EXECUTIVE SUMMARY
INTRODUCTION
The AFP Retirement and Separation Benefits System (AFPRSBS) was created by virtue of Presidential Decree (PD) No. 361, which was promulgated on December 30, 1973 and started operations in 1976. The System was established as a funding mechanism to ensure the continuous payment of retirement and separation benefits to the members of the Armed Forces of the Philippines (AFP). Certain provisions of PD 361 pertaining to membership and rate of contributions were amended by PD 1656 dated December 21, 1979 and PD 1909 dated March 22, 1984 to strengthen the AFPRSBS.
The registered business and office address of the System is at No. 424 Capinpin Avenue, Camp General Emilio Aguinaldo, Quezon City, Metro Manila Philippines. It has no other offices within and outside the Philippines.
The System is engaged in various business operations which include the management of funds invested in the stock market, money market, government and corporate bonds, corporate loans, real estate properties and equity holdings in subsidiaries and associates. It also has interests and participation in real estate projects involving the development and construction of commercial and subdivision projects, memorial parks, golf courses, and, for some, in partnership with reputable real estate developers. In the course of the System’s lending operations, it also acquires through foreclosure proceedings and dacion en pago arrangements, mortgaged real estate properties as payment for the full or partial settlement of the loan obligations of the System’s borrowers. The inventory of developed lots, condominium units and acquired assets are being offered for sale to the military personnel and to the public as well to recoup the System’s principal investments.
The AFPRSBS Board of Trustees, consisting of 11 members, is the policy making body of the System. The President/Chief Executive Officer as well as the Executive Vice President/ Chief Operating Officer take charge of the day to day affairs of the organization. As of December 31, 2012, the System has 85 regular and 32 contractual personnel or a total workforce of 117 personnel.
The AFPRSBS Corporate Operating Budget (COB) for CY 2012 approved per Board Resolution No. 02-2012 dated January 26, 2012 amounted to P159,644,669, broken down as follows:
AmountPersonnel services / 74,217,865
Maintenance and operating expenses / 65,595,191
Capital expenditures / 19,831,613
Total / 159,644,669
FINANCIAL HIGHLIGHTS (in Philippine Peso)
I. Comparative Financial Position
Particulars / 2012 / 2011 / Increase (Decrease)Assets / 14,339,965,772 / 13,535,049,577 / 804,916,195
Liabilities / 4,174,318,956 / 3,852,412,890 / 321,906,066
Fund equity / 10,165,646,816 / 9,682,636,687 / 483,010,129
II. Comparative Results of Operations
Particulars / 2012 / 2011 / Increase (Decrease)Gross income / 274,466,717 / 243,077,306 / 31,389,411
Investment and operating expenses / 38,568,925 / 36,404,171 / 2,164,754
General and administrative expenses / 86,655,482 / 89,522,556 / (2,867,074)
125,224,407 / 125,926,727 / (702,320)
Net income / 149,242,310 / 117,150,579 / 32,091,731
SCOPE OF AUDIT
Our audit covered the examination on a test basis, the accounts and operations of the AFPRSBS for the calendar year ended 2012. It was aimed at ascertaining the propriety of the financial transactions, compliance of the System with prescribed rules and regulations, and ascertaining the fairness of the presentation of the financial statements.
INDEPENDENT AUDITOR’S OPINION
We rendered an adverse opinion on the fairness of presentation of the financial statements for CY 2012 of the AFPRSBS, in view of the following Observations, among others:
1. The System’s Financial Statements are not consolidated with the financial statements of its subsidiaries and controlled entities where it has invested a total of P2.546 billion. (Observation No. 2)
2. The reliability of the receivables totaling P1.978 billion and the adequacy of the recognized Allowance for Doubtful Accounts (ADA) totaling P588.175 million as at 31 December 2012 cannot be ascertained due to the absence of subsidiary ledgers and an updated and clear basis for the setting up of the allowance for doubtful accounts. (Observation No. 3)
3. Valuation and appraisal of assets worth P10.643 billion are not undertaken regularly, as required under the pertinent Philippine Accounting Standard (PAS) 36 and 39 to determine the sufficiency and correctness of the allowance for decline in investment value amounting to P1.108 billion as at year-end. (Observation No. 4)
4. The reliability and accuracy of account balances, which include among others, the four accounts totaling P11.804 billion cannot be ascertained in the absence of supporting detailed schedule and subsidiary ledgers of the different accounts due to the AFPRSBS management information system’s failure in February 2012 and the System’s inability to maintain backup and recovery plans and procedures. (Observation No. 5)
5. Abnormal/negative subsidiary ledger (SL) balances of two equity accounts totaling P5.981 billion cast doubts on the accuracy and fairness of presentation in the System’s financial statements as at 31 December 2012. (Observation No. 6)
6. Unrecorded property and the difference of P37.291 million between the list of acquired assets provided by Property Management Enhancement Department (PMED) and the Schedule of Acquired Assets understated the Acquired Assets account by the same amount. (Observation No. 7)
7. The correctness of the book balance of the Property and Equipment and its related Allowance for Depreciation with a book value of P268.763 million and P238.195 million, respectively or a net book value of P30.568 million as at 31 December 2012 is doubtful due to the unreconciled difference of P5.687 million between the results of the annual physical inventory taking and the accounting and property records. (Observation No. 9)
8. The accuracy, reliability and validity of the Accounts Payable-Trade and Non-trade accounts totaling P179.698 million cannot be ascertained due to the absence of documents, subsidiary ledgers and schedules to substantiate the account balance and support the claims of creditors against the System, contrary to Section 40, Book VI of the 1987 Administrative Code. Construction Contract Payable account totaling P24.138 million remained in the books from four to 17 years contrary to Section 98 of Presidential Decree (PD) 1445. (Observation No. 10)
9. Net discrepancy of P23.220 million between the amount recorded in the books against the records of the respective depository banks casts doubt on the reliability of the Cash in Bank amounting to P82.068 million. Similarly, a net discrepancy of P13.264 million exists between the recorded amount in the books of the Controllership Department (CD) against the record of the Treasury Department (TD) contrary to Section 58 of Presidential Decree 1445. (Observation No. 11)
For the above mentioned audit observations, which caused the issuance of an adverse opinion, we recommended to Management the following courses of actions:
1.1 Prepare the consolidated financial statements to include the assets, liabilities and results of operations of its subsidiaries;
1.2 Eliminate all parent and subsidiary reciprocal account balances during the process of consolidation;
1.3 Disclose the status of the financial standing of said subsidiaries and its investment thereon;
1.4 Comply with all the disclosure requirements of PAS 27 relative to investments in subsidiaries and affiliates;
1.5 Evaluate whether the System has significant influence over the subject entities, and accordingly adjust the investment and affected accounts, if the significant influence is lost; and
1.6 Prepare the Statement of Affairs and the Statement of Realization and Liquidation and submit them for COA audit until all its assets are realized; all its liabilities are settled; and the concerned subsidiaries and affiliates are fully liquidated/dissolved in accordance with the pertinent rules and regulations of SEC.
2.1. Submit an updated accounting policy or implementing rules to II – Policy on Term Loans that would best reflect the provisioning for ADA to establish the recoverable amounts of the receivables; and approved BOT Resolutions showing the annual provisions for ADA in accordance with II.A.1 of Office Policy No. 7-2-87, if any.
2.2. Require the Operating Divisions of the System including the CD to coordinate and maintain the required SL for all receivables and its related accounts;
2.3. Prioritize the printing of the hard copy of the Customer’s Subsidiary ledgers;
2.4. Comply with Section 114 of PD 1445 relative to the maintenance of SL and with Paragraphs 58, 59 and 63 of the Philippine Accounting Standard (PAS) 39 on the recognition of ADA;
2.5. Prepare the aging schedule on a periodic basis to facilitate monitoring and evaluation of the accounts, indicating the status thereof to come up with adequate ADA;
2.6. Regularly back up customers files to protect files and make information readily available on demand for the proper monitoring of the receivables of the System;
2.7. Review and reconcile the accounts affected by the System’s process to come up with the correct balances for fair presentation in the financial statements; and
2.8. Revisit the organizational structure and enhance functional chart to pinpoint responsibilities among departments.
3.1. Conduct a valuation and appraisal of all its subsidiaries and affiliates to determine increase in appropriate value or impairment loss thereof; as required under the pertinent provision of PAS 36 and 39;
3.2. Adjust the balance of the allowance for the decline in value of the assets and/or recognized the impairment loss, if any, to reflect the correct value of the Investment in stocks as at year-end;
3.3. Submit the details of the allowance for the decline in the value of investment and their corresponding application to each investment account to provide basis for determining the correctness and adequacy of the amount recognized;
3.4. Revisit and re-assess the System’s valuation policy and strictly adhere to the provisions of PAS 36 specifically in setting up the Allowance for Impairment Loss;
3.5. Comply with SOP Paragraph III D of AFPRSBS SOP No. 98-02 on the periodic appraisal of its assets.
4.1. Exert effort to establish correct account balances, taking prior year balances as starting point or at the time prior to the hard disk crash. Reconcile with the current transactions bridging the gap between two periods, considering that hard copies of supporting documents are on hand;
4.2. Conduct a feasibility study on the benefits of acquiring a new Information System vis-à-vis the cost to rehabilitate the existing system considering that the System is in the process of winding down its business operations;
4.3. Review conditions of the contract with Oracle Philippines Inc. and determine courses of action that is advantageous to the System. Study the offers of Oracle as to financial, as well as operational advantages; and
4.4. Consider hiring IT experts to undertake the restoration of the Integrated Financial Management System (IFMS) database and recovery of data, identify problem areas even before the crash for enhancement, adoptability and suitability to the System.
5.1. Analyze and check the validity of the negative/abnormal balances and adjust accordingly.
6.1. Require the PMED, CD and other operating departments of the System to conduct a regular inventory taking of property and reconciliation of balances to identify the cause(s) of the variances. Likewise, book up the unrecorded property to bring the balances in agreement; and
6.2. Establish guidelines on the proper and timely recording and accounting in the books of accounts on the acquisition and disposal of acquired assets.
7.1. Enforce compliance with COA Circular No. 80-124 to reconcile the accounting records with the General Services Division’s (GSD) physical count to establish integrity of property custodianship and reliability of account balances;
7.2. Maintain updated Property and Equipment ledgers with complete information, to support account balances appearing in the books of account;
7.3. Prepare a lapsing schedule for the computation of depreciation expense;
7.4. Revisit the System’s accounting policies with regards to the building/structures guided by the provisions of PAS 16 – Property, Plant and Equipment. Likewise, determine the reason for its negative book balance; and
7.5. Impose the issuance of Acknowledgement Receipt for Equipment (previously Memorandum Receipt) to each individual user instead of assigning it to a single responsible supply officer. Recall the assignment of the vehicle to the Riviera Sports and Country Club, Inc., otherwise, issue ARE in their name.
8.1. Establish validity of outstanding obligations and determine whether these were perfected transactions/contracts or just a result of errors in recording;
8.2. Coordinate with and send letters to creditors requiring the submission of documents to prove their claims from the System;
8.3. Immediately revert to proper accounts any Payable not supported with valid claims to reflect the correct balance as at 31 December 2012, as necessary; and
8.4. Prepare schedule and maintain subsidiary ledgers for each creditor to substantiate the balance of all payable accounts.
9.1. Regularly prepare monthly bank reconciliation statement for all its bank accounts to determine the causes of the discrepancy, if any, between the book and bank balances at the earliest possible time;
9.2. Submit copies of monthly bank reconciliation statement to COA for audit purposes as required under Section 74 of PD 1445;
9.3. Coordinate with the LBP for copies of the credit advices so that the CD can make the necessary adjustments. Likewise, coordinate also with the Union Bank for any information on the closure of the bank account so that adjustments can be made in the books of the System; and
9.4. Regularly reconcile the cash in bank account of CD and TD since they are both in the same agency. Moreover, close the inactive bank accounts and transfer its balances to the other active accounts to avoid incurring bank charges on dormant accounts and eventually deplete the fund balance.
OTHER SIGNIFICANT AUDIT OBSERVATIONS AND RECOMMENDATIONS
1. The System’s total assets of P14.339 billion as at year-end is short by P47.291 billion against the estimated funding requirements of P61.63 billion based on GSIS study. (Observation No. 1)
1.1. We recommended that Management-
a. Prepare policies, procedures and guidelines on the Reserve and Actuarial setting;
b. Coordinate with the Finance Center of the Armed Forces of the Philippines re: submission of a complete list/inventory of active military personnel to include among others, the correct full name of the member, date of birth, name/s of beneficiaries, updated salary, years in services, contributions paid and more importantly the retirement dates;
c. Input the gathered data to be programmed in the IFMS Membership Group so that at any given point in time, the CD will know how many are retiring so that they can have an accurate computation of the amount that will be set up as membership refund for the coming years; and