Republic of the Philippines COMMISSION ON AUDIT Commonwealth Avenue, Quezon City

ANNUAL AUDIT REPORT ON THE

MUNICIPALITY OF SAN ILDEFONSO Province of Ilocos Sur

For the Year Ended December 31, 2011

Republic of the Philippines COMMISSION ON AUDIT Office of the Supervising Auditor Audit Group G- Ilocos Sur Province Provincial Capitol, Vigan City March 30, 2012 HONORABLE MARK ANTHONY A. PURISIMA Municipal Mayor Municipality of San Ildefonso, Ilocos Sur Sir: We transmit herewith the report on the comprehensive audit of the accounts and operations of the Municipality of San Ildefonso, Ilocos Sur for the year ended December 31, 2011, in compliance with Section 2 Article IX - D of the Philippine Constitution and pertinent section of Presidential Decree No. 1445. The report was prepared by Ramon B. Festejo, Audit Team Leader, Team IX. The audit was conducted to ascertain the propriety of financial transactions and compliance with prescribed rules and regulations. It was also made to ascertain the accuracy of financial records and reports, as well as the fairness of the presentation of the financial statements. The audit also aimed to assess or determine whether the resources of the municipality were disbursed economically, effectively and efficiently. The report consists of four parts: Part I - Audited Financial Statements, Part II Detailed Findings and Recommendations, Part III Status of Implementation of Prior Years Audit Recommendations and Part IV - Annexes. The Detailed Findings and Recommendations were discussed with the concerned management officials and staff in an exit conference held on February 21, 2012. Managements comments were included in the report, where appropriate. We request that the findings and recommendations contained in the said report be fully addressed and we would appreciate being informed of the action taken in this regard within sixty (60) days from receipt hereof, pursuant to Section 94 of the General Provisions of Republic Act No. 10147, otherwise known as the General Appropriations Act of 2011. We acknowledge the cooperation extended to the audit team by the officials and staff of that agency. Thank you. Very truly yours, ELVIRA M. JIMENEZ Supervising Auditor
cc: The Director, DILG, Regional Office No. I, San Fernando City, La Union The Director, BLGF, Regional Office No. I, San Fernando City, La Union The Director, DBM, Regional Office No. I, San Fernando City, La Union The Presiding Officer, Sangguniang Bayan, San Ildefonso, Ilocos Sur

The Assistant Commissioner, LGS, COA, Quezon City

Republic of the Philippines COMMISSION ON AUDIT Audit Group G- Ilocos Sur Province Team IX Municipal Hall, Bantay, Ilocos Sur February 29, 2012 ELVIRA M. JIMENEZ Supervising Auditor Commission on Audit Audit Group G- Ilocos Sur Province Provincial Capitol, Vigan City Madam: In compliance with Section 2, Article IX-D of the Philippine Constitution and pertinent sections of Presidential Decree No. 1445, we conducted a comprehensive audit on the accounts and operations of the Municipality of San Ildefonso, Ilocos Sur for the year ended December 31, 2011. The audit was conducted to ascertain the propriety of financial transactions and compliance of the agency to prescribed rules and regulations. It was also made to ascertain the accuracy of financial records and reports as well as the fairness of the presentation of the financial statements. The audit also aimed to assess or determine whether the resources of the municipality were disbursed economically, effectively and efficiently. The results of our audit are embodied in our attached report consisting of four parts: Part I - Audited Financial Statements, Part II Detailed Findings and Recommendations, Part III Status of Implementation of Prior Years Audit Recommendations and Part IV - Annexes. The Detailed Findings and Recommendations were discussed with concerned Management Officials and staff during an exit conference held on February 21, 2012. An unqualified opinion was rendered as to the fairness of the presentation of the financial statements of the Municipality of San Ildefonso, Ilocos Sur as of December 31, 2011 because these were free of material misstatements. Our audit was conducted in accordance with generally accepted state auditing standards and we believe that it provides reasonable bases for the results of the audit. We acknowledge the cooperation extended to the Audit Team by the officials and staff of the agency. Very truly yours, RAMON B. FESTEJO State Auditor III Audit Team Leader

EXECUTIVE SUMMARY
A. Highlights of Financial Operation The municipalitys assets, liabilities and government equity as of December 31, 2011 registered at P100,297,508.93, P17,195,373.95 and P83,102,134.98 respectively. This years income totaled P45,701,683.81 compared to that of last years income of P38,338,766.03 registering an increase of 19.20%. Total appropriations for the year amounted to P47,773,680.05 broken down into Current Appropriations and Continuing Appropriations of P47,729,180.08 and P44,500.00 respectively. Total expenditures during the year amounted to P23,082,862.26 broken down into Personal Services, Maintenance and Other Operating Expenses, Financial Expenses and Subsidies and Donations in the total amounts of P17,084,349.04, P5,752,513.22, P100.00 and P245,900.00 respectively. B. Operational Highlights Below are the major plans and targets vis--vis accomplishments of the Municipality for the year 2011: Programs/Projects/Activities Repayment of Loan to World Bank Solid Waste Management Outreach Program Day Care Services Kinder Education Aid in Financial Crisis Situation CBMS Formulation Support to Agriculture Program Textbooks Supplemental Feeding Improvement of BNHS Sports Development Program TOTAL P Targets 636,004.00 448,626.64 364,851.76 303,600.00 180,000.00 161,000.00 125,000.00 100,000.00 75,000.00 75,000.00 70,000.00 58,500.00 P 2,597,582.40 Accomplishments P 636,003.48 400,997.84 363,051.00 303,600.00 180,000.00 161,000.00 125,000.00 72,564.40 74,902.50 75,000.00 70,000.00 53,000.00 2,515,119.22 Percentage of Accomplishments 100% 89.38% 99.51% 100% 100% 100% 100% 72.56% 99.87% 100% 100% 90.60% 96.83%

C. Scope of Audit A comprehensive audit was conducted on the accounts and operations of the Municipality of San Ildefonso, Ilocos Sur. The audit consisted of review of operating procedures, inspection of the municipalitys programs and projects, interview of concerned

government officials and employees, verification, reconciliation and analysis of accounts and such other procedures considered necessary. D. Auditors Opinion on the Financial Statements The auditor rendered an unqualified opinion on the fairness of presentation of the financial statements of the Municipality of San Ildefonso, Ilocos Sur as of December 31, 2011 because these were free of material misstatements. E. Significant Findings and Recommendations The following are the significant findings and their corresponding recommendations which were discussed with management during the exit conference. Management comments are included in the report, where appropriate. 1. The Other Receivables account balance of P3,084,000.00 representing claims against various debtors was still carried in the books although the account has remained dormant for more than ten (10) years and whose collectability has been rendered improbable due to the lack of source documents to support the account. We recommend that the Municipal Mayor should instruct the Municipal Accountant to request in writing to the Commission Proper thru the Audit Team Leader for the writing-off of the dormant and uncollectible accounts amounting to P3,084,000.00. 2. The observers were not invited by the Bids and Awards Committee (BAC) in all stages in the procurement of goods and infrastructure projects through public bidding valued at P1,176,781.50 and P10,035,550.71, respectively, as required under pertinent provisions of the Implementing Rules and Regulations (IRR) of R.A. No. 9184 thereby defeating the principle of transparency in the procurement process because the observers were unable to assess the extent of the BACs compliance with the provisions of the IRR and areas of improvement in the BACs proceedings. We recommend that the Bids and Awards Committee should invite in writing the required observers in all stages in the procurement of goods and infrastructure projects through public bidding as required under pertinent provisions of the Implementing Rules and Regulations of R.A. No. 9184 to enhance transparency in the procurement process and to enable the observers to assess the extent of the BACs compliance with the provisions of the IRR and areas of improvement in the BACs proceedings. 3. The Bids and Awards Committee did not adopt the required conditions and procedures in the conduct of post-qualification on the bidders who tendered the Lowest Calculated Bid in the procurement of goods and infrastructure projects through public bidding in the amount of P1,176,781.50 and P10,035,550.71, respectively, as prescribed under pertinent provisions of Section 34 of the Revised Implementing Rules and Regulations of R.A. No. 9184. Thus the veracity of the statements made and authenticity of documents submitted by the concerned bidders was not properly established.

We recommend that the Bid and Awards Committee should strictly observe the conditions and procedures in the conduct of post-qualification as provided under pertinent provisions of Section 34 of Implementing Rules and Regulations of R.A. No. 9184 to ensure the authenticity of documents submitted, and the veracity of statements made, by bidders who tendered the Lowest Calculated Bid in the procurement of goods and infrastructure projects through public bidding. The other significant findings and recommendations are discussed fully in Part II of this report. F. Status of Implementation of Prior Years Audit Recommendations Out of the seven (7) recommendations embodied in the 2010 Annual Audit Report, five (5) were implemented and two (2) remained unimplemented by the Municipality.

TABLE OF CONTENTS
Part I Audited Financial Statements Audit Certificate Statement of Management Responsibility for Financial Statements Consolidated Balance Sheet As of December 31, 2011 (With Comparative Figures for 2010) Consolidated Statement of Income and Expenses For the Year Ended December 31, 2011 (With Comparative Figures for 2010) Consolidated Statement of Cash Flows For the Year Ended December 31, 2011 (With Comparative Figures for 2010) Notes to Consolidated Financial Statements

1 2 3 4 5 6

Part II

Detailed Findings and Recommendations I. Financial and Compliance Audit II. Value for Money Audit III. Revenue Audit IV. Compliance with Tax Laws Status of Implementation of Prior Years Audit Recommendations Annexes Financial Statement by Fund Status of Appropriations, Allotments, Obligations and Balances Schedule of Contracts for the Procurement of Goods and Infrastructure Projects Schedule of Suppliers/Contractors Who Tendered the Lowest The Lowest Calculated Bid Schedule of Contracts for the Procurement of Goods and Infrastructure Projects Projects Covered under the 20% Development Fund Schedule of Taxes Withheld and Remittances

17 27 31 33 35 A B C D E F G

Part III Part IV

PART I AUDITED FINANCIAL STATEMENTS

Republic of the Philippines COMMISSION ON AUDIT Commonwealth Avenue, Quezon City

AUDIT CERTIFICATE
HONORABLE MARK ANTHONY A. PURISIMA Municipal Mayor Municipality of San Ildefonso, Ilocos Sur We have audited the accompanying Balance Sheets of the Municipality of San Ildefonso as of December 31, 2011 and the related Statements of Income and Expenses and Statements of Cash Flows for the year then ended. These financial statements are the responsibility of the Municipalitys management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with laws, COA and INTOSAI standards and applicable generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. Our audit included examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. It also included assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Municipality of San Ildefonso as of December 31, 2011 and the results of its operations and cash flows for the year then ended in conformity with applicable generally accepted accounting principles.

COMMISSION ON AUDIT By: RAMON B. FESTEJO State Auditor III Audit Team Leader

February 28, 2012

Notes to Consolidated Financial Statements

1. Agency Profile San Ildefonso was established during the Spanish era in the year 1625. During the Spanish era, a small community in Northern Luzon was found. Arguing on how and what to name it some dwellers who were living near the Bantaoay River saw a big wooden box that contained an engraved statue of San Ildefonso and decided to call that community San Ildefonso. The people decided to make him the patron saint of the place and an annual town fiesta celebration is held every 23rd of January, the day when the image was found. By virtue of an Executive Order in 1901, providing smaller towns to be annexed to adjacent bigger ones, San Ildefonso was annexed as a barrio to Sto. Domingo. Through the help of the late Pres. Elpidio Quirino, then an assemblyman, San Ildefonso was again made a separate town in 1920. The Municipalitys operations are focused mainly on the provision of basic services through enhancement of tourism industry to increase local source revenue. The municipality is geared towards the attainment of higher and sustainable level of Socio-economic Growth and Development through the following: Vision: A green community of educated and empowerment citizenry, determined to overcome challenges in attainment of progress thru the enhancement of trade, industry and culture to be actualized by effective governance. Mission: To act as partner of the community guiding the citizenry, to achieve a sustainable social, economic and environmental condition trough the enhancement and promotion of its trade, industry and culture to generate the necessary revenue for the delivery of effective and efficient basic services. To achieve these, the municipality had set the ALISTO flagship programs stated hereunder: People Empowerment with participative NGOs and Renewed Dynamism and Transparency of -Bids and Awards Committee -Gender and Development Overwhelming Commitment and Dedication thru -Agricultural Productivity -Seed and Fertilizer Subsidy -Livelihood Projects

Good Governance towards -Human Resource Development Rural Development attaining -Improved infrastructure facilities -Technology Transfer -Communication and Transportation Economic and Ecological Balance under -Solid Waste Management -Investment Promotion/Tourism Industry Service Oriented -Social Services (health and sanitation, education, social welfare, peace and order and public safety) Organizational Management System based on -Executive-Legislative Agenda

2. Basis of Financial Statement Presentation The financial statements have been prepared in accordance with generally accepted accounting principles and reflect amounts that are based on best estimates and informed judgment of management with an appropriate consideration of materiality. The management maintains a system of accounting and reporting which provides for the necessary internal control to ensure that transactions are properly authorized and recorded and that assets are safeguarded against unauthorized use or disposition and liabilities recognized. 3. Summary of Significant Accounting Policies The following are the significant accounting policies that the agency follows: A. Revenue and Expense Recognition The agency uses accrual basis of accounting in the recognition of expenses and revenues. All expenses are recognized when incurred and reported in the financial statements in the period to which they relate. Real property taxes are accounted following the modified accrual basis. Collections of delinquent accounts for Real Property Tax/ Special Education Tax prior CY 2002 shall be recognized as direct credit to Real Property Tax/ SET accounts. Other revenues and taxes are recognized under the cash basis. The Modified Obligation System is used to record allotments received and obligations incurred. Separate registries are maintained to control allotments and obligations for each class of allotments. B. Petty Cash Fund

Petty Cash Fund account is maintained under the Imprest fund System. All replenishments are directly charged to the expense accounts. The petty cash fund is not used to purchase regular inventory items for stock. C. Office Supplies and Materials Office Supplies and Materials not consumed within the accounting period shall be recorded as assets using the inventory account following the Perpetual Inventory Method. The inventories on hand are stated at cost and are determined using the Moving Average Method, the balances are checked by means of physical counts. D. Property, Plant and Equipment (PPE) Property, Plant and Equipment are carried at cost less accumulated depreciation. The straight-line method of depreciation is used in depreciating the property, plant and equipment purchased/constructed; estimated economic lives ranging from five to fifty years. A residual value, computed at ten percent (10%) of the cost of the asset is set and depreciation starts on the second month after purchase or completion of the PPE. Properties of the government constructed during the current year which are used by the general public are accounted and reported under the Registry of Public Infrastructures. Those properties constructed in the prior years are still carried under the Property, Plant and Equipment account due to the inability of the agency to maintain subsidiary ledgers. E. Payables Payable accounts are recognized and recorded in the books of accounts only upon acceptance of the goods and /or rendition of the services to the agency and upon receipt of billings from the supplier. F. Financial Expenses Financial expenses such as bank charges and interest expense are separately classified from maintenance and other operating expenses.

G. New Government Accounting System Accounts were reclassified to conform to the new chart of accounts prescribed under the New Government Accounting System, which was implemented effective January 1, 2002.

Pursuant to Accounting Circular No. 2006-01 dated November 9, 2006, two accounts such as Cash-Disbursing Officer (103) and Due from Officers and Employees (123) were reclassified to Payroll Fund (106) and Advances to Officers and Employees (148), respectively. 4. Correction of Fundamental Errors Fundamental errors of prior years are corrected by using the Prior Years Adjustment Account while errors affecting current year operations are charged to the current years accounts. 5. Cash and Other Cash Accounts 2011 Cash in Vault Payroll Fund Petty Cash Fund Cash in Bank-LCCA Cash in Bank-LCTD TOTAL P 138,718.78 38,000.00 2,851.00 18,950,009.80 7,576,931.33 P 26,706,510.91 P 2010 37,913.21 0.00 1.29 3,044,350.42 7,387,438.00 P 10,469,702.92

The time deposit account comprises only of the municipal share from RA 7171 Tobacco Excise Tax in the Land Bank of the Philippines. 6. Receivables This is composed of the following accounts: 2011 Real Property Tax Receivable Special Education Tax Receivable Due from NGAs Due from GOCCs Due from LGUs Due from Other Funds Receivables-Disallowances/Charges Advances to Officers and Employees Other Receivables TOTAL P 976,836.70 976,836.70 4,321.58 270,618.02 266,726.59 3,492,311.08 3,645,933.98 548.01 4,103,592.07 13,737,724.73 P 2010 437,754.05 437,754.05 4,237.09 270,618.02 266,726.59 394,239.41 3,645,933.98 548.01 4,103,592.07 9,561,403.27

The account Real Property Tax Receivable represents uncollected real property taxes in CYs 2002 to 2011. Due from GOCCs represents the debit balance of the accounts GSIS Payable, Due to PHILHEALTH and Due to PAG-IBIG in prior years. Due from LGUs represent the assessment made to the provincial government in the amount of P 11,966.84 and the balance of the account is Cash in Other Local Government Treasury in the amount of P113,314.32. Due from Other Funds account includes funds transferred from General Fund to Trust Fund account for the implementation of various projects such as Community Based Management System (CBMS) of P91,162.50, Supplemental Feeding of P31,943.50, Improvement of Farmers Park and Plaza of P3,342,942.10 and the balance consists of interest earned in trust fund account in the amount of P21,262.98 and walk for a cause contribution due to General Fund amounting to P1,000.00. The account Receivables-Disallowances/Charges represents the amount due to suppliers, contractors, and/or employees resulting from audit disallowances which have became final and executory. In 2010, there were disallowances in audit on the salaries of some employees for the period January 1 to June 25, 2010 amounting to P178,590.20 in violation of Local Budget Circular No. 2009-92 dated September 3, 2009, of which P4,281.00 was settled. Advances to Officers and Employees account includes employees share on premium contributions amounting to P48.01 and the remaining balance represents unliquidated cash advance for travel. Other Receivables account includes debit balance of liability accounts in the Trust Fund account amounting to P492.21 and the balance of P4,103,099.86 consists of Livelihood Projects distributed to residents of San Ildefonso. 7. Inventories 2011 2010

Drugs and Medicines Inventory P 90,631.39 P 32,278.93 Other Supplies Inventory 510,489.95 160,038.95 TOTAL P 601,121.34 P 192,317.88 This account consists of unused and unissued drugs and medicines and other supplies intended for the Community Outreach Program. 8. Prepayments 2011 2010

Advances to Contractors

950,620.30

0.00

This account consist of fifteen (15) percent mobilization fee paid to contractors for the Improvement and Renovation of Municipal Hall Phase I and Phase II in the General Fund and for the Improvement of Farmers Plaza and Park implemented under the Trust Fund account. 9. Other Current Assets 2011 Other Current Assets P 18,708.50 P 2010 18,708.50

This amount was due to a disbursement erroneously charged to the RA 7171 account. It should have been charged to Trust Fund. 10. Property, Plant and Equipment This account includes the following: Balance Dec. 31, 2010 Land and Land Improvements Buildings Office Equipment, Furniture and Fixtures Machineries and Equipment Transportation Equipment Other Property, Plant and Equipment Construction in ProgressRiver Walls Equipment Total Accumulated Depreciation Net Book Value P 14,658,351.74 13,661,039.28 1,295,846.75 628,180.00 325,000.00 45,000.00 19,955,177.87 50,568,595.64 (789,111.97) P 49,779,483.67 3,449,082.72 7,747,633.04 (297,673.31) 7,449,959.73 Net Addition/ (Reduction) Balance Dec. 31, 2011

3,231,300.00 P 17,889,651.74 179,682.32 13,840,721.60 146,740.00 2,000.00 738,828.00 1,442,586.75 630,180.00 1,063,828.00 45,000.00 23,404,260.59 58,316,228.68 (1,086,785.28) 57,229,443.40

Land Improvements account still include cost of public infrastructures for general public use such as roads, plazas and other fixed assets that were constructed during the prior years. Other Property, Plant and Equipment acquired prior to the implementation of NGAs were not subjected to depreciation. The significant increase in Land and Land Improvements was due to a two (2) parcels of lot acquired during the year located in Poblacion West and Sagsagat in this Municipality.

The addition to the Building account comprises solely of the pavement constructed in the Public Market. Various equipment such as desktop computers, laptop, filing cabinet, digital camera, electric fans etc. were purchased during the year. Increase in Machineries and Equipment account includes purchase of agricultural equipment. One (1) Farmers vehicle (van) was added in the Motor Vehicle account. Other Property, Plant and Equipment account consists of trash bins intended for the waste segregation program of the LGU. The Construction in Progress account consists of Improvement and Renovation of Municipal Building Phase I and II in the amount of P2,329,534.44 and P1,119,548.28, respectively. The remaining balance of which is for the Construction of River Protection Project in the amount of P19,955,177.87 which was supported by Municipal Development Fund Office (MDFO). With regard to the said project, the LGU-San Ildefonso, Ilocos Sur has applied financial assistance from Department of Finance (DOF) in the year 2007 through the MDFO for the LOGOFIND (Local Government Finance and Development) Project which aimed to assist local government units in expanding and upgrading basic infrastructure, services and facilities and in strengthening their capacities in governance, investment planning, revenue generation and project development with the utmost consideration of environmental and social concerns. The LGUs subproject, Construction of River Protection in Bungro, San Ildefonso, Ilocos Sur, costs P19,955,177.87 with the following L-G-E (Loan, Grant and Equity) allocation: 70% Grant 20% Loan 10% Equity Total Subproject Cost P P 13,968,624.51 3,991,035.57 1,995,517.79 19,955,177.87

The grant and loan portion was made available through MDFO and the equity portion was the counterpart of the LGU for the subproject as stipulated in the Subproject Sub loan Agreement. The LOGOFIND sub-project was 100% completed last July 2007 but it will only be transferred to Registry of Public Infrastructure until the loan, which partly financed the project, is fully paid/settled. 11. Other Assets 2011 2010

Other Assets

P 1,053,379.75

1,053,379.75

This account includes transferred depreciated properties from Property, Plant and Equipment accounts which are still serviceable. 12. Current Liabilities The current liabilities consist of: 2011 Accounts Payable Due to Officers and Employees Due to BIR Due to GSIS Due to PAG-IBIG Due to PHILHEALTH Due to Other NGAs Due to LGUs Due to Other GOCCs Due to Other Funds Performance/Bidders/Bail Bonds Payable Other Payables TOTAL P 2010

188,982.32 P 131,684.79 2,573.19 1,646.17 791.75 113,738.61 33.05 320,157.86 3,988.31 26,387.60 891.49 26,453.99 1,412,422.75 337,252.21 678,420.03 523,280.56 227,493.91 227,496.16 5,257,024.97 139,475.62 27,015.70 21,676.80 3,794,608.15 3,794,608.15 11,594,245.62 P 5,663,858.52

Of the amount included in the Accounts Payable account in General Fund, P18,700.86 represents unpaid salary, PIB of P86,000.00, Cash gift of P5,000.00 to municipal employee, accrued survey expenses and the remaining balance represents unpaid liabilities to various creditors. Due to Officers and Employees account includes fund for the honorarium of BAC members held in trust. It also consists of underpayment of employees salary and overpayment of expenses reimbursed in the General Fund. Due to BIR account consists of unremitted taxes withheld. Due to GSIS account consists of monthly premiums and employees loan repayments. Due to Pag-ibig account represents monthly contributions and multi purpose loan repayments. Due to Philhealth account consists of monthly premiums. Included in the Due to LGUs account are Provincial Government Realty Tax share amounting to P155,765.15, Barangay realty tax share of P111,260.73 and Fire Code Fees of P75,400.92 and various funds held in trust.

Due to Other Funds account includes funds received for the implementation of various projects in the amount of P1,800,000 in the General Fund which consists of Priority Development Assistance Fund (PDAF) of P1,500,000.00 and DILG fund for Medical Assistance of P300,000.00. In the Trust Fund, this account includes on-going projects such as Supplemental Feeding of P6,943.50, CBMS of P84,876.39, Improvement of Farmers Park and Plaza of P3,342,942.10 and the remaining balance represents interest earned in this funds bank account and receipt of contribution for the Walk for a Cause amounting to P21,262.98 and P1,000.00, respectively. Performance/Bidders/Bail Bonds Payable represents claims of bidders resulted from receipt of cash to guarantee performance of terms of contract/ participation of bidding. Other payables account includes unpaid retention fee of P50,447.01 to Firefox Construction and the balance represents unpaid loans. 13. Long-term Liabilities 2011 Loans Payable Domestic P 3,647,454.93 P 2010 3,829,243.97

The loan is the 20% component of the total subprojects cost extended by the government through MDFO to the LGU to finance part of the subproject, Construction of River Protection. It shall be payable in 15 years (from CY 2007- CY 2021) at an interest rate of 12 % per annum. The amortization of the principal amount started in 2010 which reduces the balance of this account.

14. Deferred Credits This account is composed of the following: 2011 Deferred Real Property Tax Income Deferred Special Education Tax Income TOTAL 15. Government Equity P 976,836.70 976,836.70 P 1,953,673.40 P P 2010 437,754.05 437,754.05 875,508.10

This account is broken down as follows: 2011 Portions Pertaining to PPE: Total PPE Accumulated Depreciation Loans Payable-Domestic Contingent Assets Prepayments Inventories: Drugs and Medicines Inventory Other Supplies Inventory Continuing Appropriations Available for Operations TOTAL P 58,316,228.68 (1,086,785.28) (3,647,454.93) 53,581,988.47 3,645,933.98 950,620.30 90,631.39 510,489.95 601,121.34 10,783,447.71 13,539,023.18 83,102,134.98 P 2010 50,568,595.64 (789,111.97) (3,829,243.97) 45,950,239.70 3,645,933.98 0.00 32,278.93 160,038.95 192,317.88 0.00 10,917,893.84 60,706,385.40

Contingent Assets represents receivables from suppliers or entities resulting from audit disallowances/charges which have become final and executory. Prepayments includes include advances to contractors for various projects. Continuing Appropriations consists of Calamity Fund amounting to P1,171,710.00 and RA 7171 Tobacco Excise Tax in the amount of P9,611,737.71. A portion of the Available for Operations amount for CY 2011 includes 20% Development Fund savings of P1,081,396.30, Special Education Fund savings of P63,762.32 and the remaining balance accrues to the General Fund.

16. Income Accounts 2011 Local Taxes Permits and Licenses Service Income Business Income Other Income TOTAL 17. Expenditures Accounts 2011 2010 P 757,263.90 320,902.59 213,217.15 302,506.17 44,107,794.00 45,701,683.81 P 2010 1,012,106.67 258,950.92 272,639.90 244,129.85 36,550,938.69 38,338,766.03

Personal Services Maintenance and Other Operating Expenses Financial Expenses Subsidies and Donations TOTAL

17,084,349.04 5,752,513.22 100.00 245,900.00 23,082,862.26

15,903,751.79 6,428,843.50 0.00 4,148,928.50 26,481,523.81

PART II DETAILED FINDINGS AND RECOMMENDATIONS

Detailed Findings and Recommendations I. Financial and Compliance Audit

1. The Other Receivables account balance of P3,084,000.00 representing claims against various debtors was still carried in the books although the account has remained dormant for more than ten (10) years and whose collectability has been rendered improbable due to the lack of source documents to support the account. Review and verification of Trial Balance, Balance Sheet and supporting schedules under the General Fund showed Other Receivables account balance of P3,084,000.00 as of December 31, 2011. The account represents the claim of the municipality against five (5) debtor organizations for the implementation of livelihood projects. The details are as follows:
No. Name of Debtor Kabisig 1 Organizations 2 RIC Organizations Dancers 3 Organizations Farmers 4 Organizations RIC San Ildefonso 5 Chapter TOTAL Address San Ildefonso, I. Sur San Ildefonso, I. Sur San Ildefonso, I. Sur San Ildefonso, I. Sur San Ildefonso, I. Sur Particulars Kabisig Livelihood RIC Livelihood Dancers Livelihood Farmers Livelihood RIC Livelihood Amount P 2,804,000.00 100,000.00 30,000.00 120,000.00 30,000.00 P 3,084,000.00

Considering that the transaction occurred sometime in June 1997 or more than ten (10) years ago and that the account were not supported with source documents such as subsidiary ledgers, names and addresses of individual debtors and specific amounts released to them, management believes that the collection or recovery of the same is improbable. Hence, the existence of the dormant and uncollectible accounts in the books of the municipality continue to affect its true financial condition which requires the writing-off of the account as enunciated in COA Resolution No. 2003-002 dated January 30, 2003 as follows: WHEREAS, this Commission, in the exercise of this authority has authorized the writing-off of unliquidated cash advances, dormant and uncollectible accounts of government agencies the existence of which in the books continue to affect the true financial condition of the government;

17

WHEREAS, the New Civil Code provides that the right of action upon a written contract, upon an obligation created by law, or upon a judgment prescribes in ten (10) years (Article 1144). Management concurred with our observation during the exit conference and assured us to comply with our recommendation.
We recommend that the Municipal Mayor should instruct the Municipal Accountant to request in writing to the Commission Proper thru the Audit Team Leader for the writingoff of the dormant and uncollectible accounts amounting to P3,084,000.00.

2. The observers were not invited by the Bids and Awards Committee (BAC) in all stages in the procurement of goods and infrastructure projects through public bidding valued at P1,176,781.50 and P10,035,550.71, respectively, as required under pertinent provisions of the Implementing Rules and Regulations (IRR) of R.A. No. 9184 thereby defeating the principle of transparency in the procurement process because the observers were unable to assess the extent of the BACs compliance with the provisions of the IRR and areas of improvement in the BACs proceedings. The procurement process includes the following: (a) Invitation to Bid particularly the conduct of pre-procurement and pre-bid conferences, if applicable; (b) Receipt and Opening of Bids; (c) Evaluation of Bids; (d) Conduct of PostQualification; e) Award of Contracts. Review of invitation letters to observers prepared by the BAC and observation of its activities revealed that the required observers were only invited during the receipt and opening of bids stage in the procurement of goods and infrastructure projects through public bidding valued at P1,176,781.50 and P10,035,550.71, respectively. The details are shown in Annex C. The observers were not invited by the BAC to sit in its proceedings in the pre-bid conference, where applicable, evaluation of bids, conduct of post-qualification and award of contract stages as opposed to the pertinent provisions of the Implementing Rules and Regulations (IRR) of R.A. No. 9184, as amended on September 2, 2009 regarding the invitation of observers in all stages in the procurement process as follows: 13.1. To enhance the transparency of the process, the BAC shall, in all stages of the procurement process, invite, in addition to the representative of the COA, at least two (2) observers, who shall not have the right to vote, to sit in its proceedings, where: At least one (1) shall come from a duly recognized private group in a sector or discipline relevant to the procurement at hand, for example:

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a) For infrastructure projects, national associations of constructors duly recognized by the Construction Industry Authority of the Philippines (CIAP), such as, but not limited to the following: (1) Philippine Constructors Association, Inc.; (2) National Constructors Association of the Philippines, Inc.; and (3) Philippine Institute of Civil Engineers (PICE). b) For goods, a specific relevant chamber-member of the Philippine Chamber of Commerce and Industry. xxx (NGO). The other observer shall come from a non-government organization

13.4. The observers shall have the following responsibilities: a) To prepare the report either jointly or separately indicating their observations made on the procurement activities conducted by the BAC for submission to the Head of the Procuring Entity, copy furnished the BAC Chairman. The report shall assess the extent of the BACs compliance with the provisions of this IRR and areas of improvement in the BACs proceedings. Since the observers were not invited in other stages of the procurement of goods and infrastructure projects as shown in Annex C, they were unable to assess the extent of the BACs compliance with the provisions of the IRR and areas of improvement in the BACs proceedings. During the exit conference, the Vice-Chairman of the Bids and Awards Committee claimed that observers were only invited during the receipt and opening of bids. However, he informed us that all officials and employees concerned in other stages of the procurement process were invited to sit in its proceedings. We recommend that the Bids and Awards Committee should invite in writing the required observers in all stages in the procurement of goods and infrastructure projects through public bidding as required under pertinent provisions of the Implementing Rules and Regulations of R.A. No. 9184 to enhance transparency in the procurement process and to enable the observers to assess the extent of the BACs compliance with the provisions of the IRR and areas of improvement in the BACs proceedings. 3. The Bids and Awards Committee did not adopt the required conditions and procedures in the conduct of post-qualification on the bidders who tendered the Lowest Calculated Bid in the procurement of goods and infrastructure projects through public bidding in the amount of P1,176,781.50 and P10,035,550.71, respectively, as prescribed under pertinent provisions of Section 34 of the Revised Implementing Rules and Regulations of R.A. No. 9184. Thus the 19

veracity of the statements made and authenticity of documents submitted by the concerned bidders was not properly established. Review of post-qualification reports made by the Bids and Awards Committee (BAC) disclosed that they did not adopt the required conditions and procedures in the conduct of post-qualification on the bidder who tendered the Lowest Calculated Bid (LCB) in the procurement of goods and infrastructure projects through public bidding in the amount of P1,176,781.50 and P10,035.550.71 (Annex D). Moreover, the post-qualification reports were not supported with documents or reports substantiating the Technical Working Groups (TWG) validation of the authenticity of documents submitted and veracity of statements made by the concerned bidders as to the following: a. Validation of the authenticity of the documents submitted and veracity of information thereon; b. Validation of compliance of the goods offered with the requirements specified in the Bidding Documents, duly supported with inspection reports on the goods offered and test results; c. Validation of the sufficiency of the bid security as to type, amount, form and wording, validity period; d. Validation of compliance with the financial requirements; and e. Minutes of the post-qualification activities. The conduct of post-qualification of bidders who tendered the Lowest Calculated Bid in the procurement of goods and infrastructure projects through public bidding is prescribed under pertinent provisions of Section 34 of the Revised Implementing Rules and Regulations of R.A. No. 9184 as follows: Section 34.1. The Lowest Calculated Bid/Highest Rated Bid shall undergo post-qualification in order to determine whether the bidder concerned complies with and is responsive to all the requirements and conditions as specified in the Bidding Documents. Section 34.3. The post-qualification shall verify, validate, and ascertain all statements made and documents submitted by the bidder with the Lowest Calculated Bid/Highest Rated Bid, using non-discretionary criteria, as stated in the Bidding Documents. These criteria shall consider, but shall not be limited to, the following: a) Legal Requirements. To verify, validate, and ascertain licenses, certificates, permits, and agreements submitted by the bidder, x x x x. b) Technical Requirements. To determine compliance of the goods, infrastructure projects, or consulting services offered with the requirements specified in the Bidding Documents, including, where applicable: 20

i) Verification and validation of the bidders stated competence and experience, and the competence and experience of the bidders key personnel to be assigned to the project, for the procurement of infrastructure projects and consulting services; ii) Verification of availability and commitment, and/or inspection and testing for the required capacities and operating conditions, of equipment units to be owned/leased/under purchase by the bidder for use in the contract under bidding, as well as checking the performance of the bidder in its ongoing government and private contracts (if any of these on-going contracts shows a reported negative slippage of at least fifteen percent (15%), or substandard quality of work as per contract plans and specifications, or unsatisfactory performance of the contractors obligations as per contract terms and conditions, at the time of inspection, and if the BAC verifies any of these deficiencies to be due to the contractors fault or negligence, the agency shall disqualify the contractor from the award, for the procurement of infrastructure projects; iii) Verification and/or inspection and testing of the goods/product, after sales and/or maintenance capabilities, in applicable cases, for the procurement of goods; and iv) Ascertainment of the sufficiency of the bid security as to type, amount, form and wording, and validity period. c) Financial Requirements. To verify, validate and ascertain the bid price proposal of the bidder and, whenever applicable, the required CLC in the amount specified and over the period stipulated in the Bidding Documents, or the bidders NFCC to ensure that the bidder can sustain the operating cash flow of the transaction. As stated in the foregoing, the intent of post-qualification is to determine whether the concerned bidder with the LCB had complied with and responsive to all the requirements and conditions as specified in the bidding documents. If such process is not properly observed by the BAC, prospective bidders who have submitted unauthentic documents and made false statements may be post-qualified and ultimately awarded the contracts to the detriment of eligible and qualified bidders. During the exit conference, the Municipal Accountant who is a member of the Technical Working Group recalled that she was able to verify the Income Tax Returns (ITR) and Bid Security of some bidders who tendered the Lowest Calculated Bid. On the other hand, The Vice-Chairman of the BAC explained that some documents submitted were not verified due to financial constraints. However, they agreed to abide by our recommendation.

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We recommend that the Bid and Awards Committee should strictly observe the conditions and procedures in the conduct of post-qualification as provided under pertinent provisions of Section 34 of Implementing Rules and Regulations of R.A. No. 9184 to ensure the authenticity of documents submitted, and the veracity of statements made, by bidders who tendered the Lowest Calculated Bid in the procurement of goods and infrastructure projects through public bidding. 4. Management did not furnish the Auditor with copies of perfected contracts and its supporting documents for the procurement of goods and infrastructure projects within five (5) working days from its execution and issuance costing P1,176,781.50 and P10,035,550.71, respectively, for review purposes, as required under pertinent provisions of COA Circular No. 2009-001. Thus defects and/or deficiencies in the purchase orders and contracts as well as corrective measures to be undertaken, if any, were not informed to management at once. Review of 2011 transactions of the municipality from January 2011 to December 31, 2011 disclosed that copies of eight (8) perfected contracts pertaining to the procurement of goods and infrastructure projects costing P1,176,781.50 and P10,035,550.71, respectively, (Annex E) were not furnished by management to the Auditor within the prescribed period as required under the pertinent provisions of COA Circular No. 2009-001 dated February 12, 2009 as follows: Section 2.1 This Circular shall cover all contracts, purchase orders, and the like, entered into by any government agency irrespective of amount involved. Section 3.1.1- Within five (5) working days from the execution of contract by the government or any of its subdivisions, agencies, instrumentalities including government-owned or controlled corporations and its subsidiaries, a copy of said contract and each of all documents forming part thereof by reference or incorporation shall be furnished to the Auditor of the agency concerned. Section 3.1.4- The Auditor shall review the contract within a period ranging from five (5) to twenty (20) working days from receipt of the contract. X x x. Without waiting for the period herein established, the Auditor concerned shall call the immediate attention of management of regarding defects and deficiencies noted in the contract and suggest corrective measures as appropriate and warranted. Xxx. Section 3.2.1- A copy of the purchase order irrespective of amount and each and every supporting document shall within five (5) working days from issuance thereof, be submitted to the Auditor concerned. Within the same period, the Auditor shall review and point out to management the defects and deficiencies, if any.

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In view of the inability of management to comply with the submission of copies of purchase orders and contracts to our office within five (5) working days upon approval together with its supporting documents for review, we could not implement a systematic and effective review process directed towards immediately informing them of relevant audit results especially defects and/or deficiencies noted in the purchase orders and contracts, if any. Under the circumstances, we could not also suggest or offer to management specific corrective measures on the defects and/or deficiencies noted, if any. During the exit conference, the Municipal Accountant explained that the required documents were only submitted to the Auditor concerned during the conduct of inspection on the completed projects and delivered items of the municipality. The BAC Secretariat however agreed to comply with our recommendation. We recommend that the Municipal Mayor should require the BAC Secretariat to comply with the pertinent provisions of COA Circular No. 2009-001 regarding the submission of copies of purchase orders and perfected contracts together with its supporting documents to the Auditor within five (5) working days from execution for review and evaluation so that management will be immediately informed of defects and deficiencies noted, if any. 5. The procurement monitoring report which shall be approved and submitted by the Head of the Procuring Entity to the Government Procurement Policy Board (GPPB) in printed and electronic format within fourteen (14) calendar days after the end of each semester was not prepared by the Bids and Awards Committee as prescribed under Section 12.2 of the Revised Implementing Rules and Regulations of R.A. No. 9184 Section 12.2 of the Revised Implementing Rules and Regulations of Republic Act (R.A.) No. 9184 otherwise known as the Government Procurement Reform Act provides that The BAC shall be responsible for ensuring that the procuring entity abides by the standards set forth by the Act and this IRR, and it shall prepare a procurement monitoring report in the form prescribed by the GPPB. The procurement monitoring report shall cover all procurement activities specified in the APP, whether ongoing and completed, from the holding of the pre-procurement conference to the issuance of notice of award and approval of the contract, including the standard and actual time for each major procurement activity. The procurement monitoring report shall be approved and submitted by The Head of the Procuring Entity to the GPPB in printed and electronic format within fourteen (14) calendar days after the end of each semester. Our inquiry with the Bids and Awards Committee (BAC) Chairman of the municipality including our communications to his office on the preparation, approval and submission by the Municipal Mayor of the procurement monitoring report to the 23

Government Procurement Policy Board (GPPB) in the prescribed form and period produced no positive outcomes. The said report was not prepared by the BAC. Such report shall cover all procurement activities specified in the APP, whether ongoing and completed, from the holding of the pre-procurement conference to the issuance of notice of award and approval of the contract, including the standard and actual time for each major procurement activity. Since we failed to obtain a copy of the procurement monitoring report from the BAC in the prescribed form which is downloadable from the GPPB website, we were unable to entirely verify whether or not the procurement activities of the municipality was undertaken in accordance with their approved Annual Procurement Plan (APP) and consistent with its duly approved yearly budget. Furthermore, the inability of the municipality to submit the procurement monitoring report to the GPPB in the prescribed format and period may unfavorably affect the GPPBs performance of their duties and responsibilities to ensure proper implementation by procuring entities of the Implementing Rules and Regulations (IRR) of R.A. No. 9184 to conduct an annual review of its effectiveness and to recommend any amendments thereto, as may be necessary. During the exit conference, the members of the BAC mentioned that they are not aware on the aforesaid procurement law. However, they expressed their willingness to comply with our recommendation. We recommend that the Municipal Mayor should require the members of the Bids and Awards Committee to prepare the Procurement Monitoring Report for his approval and submission to the Government Procurement Policy Board in printed and electronic format within fourteen (14) calendar days after the end of each semester as prescribed under Section 12.2 of the Revised Implementing Rules and Regulations of Republic Act (R.A.) No. 9184. We also recommend that the Municipal Mayor should direct the members of the Bids and Awards Committee to download the prescribed form of the procurement monitoring report from the Government Procurement Policy Board website for reference as to coverage and contents thereto. 6. The 2011 Annual Procurement Plan for Common-Use Supplies and Equipment was not submitted by management to the Department of Budget and Management Regional Office No. 1, City of San Fernando, La Union within the time prescribed under Budget Circular Letter No. 2011-6 dated August 25, 2011. Thus the required information therein was not included in the consolidation of required data to be forwarded to the Procurement Service as basis in its projection of inventory requirements, scheduling of procurement activities and overall management of the central procurement of common-use goods.

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Inquiry with the Chairman, Bids and Awards Committee (BAC) of the municipality on February 3, 2012 disclosed that the 2011 Annual Procurement Plan for Common-Use Supplies and Equipment (APP-CSE) was not submitted within the prescribed time to the Department of Budget and Management Regional Office No. 1, City of San Fernando as required under pertinent provisions of Budget Circular Letter No. 2011-6 dated August 25, 2011. The pertinent provisions of Budget Circular Letter No. 2011-6 dated August 25, 2011 with respect to the use of the Procurement Service in procurement activities are as follows: Section 4.1. All National Government Agencies, including Military and Police Units; GOCCs, GFIs and LGUs are required to submit their Annual Procurement Plan for Common-Use Supplies and Equipment (APP-CSE), using the prescribed format shown as Annex A. The same may be downloaded thru the Procurement Service website at http://www.procurement service.org. Downloads tab and the PhilGEPS website at http://www.philgeps.net-About PhilGEPS tabUseful Downloads. The submission of the APP-CSE, nonetheless, shall not affect the responsibility of the procuring entity to submit their Annual Procurement Plan pursuant to Section 7 of R.A. 9184 and its IRR. Section 4.2. The accomplished APP-CSEs are due for submission to the DBM on the following dates: FY 2011 APP-CSE on or before September 15, 2011 FY2012 APP-CSE on or before November 15, 2012; and Henceforth, the APP-CSE shall be submitted on or before November 15 of each year.

Section.4.2.2 SUCs and LGUs are likewise required to submit their APPCSE to the DBM Regional Office. Since the APP-CSE was not submitted as required by the foregoing budget regulation, the necessary information that is supposed to be contained in the APPCSE, was not included in the consolidation of required data to be forwarded to the Procurement Service to serve as basis in its projection of inventory requirements, scheduling of procurement activities and overall management of the central procurement of common-use goods. During the exit conference, we were informed that the municipality did not receive the aforesaid letter. However, the personnel concerned told us that the 2011 APP-CSE as required by the DBM was already submitted. We recommend that the Municipal Mayor should require the Bids and Awards Committee to strictly comply with the submission of the 2011 Annual Procurement Plan for Common-Use Supplies and Equipment in consonance with Budget Circular 25

Letter No. 2011-6 dated August 25, 2011 to ensure the inclusion of useful information required by the DBM-Regional Office for consolidation purposes and to provide data to the Procurement Service relative to the projection of inventory requirements, scheduling of procurement activities and overall management of the central procurement of common-use goods. 7. The Procurement of Common-Use Supplies from the Procurement ServiceDepartment of Budget and Management (PS-DBM) for the year 2011 was not observed by management as provided under Administrative Order 17 dated July 28, 2011 thereby affecting the comprehensive reforms undertaken by the national government to modernize and standardize government procurement systems. Review of 2011 transactions of the municipality pertaining to the procurement of goods disclosed that it did not procure common-use supplies and equipment from the PS-DBM contrary to pertinent provisions of Administrative Order No. 17 dated July 28, 2011 issued by His Excellency President Benigno C. Aquino III directing the use of the Procurement Service and the Philippine Government Electronic Procurement System in procurement activities in accordance with R.A. No. 9184, and improving the operation of the Procurement Service as follows: Section 1. Reiteration of Policy. The national government hereby reiterates the policy that procurement of government supplies, materials, and equipment shall be done in the most transparent and competitive manner by purchasing from legally, technically, and financially capable sources in economic lot sizes, by observing cost-efficient specifications, and by making prompt payment. In line with this, all government agencies shall procure their common-use supplies from the PS and use the PhilGEPS in all their procurement activities, including publishing all their bid opportunities and posting all their awards and contracts in it, in accordance with R.A. No. 9184. Section 2. Coverage. This Administrative Order shall apply to all National Government Agencies, including Military and Police Units; Government-Owned and/or Controlled Corporations (GOCCs); Government Financial Institutions (GFIs); State Universities and Colleges (SUCs); and Local Government Units (LGUs). Section 4. Procurement of Common-Use Supplies. Common-use supplies shall be procured directly from the PS or its depots without need of public bidding as provided in Section 53.5 of the Implementing Rules and Regulations (IRRs) of R.A. No. 9184. If the municipality will not fully and consistently abide with the foregoing, it would contribute to the inability of the national government to achieve the

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comprehensive reforms it has undertaken to modernize and standardize government procurement systems. Management noted our observation during the exit conference and agreed to abide by our recommendation. We recommend that management should procure Common-Use Supplies which are necessary in the transactions of its official business from the Procurement Service-Department of Budget and Management as provided under Administrative Order No. 17 to contribute to the attainment of a modernized and standardized government procurement system. II. Value for Money Audit 8. Government funds totaling P10,035,550.71 representing the share of the municipality from the fifteen percent (15%) of excise taxes on locally manufactured Virginia-type cigarettes was utilized for projects other than those prescribed under pertinent provisions of Memorandum Circular No. 61-A dated January 9, 1992 thereby defeating the policy of the government to extend special support to local farmers as well as depriving them of projects that will increase their income and productivity. As a component of a Virginia tobacco-producing province, the municipality received from the Department of Budget and Management the total amount of P19,812,461.00 representing its 2011 share from the fifteen percent (15%) of excise taxes on locally manufactured Virginia-type cigarettes pursuant to R.A. No. 7171. Out of this, the total amount of P10,617,934.12 was appropriated for different infrastructure projects. However, audit and review of transactions pertaining to the utilization of the fund disclosed that the total amount of P10,035,550.71 was used for the implementation of five (5) projects other than those prescribed under pertinent provisions of Memorandum Circular No. 61-A thereby defeating the policy of the government to extend special support to local farmers as well as depriving them of projects that will increase their income and productivity. The details are as follows:

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No. 1 2 3 4 5 TOTAL

Name of Project Improvement and Renovation of Municipal Building, Phase I Improvement and Renovation of Municipal Building, Phase II Concreting of Pavement at the Public Market Repair and Improvement of Stairs Leading to Bungro Elementary School Improvement of Farmers Plaza and In front of the Municipal Hall

Appropriation P 5,000,000.00 2,019,737.66 180,000.00 70,000.00 3,348,16.46 P 10,617,934.46

Contract Amount P 4,434,118.43 2,009,706.86 179,682.32 69,099.00 3,342,42.10 P 10,035,550.71

The pertinent provisions of Memorandum Circular 61-A prescribing the guidelines for the implementation of R.A. No 7171 dated January 9, 1992 are as follows: The respective shares of the LGUs of beneficiary provinces shall be treated as a special account under the general fund of the LGUs of provinces to be utilized for the following projects: Cooperative projects that will enhance better quality of products, increase productivity, guarantee the market and as a whole increase farmers' income; Livelihood projects particularly the development of alternative farming system to enhance farmers' income; Agro-industrial projects that will enable tobacco farmers in the Virginia tobacco-producing provinces to be involved in the management and subsequent ownership of these projects such as post-harvest and secondary processing like cigarette manufacturing and by-product utilization; and Infrastructure projects such as farm-to-market roads.

During the exit conference, the Municipal Mayor explained that the aforesaid projects were envisioned to be used by the farmers of the municipality. We recommend that management should strictly comply with the provisions of Memorandum Circular 61-A dated January 9, 1992 relative to the utilization of its share from the fifteen percent (15%) of the excise taxes on locally manufactured Virginia-type of cigarettes to conform with the policy of the government to extend special support to local farmers as well as to provide them with projects that will increase their income and productivity. 28

9. Out of the 20% Development Fund appropriation of P4,733,756.40 the amount of P723,250.55 or 15.28% was used for programs, projects and activities other than those specified in Section 3.0, DILG-DBM Joint Memorandum Circular No. 1, Series of 2005, dated September 20, 2005. Thus the use of the fund did not fully contribute to the attainment of desirable socio-economic and environmental outcomes for the municipality to the detriment of intended beneficiaries. Review of the 2011 annual budget of the municipality disclosed that the amount of P4,733,756.40 was appropriated for the 20% Development Fund. Of this, the amount of P723,250.55 or 15.28% was used for programs, projects and activities other than those specified in the joint circular prescribing the guidelines on the appropriation and utilization of the 20% of the Annual Internal Revenue Allotments for development projects. The details are as follows: Name of Program/Project Christmas Decor and Lights Support to Bureau of Fire Protection Philhealth Membership Honorarium of Physical Fitness Instructor TOTAL Obligation P 22,910.00 41,140.55 648,400.00 10,800.00 P 723,250.55

Section 3.0 of the Department of Interior and Local Government and Department of Budget and Management (DILG-DBM) Joint Memorandum Circular enumerates the projects covered to be funded out of at least 20% of the annual internal revenue allotment. The projects therein cover social and economic development and environmental management. (Annex F) As a result, the use of the 20% development fund for projects did not fully contribute to the attainment of desirable socio-economic and environmental outcomes for the municipality to the detriment of intended beneficiaries. During the exit conference, management noted our observation and agreed to abide by our recommendation. We recommend that management should utilize the 20% Development Fund for projects, programs and activities as specified under Section 3.0, DILG-DBM Joint Memorandum Circular No. 1, Series of 2005, dated September 20, 2005 to attain desirable socio-economic and environmental outcomes for the municipality and intended beneficiaries. 10. The Municipality did not formulate its 2010 Gender and Development (GAD) Plan as set forth in Section 31 of the General Provisions of the 2011 29

General Appropriations Act and Section 4.4 DBM, NEDA and NCRFW Joint Circular No. 2004-1. Thus, no appropriations were allocated for the implementation of GAD related projects, programs and activities to the detriment of the intended beneficiaries. Gender and Development (GAD) mainstreaming is the main strategy for ensuring that the government pursues gender equality in all development projects to achieve the vision of gender responsive society where men and women contribute to and benefit from development projects. Review and examination of the 2011 of the approved annual budget of the municipality showed that no appropriation was set aside to support GAD related projects, programs and activities. Furthermore, inquiry with the GAD focal person disclosed that no GAD Plan was formulated for 2011 contrary to the following: Section 31 of the General Provisions of the 2011 General Appropriations Act states: Programs/Projects related to Gender and Development. All departments, bureaus, agencies, SUCs, GOCCs, and LGUs shall formulate a Gender and Development Plan designed to address gender issues within their respective sectors or mandate x x x x. The GAD Plan shall be integrated in the regular activities of the agencies, which shall be at least five percent (5%) of their respective budgets. The formulation of the GAD Plan shall proceed from the conduct of gender analysis, the generation and review of sex-disaggregated data, and consultation with gender advocates and women clientele. Its implementation shall contribute to the economic empowerment especially of marginalized women, the protection, promotion, fulfillment of womens rights and the practice of gender-responsive governance. Utilization of the GAD budget shall be evaluated based on the GAD performance indicators identified by said agencies. Section 4.4 of DBM, NEDA and National Commission on the Role of Filipino Women (NCRFW) Joint Circular No. 2004-01 provides: GAD planning and budgeting shall be observed annually and incorporated in all programming and budgeting exercises of agencies. The GAD activities in the GAD plan and budget must be included in the agency budget proposal in accordance with the budget call. Agencies shall ensure that the cost of implementing activities is part of their budget. x x x x. Agency heads shall be responsible for ensuring that GAD activities are provided with adequate resources. As a result, no GAD related projects, programs and projects were implemented for the year 2011 to the detriment of intended beneficiaries. 30

During the exit conference, the Budget Officer claimed that no GAD Plan was formulated for 2011. However, she informed us that there were GAD related programs, projects and activities implemented under the 20% Development Fund of the municipality. We recommend that the Municipal Mayor should require the GAD Focal Person to formulate a GAD Plan designed to address womens issues and concerns which implementation is funded with at least 5% of the annual local budget to guarantee that women especially those from the marginalized sectors benefit from GAD projects and programs.

III.Revenue Audit
11. The thirty five percent (35%) and twenty five percent (25%) share of the Province of Ilocos Sur and concerned barangays from the proceeds of real property tax collections for the year ended December 31, 2011 totaling P267,025.88 was not distributed as required under pertinent provisions of Section 271 of R.A. No. 7160. Hence, the intended recipients were denied of additional funds to finance the delivery of basic services and the implementation of development projects and programs for their constituents. Examination of the books of accounts of the municipality covering the year ended December 31, 2011 disclosed that Due to Local Government Units account under the General Fund has a balance of P267,025.88. These represented the thirty five percent (35%) and twenty five percent (25%) share of the Province of Ilocos Sur and concerned barangays from the proceeds of real property tax collections in the amount of P155,765.15 and P111,260.73, respectively, but were not distributed to the intended recipients as provided under pertinent provisions of R.A. No. 7160, to wit: Section 271. Distribution of Proceeds. - The proceeds of the basic real property tax, including interest thereon, and xxx shall be distributed as follows: (a) In the case of provinces: (1) province - Thirty-five percent (35%) shall accrue to the general fund; (2) municipality - Forty percent (40%) to the general fund of the municipality where the property is located; and (3) Barangay - Twenty-five percent (25%) shall accrue to the Barangay where the property is located. (d) The share of each Barangay shall be released, without need of any further action, directly to the Barangay Treasurer on a quarterly basis within five 31

(5) days after the end of each quarter and shall not be subject to any lien or holdback for whatever purpose. Hence, the intended recipients were denied of additional funds to finance the delivery of basic services and the implementation of development projects and programs for their constituents. During the exit conference, the OIC-Municipal Treasurer claimed that the provincial and barangay shares were distributed on a yearly basis. She agreed however to comply with our recommendation. We recommend that the Municipal Mayor should require the OIC-Municipal Treasurer in coordination with the Municipal Accountant to distribute the provincial and barangay shares derived from the proceeds of real property tax collections to provide intended recipients with additional funds to finance the delivery of basic services and the implementation of projects and programs for their constituents. 12. The municipality has updated its Revenue Code thereby imposing and adjusting the rates of taxes, fees and charges and consistent with the exercise of its revenue-raising power but there were deficiencies noted therein contrary to pertinent provisions of the Local Government Code of 1991. The municipality through the Sanggunian Bayan has updated its 2006 Revenue Code by the enactment of the 2011 Revenue Code thus consistent with the exercise of its revenue-raising power and the adjustment of rates of taxes, fees and charges as well, pursuant to the following: The power to create sources of revenue by the municipality is provided under Section 129 of the Local Government Code which states Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units. Whereas the authority of Local Government Units to adjust rates of tax ordinances is provided under Section 191 of the same Code which states that Local units shall have the authority to adjust the tax rates as prescribed herein not oftener than once every five (5) years, but in no case shall such adjustment exceed ten percent (10%) of the rates fixed under this Code. Conversely, review of tax ordinances and 2011 Revenue Code disclosed the following deficiencies, to wit: The ordinances levying such taxes, fees or charges were enacted without prior public hearing conducted for the purpose as required under 32

Section 187 of the Local Government Code which provides that The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the enactment. The publishing and the posting of the tax ordinances was not observed as provided under Section 188 of the Local Government Code which states that Within ten (10) days after their approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue shall be published in full for three (3) consecutive days in a newspaper of local circulation: Provided, however, That in provinces, cities and municipalities where there are no newspapers of local circulation, the same may be posted in at least two (2) conspicuous and publicly accessible places. During the exit conference, the personnel concerned noted our observation and assured us to comply with our recommendation. We recommend that the Municipal Mayor should advise the Sanggunian Bayan to abide with the provisions of the Local Government Code as to the conduct of public hearing, publishing and posting of tax ordinances or revenue measures prior to its enactments.

IV. Compliance with Tax Laws

13. Out of the taxes withheld by the municipality during the year from various sources totaling P809,525.04, the amount of P808,733.29 was remitted by management to the Bureau of Internal Revenue. The remaining balance of P791.75 as of December 31, 2010 was also remitted on January 2012 pursuant to pertinent and applicable Revenue Regulations. Audit of Due to BIR account in all funds disclosed that the municipality withheld taxes from various sources totaling P809,525.04 as of December 31, 2011. Out of this, the total amount of P808,733.29 was regularly remitted by the OICMunicipal Treasurer to the Bureau of Internal Revenue (BIR). The year-end balance of P791.75 (Annex G) was remitted to the BIR on January of 2012 in compliance with pertinent and applicable revenue regulations as follows: Section 2.81 of BIR Revenue Regulations 2-98 provides that Every person required to deduct and withhold the tax and compensation shall make a return and pay such tax on or before the 10th day of the month following the month on which withholdings were made to any authorized agent bank with the Revenue District Office.

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Section 2 (a) of BIR, Revenue Regulations No. 1-87 provides that The Provincial Treasurer and Governor in provinces; the City Treasurer and Mayor in cities; the Municipal Treasurer and Mayor in municipalities; the Head of Office in departments, bureaus, agencies, instrumentalities, government-owned and controlled corporations, and other government offices are personally charged with the duty to withhold and remit taxes on compensation, expanded and final withholding taxes, as well as government money payments on value added taxes and other percentage taxes including franchise taxes. Management was pleased with our observation and assured us to continue to comply with BIR regulations regarding the remittance of withheld taxes to the BIR to ensure that the municipality is doing its share in the contribution of revenues to the national government. We recommend that management should faithful carry on with the prompt remittance of taxes withheld from various sources as required by BIR Regulations to generate funds for the national government.

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PART III STATUS OF IMPLEMENTATION OF PRIOR YEARS AUDIT RECOMMENDATIONS

Status of Implementation of Prior Years Audit Recommendations

Out of the seven (7) recommendations embodied in the 2010 Annual Audit Report, five (5) were implemented and two (2) remained unimplemented, as detailed below: Audit Observation & Recommendation Management Action Complied Status of Implementation Fully Implemented Reason for Partial/Non Implementation

Ref

1. Procured, delivered and 2010 accepted items worth AAR P823,122.63 were not inspected because the Supply Officer did not notify the Auditor of the time and date of deliveries or furnish him copies of delivery documents within twenty four (24) hours after such acceptance as provided in Section A.2 and Section 6.9 of COA Circular No. 96-010 and 2009-002, respectively. We recommend that the Supply Officer should notify the Auditor or to furnish him copies of delivery documents within twenty four (24) hours from acceptance of delivered items for inspection purposes to ensure that procured, delivered and accepted items are those ordered by the municipality as to quantity, quality and specifications. 2. Notices of Award for the 2010 procurement of goods AAR obtained through Shopping amounting to

Complied

Fully Implemented

35

P741,044.33 were not posted in the Philippine Government Electronic Procurement System (PhilGEPS) website and at any conspicuous place in the premises of the municipality as provided in Section 54.3, Rule XVI of the Revised Implementing Rules and Regulations (RIRR) of R.A. No. 9184. We recommend that the Bids and Awards Committee (BAC), through its Secretariat, should strictly observe the posting of the Notices of Award for procurement of goods obtained through Shopping in the PhilGEPS website, and at any conspicuous place in the premises of the procuring entity to ensure interested users ready access to information and to promote transparency and competition in the procurement process. 3. Several disbursement 2010 vouchers for claims AAR subject to pre-audit totaling P297,956.00 were not submitted to Auditors Office. These were paid even without his audit action as prescribed under pertinent provisions of COA Circular No. 2009002. Thus we were unable to determine the

Complied

Fully Implemented

36

validity and propriety of the transactions. We recommend that management should strictly comply with the pertinent provisions of COA Circular No. 2009002 governing government transactions subject to pre-audit to ensure validity and propriety of the same and to avoid possible audit suspensions and disallowances. 4. The establishment of 2010 P212,500.00 as Real AAR Property Tax Receivable and Special Education Tax Receivable at the beginning of the year was not observed by responsible local officials as prescribed in Section 20 of the Manual on the New Government Accounting System for Local Government Units (MNGAS for LGUs), Volume I thereby affected the correctness and reliability of these receivable accounts and the related Deferred Real Property Tax Income. We recommend that the OIC-Municipal Treasurer should furnish the Municipal Accountant at the beginning of the year with a complete and accurate list of taxpayers with the corresponding 37

Complied

Fully Implemented

amount of taxes due and collectible for the year to serve as basis in recording in the books of accounts the Real Property Tax (RPT) and Special Education Tax (SEF) Receivables accounts and related Deferred Real Property Tax Income/Deferred Special Education Tax Income. 5. The twenty percent 2010 (20%) component of the AAR Annual Internal Revenue Allotment (IRA) amounting to P4,375,082.40 and P4,054,665.27 was appropriated and utilized respectively, for development projects or 93% budget utilization pursuant to pertinent provisions of DBMDILG Joint Memorandum Circular No. 1. Thus it contributed to the realization of desirable social, economic development and environmental outcomes essential in the attainment of its goals for a better quality of life of the constituency. We recommend that management should closely monitor the impact of implemented development projects on identified beneficiaries to ensure efficient and effective utilization of

Complied

Fully Implemented

38

funds in terms of the achievement of the objectives of each projects and programs. 6. The Municipality did not 2010 formulate its 2010 AAR Gender and Development (GAD) Plan as set forth in Section 32 of the General Provisions of the 2010 General Appropriations Act and Section 4.4 DBM, NEDA and NCRFW Joint Circular No. 2004-1. Thus the lack of appropriation and nonimplementation of related programs deprived recipients of the benefits to be derived thereto.

No GAD Plan was formulated for 2011.

Not Implemented

Reiterated In Finding No. 10.

We recommend that management should formulate a GAD Plan designed to address womens issues and concerns which implementation is funded with at least 5% of the annual local budget to guarantee that women especially those from the marginalized sectors benefit from GAD projects and programs. 7. Had the municipality 2010 No action enforced the remedies for AAR taken the collection of delinquent real property taxes aged (two) to nine (9) years totaling P437,754.05 as of December 31, 2010, concerned taxpayers could have been 39

Not Implemented

Management explained that posting of notices of delinquency to the main entrance of the Municipal Hall is not possible because of the

persuaded to pay their obligations thus providing additional funds to finance other local projects, programs and activities. We recommend to the Municipal Mayor the following: Require the OICMunicipal Treasurer to cause the posting of notices of delinquency to the main entrance of the municipal hall and in a publicly accessible and conspicuous place in each Barangay of the municipality. Such notice should specify the date upon which the tax became delinquent and shall state that personal property may be distrained to effect payment. Require the OICMunicipal Treasurer to deputize the Barangay Treasurers of each Barangay under the jurisdiction of the municipality to collect all taxes on real property provided that the latter is properly bonded for the purpose and that the premium on the bond should be paid by municipality.

on-going renovation of said building.

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 Require the OICMunicipal Treasurer to post the notice of the dates on or before the thirty-first (31st) day of January each year, when the basic real property tax and the additional tax for the Special Education Fund (SEF) may be paid without interest at a conspicuous and publicly accessible place at the municipal hall to induce taxpayers to pay their tax obligations within the prescribed period.

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PART IV - ANNEXES

Annex F Finding No. 9, page 28 PROJECTS COVERED UNDER THE 20% DEVELOPMENT FUND DILG-DBM Joint Memorandum Circular, s. 2005 dated September 20, 2005 Section 3.0 The 20% of the IRA intended for development projects shall be utilized for the following 3.1 SOCIAL DEVELOPMENT 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.1.6 3.1.7 3.2 Establishment or rehabilitation of productivity enhancement center for out-of-school youths, women, minors, displaced families, indigenous people, differently-abled persons and older persons; Establishment or rehabilitation of manpower development center; Construction or rehabilitation of health centers, rural health unit or hospital, and purchase of medical equipment; Construction or rehabilitation of local government-owned potable water supply system; Installation of street lighting system; Prevention of cultural/historical sites; Other programs or projects of similar nature.

ECONOMIC DEVELOPMENT 3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 Implementing of livelihood/entrepreneurship development program or project; Construction/rehabilitation of a communal irrigation of water impounding System and purchase of post-harvest facilities such as farm or hand tractor with trailer, thresher, mechanical drier and the like. Construction/rehabilitation of farm-to-market roads, Construction/rehabilitation of local roads or bridges; and Other Programs or projects of similar nature.

3.3

ENVIRONMENTAL MANAGEMENT 3.3.1 3.3.2 3.3.3 3.3.4 Construction/rehabilitation of sanitary landfill or controlled dumpsite and Purchase of garbage truck or related equipment. Community reforestation or urban greening projects. Flood control programs or projects such as de-clogging of canals or desilting of rivers. Other environmental management programs or projects that promote air and Water quality, as well as productivity of coastal or freshwater habitat, Agricultural land and forest land. Prepared by: RAMON B. FETSEJO State Auditor III Audit Team Leader