as
Income from Gaming Operations and Receivables in the books. It was further
noted that the recorded revenue and receivables from the STL pertained only to
the actual sales reported by the AACs and settlements of GMMRR shortfalls
due, if any, contrary to Paragraphs 27 and 28 of PAS 1 and definition of and
recognition criteria for asset and income provided under Paragraph 4.4 of the
CFFR, as quoted hereunder.

1.5 Paragraphs 27 and 28 of PAS 1 provide:

87
27. An entity shall prepare its financial statements, except for cash
flow information, using the accrual basis of accounting.

28. When the accrual basis of accounting is used, items are


recognized as assets, liabilities, equity, income, and expenses
(the elements of financial statements) when they satisfy the
definition of and recognition criteria for those elements in the
Framework.

1.6 Paragraph 4.4 of the CFFR provides the definition of and recognition criteria for
asset and income, as follows:

4.4. (a) An asset is a resource controlled by the entity as a result of


past event and from which future economic benefits are
expected to flow to the entity.

4.44. An asset is recognized in the balance sheet when it is probable


that the future economic benefits will flow to the entity and the
asset has a cost or value that can be measured.

4.47. Income is recognized in the income statement when an increase


in the future economic benefits related to an increase in an asset
or a decrease of a liability has arisen that can be measured
reliably.

1.7 As a result of the non-recognition of the subject revenue on the year it was
earned and fell due, subsequent settlements of GMMRR shortfall due were not
recorded in a uniform manner, i.e. Income from Gaming Operations was
recognized for the prior years’ settlements made during the period January-
August 2019; Miscellaneous Income account was credited for the settlements
thru cash bond forfeiture; and settlements received from September-December
2019 were recorded under the Other Income-Charity Fund account.

1.8 As shown in Table 1, out of the P8.697 billion GMMRR Shortfalls Due or PCSO’s
share on the unrecorded Income from Gaming Operations-STL for CYs 2017-
2019, P663.001 million was settled during the year and recorded under the
Miscellaneous Income account, while the P1.055 billion settlement was recorded
under the Other Business Income-Charity Fund account, resulting in remaining
unrecorded 2017-2019 receivables of P6.980 billion and overstatements of 2019
Miscellaneous Income account by P663.001 million and 2019 Other Business
Income account by P1.055 billion.

Table 1 - GMMRR Shortfalls and GMMRR Shortfall Due/Receivables


As of December 31, 2019

GMMRR Shortfalls GMMRR Shortfall Due/Receivable


Particulars CYs 2017-2018 CY 2019 CYs 2017-2018 CY 2019 TOTAL
Should Be Balance of Income
from Business Operations-
STL P 57,063,253,006.05 P 24,878,961,616.45  

88
GMMRR Shortfalls GMMRR Shortfall Due/Receivable
Particulars CYs 2017-2018 CY 2019 CYs 2017-2018 CY 2019 TOTAL
Recorded Income from
Gaming Operations-STL (41,854,598,206.21) (18,291,763,933.02)      
GMMRR Shortfall and Due
excluding Settlement in CY
2019 15,208,654,799.84 6,587,197,683.43 P 6,173,690,770.75 P 3,218,268,609.83 P 9,391,959,380.58
Settlement recorded as
Income from Gaming
Operations-STL in CY 2019 (557,040,291. (137,449,538 (694,489,830
(January to August 2019) (1,303,156,994.75) (281,979,888.22) 82) .76) .58)
Unrecorded Income from
Gaming Operations for CYs
2017-2019 and GMMRR
Shortfall Due/ Receivables
as of December 31, 2019 13,905,497,805.09 6,305,217,795.21 5,616,650,478.93 3,080,819,071.07 8,697,469,550.00
Settlement recorded as
Miscellaneous Income (663,001,262. (663,001,262.7
(Cash Bond Forfeiture)     78)   8)
Settlement recorded as Other
Business Income-CF
(September to December (666,280,994. (388,456,855.12 (1,054,737,849.8
2019)     70) ) 2)
Unrecorded GMMRR Shortfall
Due/ Receivables as of    
December 31, 2019 P 4,287,368,221.45 P 2,692,362,215.95 P 6,979,730,437.40

Table 2 - Misstatements of Affected Accounts Due to


Unrecorded GMMRR Shortfalls/Revenue

Overstatement/
(Understatement) of Overstatement/ Overstatement/
Retained Earnings (Understatement) of (Understatement) of
Particulars CYs 2017-2018 Expenses (CY 2019) Payables
Printing Cost (.5%, 1.5% and 2%) P 68,985,624.63 P (35,495,809.72) P -
2% EWT-Printing Cost (133,063.27) (133,063.27)
5% VAT-Printing Cost (332,658.16) (332,658.16)
Prize Fund Expense 5,561,738,467.55 (1,941,165,681.89) -
Agency Commission (Net of Tax) 1,251,494,802.46 (563,034,159.40) -
15% or 10% Withholding tax (Agency
Commission) 139,054,978.05 (65,269,899.04) (204,324,877.09)
5% VAT Withholding from Agency Commission - (2,217,721.09) (2,217,721.09)
BIR Tax (5% of Prize Fund) 365,909,907.79 (137,686,414.90) (503,596,322.69)
Commission on Sales Force (Net of Tax) - (39,918,979.55) -
Withholding Tax on sales force commission - (4,435,442.17) (4,435,442.17)
Documentary Stamp Tax-Charity Fund 2,459,526,540.85 (88,708,843.45) (2,548,235,384.30)
Documentary Stamp Tax-Operating Fund 321,573,020.17 (1,172,334,715.59) (1,493,907,735.76)
Share of Collectors/Sale Representatives 1,406,628,431.52 (644,784,093.58) -
TOTAL P 11,574,911,773.03 P (4,695,517,481.81) P (4,757,183,204.53)
Unrecorded Revenue for CY 2017-2018 (13,905,497,805.09) - -
Net Effect P (2,330,586,032.07) P (4,695,517,481.81) P (4,757,183,204.53)

1.9 In addition, PCSO is mandated to remit a certain percentage of its STL revenues
to the Bureau of Internal Revenue (BIR) for Documentary Stamp
tax, Prize Fund tax and withholding tax, in compliance with the revenue
allocation provided in the RIRR. Likewise, expenses incurred relative to the STL
operations such as printing costs, sales representatives’ shares, prize fund
expenses and mandatory contributions were also allocated. Hence, the non-
recognition in the books of the revenues from shortfalls for CYs 2017-2019

89
resulted in the understatement of expenses amounting to P4.696 billion,
understatement of payables by P4.757 billion and understatement of retained
earnings by P2.331 billion, see details in Table 2.

1.10 We reiterated our prior year’s recommendations that Management direct


the concerned Accounting personnel to:

a. Recognize as part of the PCSO’s revenues the GMMRR shortfalls


incurred by the concerned AACs during CYs 2017-2019 totaling
P20.210 billion and recognize as receivables the amount of P6.980
billion, representing unsettled GMMRR shortfalls due to PCSO for
CYs 2017-2019.

b. Record the STL transactions on accrual basis to ensure that the same
are recognized in the period in which they were earned and not when
cash was collected, pursuant to Paragraphs 27 and 28 of PAS 1 and
the CFFR.

c. Effect the necessary adjusting entries to correct the misstatements of


Retained Earnings, Expenses, Payables, Other Business Income and
Miscellaneous Income accounts, resulting from the inconsistent
treatment of transactions relating to the settlements of GMMRR
shortfalls as well as the unrecorded allocation of expenses relating to
the unrecorded GMMRR shortfalls.

1.11 Management explained that:

a. Their intent is to recognize the shortfall (the difference between Actual


Sales and GMMRR) as Other Income upon collection, in consonance with
the proper recognition of any infraction committed in an agreement as
sanction or penalty, thereof. While it is a valid revenue and thereby a valid
receivable from AACs, recognizing the same as sales will give rise to
Revenue Allocation thereby resulting to undue costs such as taxes, (in the
form of DST, PF Tax, Commission Taxes, for STL agents) and expenses
which cannot be duly supported as there is no actual sales to speak of.

b. The RIRR provides for the settlement of shortfalls from the AAC’s cash
bond, such that portions of 2019 sales shortfall were settled accordingly
from the application of the cash bond. PCSO intends to correct the
inconsistent treatment of transactions relating to recording and settlement of
shortfalls (whether from previous Presumptive Monthly Retail Receipts
(PMRR) or the current GMMRR) by appropriately recognizing it as Other
Income and subjecting the actual sales for Revenue Allocation,
prospectively. All sales shortfalls not yet settled (whether as a result
of PMRR or GMMRR) will be recognized as Other Income, so as not
to burden the Agency with undue and readily demandable taxes.

1.12 As a rejoinder, the Audit Team maintains its position that the previous PMRR or
the current GMMRR shortfalls should be recorded in the PCSO’s books as
revenue and the corresponding PMRR/GMMRR shortfall due as receivable.

90
Subject recommendation was in accordance with the income and asset
recognition principle embodied in the Philippine Financial Reporting Standard
(PFRS), which, according to the Statement of Management’s Responsibility
issued by Management is being presently adopted by the PCSO.

2. The full amount of P961.013 million retail receipts generated from the Instant
Sweepstakes Program (ISP), representing the CY 2019 guaranteed sales of
P833.333 million plus the P127.680 million from the CY 2018 sales, were
recognized in the books despite that only thirteen (13) per cent thereof, or
P124.932 million accrue to the PCSO as its guaranteed share, which was
tantamount to misrepresentation of the actual revenues derived from the ISP,
contrary to Section 4 (i) of the RIRR for the ISP, Paragraph 15 of PAS 1 and
Paragraph 4.47 of the Conceptual Framework for Financial Reporting (CFFR).

2.1 Paragraph 15 of PAS 1 provides:

Financial statements shall present fairly the financial position, financial


performance & cash flows of an entity. Fair presentation requires the
faithful representation of the effects of transactions, other events &
conditions in accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the Framework. Xxx.

2.2 Likewise, Paragraph 4.47 of the Conceptual Framework for Financial Reporting
states:

Income is recognized in the income statement when an increase in


future economic benefits related to an increase in an asset or a
decrease of a liability has arisen that can be measured reliably. This
means, in effect, that recognition of income occurs simultaneously with
the recognition of increases in assets xxxx

2.3 Pursuant to its mandate, the PCSO Board of Directors approved the operation of
the Instant Sweepstakes Program (ISP), a program that was operationalized
through a selection of an Instant Sweepstakes Authorized Corporation (ISAC)
that shall be under a non-exclusive all in contract involving production,
distribution, marketing, advertising and selling of Instant Sweepstakes tickets
nationwide. The PCSO shall exercise direct control and supervision over the
details of the operations, but the ISAC undertakes all the investment risks on the
project.
2.4 As explicitly provided under Section 4 (i) of the RIRR for the ISP, the ISAC shall
have a guaranteed total sale of P5 billion for a period of five (5) years or P1
billion per year, with PCSO having a guaranteed share of thirteen percent (13%)
at no cost or risk to PCSO. The said guaranteed shares of P130 million per year
or P650 million for a period of five (5) years were remitted to the PCSO in
advance in the form of sixty (60) post-dated checks in equal amounts of P10.833
million/month, which shall fall due every 30th day of each and every month.

2.5 The Powerball Marketing and Logistics Corporation (PMLC), as the only
authorized ISAC, started the selling of instant sweepstakes tickets in January
2018. On July 27, 2019, President Rodrigo Roa Duterte ordered the suspension

91
of all PCSO games, including the ISP, but was eventually lifted on September
28, 2019.

2.6 Verification disclosed that the total revenues generated from the ISP amounted
to P961.013 million, representing the CY 2019 guaranteed sales of P833.333
million plus the P127.680 million for CY 2018 sales. It was noted, however, that
the said amount was recognized in the books as Income from Gaming
Operations-NISP, instead of the 13 per cent guaranteed share, which should
have amounted to P108.333 million and P16.599 million as Retained Earnings.
Only the PCSO’s actual total share of P124.932 million contributed to the
increase in its assets, therefore, only the said amount should have been
recognized in income/retained earnings in accordance with PAS 1 and CFFR.

2.7 It was further noted that under Note 23-Income-Business Income-Income from
Gaming Operations of the CY 2019 Notes to Financial Statements, the total retail
receipts of ISP in the amount of P961.013 million was presented as part of
PCSO’s retail receipts without any appropriate disclosure, when only 13 per cent
thereof rightfully belongs to PCSO.

2.8 As noted in the prior year’s Audit Observation Memorandum (AOM), the
recording and presentation of the full amount of the PMLC sales in the financial
statements of PCSO as its total income under the ISP program was not in
accordance with Paragraph 15 of PAS 1, since it does not faithfully represent the
effects of transactions on the affected accounts, hence, providing misleading and
inaccurate information to the users of the financial statements of the PCSO.

2.9 We reiterated our prior year’s recommendation that Management direct the
concerned Accounting personnel to effect the necessary adjusting entries
in order to reflect the correct amount of retail receipts from the ISP
accruing to the PCSO pursuant to Section 4 (i) of the RIRR for the ISP, in
accordance with Paragraphs 15 and 4.47 of PAS 1 and CFFR, respectively.

2.10 Management claimed that Republic Act (RA) No. 1169, otherwise known as the
PCSO Charter, states that PCSO is the principal government agency authorized
to hold and conduct charity sweepstakes, races, lotteries and other similar
activities. When the Principal entity satisfies a performance obligation, the entity
recognizes revenues in the gross amount consideration to which it expects to be
entitled in exchange for those goods or services transferred. Under the NISP
RIRR, the Instant Sweepstakes Program is a regular game of the PCSO. As
principal and has direct control and supervision over the details of the
operations, PCSO recognizes the sale of the NISP.

2.11 As rejoinders, the Audit Team would like to state that:

a. Income is recognized only in the income statement when there is an


increase in future economic benefits related to an increase in an asset or a
decrease of a liability has arisen that can be measured reliably as provided
under the CFFR. In the case of ISP, only the guaranteed share of 13%

92
corresponds to the increase in the future economic benefit and/or asset of
PCSO.

b. The PCSO may be considered as principal in terms of authority to hold and


conduct lotteries as provided under RA No. 1169. However, in the
recording of PCSO’s transactions, the Philippine Financial Reporting
Standards (PFRSs) require that the entity (PCSO) determines and
assesses itself if it acted as Principal in the performance obligation or
promise to transfer goods or services to the customer.

c. In view of the differing opinion as regards to the proper recording of


revenue from ISP, this matter will be referred to the COA Government
Accountancy Sector (GAS), for a more authoritative opinion.

3. The faithful representation in the financial statements as of December 31, 2019 of


the Prize Fund expenses-STL account totaling P622.393 million could not be
established due to the non-submission of the summary of all prizes and winnings
paid and charged to prize fund together with all the other related reports, as
required under Section 18 (g) of the 2019 Revised Implementing Rules and
Regulations (RIRR) for the STL.

3.1 Section 18 - Duties and Obligations of the AAC of the 2019 RIRR for the STL
provides, viz.:

a. Xxx

e. Hold in trust the Prize Fund for and on behalf of the PCSO, and
pay all prizes or winnings under such terms as determined by the
PCSO. Any deficiency in the prize fund arising from the payment
of prizes or winnings shall be for the exclusive account of the
AAC. The PCSO shall not be responsible for or be required to
reimburse deficiencies in the prize payouts. All excess Prize fund
at the end of the year shall be remitted to the PCSO.

g. The following reports shall be submitted to the NCR Department


and concerned Branch Office on or before the 2 nd of ensuing
month.

i. Xxx

ii. Summary of all prizes and winnings paid and charged to


prize fund

iii. Xxx.

3.2 For CY 2019, the total amount of P622.393 million was recognized as prize fund
expenses from STL operations and none was recognized as prize fund held in
trust. It was noted that said expenses were based only on the revenue allocation
rates stated in the CYs 2018 and 2019 RIRR, notwithstanding the above-stated

93
provisions. It was further noted that the prize fund expenses were not supported
by documents/information to prove the existence of valid winners.

3.3 The summary of all prizes and winnings paid and charged to prize fund together
with the other related reports required to be submitted by each AAC was
requested from the Branch Operations Sector (BOS) through a letter dated
February 5, 2020, but none was submitted to the Audit Team. Likewise,
verification conducted by the COA-PCSO-Branches revealed that some AACs
did not submit the said reports and some have submitted but were not
considered in the accounting and recording of STL prize fund transactions, thus
casting doubt on the validity and reliability of the total amount of P622.393 million
recorded under the Prize Fund expenses-STL account.

3.4 It is emphasized that Prize Fund in the custody of the AACs was entrusted by
PCSO for payment to possible valid winners. Hence, the same should be
recognized as asset in the books of PCSO and as a trust liability in the books of
the AACs. Moreover, the excess prize fund computed at the end of the year is
supposed to be returned by the concerned AACs to PCSO in accordance with
Section 18 (e) of the 2019 RIRR for the STL. Verification, however, disclosed
that none was remitted at the end of the year.

3.5 We recommended that Management: (a) require the AACs to submit the
reports on the utilization of the STL Prize Fund enumerated under Section
18 (g) of the RIRR for the STL, copy furnished the Office of the Auditor; and
(b) ensure that recognition of prize fund expenses in the books of accounts
is supported by valid documents.

3.6 Management informed that the STL-AACs are submitting their Prize Fund
utilization reports to their branch offices. However, COA was not furnished with
the said report. The BOS will require all branch offices and STL-AACs to submit
the Prize Fund reports, copy furnished COA, for proper monitoring and
accounting of transactions to ensure that the recognition of prize fund expenses
is supported by valid documents.

4. The faithful representation in the financial statements of the balance of the Cash
and Cash Equivalents account of P14.840 billion as of December 31, 2019 was not
established due to various deficiencies enumerated below, contrary to Paragraph
15 of PAS 1 and QC12 of the CFFR:

a. Variance between the balances per books and the confirmed bank balances
of the Operating Fund (OF) accounts and Main account in the total amount
of P46.138 million;

b. Variance of P61.861 million between the balances per books and the
confirmed bank balances of the Charity Fund (CF), Prize Fund (PF) and
Small Town Lottery (STL) remittances accounts;

c. Closed accounts still having outstanding balances in the books amounting


to P12.020 million and P39.280 million (negative);

94
d. Variance of P3.377 million between the balances per books and the
confirmed bank balances of the bank accounts maintained with the Land
Bank of the Philippines (LBP) that was not reconciled due to non-
preparation of the monthly Bank Reconciliation Statements (BRSs); and

e. Checks totaling P1.550 million already presented to and cleared by the


bank were erroneously included as unreleased checks that were reverted
back to cash
at year-end.

4.1 Paragraph 15 of PAS 1 provides:

Financial statements shall present fairly the financial position, financial


performance & cash flows of an entity. Fair presentation requires the
faithful representation of the effects of transactions, other events &
conditions in accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the Framework. Xxx.

4.2 The CFFR enumerates faithful representation as one of the qualitative


characteristics of a useful financial information. As stated under QC12, “To be a
perfectly faithful representation, a depiction would have three characteristics. It
would be complete, neutral and free from error”.

4.3 As of December 31, 2019, the Cash and Cash Equivalents account had a
balance of P14.840 billion. Audit of the account disclosed various deficiencies
discussed as follows:
Variance between the balances per books and the
confirmed bank balances of the OF accounts and Main
account in the total amount of P46.138 million

4.4 Examination of the balances per books and the balances confirmed by the
corresponding depository banks of the OF and Main accounts of the PCSO
disclosed a total discrepancy of P46.138 million, as can be gleaned from Table
3.

Table 3 – Discrepancy between the Balances per Book and Confirmed Balances
Of the Cash-in-Bank – OF and Main Accounts
As of December 31, 2019

Balance per Bank


Confirm
Account Title Account Number ation Balance per Books Discrepancy
Main Account
CIB-LC-SA- CURRENT ACCOUNT- LBP - 3102-1000-09 P 243,514,925.05 P 243,059,213.15 P 455,711.90
LBP (E. RODRIGUEZ AVE.)
CIB-LC-SA- AGENTS SAVINGS PNB - 3742-5360-0014 60,253.83 2,457,707.74 (2,397,453.91)
ACCOUNT
OF Account
CIB-LC-CA- OPERATING FUND- LBP - 3102-1000-33 747,135,004.58 716,657,333.92 30,477,670.66
LBP (E. RODRIGUEZ AVE.)
CIB-LC-CA-OPERATING LBP - 3102-1005-64 211,461,577.37 193,859,180.75 17,602,396.62
FUND(LBP)-STL REMITTANCES

95
Balance per Bank
Confirm
Account Title Account Number ation Balance per Books Discrepancy
TOTAL P 1,202,171,760.83 P 1,156,033,435.56 P 46,138,325.27

4.5 Verification of the BRSs for CY 2019 for the subject accounts disclosed that the
said discrepancy pertained to unadjusted book and bank reconciling items
totaling P47.085 million and P0.947 million, respectively, details shown in Table
4.

Table 4 – Summary of Book and Bank Reconciling Items


As of December 31, 2019

Erroneous Recording of Unrecorded


Year Fund Transfers Deposits/DM/CM Errors in Posting Total
2006 P - P - P (285,732.10) P (285,732.10)
2008 - 130,724.09 22,314.52 153,038.61
2009 - 15,200.00 (3,801.40) 11,398.60
2010 - (525.00) 1,660.00 1,135.00
2011 - - (0.50) (0.50)
2012 - 27.91 (19.06) 8.85
2013 11,260,808.00 21,656.04 - 11,282,464.04
2014 2,316,685.85 0.02 200,422.30 2,517,108.17
2015 9,937,363.21 6,466,503.17 - 16,403,866.38
2016 1,255,000.00 (48,674.20) - 1,206,325.80
2017 (296,400.01) 314,742.54 18,699.00 37,041.53
2018 2,608,274.55 555,275.39 84,143.35 3,247,693.29
2019 3,528,832.60 1,396,949.55 7,585,188.89 12,510,971.04
Total P 30,610,564.20 P 8,851,879.51 P 7,622,875.00 P 47,085,318.71

Year Outstanding Checks Unposted Deposits Errors Total


2006 P - P - P (200.00) P (200.00)
2008 - - - -
2009 - - (7,748.00) (7,748.00)
2010 - - 353,393.52 353,393.52
2011 - - (6,727.50) (6,727.50)
2012 - 581,638.95 (107,860.95) 473,778.00
2013 - 4,612.50 49,436.78 54,049.28
2014 - 3,014,943.00 (3,736,128.70) (721,185.70)
2015 - 10,994,404.55 (9,970,667.56) 1,023,736.99
2016 - 201,818.14 (66,936.90) 134,881.24
2017 - 17,856,619.75 (16,976,499.81) 880,119.94
2018 - 79,389.45 (3,854.11) 75,535.34
2019 (1,319,669.83) - 7,000.00 (1,312,669.83)
Total P (1,319,669.83) P 0 P (30,466,793.23) P 946,963.28

4.6 Based on Table 4, it was also noted that there were book reconciling items that
were already identified in the prior years’ BRSs dated 1 to 13 years ago, but no
action had been taken by Management to adjust the corresponding Cash in Bank
and other affected accounts. Accordingly, the same remained reconciling items
to date.

4.7 The unposted deposits in the total amount of P32.733 million for the period 2012-
2018 that remained unadjusted could have been corrected by the bank had the
concerned PCSO personnel promptly brought the matter to the bank’s attention

96
considering the substantial amount involved and the length of time that these
have remained unposted.

4.8 The same audit observations were already noted in prior years and were
included in the respective Annual Audit Reports (AARs); however, book and
bank reconciling items pertaining to CYs 2006 to 2018 transactions in the total
amounts of P34.574 million and P2.260 million, respectively, remained
unadjusted as of December 31, 2019.

Variance of P61.861 million between the balances per


books and the confirmed bank balances of the Charity
Fund (CF), Prize Fund (PF) and Small Town Lottery
(STL) remittances accounts

4.9 Results of confirmation of the balances of the accounts with the various
depository banks maintained for the CF, PF and STL Remittances as of
December 31, 2019 disclosed net discrepancies of P61.861 million when
compared with the balances reflected in the financial statements as of the same
date, details shown in Table 5.

4.10 Further, verification of the BRSs for the subject accounts as of December 31,
2019 revealed that the above-stated net discrepancies were caused by book
reconciling items from CYs 2012-2019, which remained unadjusted in the books,
details presented in Table 6.

Table 5 – Comparison of the Balances per Books and per Bank Confirmations
As of December 31, 2019

Balance per Bank Net


Account No. Confirmation Balance per Books Discrepancy
LBP Acct No. 3102-1005-56
(STL Remittance – Charity Fund) P 460,322,264.21 P 430,673,471.51 P 29,648,792.70
LBP Acct No. 3102-1000-17
(Prize Fund) 3,920,793,996.41 3,895,982,213.73 24,811,782.68
LBP Acct No. 3102-1000-25
(Charity Fund) 7,947,750,736.56 7,933,970,110.59 13,780,625.97
LBP Acct No. 3102-1006-10
(STL Remittance – Prize Fund) 99,067,611.71 105,446,385.03 (6,378,773.32}
LBP Acct No. 3102-1006-61
(Charity Fund – Peryahan) 14,490,914.03 14,491,514.03 (600.00)
LBP Acct No. 3102-1006-70
(Prize Fund- Peryahan) 1,922,564.72 1,923,164.72 (600.00)

P 12,444,348,087.64 P 12,382,486,859.61 P 61,861,228.03

Table 6 – Summary of Unadjusted Reconciling Items for CYs 2012-2019


As of December 31, 2019

97
Unrecorded Fund Difference in
Erroneous
Collections Transfers the amount of Unrecorded
Recording of
/Deposits from PDOs remittance Debit Memos
disbursements
(CY 2015- (CY 2013- (CY 2012- (CY 2018-2019)
(CY 2015-2019)
Account No. 2019) 2019) 2019) Total
LBP Acct No.3102-
1005-56 (STL P 6,955,824.49 P P(1,201,492.98 P23,947,180.45 P (52,719.26) P29,648,792.70
Remittance – )
Charity Fund)
LBP Acct No. 3102-
1000-17 (Prize 1,032,556.55 16,720,603.73 - 7,058.622.40 - 24,811,782.68
Fund)
LBP Acct No. 3102-
1000-25 (Charity - 6,909,559.34 - 6,871,066.63 - 13,780,625.97
Fund)
LBP Acct No.
3102-1006-10 (STL 4,536,527.79 1,059,003.89 (11,974,305.00) (6,378,773.32)
- -
Remittance -Prize
Fund)
LBP Acct No.
3102-1006-61
- - - - (600.00) (600.00)
(Charity Fund-
Peryahan)
LBP Acct No. 3102-
1006-70 (Prize
- - - - (600.00) (600.00)
Fund-Peryahan)

P12,524,908.83 P23,630,163.07 P(142,489.09) P25,902,564.48 P(53,919.26) P61,861,228.03

4.11 It was noted that the above-stated discrepancies dated back from CY 2012 were
already identified by the concerned Accounting personnel. However, no action
had been taken to adjust the corresponding Cash in Bank and other affected
accounts, hence, remained as reconciling items to date.

Closed accounts still having outstanding balances in the


books amounting to P12.020 million and P39.280 million
(negative)

4.12 Verification disclosed that the Cash in Bank–Local Currency account included
the balance of P12.020 million of Philippine National Bank (PNB) account no.
121270002159 maintained by the PCSO with the PNB Mandaluyong Shaw-
Princeton Branch, which was already closed in September 2018. Further
verification disclosed that the subject balance consisted of long-outstanding book
reconciling items relating to CYs 2013-2016 fund transfers from branch offices,
which remained unadjusted as of December 31, 2019.

4.13 The same observation was already brought to the attention of Management
during the CY 2018 audit, but the said closed account still had a remaining
balance of P12.020 million as of year-end resulting in the overstatement of the
Cash and Cash Equivalents account presented in the financial statements as of
December 31, 2019 by the same amount.

4.14 Likewise, two (2) current accounts maintained by the PCSO with the PNB
Mandaluyong Shaw-Princeton Branch for the Prize Fund and Charity Fund were
already closed on January 4, 2019 and September 5, 2018, respectively.

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Verification of the accounting records, however, disclosed that the same have
still negative balances in the books in the total amount of P39.280 million as of
December 31, 2019, details shown in Table 7.

Table 7 – Closed Bank Accounts with Negative Balances


As of December 31, 2019

Account Description Balance per Books Date Closed


PNB Acct No. 121270002148 (Prize Fund) P(21,587,026.12) January 4, 2019
PNB Acct No. 121270002171 (Charity Fund) (17,693,481.63) September 5, 2018
P(39,280,507.75)

4.15 The above-mentioned negative balances reduced the aggregate balance of the
Cash and Cash Equivalents account presented in the financial statements as of
December 31, 2019 by the same amount.

Variance of P3.377 million between the balances per


books and the confirmed bank balances of the bank
accounts maintained with the LBP that was not
reconciled due to non-preparation of the monthly BRSs

4.16 Verification disclosed that the required monthly BRSs were not prepared for the
Cash in Bank accounts maintained with the LBP, specifically account numbers
3101-0076-25 and 3102-1006-53.

4.17 Examination of Accounting records showed that bank account numbers 3101-
0076-25 and 3102-1006-53 had a total book balance of P189.855 million and
total confirmed bank balance of P193.232 million, thus having a total discrepancy
of P3.377 million.

4.18 The non-preparation by the concerned ABD personnel of the required BRSs
resulted in the non-reconciliation of balances and errors and unrecorded
transactions, if any, were not immediately determined, corrected and/or adjusted
accordingly.

Checks totaling P1.550 million already presented to and


cleared by the bank were erroneously included as
unreleased checks that were reverted back to cash
at year-end

4.19 Verification of the Accounting records showed that a journal entry was made on
December 31, 2019 by the ABD to record the restoration of the Operating Fund’s
unreleased checks in the total amount of P148.799 million to the Cash in Bank
account and to the corresponding liability account based on the Treasury
Department’s Schedule of Available Checks for Release (Operating Fund) as of
December 27, 2019.

4.20 Further verification, however, revealed that it included issued checks totaling
P1.550 million which were already cleared by the bank and debited from the
PCSO’s bank account during the months of November and December 2019.

99
Consequently, both the Cash and Cash Equivalents and Accounts Payable
accounts were overstated by P1.550 million.

4.21 In summary, due to the above-mentioned deficiencies, the faithful representation


of the balance of the Cash and Cash Equivalents account of P14.840 billion in
the financial statements as of December 31, 2019 was not established and
affected related accounts in the financial statements.

4.22 We recommended and Management agreed to direct the concerned


Accounting personnel to:

a. Effect the necessary adjustments, after a thorough verification of the


book reconciling items for each of the subject bank accounts, in order
to present fairly the balance of the Cash in Bank account in the
financial statements;

b. Intensify the efforts in coordinating with the corresponding


depository banks to thresh out the details of the bank reconciling
items and investigate the cause/s of the alleged unposted deposits
totaling P32.733 million under the Operating Fund accounts so that
appropriate action may be taken thereafter;

c. Effect the necessary adjusting entries, after a thorough verification of


the long-outstanding reconciling items, in order to correct the P12.020
million overstatement of the Cash and Cash Equivalents account and
the negative balance of P39.280 million, which pertained to book
balances of closed PNB accounts;

d. Effect the necessary adjusting entries that will correct the P1.550
million overstatement of the Cash and Cash Equivalents and
Accounts Payable accounts as of December 31, 2019 brought about
by the erroneous entry reverting back to cash the issued checks that
were already cleared by the concerned depository banks at year-end;
and

e. Ensure the timely preparation of monthly BRSs for all the bank
accounts of the PCSO to facilitate prompt reconciliation of
discrepancies.

4.23 Management informed that the following adjustments in the books of accounts
totaling to P4.366 million were already made:

a. LBP Account No. 3102-1000-17 (111-J) - for the 2019 book reconciling
items, P986,806.55 was adjusted in July 2020.

b. LBP Account No. 3102-1005-56 (111-U) - for the 2019 book reconciling
items, P2,840,877.88 was adjusted and recorded to its appropriate account
in January 2020.

100
c. LBP Acct No. 3102-1006-10 (111-R1) - for the 2019 book reconciling items,
P538,499.27 was adjusted and recorded to its appropriate account in
January 2020.

d. For the following bank account numbers, the ABD will prepare the
necessary BRSs since these are newly opened accounts:

 LBP 3102-1006-61
 LBP 3102-1006-70

4.24 Management further informed that a thorough review of BRSs and verification of
reconciling items will be conducted to resolve the discrepancies between bank
and book balances. All identified reconciling items will be adjusted immediately.
For the reconciling items concerning branch offices, the ABD will coordinate with
the said branch to get the supporting documents and effect the adjustments.
They also intend to create a Reconciliation Team whose main focus is to resolve
reconciling items and preparation of BRSs which will address these issues. A
thorough evaluation of the remaining cash accounts with abnormal balances will
be conducted to address the discrepancies. For the reconciling items relating to
CYs 2013-2016 concerning the fund transfers, these are to be verified and
coordinated to branch offices and to get the supporting documents and effect the
adjustments.

5. The faithful representation of the effects of the transactions relating to the


Accounts Receivable (AR) account having a balance of P1.096 billion, net of
Allowance for Impairment of P163.864 million, as of December 31, 2019 was not
established due to various deficiencies enumerated below, contrary to Paragraph
15 of the PAS 1 and QC12 of the CFFR:

a. Abnormal (credit) balances of four (4) AR sub-accounts totaling P681.735


million;

b. Variance in the total amount of P466.230 million between the account


balances per General Ledger (GL) and the Aging Schedule resulting from
prior period errors in posting of transactions; and

c. Twelve (12) AR sub-accounts totaling P72.089 million cannot be validated


due to absence of complete supporting subsidiary ledgers, schedules and
the corresponding aging schedule.

5.1 Paragraph 15 of PAS 1 provides:

Financial statements shall present fairly the financial position, financial


performance & cash flows of an entity. Fair presentation requires the
faithful representation of the effects of transactions, other events &
conditions in accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the Framework. Xxx.

101
5.2 The CFFR enumerates faithful representation as one of the qualitative
characteristics of a useful financial information. As stated under QC12, “To be a
perfectly faithful representation, a depiction would have three characteristics. It
would be complete, neutral and free from error”.

Abnormal (credit) balances of four (4) AR sub-accounts


totaling P681.735 million

5.3 Analysis of the composition of the AR account disclosed that four (4) out of the
18 sub-accounts reflected abnormal (credit) balances aggregating P681.735
million, broken down as follows:

Table 8 – Schedule of AR accounts with abnormal (credit) balances


As of December 31, 2019

Balance as of
Account Code Account Name December 31, 2019
10301010-00-001-000007 Accounts Receivable-Sales Supervisor P ( 76,181.54)
10301010-00-001-000010 Accounts Receivable-Others ( 338,530.00)
10301010-00-002-000001 Accounts Receivable-Ticket Sales-Lotto (658,685,952.04)
10301010-00-002-000002 Accounts Receivable-Ticket Sales-Lotto ( 22,634,164.99)
P (681,734,828.57)

5.4 The concerned Accounting personnel explained that the said abnormal balances
were due to prior years’ errors in the posting of transactions, which originated
from the Branch Offices, that remained unreconciled and unadjusted as of
December 31, 2019.

Variance in the total amount of P466.230 million between


the account balances per GL and the Aging Schedule
resulting from prior period errors in posting of transactions

5.5 Examination of the balances reflected in the submitted Aging of AR with the
corresponding GL balances revealed significant discrepancies in the total amount
of P466.230 million, as shown in Table 9.

Table 9 – Discrepancies between the balances of AR Sub-accounts


per GL and per submitted Aging of AR
As of December 31, 2019

Outstanding Balance as of December 31, 2019


Per Submitted
Game Account Code Per GL Aging of AR Variance
AR – Lotto 10301010-00-001-000012 P (625,843,450.21) P 289,054,326.15 P (914,897,776.36)
10301010-00-002-000001
10301010-00-002-000002
AR – Keno 10301010-00-003-000001 1,066,642,726.80 18,769,318.79 1,047,873,408.01
AR – STL 10301010-00-004-000001 679,219,543.90 375,715,233.02 303,504,310.88
AR - Mini 5,368,833.32 19,000.00 5,349,833.32
10301010-00-001-000001
Sweepstakes

102
AR - Peryahan * 10301010-00-005-000001 61,918,166.53 37,518,275.90 24,399,890.63

Total P 1,187,305,820.34 P 721,076,153.86 P 466,229,666.48


* Comparison of balances for AR-Peryahan pertains only to the balances for NCL, STBR and VisMin branches
since the Aging of AR-Peryahan (NCR) was not submitted

5.6 Generally, the AR balance reflected in the corresponding aging schedules should
agree with the book balance of the AR sub-accounts since aging schedule
merely provides information on the age of the recorded receivables per
agent/debtor. It was noted, however, that the balances of the AR sub-accounts
per GL, as shown in Table 9, were greater by P466.230 million when compared
with the balances per Aging of AR.

5.7 Validation revealed that the Aging of the AR was prepared by the Branch
Operations Sector (BOS) and not the ABD since it is the former that monitors the
individual agent’s account. The concerned personnel of the National Capital
Region (NCR) Department, BOS, further informed that the Aging of AR from the
agents in the NCR were prepared based on the subsidiary ledgers maintained by
them. The concerned ABD personnel, on the other hand, explained that the
discrepancies noted were due to prior period errors in the posting of transactions
which remained unreconciled and unadjusted as of December 31, 2019

Twelve (12) AR sub-accounts totaling P72.089 million


cannot be validated due to absence of complete
supporting subsidiary ledgers, schedules and the
corresponding aging schedule

5.8 Section 41(2) of Presidential Decree (PD) No. 1445 provides: “The chief
accountant or the official in charge of keeping the accounts of a government
agency shall submit to the Commission year-end trial balances and such other
supporting or subsidiary statements as may be required by the Commission not
later than the fourteenth day of February xxx.”

5.9 Section 3.1 of COA Circular No. 2015-004 dated July 16, 2015 further requires
the Chief Accountant/ Head of Accounting Unit to submit directly to then COA
Government Accountancy Office (GAO), now Government Accountancy Sector
(GAS), and to the Supervising Auditor (SA)/Audit Team Leader (ATL) concerned,
the Statement/Aging of Receivables, together with other required year-end
financial statements and other related financial reports/schedules in accordance
with the existing format and in printed and digital copies on or before February
14 of each year.

5.10 Verification, however, revealed that the AR sub-accounts with balances totaling
P72.089 million, details presented in Table 10, were not properly supported with
complete subsidiary ledgers, schedules and the corresponding aging schedule.

Table 10 - AR Sub-accounts not properly supported


As of December 31, 2019

103
Balance as of
Account Code Account Description December 31, 2019
10301010-00-006-000001 Accounts Receivable-Powerball-Instant Sweepstakes Scratch It P 4,718,891.79
10301010-00-001-000002 Accounts Receivable-Authorized Sellers 9,463,261.58
10301010-00-001-000003 Accounts Receivable-Defaulted Authorized Sellers 378,204.24
10301010-00-001-000004 Accounts Receivable-Special Draw 3,758,287.32
10301010-00-001-000005 Accounts Receivable-Provincial Distributors/Sales Representative 1,003,059.90
10301010-00-001-000006 Accounts Receivable-Defaulted Provincial Distributors 37,141,973.50
10301010-00-001-000007 Accounts Receivable-Sales Supervisor (76,181.54)
10301010-00-001-000008 Accounts Receivable-Defaulted Sales Supervisor 6,157,394.87
10301010-00-001-000009 Accounts Receivable-Ticket Account 3,888,407.19
10301010-00-001-000010 Accounts Receivable-Others (338,530.00)
10301010-00-001-000011 Accounts Receivable-Patner Tayo 9,568,698.00
10301010-00-005-000001 Accounts Receivable-Peryahan (NCR) (3,574,155.16)
P 72,089,311.69

5.11 The non-submission of the complete supporting schedules, subsidiary ledgers


and aging of the above-stated accounts despite the COA’s written requests
hindered the examination thereof. Likewise, alternative audit procedures cannot
be resorted to in view of inadequate accounting records. Consequently, the
fairness of presentation of the balances of the AR sub-accounts presented in
Table 10 cannot be established.
5.12 In view of the foregoing deficiencies, the faithful representation of the effects of
the transactions relating to the AR account having a balance of P1.096 billion,
net of Allowance for Impairment of P163.864 million, as of December 31, 2019
was not established.

5.13 We recommended that Management:

a. Direct the concerned Accounting personnel to: (i) conduct an


immediate thorough evaluation of the AR sub-accounts with
abnormal balances totaling P681.735 million; (ii) undertake closer
coordination with the concerned Branch officials and employees in
order to determine the specific cause/s thereof, and thereafter, effect
the necessary adjusting entries to bring the accounts to their normal
balances; and (iii) submit to the Audit Team the complete supporting
schedules, subsidiary ledgers and aging schedules for the AR sub-
accounts in the total amount of P72.089 million, pursuant to the
provisions of PD No. 1445 and COA Circular No. 2015-004.

b. Direct the ABD and the BOS to: (i) conduct thorough analysis of the
outstanding receivables due from each agent/debtor and reconcile
their records in order to determine the causes of the P466.230 million
variance between the balance per GL and the aging schedule of the
subject receivables; and (ii) effect the necessary adjusting entries
thereafter to ensure that the balance of the AR account presented in
the financial statements faithfully represents the effects of
transactions on the said account and properly supported with reliable
financial records.

104
5.14 Management informed that the following adjustments in the books of accounts
totaling P78.575 million were already made:

a. 10301010-00-001-000010
Accounts Receivable – Others - reclassified misposted transactions
aggregating net amount of P1,011,750 to the appropriate accounts on July
31, 2020.

b. 10301010-00-002-000002
Accounts Receivable – Ticket Sales – Lotto -Reclassification of entries due
to error in account code used aggregating an amount of P22,634,164.99
which were prepared and recorded in July 2020.

c. Accounts Receivable – STL - Reclassification of entries due to error in


responsibility code used aggregating an amount of P54,929,426.71 which
were prepared and recorded in August 2020.

5.15 Management further informed that ABD is now conducting thorough evaluation
on the remaining AR with abnormal balances in coordination with branch offices.
The PCSO will submit the complete supporting schedules, subsidiary ledgers
and aging schedules for the twelve (12) AR sub-accounts totaling P72.089
million.

6. The faithful representation in the financial statements of the balance of the


Property, Plant and Equipment (PPE) account in the carrying amount of P931.244
million as of December 31, 2019 could not be ascertained due to the following
deficiencies:

a. Net discrepancy of P151.273 million existed between the carrying amount


of depreciable PPE per books and the corresponding lapsing schedules;
and

b. Results of the actual physical count of various PPE comprising the Head
Office and the various Branch Offices disclosed material net discrepancy
of P157.311 million when compared with the balance per books of the PPE
account.

Net discrepancy of P151.273 million existed between the


carrying amount of depreciable PPE per books and the
corresponding lapsing schedules

6.1 Examination of the acquisition costs and the related accumulated depreciation of
the depreciable items of PPE as of December 31, 2019 disclosed a discrepancy
of P151.273 million between the amounts recorded in the books and the
supporting lapsing schedules, as summarized in Table 11.

Table 11 – Comparison of PPE amounts recorded per books


versus amounts per lapsing schedules

Balances Per
Particulars Books Lapsing Schedule Variance
Acquisition cost P 703,909,175.86 P 566,564,782.99 P 137,344,392.87

105
Balances Per
Particulars Books Lapsing Schedule Variance
Accumulated depreciation (364,945,232.26) (378,874,259.82) 13,929,027.56
P 338,963,943.60 P 187,690,523.17 P 151,273,420.43

6.2 Normally, the lapsing schedule should agree with the book balances of the
various items comprising the PPE account since it merely provides specific
accounting data such as original purchase cost, accumulated depreciation,
additions, and disposal for each item of PPE that were recorded in the books. It
was noted, however, that the balances of the depreciable items of PPE per
books were greater by P151.273 million, net of the related accumulated
depreciation, when compared with the balances reflected in the lapsing
schedules. The concerned accounting personnel informed that the noted
discrepancy was due to the absence of pertinent information needed for
inclusion in the lapsing schedule; hence, the same were just labelled as “For
Reconciliation”.

6.3 The same audit observation was already noted in prior years, but the balances of
the depreciable PPE per books and the corresponding lapsing schedules
remained unreconciled as of December 31, 2019. The existence of the above-
mentioned discrepancy of P151.273 million casts doubt on the fairness of
presentation of the balances of the depreciable items of PPE in the financial
statements as of December 31, 2019.

Results of the actual physical count of various PPE


comprising the Head Office and the various Branch
Offices disclosed material net discrepancy of P157.311
million when compared with the balance per books of the
PPE account

6.4 Likewise, comparison of the balances reflected in the Physical Inventory Report
as of December 31, 2019 with the corresponding balances per books as of the
same date disclosed a discrepancy of P157.311 million, details in Table 12:

Table 12 – Variance between Balance per Books and Balance per Inventory Report
As of December 31, 2019

Balance Per
Accounts Books Inventory Report Variance
Office equipment P 169,967,740.52 P 37,408,475.83 P 132,559,264.69
Information & communication 109,689,027.46 100,482,931.71 9,206,095.75
Technology equipment
Communication equipment 8,776,917.61 3,654,547.58 5,122,370.03
Military, police & security equipment 1,474,829.96 172,410.00 1,302,419.96
Medical equipment 16,268,645.68 8,586,118.00 7,682,527.68
Printing equipment 102,682,475.60 100,114,881.00 2,567,594.60
Motor vehicles 170,327,886.26 176,131,904.48 (5,804,018.22)
Furniture & fixtures 10,879,274.54 6,702,581.73 4,176,692.81
Books 70,000.00 54,520.00 15,480.00
Other property, plant & equipment 17,710,550.08 17,227,878.44 482,671.64
Total P 0 P 0 P 157,311,098.94

106
6.5 Physical stock-taking is an indispensable procedure not only to check the
integrity of property custodianship, but also to ascertain the reliability and
propriety of the account balances. Hence, the physical inventory report must be
reconciled with the Accounting records. The existence of a material discrepancy
of P157.311 million between the results of the physical inventory and the
corresponding balances per books casts doubt on the fairness of presentation of
the balance of the PPE account in the financial statements as of December 31,
2019.

6.6 We reiterated our prior years’ recommendation that Management direct the
concerned Accounting personnel to: (a) conduct an immediate
reconciliation of the balances per books with the balances in the
corresponding lapsing schedules to determine the causes of discrepancy
of P151.273 million as of December 31, 2019; and (b) thereafter, effect the
necessary adjusting entries to correct the balances of the affected
accounts so that the PPE account shall be fairly presented in the financial
statements.

6.7 We also recommended that Management:

a. Direct the concerned officials and employees to: (i) conduct


immediate reconciliation of the balance per books with the
corresponding balances per inventory report as of December 31, 2019
in order to determine the causes of the material net discrepancy of
P157.311 million as of December 31, 201; and (ii) thereafter, effect
necessary adjusting entries so that the balance of the PPE account
shall be fairly presented in the financial statements.

b. Conduct deeper investigation considering that the balance per books


was greater than the balance per physical count, which may indicate
missing items of PPE, and undertake the appropriate legal and/or
administrative actions under the circumstances.

6.8 Management explained that:

a. For CY 2016 up to the present, all newly purchased PPEs were already
being reconciled with the ASMD records. The PPE lapsing schedule
prepared by the ABD were mainly composed only of current purchases and
available/active inventory. Any differences between the accounted PPE in
the lapsing schedule versus the balance per book were labeled as “For
Reconciliation” since these were composed of PPEs from 2009 and below
which do not have any supporting documents and were lost due to frequent
transfer of PCSO office and fire incidents that happened in 2007 and 2010.

b. Compared with what was noted under COA AOM No. 19-023, the PPE
discrepancies decreased due to the recording of sale of unserviceable
properties and reconciliations made by the ABD and ASMD. The ABD and
ASMD will continue reconciling the PPE accounts, any
unreconciled/unidentified PPE due to transfer of office/fire incidents will be
reported to the Management for appropriate action.

107
7. The measurement of right-of-use asset and lease liability was not in accordance
with the Philippine Financial Reporting Standard (PFRS) 16 – Leases, resulting in
the overstatement of the Finance Lease Payable, Prepaid Rent and Depreciation
Expense accounts by P26.508 million, P24.631 million and P1.473 million,
respectively, and the corresponding understatement of Leased Assets,
Accumulated Depreciation, Interest Expense, Rent Expense and Retained
Earnings accounts by P97.512 million, P98.985 million, P1.063 million, P0.874
million and P0.868 million, respectively.

7.1 Paragraph 22 of PFRS 16, which took effect on or after January 1, 2019, states:
“at the commencement date, a lessee shall recognize a right-of-use asset and a
lease liability.”

7.2 Review of the contract of lease for office space and parking lots entered into by
PCSO with the Joint Venture of Sun Plaza Development Corporation, AP
Securities, Inc. and Conservatory Shaw Plaza, Inc. disclosed that it has a term of
three years commencing on January 1, 2018 and expiring on December 31,
2020. The total contract price for the lease was P310.591 million, inclusive of
Value Added Tax (VAT) and Association Dues, with an escalation rate of 5% per
annum, as summarized in Table 13:

Table 13 – Summary of Contract Price for the Lease of Office Space and Parking Lots
For the Period 2018-2020

Monthly Rental Fee


Period Rental per Annum
2018 P 8,210,190.24 P 98,522,282.88
2019 8,620,699.75 103,448,397.00
2020 9,051,734.74 108,620,816.88

Total P0

7.3 Section 4 of the said Contract of Lease provides that, immediately upon signing
of the contract, the PCSO shall pay the Lessor the amount of P24,630,570.72,
representing three months’ advance rental to be applied to the last three months
of the lease contract.

7.4 Examination of the Accounting records disclosed that the following entries were
made to recognize the right-of-use asset and lease liability as of December 31,
2019:

Table 14 – Accounting Entries made by PCSO to recognize the right-of-use asset and lease liability
as of December 31, 2019

Account
Code Debit Credit
1060802 P
Leased assets, buildings and other structures 0 100,457,763.87
5030102
Interest expense 0 8,166,381.42
5050108
Depreciation 0 100,457,763.87
Finance lease payable 2010107 P 105,633,512.16

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0
5029905
Rent expenses 0 103,448,397.00

7.5 Verification, however, revealed that the recognition of the lease payments in the
books of accounts was not in accordance with the provisions of PFRS 16,
resulting in the misstatements of the Finance Lease Payable, Prepaid Rent,
Depreciation Expense, Leased Assets, Accumulated Depreciation, Interest
Expense, Rent Expense and Retained Earnings accounts, in view of the
following:

a. Measurement of Lease Liability

7.6 Validation revealed that the incremental borrowing rate (IBR) used by PCSO for
the measurement of lease liability was based on the prevailing rate of 5.18% in
2019 for a five-year government security. The concerned personnel of the
Accounting and Budget Department (ABD) informed that the IBR was
determined based on the assumption that the PCSO will extend the lease for
another three years. While there was an assumption of lease extension for
another three years, which would modify the lease term to five years, the same
ABD personnel explained that the lease liability was determined based on the
present value (PV) of the remaining lease payments of two years because the
lease payments that will be required for the contract extension were not identified
in the contract.

7.7 Paragraph B34 of PFRS 16 states:

In determining the lease term and assessing the length of the non-
cancellable period of a lease, an entity shall apply the definition of a
contract and determine the period for which the contract is
enforceable. A lease is no longer enforceable when the lessee and the
lessor each has the right to terminate the lease without permission
from the other party with no more than an insignificant penalty.

7.8 Section 2 of the Contract of Lease provides that the lease shall be for a period of
three years, “subject to extension as may be agreed upon by the parties with at
least 60 days prior written notice, under the same terms, until PCSO shall have
awarded a new contract to the winning bidder, unless sooner terminated under
the conditions provided in this Agreement or as may be allowed by law.”

7.9 Clearly, the extension of the lease requires a mutual agreement of both parties,
hence, the contract shall be enforceable only until December 31, 2020. Using the
rate for a five-year government security as its IBR, based on the assumption that
PCSO will extend the lease for another three years, was not in conformity with
the above-stated provision under PFRS 16.

7.10 Likewise, Paragraph 26 of PFRS 16 states:

At the commencement date, a lessee shall measure the lease liability


at the present value of the lease payments that are not paid at that
date. The lease payments shall be discounted using the interest rate

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implicit in the lease, if that rate can be readily determined. If that rate
cannot be readily determined, the lessee shall use the lessee’s
incremental borrowing rate. (Underscoring supplied).

7.11 It was noted, however, that in the determination of the PV of the remaining lease
payments, PCSO included the months of October, November and December
2020 to which the advance payment of P24,630,570.72 (already paid upon
signing of the contract) shall be applied. In effect, the lease liability was
measured for the period January 2019 until December 2020 when in fact the
lease liability should only be for 21 months, that is, from January 2019 up to
September 2020.

b. Measurement of Right-of-Use Asset

7.12 On the measurement of the right-of-use asset, Paragraphs 23 and 24 of PFRS


16 provide:

23. At the commencement date, a lessee shall measure the


right-of-use asset at cost.

24. The cost of the right-of-use asset shall comprise:

(a) the amount of the initial measurement of the lease


liability, as described in paragraph 26;

(b) any lease payments made at or before the


commencement date, less any lease incentives
received xxx.

7.13 Considering that the cost of the right-of-use asset includes the initial
measurement of lease liability, the effects of the errors noted in the
measurement of lease liability were carried over to the measurement of the
asset.

7.14 Paragraph 30(a) of the same Standard further states that to apply the cost
model, a lessee shall measure the right-of-use asset at cost less any
accumulated depreciation and any accumulated impairment losses. Validation,
however, revealed that the right-of-use asset was not measured at cost, instead,
the amount of leased asset recognized in the books was net of the accumulated
depreciation of P100.458 million. Thus, while there was a recognition of
depreciation expense, the corresponding accumulated depreciation was not
recorded in the books.

c. Adjustment of Rent Expense

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7.15 Under the finance lease, the lease payments shall be recognized as interest
expense and a reduction to the lease liability, thus, the rent expense recognized
in CY 2019 had to be adjusted. Verification revealed that the amount of rent
expense that was credited upon initial recognition of the lease liability was
P103.448 million, while the rent expense recognized in CY 2019 that needs to be
adjusted was P102.574 million, resulting in a discrepancy of P0.874 million, see
details in Table 15.

Table 15 – Breakdown of the P0.874 million discrepancy noted in


the Rent Expense account upon recognition of Lease Liability

Particulars Amount
Overpayment made in CY 2018 that was applied to the CY 2019 lease payments was recognized in the
books as a reduction to Rent Expense account instead of making an adjustment to Retained Earnings P 868,122.78
Unpaid CY 2019 rent was not recorded in the books 6,221.61

Total P 0

7.16 For purposes of measuring the lease liability and right-of-use asset as of
December 31, 2019, the Audit Team used the 7.061% rate for a two-year
corporate security posted at the PDS Group website, with an issue date of
December 7, 2018 and maturity date of December 7, 2020, as the IBR since the
corporate security has a term of two years which was similar to the remaining
lease term for the lease of PCSO’s office space and parking slots. Thus, the
entries to record lease liabilities and right-of-use assets should have been as
follows:

Debit Credit

To Record Finance Lease Asset and Liability


Leased Assets, Buildings and Other Structures P 197,969,594.70
Finance Lease Payable P 173,339,023.98
Prepaid Rent 24,630,570.72

To record Depreciation of Leased Assets


Depreciation Expense - Lease Assets P 98,984,797.35
Accumulated Depreciation - Leased Assets P 98,984,797.35

To record lease payments for CY 2019


Finance Lease Payable P 94,219,385.26
Interest Expense 9,229,011.74
Rent Expense P 102,574,052.61
Retained Earnings 868,122.78
Finance Lease Payable 6,221.61

7.17 The misapplication of PFRS 16 resulted in the overstatement of Finance Lease


Payable, Prepaid Rent and Depreciation Expense accounts by P26.508 million,
P24.631 million and P1.473 million, respectively, and the corresponding
understatement of Leased Assets, Accumulated Depreciation, Interest Expense,
Rent Expense and Retained Earnings accounts by P97.512 million, P98.985
million, P1.063 million, P0.874 million and P0.868 million, respectively.

7.18 We recommended that Management direct the concerned Accounting


personnel to effect the necessary adjusting entries to correct the

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erroneous entries made on the transition from operating lease to finance
lease in accordance with PFRS 16 as well as to correct the misstatements
in various accounts.

7.19 Management informed that the subject misstatements have been corrected in
the August 2020 Financial Statements.

7.20 As a rejoinder, the Audit Team has still to validate the adjusting/correcting entries
made in the August 2020 Financial Statements of PCSO.

B. OTHER OBSERVATIONS

8. Seventeen (17) beneficiaries/recipients of the financial assistance for the


procurement of medical equipment in the total amount of P206.286 million were
unable to submit the Terminal Financial and Accomplishment Reports required
under the Memorandum of Agreement (MOA) executed with the PCSO as well as
the Terminal/Liquidation Reports provided under Section E.4 of the Implementing
Guidelines of the Financial Assistance for the Procurement of Medical Equipment
Program, hence, it cannot be determined whether the financial assistance was
spent by the concerned beneficiaries for the purpose this was given. Likewise, the
Disbursement Vouchers (DVs) for the grant of medical equipment assistance to
eight (8) beneficiaries/recipients during CY 2019 amounting to P105.328 million
were processed despite the absence of certified copies of Abstract of Bids duly
signed by the Bids and Awards Committee (BAC) Members and certified true
copies of the Purchase Orders (POs) or Contracts, contrary to Section D.1 of the
Financial Assistance for the Procurement of Medical Equipment Program
Implementing Guidelines.

8.1 The MOA entered into by the beneficiaries/recipients of the financial assistance
for the procurement of medical equipment with the PCSO states:

The beneficiary shall submit to the PCSO a Terminal Financial and


Accomplishment Report within ninety (90) days from receipt of the
financial assistance or purchase of the medical equipment, whichever
comes earlier, with Credit Notice from in-house Commission on Audit
(COA).

8.2 Likewise, Section E.4 - Implementation, Monitoring and Liquidation of the


Implementing Guidelines for Financial Assistance for the Procurement of Medical
Equipment Program provides:

The beneficiary shall submit a Terminal/Liquidation Report within forty-


five (45) days from the completion of the delivery as stated in the
Purchase Order or Contract. This must be supported by the following
documents:

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a) Certified copy of the official receipts;
b) Certificate of Inspection;
c) Certificate of Acceptance by the end-user;
d) COA Credit Notice; and
e) Photos of the installed medical equipment within the institution.

8.3 Verification, however, disclosed that 17 recipients/beneficiaries of the financial


assistance for the said program of the PCSO in the total amount of P206.286
million, breakdown shown in Table 16, have not submitted the required Terminal
Financial and Accomplishment Reports and Terminal/Liquidation Reports as of
December 31, 2019, which was an utter disregard of the above-stated
requirements. In the absence of the said reports, it cannot be determined
whether the financial assistance granted to the concerned
beneficiaries/recipients was spent for the purpose this was given.

Table 16 – Summary of Beneficiaries/Recipients which have not submitted


the Terminal Financial and Accomplishment Report
and Terminal/Liquidation Report
As of December 31, 2019

Year Number of Total Amount


Granted Beneficiaries/Recipients Granted
2017 3 P 33,675,000.00
2018 5 76,664,000.00
2019 9 95,946,975.00
Total 17 P 206,285,975.00

8.4 Moreover, Section D.1 of the Implementing Guidelines of the PCSO Financial
Assistance for the Procurement of Medical Equipment Program provides:

(1) The following shall form part of the documentary requirements for
the processing of the Disbursement Voucher:

a) Signed MOA,
b) Notice of Award,
c) Certified copy of the Abstract Bids duly signed by the BAC
Members; and
d) Certified true copy of the Purchase Order (PO) or Contract.

8.5 Verification, however, disclosed that the DVs for the grant of medical equipment
assistance to eight (8) beneficiaries/recipients during CY 2019 amounting to
P105.328 million were processed despite the absence of certified copies of
Abstract of Bids duly signed by the BAC Members and certified true copies of the
Purchase Orders (POs) or Contracts, contrary to the above-stated requirements,
details presented in Table 17.

Table 17 - Disbursements for Medical Equipment Assistance


With lacking supporting documents

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Lacking Document (x)
Certified True Copy of the Certified True
Abstract of Bids duly Copy of
Check signed by the BAC Purchase Order
No. Date Payee Amount Members or Contract
381204 3/18/2019 PAF TRUST LIABILITIES- AIRFORCE
P 28,880,000.00 x x
GENERAL HOSPITAL
381206 3/18/2019 PAF TRUST LIABILITIES-AIRFORCE CITY
19,440,000.00 x x
HOSPITAL CLARK AIRBASE PAMPANGA
381205 3/18/2019 PAF TRUST LIABILITIES- BASA AIRBASE
19,440,000.00 x x
HOSPITAL
375141 1/15/2019 LUIS HORA MEM. REGIONAL HOSP. 13,875,000.00 x √
381927 3/20/2019 NORTHERN CAGAYAN DISTRICT
10,000,000.00 √ x
HOSPITAL
381202 3/18/2019 COLLECTING OFFICER, FCPA - KUTA
MAJOR CESAR L. SANG-AN STATION 6,691,875.00 x x
HOSPITAL
381201 3/18/2019 COLLECTING OFFICER, FCPA -ARMY
3,834,300.00 x x
GENERAL HOSPITAL
381203 3/18/2019 COLLECTING OFFICER, FCPA - CAMP
GENERAL MATEO CAPINPIN ARMY 3,166,900.00 x x
STATION HOSPITAL
  TOTAL P105,328,075.00    
x – unsubmitted
√ - submitted

8.6 We recommended that Management cause the immediate submission of


the:

a. Terminal Financial and Accomplishment Reports required under the


MOA as well as the Terminal/Liquidation Reports required under
Section E.4 of the Implementing Guidelines for the subject program
by the concerned beneficiaries/recipients in order to properly monitor
and determine whether the financial assistance granted was utilized
for the purpose it was given as well as to ensure that there was no
wastage of government resources; and

b. Certified true copies of the Abstract of Bids duly signed by the BAC
Members and certified true copies of the POs or Contracts required
under Section D.1 of the Implementing Guidelines for the Financial
Assistance for the Procurement of Medical Equipment Program to
support the corresponding DVs processed and approved pertaining
to the grant of the financial assistance to eight (8)
beneficiaries/recipients. Otherwise, the transactions shall be
suspended in audit for lack of necessary supporting documents.

8.7 Management informed that of the enumerated 17 beneficiaries of the Financial


assistance for the Procurement of Medical Equipment Program for CYs 2017 to
2019, four (4) have already submitted the Financial Liquidation reports as of July
2020. Despite several Letters of Reminder and Demand Letters from the Legal
Department, the remaining 13 beneficiaries have not submitted their Financial
Liquidation Reports. Continuous and constant follow-up of the full liquidation of

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the Abra Provincial Hospital and Philippine National Red Cross Quezon, Lucena
Chapter, as well as the submission of Financial Liquidation Report and the
Terminal Financial Accomplishment Report for all non-compliant beneficiaries
and that corrective actions are being done/undertaken to properly monitor the
utilization of assistance. The CAD submitted the Certified Copies of the Abstract
of Bids duly signed by the BAC members and Purchase Orders of Contracts of
the eight (8) hospital recipients listed in the audit observation.

9. The implementation of the Ambulance Donation Program of the PCSO,


particularly those pertaining to the 221 units of ambulance released to the
approved beneficiaries/recipients during CY 2017 disclosed the following
deficiencies:

a. Recipients of the thirteen (13) units of ambulance did not cover the said
vehicles with comprehensive insurance to answer for any damage
sustained or caused by these to any third party, contrary to the
requirement under Section 2, Article III of the Deed of Donation (DOD);

b. Forty-one (41) beneficiaries did not submit to the Assets and Supply
Management Division (ASMD) of the PCSO a report on the utilization of the
donated ambulance units as required under Section 3, Article III of the
DOD; and

c. Fifteen (15) donated ambulances have not been put into operation for a
long period of time due to various engine problems, defeating the purpose
for which these were given.

Recipients of the 13 units of ambulance did not cover the


said vehicles with comprehensive insurance to answer for
any damage sustained or caused by these to any third
party, contrary to the requirement under Section 2, Article
III of the DOD

9.1 Section 2, Article III of the DOD provides:

Section 2. The DONEE shall have the vehicle covered by a yearly


comprehensive insurance based on its current value to answer for any
damage sustained or caused by it to any third party xxx

9.2 Results of confirmation with the one hundred-one (101) beneficiaries of the
subject ambulance units disclosed that thirteen (13) donated units were not
covered with annual comprehensive vehicle insurance, contrary to the above-
mentioned provision.

9.3 Prior to the release of the ambulance units to the selected beneficiaries during
CY 2017, all units were registered with the Land Transportation Office (LTO) for
three (3) years and were covered already by a one-year comprehensive
insurance. However, thirteen of those who responded informed that the

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ambulance units they received were no longer covered with annual
comprehensive insurance after its expiration.

9.4 Considering that the ownership of the six (6) out of the said 13 units of
ambulance has not yet been transferred under the name of the beneficiaries, the
PCSO is faced with the risk of being sued for damages/penalties in case of
accidents or misuse by the beneficiaries thereof in the absence of a
comprehensive insurance coverage.

Forty-one (41) beneficiaries did not submit to the ASMD


of the PCSO a report on the utilization of the donated
ambulance units as required under Section 3, Article III of
the DOD

9.5 Section 3, Article III of the DOD requires the Donee to submit a semi- annual
report to the PCSO ASMD on the utilization of the PCSO donated ambulance
units. Verbal inquiry, however, disclosed that 41 beneficiaries did not submit the
said utilization reports as of May 2019. The concerned ASMD personnel
admitted that they did not strictly enforce compliance with the said requirement.

9.6 The utilization report to be submitted by the Donee shall enable PCSO to monitor
whether the ambulance unit was used exclusively and solely for emergency
medical services, as clearly stated in the DOD. In the absence of the said report,
PCSO shall have no basis of determining if the same was utilized for the
intended purpose.

Fifteen (15) donated ambulance units have not been put


into operation for a long period of time due to various
engine problems, defeating the purpose for which these
were given

9.7 Results of the ocular inspection conducted on one hundred-one (101) units of
donated ambulance disclosed that there were fifteen (15) units that were
defective; hence, these were not utilized for the intended purpose. Some of the
beneficiaries informed during the interview that repairs of the units took longer
period due to unavailability of spare parts especially those in the regions.

9.8 Review of the Special Condition of the Contract for the procurement of said
ambulance units disclosed that the Supplier guarantees the availability of
Original Equipment Manufacturer (OEM) spare parts and accessibility of repair
facilities for all ambulance units delivered nationwide for a period of seven (7)
years from the date of delivery. Likewise, the Supplier will provide complete
technical back-up whenever necessary, and practical back-up, i.e. provision of
loaner ambulance unit, if the ambulance unit delivered and brought in for repair
was not repaired within ten (10) working days due to unavailability of spare parts.

9.9 In case the Supplier will be unable to provide the PCSO and the beneficiaries of
the ambulance units with accessible and sufficient OEM spare parts and repair
facilities as required, the PCSO and/or concerned beneficiary may exhaust all

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reasonable legal remedies available for recovery of damages, as may be
applicable.

9.10 Had the PCSO, specifically the ASMD, properly monitored the conditions/status
of the donated ambulance units and properly informed the beneficiaries about
the terms/conditions pertaining to the repairs thereof as stipulated in the Special
Condition of the Contract with the Supplier, the donated ambulance could have
been repaired and put into operation the soonest possible time.

9.11 We recommended that Management:

a. Direct the concerned official to closely monitor compliance by the


Donees with Section 2, Article III of the DOD in order to ensure that
donated ambulance units are covered with the required annual
comprehensive insurance;

b. Direct the concerned personnel of the ASMD to ensure compliance by


the Donees with Section 3, Article III of the DOD, which requires the
submission of a semi-annual report to the ASMD on the utilization of
the PCSO donated ambulance units in order to determine whether the
said units were utilized for the intended purpose; and

c. Monitor all donated units of ambulance to determine their


status/conditions and assist/inform the beneficiaries with defective
units on how to coordinate with the concerned supplier/dealer of the
ambulances regarding the provisions under the Special Condition of
the Contract with the Supplier.

9.12 Management commented that they started the conduct of inspection of PCSO-
Donated Ambulances in CY 2018 as part of the monitoring functions delegated by
the Board under Resolution No. 0247, series of 2017 dated October 11, 2017 . It
covered the ambulance units procured from 2010 to 2017. During the
inspection, the units presented were checked by the ASMD personnel using a
Monitoring Tool. It sought to gather information about the vehicle, the
completeness of the medical accessories, the condition of the vehicle at the time
of inspection, the state of the ambulance decals and the utilization of the unit.
The beneficiaries/donees were also asked to submit the Ambulance Utilization
Report, photocopies of the OR/CR and Comprehensive Insurance to check if
they complied with the provisions stipulated in the DOD. After the conduct of
inspection, the beneficiaries that were observed to have committed a violation
were sent a letter requiring them to comply with the requirements under the
DOD. In summary, the ASMD and the Branch Offices are jointly monitoring the
ambulances donated by PCSO on top of their regular duties and functions.
Nonetheless, PCSO took note of the observations made by COA and will
strengthen and develop additional measures in order to strictly monitor the
beneficiaries’ compliance with the provisions set forth in the DOD.

10. Absence of provisions in the 2019 Revised Implementing Rules and Regulations
(RIRR) for the Small Town Lottery (STL) and the 2017 RIRR for the Instant

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Sweepstakes of the PCSO on the proper accounting and monitoring of the
allocation for printing costs retained by the Authorized Agent Corporations
(AACs) and the Instant Sweepstakes Authorized Corporation (ISAC) in the total
amount of P197.284 million during CY 2019 resulted in apparent absence of
internal control system that will ensure that government funds are safeguarded
against loss or wastage through illegal or improper disposition, contrary to
Section 2 of Presidential Decree (PD) No. 1445.

10.1 Verification of the Printing and Publication expense account totaling P197.541
million for CY 2019 disclosed that P197.284 million thereof pertained to the
amounts retained by the AACs and ISAC for the printing of STL and Instant
Sweepstakes tickets pursuant to the corresponding provisions embodied in the
2019 RIRR for the STL and the 2017 RIRR for the Instant Sweepstakes of the
PCSO, respectively.

10.2 Review of the said RIRRs, however, disclosed the absence of any provision on
the proper accounting and monitoring of the said allocation for printing costs
retained by the AACs and ISAC. Apparently, there are no controls in place to
ensure that government funds are safeguarded against loss or wastage through
illegal or improper disposition thereof, contrary to Section 2 of PD No. 1445,
which provides that: “all resources of the government shall be 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 operations of government.”

10.3 Section 48 of the 2019 RIRR for the STL provided the table for the STL revenue
allocation where it showed that 1.5% of the 2% printing cost was allocated to the
AAC, while the remaining 0.5% shall be the PCSO’s share in the printing cost.

10.4 Further verification disclosed that prior to the issuance of the 2019 RIRR for the
STL in August 2019, Board Resolution No. 0498, Series 2018 was passed by the
PCSO Board of Directors during its meeting on December 19, 2018, approving
the retention by the AACs of the 2% printing cost from the gross receipt of STL,
provided that the amount shall be exclusively used for Official Retail Receipt
(ORR) printed by any of the recognized government printers. Pending the
implementation of the ORR in all STL areas of operation, the AACs, in the
interim, shall retain 0.50% of the printing cost for the production of STL tickets
and the remaining 1.50% shall be remitted directly to PCSO.

10.5 Section 56 of the 2017 RIRR for Instant Sweepstakes, on the other hand,
provided the revenue allocation of net receipts from Instant Sweepstakes
wherein the 2% printing cost shall be deducted from the gross receipts to arrive
at the net receipts. However, there was no mention on the said provision on the
accounting and monitoring of the actual amount expended for the printing of
Instant Sweepstakes tickets.

10.6 Examination of the Accounting records disclosed that the Printing and Publication
expense account totaled to P197.541 million for the year ended December 31,
2019, wherein P197.284 million thereof pertained to the amounts retained by the
AACs and ISAC for the printing of STL and Instant Sweepstakes tickets in

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accordance with the allocation embodied in the subject RIRRs, see details in
Table 18. Apparently, said allocation was recognized as outright expense in the
books of accounts of PCSO despite without valid supporting documents.

Table 18 – Breakdown of the Printing Costs Retained


by the AACs and ISAC During CY 2019

Printing Cost % of
Retained by Retail
Particulars Period Retail Receipts AACs/ISAC Receipts
January to August P 11,253,140,748.86 P 56,265,703.74 0.5%
STL April to July * 1,667,773,677.00 33,355,473.54 2%
September to December 5,367,076,827.83 80,506,152.42 1.5%
STL – from Shortfall Collection January to December 1,587,364,493.30 7,936,822.47 0.5%
Instant Sweepstakes January to December 961,013,773.30 19,220,275.47 2%
Total P 0 P 0

10.7 We recommended that Management:

a. Revisit the 2019 RIRR for the STL and the 2017 RIRR for the Instant
Sweepstakes and consider amending certain provisions relating to
the printing costs of STL and Instant Sweepstakes tickets to include
guidelines on the proper accounting, reporting and monitoring
thereof; and

b. Require the AACs and ISAC to liquidate the amounts retained by them
for the printing of STL and Sweepstakes tickets, submit the original
documents to support the utilization of funds and return to PCSO any
unutilized amounts.

10.8 Management informed that the Branch Operations Sector is ready to require the
STL-AACs to liquidate the amount retained by them for the printing of STL tickets
and to submit the original documents to support the utilization of funds and to
return any unutilized amount to PCSO, as recommended by COA.

GENDER AND DEVELOPMENT (GAD)

11. The PCSO’s Annual GAD Plan and Budget (GPB) duly endorsed by the Philippine
Commission on Women (PCW) and the corresponding Accomplishment Report
(AR) were not submitted to COA within the period prescribed under Section V of
COA Circular No. 2014-001, hence, the Audit Team was unable to promptly assess
whether the PCSO’s accomplishments relating to GAD programs, activities and
projects were within the approved GPB.

11.1 Item V of COA Circular No. 2014-001 dated March 18, 2014 states:

The Audited agency shall submit a copy of the Annual GAD Plan and
Budget (GPB) to the COA Audit Team assigned to the agency within

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five (5) working days from the receipt of the approved plan from the
PCW or their mother or central offices, as the case maybe. Likewise, a
copy of the corresponding Accomplishment Report shall be furnished
the said Audit Team within five (5) working days from the end of
January of the preceding year.

11.2 Review of the PCSO’s GPB disclosed that this was reviewed and endorsed
through the Gender Mainstreaming Monitoring System (GMMS) of the PCW on
December 18, 2019, while the GAD AR was under the unendorsed status.
However, the PCW-endorsed GPB and the unendorsed AR were submitted to
the Audit Team only on July 16, 2020, contrary to the above-stated provision.

11.3 Due to the long delay in the submission of the GPB and the corresponding AR,
the Audit Team was not able to promptly and properly assess/audit the propriety
of the expenses incurred and whether the GAD programs, activities and projects
indicated therein correspond to the Agency’s mandate.

11.4 We reiterated our prior year’s recommendation that Management direct the
concerned official and employees to comply with the provisions of Item V
of COA Circular No. 2014-001 on the submission of the PCW-endorsed
GPB as well as the GAD AR within the prescribed period.

11.5 Management informed that the PCSO GAD Focal Point System (GFPS)
submitted to PCW GMMS its 2019 GAD AR, for review (as evidenced by the
System Administrator [email protected] email dated February 28, 2020.
They explained that the 2019 GAD AR was not yet endorsed by the PCW due to
the requirement to submit a HGDG PIMME Report for the GAD attributed IMAP-
ASAP-UHC-Malasakit Center hospitalization assistance. The same had been
prepared together with the SDD report, and an advanced copy was furnished to
COA-PCSO. To avoid repetition of delayed GAD reports to COA, the agency-
wide gender mainstreaming of GAD PPAs will include decentralized GAD fund
utilization by concerned units, to include preparations of GAD AR and SDDs.
For this reason, a Guide was prepared by the GFPS to hasten GAD Gender
mainstreaming budget and plans starting CY 2020, subject to PCW
Memorandum Circular No. 2020-03 (Re: Review of 2020 GPB Use of GAD funds
for COVID-19 response) in relation to DBM National Budget Circular 580, series
of 2020 (Observance of austerity measures due to COVID-19).

12. The PCSO was able to allocate five per cent of its 2019 Approved Budget for CY
2019 GPB, in accordance with Joint Circular No. 2012-01 of the PCW, National
Economic and Development Authority (NEDA) and the Department of Budget and
Management (DBM).

12.1 Section 6.1 of the PCW-NEDA-DBM Joint Circular No. 2012-01 provides:

At least five percent (5%) of the total agency budget appropriations


authorized under the annual GAA shall correspond to activities
supporting GAD plans, and programs. The GAD budget shall be drawn
from the agency’s maintenance and other operating expenses
(MOOE), capital outlay (CO), and personal services (PS). It is

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understood that the GAD budget does not constitute an additional
budget over an agency’s total budget appropriations.

12.2 Verification disclosed that the PCW-endorsed GPB of the PCSO for CY 2019
amounting to P4.471 billion met the required five per cent of the approved
Agency’s Corporate Operating Budget (COB) amounting to P69.319 billion.
Likewise, as can be gleaned from Table 19, the PCSO’s GAD Accomplishment
Report for CY 2019 reflected actual expenditures of P5.923 billion.

Table 19 – Actual Expenditures Relating to GAD For CY 2019

No. GAD Accomplishment Amount


1 No. of Grant and Subsidy (PCW national campaign/ event sponsorship) – At least One (1) PCW – initial P 1,666,843.32
national activity during the 18-DAYS CAMPAIGN to end Violence Against Women and their Children)
2 No. of Grant and Subsidy (IAC-VAWC operations & activities c/o PCW as Secretariat) - At least one (1) 2,000,000.00
Grant & Subsidy for operations and activities for Inter-agency Committee on Violence Against Women
and their Children (DOH-DILG-DND-DepEd, etc.) with PCW as beneficiary, in its capacity as IAC-VAWC
Secretariat
3 Campaign support to PCSO’s GEDSI Program (Outreach for Indigenous People Communities) 1,959,412.89
4 PCSO- Presidential Legislative Liaison Office (PLLO)- Inter-agency Meeting 105,468.75
5 Conduct of seminar on Magna Carta of Women and Violence Against Women and Children for NCL 1,364,828.93
Department on June 5 & 6, 2019
6 Conduct of HGDG capability building activities for GFPS and Partner Institutions 1,599,833.27
7 GEDSI (GAD) capacity building for employees thru training (2019 GEDSI “Serbisyo Para Kay Juana” in 243,148.15
Northern & Central Luzon)
8 PCSO GFPS Joint HGDG Workshop on Universal Health Care (UHC) with PhilHealth 131,767.50
9 For hiring of consultants and data encoder for GAD related activities 1,836,000.00
10 Procurement of Office equipment for GAD related activities 270,000.00
11 Conduct of Regular & Special Meetings for GAD related 189,392.36
activities
12 Attributed Programs to GAD – Implementation of UHC, IMAP-ASAP Program 5,911,513,622.82
Total P 5,922,880,317.99
12.3 We recommended that Management continue complying with the GAD
related law, rules and regulations and commitments.

COMPLIANCE WITH TAX LAWS

13. Applicable taxes for draw allowances paid by PCSO in CY 2019 in the total
amount of P182.087 million were not withheld, in violation of the National Internal
Revenue Code (NIRC) of the Philippines and depriving the National Government
of additional revenue.

13.1 Section 23 (A) of the NIRC of 1997, as amended by Republic Act (RA) No.
10963 states: “a citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the Philippines.”

13.2 On June 20, 2014, Revenue Memorandum Order (RMO) No. 23-2014 was
issued to clarify and consolidate the responsibilities of the public sector to
withhold taxes on its transactions as a customer and as an employer. Under this
RMO, all government offices including government owned or controlled
corporations (GOCCs) are constituted as withholding agents for purposes of the
creditable tax required to be withheld on the following:

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a) Withholding of creditable income tax
b) Withholding tax on Government Money Payments (GMPs)
c) Withholding tax for non-resident foreign contractors, subject to applicable
tax treaty
d) Other withholding taxes that may be mandated from time to time by the
Bureau of Internal Revenue (BIR) in the implementation of the NIRC of
1997, as amended

13.3 As an employer, government offices including GOCCs are likewise constituted


as withholding agents for purposes of the creditable tax required to be withheld
from compensation paid for services of its employees. Section 2 (a) of Revenue
Regulations (RR) No. 8-2018 dated January 25, 2018 defines compensation
income as all remunerations for services performed by an employee for his
employer under an employer-employee relationship. Thus, salaries, wages,
emoluments and honoraria, allowances and other income of a similar nature
constitute compensation income.

13.4 Section 251 of the NIRC of 1997, as amended by RA No. 10963, further provides
that, “any person required to withhold, account for, and remit any tax imposed by
this Code or who willfully fails to withhold such tax, or account for and remit such
tax, or aids or abets in any manner to evade any such tax or the payment
thereof, shall, in addition to other penalties provided for under this Chapter, be
liable upon conviction to a penalty equal to the total amount of the tax not
withheld, or not accounted for and remitted.”

13.5 Examination of the Cash Disbursements Journal (CDJ) disclosed that draw
allowances in the total amount of P182.087 million were paid during CY 2019.
Further verification, however, revealed that the applicable taxes were not
withheld from the said allowances despite the audit observation in CY 2018
which was included in the Annual Audit Report (AAR).

13.6 The PCSO’s inability to withhold taxes from the said draw allowances and to
remit the same to the BIR deprived the National Government of additional
revenue to fund its priority programs and projects, notwithstanding the fact that
such was a clear violation of the above-stated law and regulations, subject to the
penalties provided therein.

13.7 We reiterated our prior year’s recommendation that Management ensure


compliance with Section 251 of the NIRC of 1997, as amended by RA No.
10963, and direct the concerned officials to cause the withholding of the
applicable taxes from the draw allowances being paid to the concerned
PCSO officials and employees and other individuals and to remit the same
to the BIR.

13.8 Management informed that PCSO has implemented the withholding of taxes on
draw allowance for CY 2020.

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14. Taxes withheld and due to the Bureau of Internal Revenue (BIR) for January to
November 2019 in the total amount of P 10.816 billion were deducted and remitted
within the prescribed period. The taxes withheld for the month of December 2019
amounting to P497.672 million were remitted to the BIR in January 2020 as shown in
Table 20.

Table 20 – Remittances of Taxes Withheld


During the Month of December 2019

Particulars Amount Date Remitted


Final Income Taxes Withheld P 106,060,044.45 January 27 & 29, 2020
Creditable Income Taxes Withheld (Expanded) 74,192,624.81 January 30, 2020
VAT and Other Percentage Taxes Withheld 62,313,647.99 January 10, 2020
Documentary Stamp Tax 255,105,677.38 January 6, 2020
Total P0

COMPLIANCE WITH GSIS, PAG-IBIG AND PHILHEALTH DEDUCTIONS AND


REMITTANCES

15. The PCSO was unable to remit all the contributions to the Government Service
Insurance System (GSIS) as there was under remittance of contributions in the
total amount of P1.631 million due to the inability of the Agency to update its
employees’ records with the GSIS, which was not in accordance with the
provisions under Section 6 of Republic Act (RA) No. 8291.

15.1 Section 6 of RA No. 8291 provides:

“(a) The employer shall report to the GSIS the names of all its
employees, their corresponding employment status, positions, salaries
and such other pertinent information, including subsequent changes
therein, if any, as may be required by the GSIS; the employer shall
deduct each month from the monthly salary or compensation of each
employee the contribution payable by him xxx

(b) Each employer shall remit directly to the GSIS the employees’ and
employer’s contributions within the first ten (10) days of the calendar
month following the month to which the contributions apply xxx.

15.2 Moreover, Section 11.1, Rule III of the Implementing Rules and Regulations
(IRR) of RA No. 8291 states:

Xxx effective January 1, 2003, the rate of contribution payable by the


member and government agency shall be 9% and 12%, respectively,
based on the actual monthly salary of the member.

15.3 Examination of the financial records pertaining to the GSIS contributions withheld
from the salaries of PCSO personnel assigned at the Head Office disclosed that
contributions equivalent to 9% of the employees’ monthly salary were deducted
for the period January to December 2019 in the total amount of P25.009 million.

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However, total remittances for the same period amounted only to P23.378
million, thereby having net under remittance of P1.631 million.

15.4 Verbal Inquiry with the PCSO’s Electronic Remittance File (ERF) Officer, the
personnel responsible for the remittance of contributions to the GSIS, revealed
that discrepancies between the amounts withheld and remitted were due to the
delay in the updating of employees’ records through the GSIS eBilling and
Collection System (eBCS). She explained that remittances of contributions to the
GSIS cannot exceed the amounts reflected in the monthly Electronic Billing Files
(EBFs), which were generated from the eBCS.

15.5 Hence, if an employee had an increase in salary but his/her record in the eBCS
was not updated, the amount of contribution that would be remitted will still be
based on his/her previous salary rate. In the same manner, if there was a newly
hired employee or if there was an employee from the branch office that was
transferred to the Head Office but the employee’s record was not updated in the
eBCS, the mandatory contribution will not be remitted to the GSIS. The correct
mandatory contributions will only be remitted to the GSIS once the employees’
records are updated and reflected in the EBFs.

15.6 As provided in the GSIS website, the Agency Authorized Officer (AAO) shall
coordinate with the ERF officer to ensure that the changes in the membership
records submitted to GSIS are duly reflected in the next generated remittance
file, and the Reconciliation Billing Issues (RBIs) forwarded by the GSIS are
addressed and the appropriate membership updating forms are prepared and
transmitted to GSIS before the following month’s remittance. The ERF Officer, on
the other hand, shall coordinate with the AAO to ensure that membership
updating forms are forwarded to the GSIS membership coordinators before the
monthly remittance is paid.

15.7 The delay in the updating of employees’ records with the GSIS resulted in the
under remittance of P1.631 million, contrary to Section 6 of RA No. 8291.
Moreover, the concerned personnel of the PCSO were unjustly disadvantaged
by the neglect of the AAO and the ERF Officer to update their records with the
GSIS considering that it has an effect on the computation of their retirement and
other membership benefits.

15.8 We recommended that Management direct:

a. The concerned official of the PCSO to coordinate with the GSIS and
take the necessary steps towards the immediate remittance of the
GSIS contributions amounting to P1.631 million; and

b. The AAO and the ERF Officer of the PCSO to coordinate with each
other to ensure that the employees’ records are promptly updated
with the GSIS so that the correct amount of monthly contributions
shall be remitted to the said Agency.

15.9 Management informed that the HRD prepared a draft letter for signature of the
General Manager addressed to the Department Manager, NCR Department III of

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GSIS to request for a meeting to address the immediate remittance of unremitted
GSIS contributions of concerned PCSO officials and employees. Likewise, the
HRD transmitted the list of employees whose records have been updated or
created to the GSIS portal or through email by the AAO through Memorandum
dated August 19, 2020. The HRD shall schedule a meeting with the Accounting
and Budget Department for the reconciliation of employees records and the
unremitted contributions to the GSIS.

16. Premiums due to GSIS, Pag-IBIG and PhilHealth for January to November 2019 were
deducted from the salaries of PCSO-Head Office personnel in the total amount of
P53.590 million and remitted within the prescribed period. The premiums deducted in
December 2019 in the total amount of P5.481 million were remitted in January 2020,
details presented in Table 21.

Table 21 – GSIS, Pag-IBIG and PhilHealth Deductions and Remittances


During the month of December 2019

Premiums collected and Premiums collected in


remitted in 2019 (January December 2019 and Date Remitted in
Agency to November 2019) remitted in January 2020 Total
2020
GSIS P 47,000,170.41 P 4,771,649.02 January 8, 2020 P 51,771,819.43
Pag-IBIG 1,724,392.50 168,892.50 January 14, 2020 1,893,285.00
PhilHealth 4,865,715.40 540,339.61 January 16, 2020 5,406,055.01
Total P 0 P 0 P 0

SUMMARY OF TOTAL SUSPENSIONS, DISALLOWANCES AND CHARGES

17. The total unsettled audit suspensions and disallowances amounted to P2.114 billion as
at December 31, 2019, details presented in Table 22. There was no Notice of Charge
issued during the year.

Table 22 – Summary of Audit Suspensions and Disallowances


As of December 31, 2019

Balance, Issued Settlement Balance,


Particulars
1/1/2019 This period This period 12/31/2019
Notices of Suspension P 4,350,400.18 P36,380,172.02 P2,731,464.39 P 0
Notices of Disallowance 2,067,686,833.22 8,851,200.00 56,540.05 0

Total P00 P0 P0 P0

17.1 The Notice of Disallowance issued during CY 2019 amounting to P8.851 million
represents excessive per diems paid to the members of the PCSO Board of

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Directors. On the other hand, the Notices of Suspension issued during the year
totaling P36.380 million pertained to the non-submission of documentary
requirements for the financial assistance granted by PCSO and for the liquidation
of cash advances for travel expenses amounting to P33.107 million and P3.273
million, respectively. The details of unsettled suspensions and disallowances at
year-end are shown in Part IV-Annex A of this Report.

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