PHILIPPINE NATIONAL RAILWAYS
EXECUTIVE SUMMARY
A.
Introduction
The Philippine National Railways (PNR) is a wholly-owned government corporation created
on June 20, 1964 by virtue of Republic Act No. 4156 to provide nation-side railroad and
transportation system. Subsequently, on August 20, 1971, RA 6366 was issued amending
certain provisions of RA 4156 with the objective of rehabilitation and modernization of
transport facilities to effectively perform mandated tasks. With the expanded role of the PNR
in the total economic and social development of the country it was imperative to facilitate the
restoration of abandoned lines, and expansion of line services; thus, re-amendment of
several provisions of the Corporate Charter was made four years later upon the issuance of
Presidential Decree No. 741 on July 3, 1975. Among the changes made to expeditiously
attain the objectives is the increase in the Corporation’s authorized capital stock to P1.5
billion.
As a policy, the PNR shall be administered with the view of serving the interests of the public
by providing maximum service yet ensuring economy in operation with the service rendered
at minimum passenger and freight prices possible. Pursuant to its existing Charter, the
PNR’s term of existence is for fifty years expiring in year 2014.
The policies and programs of the PNR are synchronized and coordinated with the
Department of Transportation and Communication (DOTC). The corporate powers of the
agency are vested in and exercised by its Board of Directors composed of the Chairman,
Vice Chairman, and 7 members. Pursuant to Executive Order No. 366 and its Implementing
Rules and Regulations and Memorandum Order No. 190, s. 2005, the Rationalization Plan of
the PNR was approved in May 2008. Aside from the Offices of the General Manager and the
Assistant General Manager, PNR management in the Organization Structure of the PNR as
rationalized in 2008 is comprised of 4 departments and 18 division offices. Also among the
highlights in the rationalization is the reduction in regular workforce as a result of
outsourcing/contracting out. The authorized number of positions was reduced then from
3,064 to 199. Actual manpower complement as of December 31, 2012 consists of a total of
204 permanent employees and 1,375 job order employees.
B.
Financial Profile (In thousand pesos)
Comparative Financial Position
Assets
Liabilities
Equity/Capital Deficiency
2012
2011
Increase/(Decrease)
%
53,102,554
25,956,031
27,146,522
13,621,810
25,607,009
(11,985,199)
39,480,744
349,023
39,131,721
289.8
1.4
326.5
Comparative Results of Operations
Total revenue
Total expenses
Total other income (expenses)
Subsidy from National Government
Net income (loss)
2012
2011
Increase/(Decrease)
%
397,641
1,143,950
567,572
128,653
(50,083)
354,243
1,049,993
(52,170)
779,995
32,075
43,398
93,957
619,742
(651,342)
(82,158)
12.3
8.9
1,187.9
83.5
256.1
C.
Scope of Audit
The audit covered the transactions and accounts of PNR for CY 2012. The audit involved
performing procedures to obtain audit evidence to determine the fairness of presentation of
the financial statements and the propriety of the financial transactions in accordance with the
Philippine Standards of Auditing, applicable laws, rules and regulations.
D.
Independent Auditor’s Opinion
As stated in the Independent Auditor’s Report presented in Part I of this Report, the Auditor
rendered an adverse opinion on the fairness of presentation of the financial statements of the
PNR as of December 31, 2012 for reasons stated therein.
E.
Significant Audit Observations and Recommendations
Hereunder is a summary of the significant audit observations, with details presented in Part
II.A of this Report:
1. The Land account carried an appraised value of P40.05 billion determined by
PNR Management based on BIR zonal valuation as of December 31, 2012, and
not on fair market value determined by an independent appraiser or reputable
expert, as required in COA Resolution No. 89-17.
The appraisal which resulted in huge leap of the book value of Land from
P704.01 million, or a gigantic increase of P39.35 billion or by 5,689.60 % was
done 31 years after its appraisal in 1981, contrary to PAS 16 which requires that
revaluation should be made with sufficient regularity to ensure that the carrying
amount does not differ materially from that which would be determined using
fair value at the balance sheet date.
Likewise, the appraisal with significant impact on the financial statements was
not supported with authority from the PNR Board.
Recommendations:
We reiterated our recommendation that the PNR hire an independent and qualified
appraiser, as required in COA Resolution No. 89-17 and PAS 16, to determine the
fair market values of the major class of assets under Property and Equipment, using
the Masterlist of Real Property prepared by the Real Estate Division as a tool/guide in
locating the land owned and utilized in operations for proper valuation.
2. The carrying value of the PNR Hospital (Land and Land Improvements) per
books of P1.73 million was not adjusted to reflect the prevailing fair market
value of P254.86 million at the time of sale, and the increase of P219.75 million
in book value of the PNR Hospital arising from the appraisal conducted in year
2009 was booked up only upon its sale in 2010 as Gain on Sale of Asset and not
as Revaluation Surplus. Had this been recorded as Revaluation Surplus, the
sale would result in net loss of P863,360, and not in net income of P219.75
million.
On the other hand, the selling price at P70.31 million of the three parcels of land
sold to LRTA was based on BIR zonal valuation, and not on its fair market
value, and the increase in book value was likewise recognized as Gain on Sale
of Assets instead of Revaluation Surplus, resulting also in an increase in Net
Income amounting to P70.26 million.
Recommendation:
Accounting adjustments should be taken up on the sale of the PNR Hospital and the
three parcels of land to LRTA to correct the balances of affected accounts in the
books of the PNR.
3. The existence, validity and valuation of the Property, Plant and Equipment
(PPE) with year-end balance of P17.11 billion (gross historical value),
comprising 32.2% of total assets were not ascertained due to incomplete
physical inventory taking and absence of Schedule of PPE and equipment
ledger cards with detailed information on the assets comprising the account.
Likewise, there was no designated property custodian responsible in
monitoring and control of fixed assets other than office furniture, fixture and
equipment thus persons accountable thereon could not be pinpointed.
Recommendation:
Direct the Inventory Committee to fast track the conduct of physical inventory and the
submission of a report on the results thereof reconciled with the property and
accounting records which on the other hand, should be completed and updated.
4. Depreciation Expense of P181.91 million in CY 2012 was understated as it was
computed only on selected items under PPE and not on all items comprising
PPE, contrary to PAS 16, and resulting in understated net loss reported during
the year.
Recommendation:
The Controllership Division should prepare a detailed Schedule of PPE to provide
basis for the computation of Depreciation Expense yearly, which should be applied
consistently for the items comprising PPE.
5. Accounts Payable with year-end balance of P137.43 million was not valid due to
recording of certified obligations amounting to P114.14 million without
documentation on the incurrence thereof.
Also, the current practice of
recording pre-audited disbursement vouchers as reduction (credit) to Cash-inBank account instead of Accounts Payable without preparation yet of the check
covering payment of the obligation casted doubt on the accuracy of the
balances of the Accounts Payable and Cash in Bank accounts.
Recommendations:
a. Stop the practice of recording liabilities without complete documentation of the
incurrence of obligations;
b. Record obligations only upon receipt of goods and service procured; and
c. Record disbursements only upon preparation and approval of the check
covering the obligation to be settled with a debit to Accounts Payable and a
credit to Cash In Bank.
We issued Notice of Suspension No. 13-001-401-(12) dated July 9, 2013 requiring
the submission of documents supporting JEV 549 to establish the validity of the
obligations.
6. Costs of repair and maintenance, and replacement of parts totaling P83.32
million were improperly capitalized and charged to Construction in Progress
(CIP), contrary to PAS 16. Also, supply and delivery contract costs totaling
P42.26 million were recorded as CIP without proof of receipt of goods and
service rendered. Thus, the CIP was overstated by P125.58 million with
corresponding overstatement of Accounts Payable, and understatement of
Repair and Maintenance Expense and Tools and Other Equipment.
Likewise, the balance of CIP amounting to P2.57 billion as of December 31,
2012 was not accurately stated as the completed components of the NorthrailSouthrail Linkage Project and improper charges in the previous years were still
part of the CIP balance and were not yet reclassified to proper accounts. No
detailed schedule or breakdown by project to fully account the balance could
be provided.
Recommendations:
a. The cost of labour, small parts or consumables for day-to-day servicing be
budgeted and accounted as Repairs and Maintenance charged to current
year’s income instead of part of carrying cost of CIP;
b. Replacement items delivered which could be directly identified to the related
fixed assets be treated part of their carrying costs with the replaced parts
derecognized from the books if these could be measured reliably;
c. The Controllership Division should conduct thorough analysis of past
transactions recorded under the CIP account and adjust to PPE accounts or
Adjustment of Prior Year’s Income account all inappropriate charges to the
CIP account; and
d. A project status report should be prepared to support the year-end balance of
CIP.
7. The reported balance of Other Assets of P15.97 million consisting of nonoperating property and materials in-transit property was understated due to
non-recognition as part of the account, unserviceable and disposable assets
found in PNR workshops and compound. Also, the unserviceable and
disposable government property were not adequately safeguarded.
Recommendations:
a. Conduct periodic inventory and inspection of the stocks of unserviceable
property to avert possible losses; and, properly account the non-operating
property under Other Assets;
b. Considering that the non-operating assets are subject to further obsolescence
and diminishing market value, immediately conduct the disposal process thru
auction or sale of the obsolete and no longer needed property to generate
fund for operational needs; and
c. Designate a property custodian for the unserviceable and disposable assets
8. Deficiency tax liability amounting to P218.64 million was not recognized in the
books, or disclosed in the Notes to Financial Statements, contrary to PAS 37.
This pertained to real property taxes assessed by the City of Manila which were
covered with Memorandum of Agreement to be settled thru “Dacion en Pago”.
Recommendation:
Considering that the issue on the PNR’s exemption from payment of real property
taxes to the City of Manila has not been resolved yet, we recommended that
Management disclose in the Notes to Financial Statements the real property taxes
initially agreed settled in the concept of “Dacion en Pago” in accordance with the
Memorandum of Agreement dated December 2, 2003, by and between the PNR and
the City of Manila.
9. Delivery of “Larch” Wood ties with total cost of P47.13 million (net of Expanded
Withholding and Value Added Taxes of P2.67 million) and acceptance thereof
by Management even if not in accordance with the specification required and
approved by the PNR Board of Directors, was extremely disadvantageous to
the government and the general public who are the intended beneficiaries of
the items procured. All supporting documents relative to the transaction to wit:
board resolution, BAC resolution, bidding documents, notice of award, notice
to proceed, and contract agreements specified the procurement of “Yakal”
(hard) wood and not “Larch” (soft) wood.
Moreover, based on the results of laboratory test conducted by the Forest
Products Research and Development Institute of the Department of Science
and Technology, the sample larch wood tested, ranged from low to moderately
low as to strength classification and related properties. Wood ties of inferior
quality would have shorter life span; installation with modification would entail
additional cost on support; and, more importantly could pose hazard at the
railroad tracks and endanger train commuters’ lives.
Recommendation:
Finding the amendment to the contract agreements through letter of conformity null
and void; and, the Larch wood paid for not in accordance with the required and
approved specification as indicated in the board resolution, BAC resolution, bidding
documents, notice of award and notice to proceed, we issued Notice of Disallowance
for the payments made to the Supplier of ‘larch’ wood bridge, switch and joint ties.
We recommend that appropriate action, administrative or criminal, or both be initiated
against those who participated in the transaction.
10. A P10.61 million reimbursement representing the cost of repair, maintenance,
fuel, salaries of Train Drivers and Conductors, and overtime of PNR personnel
was deducted from the rental fees on the use of PNR locomotives and
equipment collected from the Contractor for the Supply and Distribution of
Ballast for the Reopening of the Bicol Line Project, WITHOUT ANY VALID
BASIS as there was no provision in the Contract Agreement between the PNR
and the Contractor that the PNR shall defray the operating and maintenance
costs nor was there an addendum or separate lease agreement executed for the
purpose, and the claim was not adequately documented.
Moreover, the Contract Agreement did not provide for rental rates, and the
amount determined payable using PNR Marketing Circular No. 385 as basis
which took effect on November 8, 2000 amounted to P13.45 million for the
locomotive and gravel car, and P0.81 million for the tamping machine or a total
of P14.26 million of which only P11.37 million had been recognized by the
Contractor, with a difference of P2.89 million. Thus, after deducting the P0.76
million already collected from the Contractor, the balance of rental fees still to
be collected from the Contractor amounted to P13.50 million.
Recommendation:
In view of the non-compliance on the Contract Agreement and payment made to the
Contractor on the supply and distribution of ballast without any valid basis, we issued
Notice of Suspension No. 13-003-107-(12) issued dated July 17, 2013 requiring the
submission of justifications/explanations and documents pertinent to the transactions.
11. The accuracy and validity of salaries and wages of P242.10 million were not
ascertained as the payrolls on wages of contractual workers from January to
May 2012 were not submitted as of audit date. On the other hand, those
covering June to December 2012, including the monthly payrolls for regular
employees for year 2012 were submitted late, and were not properly supported
with Daily Time Records, Payroll Register for regular employees, and hard and
soft copy of Schedules of Salary Remittance to Banks for Deposit to
Savings/Checking Accounts of Employees, the latter being provided to the
depository bank as basis in determining the actual recipients of salaries and
wages paid thru bank’s ATM.
The reported huge increase of 75.6% in wages of contractual workers
amounting to P76.65 million was highly questionable considering that increase
would amount only to approximately P25.29 million for the wages of the newly
hired/additional 162 contractual workers even assuming that all started
beginning of the year.
Recommendation:
We recommended immediate and complete submission of CY 2012 payrolls covering
wages of hired contractual workers together with supporting documents, including
soft copies of payrolls submitted to the bank.
Also, we requested that we be provided with a copy of the investigation report and
results of the internal audit, for our reference in audit
12. Existing controls in the sales and remittance of proceeds from train tickets
were not adequate to ensure the accuracy of earned and reported rail revenue.
Recommendation:
Management should evaluate and strengthen its operating and monitoring controls on
sales and remittances of cash proceeds from train tickets; and adhere to the pertinent
provisions of the GAAM in the handling and monitoring of collections.
13. Water and Electricity Expenses in CY 2012 were overstated by P695,993 as this
amount pertained to prior year’s expenses. Also, the average cost of electricity
per month of P355,671.83 incurred for the PNR workshop, and P38,472.94 for
the Higgins idle building were doubtful since normally the expected demand on
supply of power would be lesser and nil, respectively.
Recommendations:
Necessary accounting adjustment should be made to reflect the actual water and
electricity expenses in CY 2012; that investigation be made to ascertain whether
illegal connections exist; and that unpaid obligations be verified to confirm their
validity.
14. Rules and regulations on granting, custody or handling, utilization, and
liquidation of Revolving/Petty Cash Fund were not observed by the PNR
Special Disbursing Officers
Recommendations:
a. Rules and regulations prescribed in COA Circular No. 97-002, the pertinent
provisions of the GAAM and PD 1445 on the granting, custody, utilization and
liquidation of cash advances or revolving fund to correct the foregoing
deficiencies and lack of internal controls, be strictly complied with;
b. Office Orders be issued in the designation of SDOs indicating the name of the
petty cash custodian, designation, purpose and amount of the cash advance
or revolving fund to be granted/maintained, among other items;
c. Government fund be kept separate from personal fund to avoid possible
misuse;
d. All designated SDOs be required to maintain the official cashbook to record
their transactions which should be periodically reconciled with the accounting
records;
e.
PCVs be prescribed for use, pre-numbered for monitoring purposes,
accomplished by the requisitioner/end-user, signed by the custodian of fund,
and approved by the Head of the Department or Division to signify authority
on the use of the cash advance or revolving fund;
f.
Function of authorization and the custodial function involving execution of
transactions be segregated and not provided under the control of an individual
employee; department or division managers should not be designated as
custodians of petty cash funds; and the custody and disbursing functions
including proper recording of transactions in the cashbook may not be
assigned to other regular employees of the concerned office; Proper
segregation of duties and functions for effective check and balance be
observed.
15. The existence, validity and accuracy of Cash-in-Bank account with year-end
balance of P308.76 million were not ascertained due to unreconciled
discrepancy between balances per books and the results of bank confirmation
amounting to P19.10 million, and unconfirmed balances of P13.63 million.
Likewise, Bank Reconciliation Statements for the months of April to December
2012 for 16 bank accounts were submitted only in June 2013, delays ranging
from 5 to 13 months.
Further, balances per books and balances per Cash Position Report of the
Budget and Cash Division showed unreconciled variances totalling P12.56
million.
Recommendations:
We reiterated strict compliance with the provision of Section 74 of PD 1445 on
monthly reports of depositories to agency head which provides that, ”At the close of
each month, depositories shall report to the agency head, in such form as he may
direct, the condition of the agency account standing on their books. The head of the
agency shall see to it that reconciliation is made between the balance shown in the
reports and the balance found in the books of the agency.”
16. Of the total Overtime Pay (OT) of P3.48 million, the amount of P3.37 million
represents claims for payment without supporting documents, to wit: authority
to render OT, work program, accomplishment report, and DTRs as prescribed
in COA Circular 2012-001; while, the balance of P0.11 million was not supported
with duly accomplished OT requests prior to the rendition of OT.
Recommendations:
a. Strictly comply with the requirements of COA Circular No. 2012-001 on the
Revised Guidelines and Documentary Requirements for Common
Government Transactions; and
b. Submit Daily Time Records, OT accomplishments and other required
documents, including justification/s on the OT claims of the Division Managers
and Railway Operations Officers and supervisors.
We issued Notice of Suspension No. 13-002-719B-(12) dated July 9, 2013 requiring
the submission of documents to support the overtime expenses recorded in the
books.
17. Due to the GSIS-Personal Share on Life and Retirement Premium account
carried an abnormal debit balance totaling P2.50 million due to overcharging of
delayed remittances of premiums of prior years which were not set-up to as
payables.
Recommendation:
The Controllership Division should conduct thorough review of the CY 2010 and 2011
payrolls for salaries of PNR employees to verify and ascertain that the amount
remitted to GSIS is equal to the premium contributions actually withheld from their
salaries; and effect rectification of the over-remittances and under-remittances in CY
2012.
18. The utilization of fund for Gender and Development in CY 2012 was not related
to the promotion of gender awareness and sensitivity.
Recommendations:
a. Submit the lacking documents to prove the propriety of the transactions
including original copies of the daily attendance sheets signed by the
participants and a copy of the survey sheet on the intention of the proposed
participants in the seminar;
b. In the seminar conducted last December 6 to 8, 2012 at PNR Naga Station,
submit justification on the excess number of participants, from 50 persons in
the Estimated Cost of Seminar Expenses attached to the DV on the request
for SCA to 72 participants claimed to be in actual attendance. The increase in
number of participants increased the cost of seminar expenses to P42,430
compared to the budgeted amount of P37,915 per class;
c. Submit an explanation on the over-acquisition of 120 pieces of ballpens
bought for the 55 participants in the second seminar conducted at the PNR
Building on December 12 to 13, 2012;
d. Consider all expenses incurred in the seminar conducted at the Naga Station
on January 16 to 17, 2013 amounting to P30,707 in CY 2013; and
e. The Controllership Division should effect the necessary correcting entries to
present the actual expenses incurred in CY2012.
19. Expenses of P221.52 million and revenue of P3.94 were not immediately
recorded at the time when earned or incurred that resulted in adjustments to
Prior Years’ Income and certified Accounts Payable of P70.35 million prior to
closing of the books.
Recommendation:
Transactions should be recorded as they occur to ensure complete recording thereof
and avoid misstatement of account balances.
20. Fund proposed for terminal leave benefit was used to pay for monetized leave
credits, payment of which is not in conformity with established rules.
Recommendation:
Management should strictly abide by the guidelines in the Omnibus Rules
Implementing Book V of Executive Order 292 issued by the Civil Service
Commission, and the provisions of Budget Circular No. 2002-1. Pursuant to Budget
Circular No. 2002-1, any payment on monetization of leave credits not in accordance
with its provisions shall be the personal liability of the Head of the Agency, however,
without prejudice to a refund of the concerned employee.
21. Unsettled audit suspensions, disallowances and charges as of December 31,
2012 amounted to P1.29 million, P15.87 million and P120.04 million,
respectively.
Recommendation:
Management should undertake appropriate action to ensure settlement of the
disallowances and charges which had been decided with finality; and, ensure
compliance with the requirements for transactions suspended in audit.
F.
Status of Implementation of Prior Year’s Audit Recommendations
Of the 14 audit recommendations disclosed in the CY 2011 Annual Audit Report and
presented in Part II. B of this report, only two were implemented, eight were partially
implemented and three were not implemented while, one cannot be confirmed as without
similar transaction noted during the year.