Executive Summary - Commission on Audit

A. Introduction
The City of Olongapo was created by virtue of Republic Act No. 4645 dated June 1966. It
was elevated to the status of highly urbanized city on December 7, 1983. Under its charter,
the City constitutes a political body corporate and as such, is endowed of the powers, which
pertain to a municipal corporation. Its powers and authority were later modified by Republic
Act No. 7160 as the Local Government of Code of 1991.
The City of Olongapo has a total land area of 18,500 hectares or 12.32% built-up area.
Seventeen (17) barangays occupy an estimated land area of 7,390.73 hectares. Based on the
2007 census on population conducted by the National Statistics Office (NSO), Olongapo had
a total population of 247,840, excluding transients with an annual growth of 2.19%.
As of December 31, 2012, the City had total personnel complement of 2,288 as follows: 983
regular employees, 482 casual employees, 557 contract of service, 72 consultants, 14
Elective officials, 23 co-terminus appointees, and 157 job order personnel.
As required under Section 308, 309, 310 of the Local Government Code, separate books are
maintained for the General Fund, Special Education Fund and Trust Fund.
B. Financial Highlights
The City Government of Olongapo had total appropriations amounting to P2,070,123,323.00
for CY 2012 which was lower by P860,035,272.00 as compared to the previous year. Of the
total appropriations/allotment, the amount of P1,706,349,716.00, was obligated, thereby
leaving an unobligated balance of P363,773,607.00. The details of financial condition,
sources and application of funds are as follows:
A. Financial Condition
Government Equity
B. Sources and Application of Funds
Local Taxes
General Income
Personal Services
Financial Expenses
Excess of Income
Over Expenses
Increase/ (Decrease)
6,501,134,068.35 P 6,027,742,271.92 P
2,191,421,125.26 P 4,174,366,103.14 P (1,982,944,977.88)
162,689,422.51 P
157,829,469.55 P
655,699,534.72 P 1,244,365,228.70 P
381,176,687.14 P
885,599,600.86 P
(229,900,066.14) P
374,263,499.41 P
932,621,007.54 P
311,744,221.16 P
C. Operational Highlights
The City of Olongapo maintains various economic enterprises, which are (a) James L.
Gordon Memorial Hospital; (b) Public Utilities Department; (c) Gordon College; (d)
Olongapo City Convention Center; (e) Environmental Sanitation and Management Office; (f)
Two (2) Public Markets; and (g) Slaughterhouse.
In addition, the City of Olongapo also has a continuing banner program called HELPS
(Health & Housing, Education & Environment, Livelihood, Labor, Peace and Order, Social
Welfare and Sports). Under the HELPS Program, various sectors considerably improved
their service delivery through systems upgrade, facility and equipment modernization. One
remarkable achievement of the program is the City Government’s employment generation
project. Consequently, concrete and tangible achievements were attained for the benefit of
the general welfare of its constituents.
D. Scope of Audit
The audit covered the financial transactions and operations of the City of Olongapo for the
year 2012. The objective of the audit was to a) ascertain the level of assurance that may be
placed on management’s assertion on the financial statements; b) recommend agency
improvement opportunities and c) determine the extent of implementation of prior years’
audit recommendations.
E. Independent Auditor’s Report
The Auditor rendered a qualified opinion on the fairness of presentation of the financial
statements of the City Government of Olongapo for the year ended December 31, 2012 due
to deviations from prescribed procedures and non-compliance with rules and regulations
resulting in errors in some account balances and accounting deficiencies which are discussed
in detail in Part II of this report and summarized as follows:
AO No.
Nature of Error
Effect on the FS % of Error
Accounts Affected Amount of Under to Account
(Over) Statements Balance
Errors affecting Assets Accounts
but Due from Officers
cash and
advances for time- Cash
bound activities
Erroneous inclusion of Due from Officers
transactions and
improperly classified as Employees/Payroll
cash advances
of Receivables
receivable account due Inter-Agency
long Receivables
outstanding accounts
Net errors affecting Asset Accounts
Total Assets
% to Total Assets
Errors affecting Liability Accounts
long Accounts Payable
outstanding payables,
aged 2 to 8 years
Inclusion of various Accounts Payable
transactions debited to
the account without
prior recorded credits
Set up of liability and/or Accounts Payable
negative credit balances
Doubtful/Unsupported Due to Other Funds
Due to Other Funds
Dormant Due to BIR Due to BIR
accounts, aged 3-17
Net errors affecting Liability Accounts
Total Liabilities
% to Total Liabilities
Errors affecting Government Equity
1 Unliquidated but expended cash advances for
time-bound activities
1 Erroneous inclusion of various transactions
improperly classified as cash advance
2 Overstatement of receivables account due to
dormant, long outstanding accounts
5 Dormant, long outstanding payables, aged 2 to 8
5 Inclusion of various transactions debited to the
accounts without prior recorded debits/credits
5 Set up of liability and/or transactions with
negative credit balances
7 Doubtful/unsupported due to other funds
26 Dormant, Due to BIR, aged 3-17 years
Net errors affecting Government Equity
Total Government Equity
% to Total Government Equity
Accounting Deficiencies
4 Improper classification of cash
Accounts Affected
Accounts Receivable
Cash Advances
Unreconciled difference between the
physical inventory report and
accounting records
PPE Accounts
11 Unrecorded liabilities to PSALM on
interest, VAT and other charges
Accounts Payable
Amount Involved
For the foregoing errors and deficiencies, we recommended that management:
For all Unliquidated Cash Advances
a) Require the City Accountant and the City Treasurer to demand the immediate
liquidation of outstanding cash advances and remittance of shortages in collection of all
officials and employees still in the service.
b) Require the City Accountant to take responsibility to conduct a final review, analysis
and reconciliation of all dormant cash advance accounts pursuant to the Guidelines on
the Proper Disposition/Closure of Dormant funds and/or accounts as provided by COA
Circular No. 97-001 dated February 5, 1997.
For the long-outstanding balances of Receivable Accounts
a) Require the City Accountant to conduct a regular review, reconciliation and monitoring
of all booked receivables to ensure that only valid receivables are recorded in the
books. Analyse the accounts that are dormant and long outstanding and take necessary
actions to drop them from the books pursuant to COA Circular No. 97-001. Reclassify
the accounts which were improperly recorded as Accounts Receivable to their
appropriate accounts.
For the unreliable Property, Plant and Equipment account
a) Require the General Service Office and the Inventory Committee to complete the
physical inventory of property, plant and equipment and to prepare and submit a report
thereon to determine the accuracy and correctness of the year-end balance and reconcile
the material discrepancy noted in audit totalling P116,792,920.11.
b) Require the Inventory Committee to conduct a thorough review of the Report on the
Physical Count of Property, Plant and Equipment by conducting actual count,
validation, verification and inspection of PPE owned by the City to establish their
c) Require the Accounting Office and the General Service Office to maintain complete
PPELC and property cards, reconcile their records and effect the necessary adjustments
to fairly present the balance of the affected PPE.
For the Dormant Due to Other Funds Account
a) Require the City Accountant to analyse the composition of the account and prepare the
subsidiary ledgers for the Withheld Salaries/Wages Due for remittance to the Trust
Fund Account.
b) Remit immediately to the Trust Fund account the balance of Due to Other Funds
amounting to P11,423,003.83 in order to correct the abnormal balances of the recipient
trust fund account.
For the Dormant Due to BIR Account
a) Require the City Accountant to take responsibility for conducting review, analysis and
reconciliation of the dormant and long outstanding Due to BIR accounts of
P14,596,917.15, reconcile them with the Tax Remittance Advice and Tax Remittance
Reports. Prepare adjusting entries/reconciliation entries and remit all taxes due to the
Other Significant Audit Observations and Recommendations
Summarized below are the other significant audit observations noted and the corresponding
recommendations that are discussed in detail in Part II of the report.
1. The terms and conditions of the contract of lease executed by and between the City
Government and SM Prime Holdings allowed the demolition of the Olongapo City Mall
without proper adherence to the Audit Guidelines on the divestment or disposal
procedures, thereby caused the overstatement of the Property, Plant and Equipment by
P0.174 billion due to the failure of the City Accountant to drop the demolished property
in the books of accounts contrary to Section 370 of RA 7160 and COA Circular No. 89296 dated January 27, 1989 and the Manual on NGAS.
We recommended that management (a) submit explanation and justifications from the
signing officials and members of the negotiating team on why the terms and conditions of
the Contract of Lease allowed the demolition of the Olongapo City Mall which resulted
to their failure to comply with the provisions of Commission on Audit Circular No. 89296 dated January 27, 1989 which governs the disposal and divestment of government
property knowing fully well that the said property would be demolished and would no
longer be used by the LESSEE; and (b) Require the City Accountant to request an
Authority from the COA Central Office for the write-off/dropping of the demolished
asset from the books of accounts duly supported with the Contract of Lease, other
supporting documents and management justifications pursuant to the 2009 Revised Rules
and Procedures of the Commission on Audit for the purpose of fair presentation of the
PPE account in the financial statements
2. The management incurred delays of almost one year from the issuance of the CY 2011
Annual Audit Report in the submission of explanation and justifications relative to its
compliance with the Previous Year’s AAR Recommendations on the adoption of the
rental rate of P40/square meter/month instead of the P520/square meter/month rental rate
recommended by the agency’s appraisal committee; the minimal increase in Monthly
Guaranteed Lease (MGL) of 6% beginning the 11th year of the term of the lease and
every five (5) years thereafter is lower than the allowable 7% annual increase of the
agreed rental on residential apartments and other terms and conditions which were found
in the initial review of the Lease Contract of Olongapo City Mall (OCM) with SM
Prime Holdings, Inc. The prolonged inaction by the management in complying with the
recommendations contained in the previous year’s Annual Audit Report cast doubts on
the legality and regularity of the terms and conditions of the contract of lease.
We recommended that management create a technical committee to review the terms and
conditions of the Lease Contract entered into by the City with SM Prime Holdings to
evaluate and assess the stipulations contained therein taking into consideration the
amendment of the terms and conditions that are disadvantageous on the part of the
3. The management submitted a Supplement to the Asset Purchase Agreement (APA) with
the Cagayan Electric Power and Light Company, Inc. (CEPALCO) dated July 12, 2012
providing stipulations on the sunset date, assets added by the seller, aggregate increase in
the assets and joint inventory of the assets which are deemed advantageous only on the
part of the buyer because all additions to assets, regardless of their utility and length of
service life shall be treated as “Excluded Assets” within the purview of the PPA.
We recommended that (a) management should restudy the terms and conditions of the
“Supplement” such that assets purchased during the prolonged transition period until
sunset date such as poles, distribution transformers, wires and other electrical hardware
which prolong the life, improve the reliability, safety and efficiency of the distribution
utility service and installation of assets to serve new customers be considered as additions
to the Asset Base defined as Assets in Article 2, Section 2.01 of the APA; and (b) require
the Transition Distribution Utility Improvement and Maintenance Team created by the
City Mayor under Executive Order No. 01 dated January 3, 2011 to submit their
accomplishment report on the extent of implementation of the capital expenditures, civil
works and construction services undertaken by the buyer during the transition period
pursuant to the General Scope of Works provided in Schedule 10 (Transition Distribution
Utility Efficiency and Maintenance Program) of the Asset Purchase Agreement.
Our findings and recommendations were discussed with the concerned agency officials
and their comments were incorporated in the report, where appropriate.
Status of Implementation of Prior Year’s Audit Recommendations
Of the fourteen prior year’s audit recommendations, six were implemented, two were
partially implemented and six were not implemented.