PM 230 - Mod 5-9 - 1 - 13

Module 5 91
Module 5
Appropriations, Income,
Disbursements, and Cash
Management
T his module will look full as we try to

compress a number of topics on ac-
counting. But as we said in the beginning,
Objectives
a manager need not necessarily know At the end of the module, you
which entries to debit and which entries should be able to:
to credit, or the debit and the credit code
for a particular expense or for appropria- 1. Describe the accounting
tions and allotments. procedures for appropria-
tions, allotments, and obli-
The previous module gave you basic in- gations;
formation in government accounting. In 2. Identify the principles gov-
this module, we will continue with ac- erning the accounting pro-
counting for appropriations, allotments, cedure for income and re-
and obligations. We will also discuss in- ceipts;
come and expenditures and how to ac- 3. Explain the concepts and
count for them, disbursements, and cash principles pertaining to ac-
management concepts. You will be given counting for disburse-
tips and tools to help you become familiar ments;
with the technical processes involved in ac- 4. Illustrate the granting, uti-
counting for appropriations. You will also lization, and liquidation of
read about some practical tools to help you cash advances; and
understand financial reports and state- 5. Discuss the basic account-
ments. ing practices in local gov-
ernment units.
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92 PM 230: Financial Management in Government
Nature of Appropriations, Allotments,

and Obligations
An appropriation is an authorization made by law or other enactment
for payments to be made with government funds under specified condi-
tions and or for specified purposes.
The annual GAA covers the regular annual appropriation of the govern-
ment. It covers expenses for the year it was approved. Savings from the
GAA revert back to the National Treasury. Such savings are no longer
available for spending unless another appropriation law is passed for the
purpose. An exception to this policy are the appropriations for capital
outlay, which remain valid until fully spent or reverted.
Allotments are authorizations issued by the DBM allowing an agency to

incur obligations within a specified amount, within a legislative appro-
priation.
Obligations are amounts that a government agency is committed to pay.

This arises from an act of a duly authorized administrative office that
binds the government to the immediate or eventual payment of a sum of
money.
Kinds of appropriations
It is important to know the kinds of appropriations that your agency will
be receiving as this spells the difference in the kinds of programs that may
be undertaken, the sources of financing, and whether there can be flex-
ibility in spending, among other things.
There are many categories of appropriations. The first of these is the An-
nual Appropriation. This is what we popularly call the General Appro-
priations Act (GAA) or the national budget. This is a one-year appropria-
tion available for incurring obligations only during a specified fiscal year.
Then we have Special Appropriations. This is intended for programs/

projects that have not been included in the GAA. An example of this is
the Public Works Act for Infrastructure projects.
There are also Supplementary Appropriations. This is an appropriation

to adjust the GAA in case it has been upset by current economic, political,
or social conditions, or to provide an additional amount to the original
appropriation which proved to be inadequate or insufficient for a par-
ticular purpose.
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Continuing Appropriations are appropriations available for incurring

obligations for a period in excess of one year. The Public Works Act also
falls in this category.
Standing or Automatic Appropriations are annual appropriations which,

by virtue of standing legislation, do not require periodic action by a legis-
lative body. Expenditures for personnel, retirement premiums, govern-
ment service insurance, and other similar fixed expenditures, principal
and interest on public debt, and national government guarantees of obli-
gations that are drawn upon, are automatically appropriated.
Interim appropriation is a provisional appropriation set to the ceiling of

the preceding year’s appropriation to meet current operating expendi-
tures in the meantime that the legislative body has not acted upon the
current annual appropriation law.
Accounting for appropriations, allotments,

and obligations
There are general principles and guidelines governing accounting for ap-
propriations, allotments, and obligations contained in the Philippine Con-
stitution and in various laws. It is important to know these vital principles
and legal provisions.
Rules on appropriations
One of the first of these policies is the Constitutional prohibition on agen-

cies to augment any item in the GAA for their respective offices from
savings in other items of their respective appropriations (Section 25(5),
Article VI of the 1987 Constitution). However, the offices of the President,
the President of the Senate, the Speaker of the House of Representatives,
the Chief Justice of the Supreme Court, and the heads of Constitutional
Commissions may be authorized to do so.
Second is the policy that annual appropriations are available only for the
current year expenses of the government (Section 33, PD 1177). Any un-
expended balances of appropriations revert to the Unappropriated Cu-
mulative Results of Operations of the General Fund at the National Trea-
sury at the end of the fiscal year. This amount is not available for expendi-
ture, except by subsequent legislation.
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On this rule, there are three exceptions:

1. In the case of appropriations for capital outlays, these remain valid
until fully spent or reverted.
2. In the case of continuing appropriations for current operating expen-
ditures, these may be specifically recommended and approved as such
in support of projects whose effective implementation calls for multi-
year expenditure commitments.
3. Savings realized by an agency during a given year may be used to meet
non-recurring expenditures in a subsequent year if authorized by the
President.
While continuing appropriations remain valid for the duration of the pro-
gram or project, their balances have to be reviewed as part of the annual
budget preparation process. In this review, the President may direct the
reversion of funds no longer needed in connection with the activities funded
by said continuing appropriations.
It is important that the proposed budget for the ensuing year is passed by
Congress and signed by the President. Otherwise, the previous year’s bud-
get is automatically reenacted and remains in force until the general ap-
propriations bill is passed by Congress. (Article VI, Section 25(7), 1987
Constitution)
Rules on allotment
Agencies sometimes have savings in their budgets at the end of the year.
If the amount is not obligated, two things can happen (Section 28, Chap-
ter III, Book VI, of EO 292 and Section 33, PD 1445):
• An unobligated amount for Current Operating Expenditures reverts to

the Cumulative Results of Operations Unappropriated.
• An unobligated amount for Capital Outlay remains as continuing ap-
propriation and available for obligation until December 31 of the fol-
lowing year without the need for the issuance of Confirmation of No-
tice of Allotment.
The allotment is released by the DBM on the basis of the Agency Budget
Matrix (ABM) submitted by the agency. The ABM sets forth the maxi-
mum amount that an agency can obligate for each class of expenditures.
Please refer to the sample ABM at the end of the module and familiarize
yourself with it.
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Upon receipt of the approved ABM, the NGA concerned prepares a Jour-
nal Voucher to take up the allotment and records it in the General Journal
(GJ). The allotment received is also entered as figures in red ink on the left
hand column of the Journal and Analysis of Obligation (JAO). Simulta-
neously, it is recorded in the Cumulative Results of Operations Unappro-
priated (CROU) books of COA.
The JAO is a special journal used to record obligations incurred and monitor
the unused balance of allotments. A separate sheet is kept for every fund,
program, project, and activity. The JAO has two sections: (1) the Journal
Section where the allotment released and the obligations incurred are re-
corded, and (2) the Analysis Section where the breakdown of releases
and obligations are recorded.
Rules on obligations
To determine whether an expenditure certified to be an account payable

is valid or not, you will have to check the supporting documents and
whether the transaction has been properly authorized. Any certification
for a non-existent or fictitious obligation and/or creditor shall be consid-
ered void. The certifying official shall be dismissed from the service with-
out prejudice to criminal prosecution under the provisions of the Revised
Penal Code. Any payment made under such certification shall be illegal
and every official authorizing or making such payment, or taking part
therein or receiving such payment, shall be jointly and severally liable to
the government for the full amount so paid or received.
No money shall be paid out of the Treasury except in pursuance of an

appropriation law or other specific statutory authority. Heads of depart-
ments, bureaus, offices, and agencies are strictly reminded not to incur or
authorize the incurrence of expenditures or obligations in excess of allot-
ments released by the DBM for their respective departments or office.
Parties responsible for the incurrence of overdrafts shall be held liable.
Obligations arise from an act of a duly authorized administrative office.

An obligation has the effect of binding the government to the immediate
or eventual payment of a sum of money. Each time a contract or purchase
order is executed, a Request for Obligation and Allotment (ROA) is pre-
pared to prove incurrence of obligation. The ROA has three parts, namely:
1. Section A, to be accomplished by the official requesting for the obligation;

2. Section B, to be accomplished by the accountant certifying that funds are
available for that particular obligation; and
3. Section C, to be accomplished by the ledger keeper monitoring the liqui-
dation of the obligations.
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The ROA, with the claim documents such as payrolls and/or disburse-
ment vouchers with appropriate supporting documents, is submitted to
the Accounting Division for processing after it has been duly signed by
the authorized requesting official.
The amount of the ROA shall be checked against the unobligated balance
of the allotment. If funds are sufficient to cover the request, an obligation
number shall be assigned.
After proper accomplishment of Sections A and B, the ROA is recorded in

the agency book, in the JAO. Section C of the ROA serves as the subsid-
iary ledger for each obligation and liquidation. When an obligation is fully
liquidated, the ROA is transferred to the inactive file. Those with unliqui-
dated balances remain in the active file. Both files are kept in numerical
order. The Summary of Unliquidated Obligation is prepared directly from
the active file of the ROAs on a quarterly basis.
In case there are major changes in obligations, a cancellation of the origi-

nal ROA and issuance of a new one shall be made. The JAO Keeper shall
enter the cancellation of obligation in the JAO and the old ROA shall be
marked “cancelled.” Likewise, the Subsidiary Ledger Keeper shall write
across the original copy of the ROA the word “cancelled” and transfer it
to the inactive file.
Refer to the end of the module for sample forms of the Journal of Appro-
priation and Allotment, General Journal, Journal of Analysis of Obliga-
tions, and Request for Obligation of Allotment. Familiarize yourself with
the contents of these forms.
SAQ 5-1
What do you understand by an appropriation, an allotment, and
an obligation?
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ASAQ 5-1
An appropriation is actually the authority of the agency to incur
obligations. An allotment has the same effect of giving authority to
the agency, specifying the amount. Obligations are amounts that
a government agency is committed to pay.
Revenue, Receipts, and Income

Revenue covers tax and non-tax items such as those earned or realized
from regular operations and services rendered, government business or
proprietary operations, sales of assets, and grants/aids, whether actually
collected in cash or accrued, resulting in additions to or increases in the
net assets of an entity.
Receipts refer to cash inflow, whether actual or constructive, regardless

of source or purpose, and whether pertaining to the agency or not. It
includes not only income or revenue actually collected but also trust re-
ceipts, fund deposits, inter-fund and inter-agency transfers, and equity
contributions received by corporate agencies.
Income includes revenues, receipts, and proceeds from loans or borrowing.
Categories of income in NGAs

In accounting terminology, income in national government agencies fol-
low a different categorization. This categorization clarifies the types of in-
comes available to agencies and the purposes for which they can be spent.
Income totally accruing to the General Fund. This category of income is

derived from fees, fines, penalties, surcharges, and other sources that to-
tally accrue to the General Fund.
Income collected in excess of the Approved Agency Income Estimate.

This income is reflected in the Budget Program and Personal Services Item-
ization and made available for necessary expenditures of the agency in
addition to its annual appropriation.
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Income made available in whole for Agency expenditures. This income

category is derived from services rendered in the exercise of agency func-
tions, including assessments in GOCCs and LGUs and made available in its
totality for agency use in addition to its regular appropriation.
Income made available in part for agency expenditures. This is income

derived from services rendered in the exercise of agency transactions and
subsequently made available in part for agency expenditure, in addition
to its regular appropriations, subject to certain limitations (percentage or
fraction of total income collected).
Income treated as Special Account in the General Fund. This income

comes from collections in pursuance of a special act or on account of a
special provision in PDs, LOIs, etc., which comprise all income remitted
to the BIR by government agencies and remittances of GOCCs to the credit
of a national government agency and classified or treated as a Special
Account in the General Fund.
Income constituted as agency revolving account in the GF. This is in-

come derived from services rendered to private entities and other govern-
ment agencies, including GOCCs, to be deposited in the BTR/authorized
government depository bank to constitute a Separate Revolving Account
in the GF for additional operating expenses of the agency concerned. The
Revolving Account in the GF is considered self-perpetuating and all ex-
penses are borne by funds out of its revenue.
Income Automatically Appropriated. This is income collected over and

above the amount appropriated for the agency which is specifically au-
thorized for outright utilization by the agency for its operation without
the need for specific statutory authority, provided that the amount of
appropriation authorized for the agency has been previously offset or
paid off by an equal amount of income collected and deposited with the
BTR.
General principles governing the accounting

of income and receipts
The principles and measures governing the accounting of income and
receipts are:
1. Make sure that all collections, whether from income or non-income

sources, are supported by official receipts.
2. Required cash collections and accountable forms must be kept in safe
custody.
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3. See to it that collections are deposited intact with the BTR/authorized

government depository bank/provincial treasury or any other autho-
rized depositories in the frequency set by regulations.
4. Instruct collecting officers/treasurers/cashiers to keep their cashbooks
up-to-date, footed, balanced, and ruled at the end of each month.
5. Ensure that accountable officers submit a report of collections which
should be reported at least once a month.
6. Ensure that all transactions pertaining to income, collection, and re-
mittances/deposits are properly recorded in the appropriate books of
account.
Remittance procedures
Certain rules also have to be observed in remitting collections to the Bu-
reau of Treasury. Check whether collecting officers deposit their national
collections intact with the BTr or any authorized government depository
bank in accordance with the following frequency of deposits (COA-MOF
Joint Circular No. 1-81):
Table 5-1. Frequency of deposits
Distance Travel time Accumulated Frequency of deposits

collections
Less than Less than l P500 or more l Daily

15 km one day l Less than P500 l Weekly or as soon
as collections reach P500
15-30 kms Less than l P2000 or more l Daily

one day l Less than P2000 l Weekly or as soon
A day or l P2000 or more l Weekly
more l Less than P2000 l Twice a month or as soon
More than Less than l P2000 or more l Daily

30 kms one day l Less than P2000 l Weekly or as soon
A day or l More than P5000 l Twice a week
more l P2000 to P5000 l Weekly
l Less than P2000 l Monthly or as soon
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SAQ 5-2
A. In the space after each number, state whether the item refers
to income, receipts, or revenues.
1. tax and non-tax items such as those earned or realized from

regular operations and services rendered, government
business or proprietary operations, sales of assets, and
grants/aids
2. includes revenues, receipts, and proceeds from loans or

borrowing
3. cash inflow whether actual or constructive, regardless of

source or purpose, and whether pertaining to the agency or
not
B. There are 7 categories of income. Five are listed below. Write

the two not listed in the space below.
• Income collected in excess of the Approved Agency Income

Estimate
• Income made available in whole for Agency expenditures
• Income made available in part for Agency expenditures
• Income treated as Special Account in the General Fund
• Income constituted as agency revolving account in the GF
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ASAQ 5-2
A. 1. Revenue
2. Income
3. Receipts
B. The categories of income are:

• Income totally accruing to the General Fund
• Income Automatically Appropriated
Accounting for Disbursements

and Expenditures
Disbursements constitute all cash paid out during a given period. It rep-
resents the movement of cash from either the Bureau of Treasury or an
authorized disbursing officer, to the final recipient. It is the settlement of
government obligations by cash or by check.
Expenditures, on the other hand, include all charges against the fund of
the agency for current operating expenditures, capital outlays and provi-
sions of retirement of long-term obligations. The charges are both the
amount actually paid and those incurred and recorded as liabilities to be
paid in the future.
Accounting for disbursements

Disbursement of government funds is among the major concerns of gov-
ernment, especially in the context of accountability. This is where tempta-
tions to commit dishonesty usually come in. I’m sure you have heard about
irregularities in the disbursement of funds in government agencies.
We classified expenditures when we discussed line-item budgeting in other

modules. To reiterate, there are two categories of expenditures:
1. Current operating expenditures, referring to appropriations for the

purchase of goods and services for current consumption, or for ben-
efits expected to terminate within the fiscal year. This is further classi-
fied into: Personal Services (PS) and Maintenance and Other Operat-
ing Expenses (MOOE).
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2. Capital outlays, referring to appropriations for the purchase of goods

and services the benefits of which extend beyond the fiscal year and
which add to the assets of government, including investments in the
capital of GOCCs and their subsidiaries as well as investment in public
utilities.
As in accounting for appropriations, allotments, and obligations, there

are also general principles that govern accounting for disbursements.
There is the requirement to disburse money only for duly authorized ex-
penditures and on the basis of duly approved and supported disburse-
ment vouchers. All disbursements made from the BTr shall be only on the
basis of the NCA issued by the DBM except when it is otherwise provided
by law. Cash, checks, and accountable forms must be kept in safe cus-
tody. Cashbooks of the disbursing officer should be kept up-to-date, footed,
balanced, and ruled at the end of each month.
All disbursements shall be made by check (except for salaries, wages, and
allowances) and when the amount is less than P10,000.00 or when a higher
amount is allowed by law and/or specific authority by COA. All disburse-
ments shall be reported at least once a month. There should always be two
signatories for all checks issued, namely, the signing officer and the counter-
signing officer. All transactions pertaining to disbursements should be prop-
erly recorded in the relevant books of accounts.
Take note of these general principles. These principles are very important for
every government employee to be aware of. It is emphasized that these prin-
ciples govern the disbursement transactions in the essence of public account-
ability.
Basic requirements applicable to all classes

of disbursements
The following basic requirements shall be complied with in all classes of
disbursementss:
1. Certification of availability of funds. In national government, the Chief

Accountant or head of accounting unit certifies to the availability of funds.
The certification should first be secured before disbursements are made.
2. The claim or expenditure should have the approval of the head of of-fice
or his/her duly authorized representative.
3. A claim or expenditure is accompanied by documents and other evi-
dences to establish its validity and correctness.
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Modes of disbursements
In government, there are two modes of disbursements: by cash or by check.
NGAs are mandated to follow the Modified Disbursement System (MDS)
(Section 184, Article 3, Title 4, Book III, GAAM, Vol. 1), which covers:
• All funds appropriated in the GAA

• Public Works Acts
• Other supplemental appropriations for the different departments in-
cluding their bureaus, offices, and agencies/hospitals
• All other funds deposited with the BTr whether or not requiring spe-
cial budgets, including Special Accounts maintained by NGAs and those
maintained by government corporations
On the other hand, Section 185 states that the following are exempted
from the said scheme:
• Revolving fund transactions for business-type activities authorized to

be deposited with a government depository bank
• A constructive cash requirement / disbursement scheme covering loan
availments for Foreign-Assisted Projects (FAPs) for which Non-Cash
Availment Authority (NCAA) shall be issued by the DBM to the imple-
menting agencies
• Utilization of foreign collections of the DFA, BIR, DOLE, DTI, and
DECS
• Agency requirements directly drawn against the Special Account
(Working Fund) maintained by the Bureau of Treasury with the BSP
The release of funds (in the form of Notice of Cash Allocation or NCA) by
the DBM is direct to every NGA Central and Regional office (CO/RO)
and some specific provincial offices and operating units (PO/OU) on a
monthly basis. The NCA is an authorization to make disbursements. It is
a device intended to effectively control cash utilization in order to elimi-
nate unnecessary cash drawdowns from the BTr.
The NCA shall be recorded as a memorandum entry in the Allocation

and Utilization Control Sheets (AUCS) to be maintained by both the Ac-
counting and Cash Divisions to ensure that MDS checks issued do not
exceed the NCA. All MDS and commercial checks shall be covered by
duly approved Disbursement Vouchers.
ROs that receive NCA for OUs/POs not receiving NCA directly from
DBM, shall issue funding checks (MDS checks) to such OUs/POs for each
allotment class. Said checks shall be deposited with Government Servic-
ing Banks (GSB) against which commercial checks shall be drawn.
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Offices receiving NCA directly from the DBM shall remit refunds of cash
advances/overpayments to the BTR. Those receiving funding checks shall
deposit such refunds in the agency current account with GSB.
It is important to emphasize that balances of the NCA at the end of the

year shall automatically expire and shall no longer be valid for use in the
ensuing year. The prior year’s unpaid obligations shall be paid out of the
NCA requested/released for the purpose in the ensuing year.
Balance of deposits per book of POs/OUs (not receiving NCA directly

from DBM), corresponding to the unobligated allotment at the end of the
year, shall be withdrawn for remittance to BTr and covered with a Remit-
tance Advice.
Refer to the end of the module for samples of the Release of Allotment,
Release of Funds for CO Projects, Disbursement Voucher, Allocation and
Utilization Control Sheet, and flowchart of transactions on the release of
funds to COs by ROs.
Other modes of disbursement

Aside from using cash and checks, disbursements in the national govern-
ment agencies can also be made through the following modes:
• Cash advances. Remember that only bonded officials and duly ap-
pointed or designated disbursing officers (regular and special) depend-
ing upon the purpose, nature and need for such, may be granted a
cash advance. The rules on bonding are set by the BTr.
• Commercial checks are issued for operating and other expenses.
• Transfer of funds from one agency of the national government (treated
as Inter-Agency Transferred Funds) is effected through Treasury Ac-
count Check Disbursements. Disbursements from such transferred
funds are made by commercial checks.
• Disbursements for which the DBM issued Non-Cash Availment Au-
thority (NCAA) and those exempted from the MDS are taken up in the
accounts by means of the Journal Voucher and recorded in the General
Journal.
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Cash advances
Most government officials need cash advances to cover unforeseen ex-

penses in the performance of official functions and duties where payment
by check is difficult, impractical, or impossible. In this case, payments
may be made by the disbursing officer in the form of cash through cash
advances.
Cash advances are of two types: regular and special.
1. Regular cash advance. This is granted to cashiers, disbursing officers,

paymasters, and/or property/supply officers for any of the following
purposes:
• Salaries and wages
• Commutable allowances
• Honoraria and other similar payments to officials and employees
• Petty operating expenses consisting of small payments for maintenance
and operating expenses which cannot be paid conveniently by check
or which are required to be paid immediately
2. Special cash advance. This is granted on the explicit authority of the

head of the agency only to duly designated disbursing officers or em-
ployees for other legally authorized purposes. For instance, it can be
granted for:
• Current operating expenditures of the agency field office or of the
activity of the agency undertaken in the field when it is impractical
to pay the same by check, such as salaries, wages, allowances, and
maintenance and other allowances; and
• Travel expenditures, including transportation fare, travel allowance,
hotel room fees, lodging expenses, and other expenses incurred by
officials and employees in connection with official travel.
Payments through cash advances should be only in small amounts. Of

course, the purpose of the payment must be legal.
No additional cash advance is allowed for any official or employee unless

the previous cash advance has been settled or a proper accounting has
been made. A cash advance shall be reported as soon as the purpose for
which it was given has been served.
Only permanently appointed officials shall be disbursing officers. Elected

officials may be granted a cash advance only for their official traveling
expenses. Only duly appointed or designated disbursing officers may per-
form disbursing functions. Officers and employees who are given cash
advances for official travel need not be designated as Disbursing Officers.
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Transfer of cash advance from one accountable officer to another shall

not be allowed.
The cash advance shall be used solely for the specific legal purpose for
which it was granted. Under no circumstances shall it be used for
encashment of checks or for liquidation of a previous cash advance. The
Accountant shall obligate all cash advances granted. He shall see to it
that cash advances for a particular year are not used to pay expenses of
other years.
Take note of these eight guidelines. A lot of people are not granted clear-
ances from the agency because of their failure to liquidate their cash ad-
vances.
The cash advance shall not be used for payment of regular expenses, such
as rentals, subscriptions, light, water, and the like. Payments out of the
cash advance shall be allowed only for amounts not exceeding P15,000.00
for each transaction, except when a higher amount is allowed by law
and/or a specific authority by the COA. Splitting of transactions to avoid
exceeding the ceiling shall not be allowed.
SAQ 5-3
In the blank before each statement, write True if the statement is
correct and False if it isn’t.
______________ 1. Disbursements should be in cash only.
______________ 2. The basic requirements for disbursements

are a certification of availability of funds,
approval of the claim of expenditure by the
head of office, and evidence of validity and
correctness of disbursement.
______________ 3. Any official can be issued a cash advance.
______________ 4. A cash advance is used for payment of

regular expenses.
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ASAQ 5-3
1. False. You disburse either in cash or check. Other modes of
disbursements are through the cash advance, use of commer-
cial checks, interfund transfer, and the NCAA issued by DBM.
2. True. To ensure that a disbursement is in order, check the:

• Certification of availability of funds. In the national
government, the Chief Accountant or head of accounting
unit certifies to the availability of funds. The certification
should first be secured before disbursements may be made.
• The approval of the head of office or his duly authorized
representative.
• Documents and other evidences to establish its validity
and correctness.
3. False. A cash advance is granted only to bonded officials such

as cashiers, disbursing officers, paymasters, and/or property/
supply officers, heads of office, and duly designated disbursing
officers or employees.
4. False. A cash advance is used to pay for petty operating ex-

penses consisting of small payments for maintenance and
operating expenses which cannot be paid conveniently by
check or which are required to be paid immediately. It can be
used for current operating expenditures of the agency field
office or of the activity of the agency undertaken in the field
when it is impractical to pay the same by check, such as
salaries, wages, allowances and maintenance, and other
allowances. Moreover, the facility of the cash advance can
apply for travel expenditures, including transportation fare,
travel allowance, hotel room, lodging expenses, and other
expenses incurred by officials and employees in connection
with official travel. None of these are regular expenses, which
include rentals, subscriptions, utilities and the like.
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Accounting in Local Government Units
Appropriations
The procedures in accounting for appropriations, allotments, and obliga-
tions of LGUs are spelled out in Title V, Local Government Accounting of
the GAAM, Vol. II. They are similar to those of the NGAs which follow
the phases of the budget process. As in the national government, local
appropriations are enacted by the legislative body of LGUsthe
Sanggunians.
However, procedures differ from those of the national government in the

sense that the accounting responsibility for NGAs is shared by the COA,
BTr, and the agency concerned. In LGAS, the appropriation is recorded
only in the books of the LGU concerned.
As prescribed in Section 468, the entire annual local budget shall be re-
corded on the first business day of the fiscal year. The estimated revenues,
receipts, and appropriations, and the amount approved by the legislative
body and confirmed by the reviewing authorities are recorded in the books
where they may be compared with the actual developments of the pe-
riod.
As in national government accounting, appropriations are recorded in
the JAO in red ink as a memorandum entry.
As per Section 469, the approved budget can be utilized only when the
Advice of Allotment (AA) approved by the local chief executive (LCE) is
released by the Budget Officer to the various departments/offices, copy
furnished the Accountant. The AA serves as the authority to incur obliga-
tions up to the specified amount that is within the approved appropria-
tions. Allotments are released quarterly by allotment class in accordance
with the itemization in the budget.
Furthermore, Section 470 provides that, upon receipt of the AA, the ac-
countant shall draw a Journal Voucher for the approval of the LCE or his
duly authorized representative. The approved Journal Voucher shall be
recorded in the General Journal. In addition, a memorandum entry in red
ink shall be made in the JAO maintained for each fund by Function, Project,
and allotment class.
UP Open University
Module 5 109
To prevent the incurrence of an overdraft, Section 471 indicates that funds

are earmarked for each proposed expenditure and transfer. Expenditures
and transfers of the General Fund and the Special Education Fund shall
be taken up in the accounts as the obligations are incurred. For each obli-
gation, the requesting department/office shall prepare the ROA signed
by the department or office head as requesting official.
The Budget Officer shall certify to the existence of appropriations that

have been legally made for the purpose of signing Certification No. 1 of
the ROA. The Treasurer shall certify to the availability of funds by signing
Certification No. 2 of the ROA. The Accountant shall certify as to the
obligation of the allotment by signing the ROA. Then, an obligation num-
ber shall be assigned and the amount of obligations shall be recorded in
the JAO.
In LGUs, receipts refer to income realized from operations and activities

of the LGU or received by it in the exercise of its corporate functions,
consisting of charges for services rendered, conveniences furnished, or
the price of a commodity sold, loans, and contributions or aids from other
entities, except provisional advances for budgetary purposes.
Disbursements
As in the national government, disbursements in LGUs are covered by
disbursement vouchers and are paid either by cash or check. In LGUs,
disbursements may be made only after:
• The local budget officer has certified to the existence of appropriation

that has been legally made for the purpose;
• The local accountant has obligated said appropriation; and
• The local treasurer has certified to the availability of funds for the pur-
pose.
As specified in Section 473, Chapter 1, Title V, GAAM, Vol. II, the checks
in payment of obligations and payables are drawn by the local treasurer
and countersigned by the local administrator. In the case of municipali-
ties where no administrator has been appointed, checks are countersigned
by the municipal mayor. For expenditures appropriated for the operation
of the Sanggunian, checks are countersigned by the provincial governor,
the city vice-mayor, or the municipal vice-mayor, as the case may be.
The checks issued, including cancelled or voided ones, are recorded chro-
nologically in the Report of Checks Issued, which is prepared weekly for
each fund by the Treasurer/Cashier in three copies.
UP Open University
For cash payments, Section 474 states that payments are made out of
regular and/or special cash advances.
Regular cash advances are those granted to cashiers, disbursing officers,

paymasters, and/or property/supply officers separately for any of the
following purposes:
• Salaries and wages

• Commutable allowances
• Honoraria and other similar payments to officials and employees
• Petty operating expenses
Special cash advances are those granted on the explicit authority of the
head of the agency only to duly designated disbursing officers or employ-
ees for other legally authorized purposes such as confidential expenses
and expenditures for activities of the agency undertaken in the field where
it is impractical to pay by check.
The Accountant shall obligate all cash advances granted.
That’s all about accounting for disbursements. The process is simple. It is

a matter of knowing the flow of transactions and accomplishing corre-
sponding vouchers or journals. Samples of the Preliminary Trial Balance
for Province, Local Government Statement of Operations, and Local Gov-
ernment Balance Sheet are appended to this module.
SAQ 5-4
1. When can a disbursement be made at the local government
level?
2. Can a head of office get a cash advance?
UP Open University
Module 5 111
ASAQ 5-4
1. In LGUs, disbursements may be made only after:
• The local budget officer has certified to the existence of
appropriation that has been legally made for the purpose;
• The local accountant has obligated said appropriation; and
• The local treasurer has certified to the availability of funds
for the purpose.
2. The head of office can get a cash advance if he/she has been
bonded. The cash advance may be used only for confidential
expenses, and expenditures for activities of the agency under-
taken in the field where it is impractical to pay by check.
Activity 5-1
Examine the strengths or weaknesses of the cash advance as an
instrument of financial management. You may draw insights and
examples from your own agency. Identify these strengths and
weaknesses and give suggestions to improve the system.
UP Open University
References
Briones, LM. (1996). Philippine public fiscal administration.

Commission on Audit State Accounting and Auditing Development Office,
Research, Curriculum Development, and Evaluation Division. (1995).
Trainee’s manual on national government financial accounting.
GAAM, Volumes I and II.
UP Open University
Module 6 113
Module 6
Financial Reports
and Statements
T he end-products of the accounting process are financial statements and re-

ports. These documents reflect the financial position of an agency at a given
moment and the results of its operations. Fi-
nancial statements and reports are the princi-
pal tools by which the comprehensive infor-
Objectives
mation accumulated and processed in the ac-
counting system is periodically communicated At the end of this module, you
to end-users. should be able to:
The statements and reports we are referring to 1. Explain the accounting

include the Trial Balance, Balance Sheet, and process;
Statement of Operations. To reinforce the dis- 2. Describe the contents of
cussion on accounting procedures in the pre- financial reports;
vious module, we begin this module with a 3. Analyze the financial
discussion of the accounting process, and then health of an agency based
proceed to a discussion of financial statements. on financial reports;
4. Explain cash management.
The Accounting Process

An accounting cycle is divided into accounting periods. The accounting period
followed in government is usually a month. The trial balance and budget reports
are prepared at the end of each accounting period. After a fiscal year has ended,
the agency is given a grace period after which it must present the end-of-the-year
financial statements and an end-of-the-year budget report.
UP Open University
Transaction
Journal entry
General ledger Subsidiary ledger
Trial Balance Budget reports
Worksheet
Adjustments and Adjusted Trial Balance
Closing entries and Final Trial Balance
Financial Statements
Figure 6-1. Comprehensive Accounting Process

(Source: Garner, 1990)
Closing the books

There is a specific process to be followed from the opening of the books to
the closing of the books.
The national government budget, and therefore the agency budget, shall
have been approved by the end of the year. A new accounting cycle com-
mences at the beginning of the year, which is also the fiscal year. The
nominal accounts are opened at the beginning of the year for estimated
appropriations. The agency makes its budget allocations and opens the
subsidiary ledger accounts. With approved appropriations, the agency
can already enter into contract and incur expenses.
Once the notice of cash allocation is received from the DBM, the agency
now has available cash and can pay its obligations. All agency transac-
tions are recorded in the journal. Journal entries are posted to the ledger
and, if appropriate, to the subsidiary ledger. At the end of the month, the
monthly trial balance and budget reports are prepared as required.
UP Open University
Module 6 115
At the end of the fiscal year, the books are closed, and the following sec-
tions in a worksheet are prepared:
• An end-of-the-year trial balance

• Adjustments
• An adjusted trial balance
• Revenues, expenditures and excess of funds
• The balance sheet
This means making the adjusting entries, preparing an adjusted trial bal-
ance, making the closing entries, preparing the post-closing or final trial
balance, and preparing the financial statements (the Balance Sheet and
the Statement of Operations).
The work sheet is a large multi-column sheet of paper with two columns
for each of the five sections enumerated in the list above. Each section has
one column for debit balances and another for credit balances. The first
section is an end-of-year trial balance, which lists all the debit and credit
balances in the general ledger, including the control accounts for revenue
and expenses, encumbrances and reserves for encumbrances, and appro-
priations and estimated revenue accounts. The next section is for adjust-
ing entries. This is followed by an adjusted trial balance, which shows the
equality between debits and credits after making the adjustments, the
Revenue and Expenses column, and the Balance Sheet column (Garner,
1990: 169).
Double-entry accounting
The accounting formula of the double entry method is the key to its suc-
cess. The standard formula is:
Assets = Liabilities + Residual Equity

or
Assets - Liabilities = Residual Equity
This means that what an organization owns (assets) is equal to what it

owes (liabilities) plus the amount in the residual equity. If liabilities are
subtracted from the assets, the difference is the amount in the residual
equity.
UP Open University
Debits and
represents credits
deposits of collections to the National Treasury, directly or indirectly.
This account is not closed at the end of the year. Accounts 8-70-702 and 8-
The next representing
70-703 step is to understand the means
Treasury Warrant (TW)by andwhich
TreasurytheChecking
accountsAc- in the
formula are changed. This is accomplished through
count for all Agencies (TCAA) drawn against the National Treasury are the use of bookkeep-
ingclosed
entries. We will
against describe
8-70-700, whichtheshould
way the notentries affect the
be overdrawn input
at any oneandtime.pro-
cessing of information in the accounting system.
2. The accounts 8-70-702; 8-70-703; and 8-70-709 are also Current Asset
(Cash) accounts. They are always with negative debit balance. The total of
For any transaction, a bookkeeping entry is made. The additions or sub-
these three
tractions to a accounts
balance in must
an not exceed
account arethemade
total by
of Account
recording 0-99-200,
debits or Cash
cred-
Disbursement Ceiling. The accounts refer to:
its in a journal. We will present the effect of a debit or a credit entry to
8-70-702
assets, Cash - Treasury/Agency
liabilities Accountdebits
and equity. In general, CurrentcauseTW Disbursements
an increase in assets
8-70-703 Cash - Treasury/Agency Account Current
(the left side of the T), while credits cause an increase Check Disbursements
in liabilities and
8-70-709
fund Cashaccounts
balance - Treasury/Agency
(the rightAccount
side ofCurrent-Other
the T). Conversely,Disbursements
a credit de-
creases an asset account,
0-99-200 Cash Disbursement Ceiling and a debit decreases a liability and equity ac-
count.
Check the account 0-99-200 for unused CDC.
Check account 0-90-000 for the unobligated balance of the allotment.
Debits and credits
3. For obligations mayand
incurred also be presented
obligations in the
liquidated, lookform
at theoffollowing
a T-account,
in
withthe debit balance on the left (same side as the asset side) and the
the Liabilities portion of the TB:
credit balance on the right (same side as the liability and fund balance
0-82-000 Obligations incurred
side) (Garner, 1991:125).
0-83-000 Obligations liquidated
8-81-400 Unliquidated obligations/vouchers
4. For Debit
income Balance side look at accounts
realized, Credit0-91-000
Balance side and 8-99-000 in the
Residual
DebitsEquity.
(+ assets) Debits (-liabilities and residual equity)
0-91-000Credits Income (Summary Account),
(-assets) a credit balance
Credits (+liabilities and residual equity)
8-99-000 National Clearing Account
5. Moreover, you may also check
Figure the TB
6-2. Debit andforCredit
the following
T-account equalities:
* The grand total debit totals = the grand total credit totals
* The total of the debit balances of the Current and Other Assets = the total of
In the
each journal
credit entry,
balances of the amountand
the Current of Other
the debits must+equal
Liabilities the amount
Cumulative Resultsof
theofcredits in
Operations order for the accounting formula to balance. The relation-
ship
* Theoftotal
assets,
debitsliabilities, and fund
of Contingent Assetsbalance
= the totalaccounts
credits ofto Contingent
debits or credits
Liabili-is
shown below:
ties + Contingent Capital
* The total debit balances of Investments and Fixed Assets = the total credit
balances of the Long-Term Liabilities +Liabilities
Assets Invested and Capital.
Residual Equity
Revision of the Preliminary TB is allowed only once. In case such reports are
Debit or
returned side
notice isCredit
madesideby the COA Debit side
Accountancy Credit
Office dueside
to non-
Balance side Balance side
compliance
Increases
with the requirements,
Decreases
resubmission
Decreases
shall be made within
Increases
3 days
from date of receipt/notice.
The supportingFigure
statements/schedules
6-3. Relationship for the Trial Balance
of assets, which
liabilities, andmay also be
examined are: fund balance accounts to debits and credits
* For the Quarterly TB
? Journal Vouchers for the National Clearing Account (8-99-000)
* For the Preliminary TB
UP Open University
Module 6 117
?Briefly,
Copiesassets haveVouchers
of Journal a debit covering
balance, the
andfollowing
liabilitiesitems:
and equity have a credit
balance.
? ClosingThe effects of debits and credits on the real accounts are summa-
entries
rized as follows:
? Transactions affecting the National Clearing Account and Surplus Adjustments
? Wiping out of overdrafts
? Reclassification entry re Continuing Appropriations (0-90-300)
A debit entry will Increase an asset account
? Relief of accountability
Decrease a liability account
? The analysis of the National Clearing Account as provided in COA Circular
Decrease a fund account
No. 92-142-A dated March 2, 1992
A credit entry will
? Statement of Allotments, ExpendituresDecrease an asset account
and Balances, to support total credits
Increase a liability account
to 0-90-000 in the trial balance and serves as basis in reconciling releases of
allotment per Accountancy Office of Increase COA and a the
fundagency
account
? Statement of Expenditures by Object, to support total credits to 0-82-000
Figure 6-4. Effects of debits and credits on real accounts
and 8-82-700 (less beginning balance plus or minus adjustments) in the trial
balance
? Breakdown
Nominal of Income as to Source, to support total credits to 0-91-100 in
accounts
the trial balance.
The Final Trial
Expenses shouldBalance is prepared
be perceived in after recording
relation to thethe closing
fund entries
balance. in the put,
Simply
Generaldecrease
expenses Journal and posting
equity, and to the General
income Ledger.equity.
increases The Final TBs go through
the following process of submission:
Income
Operating accounts musttohave
units submit a creditOffice,
the Regional balance oninororder
beforetoJanuary
add to10 theofequity
the
account (and
following appear on the right side of the T account), and expense
year;
accounts must have
Regional Offices submit a debit balanceOffice,
to the Central to subtract from January
on or before the equity20 ofaccount
the
(and appear on the left side of a T account).
following year; and
Central Office to COA, on or before February of the following year.
Residual equity is shown on the right side of the balance sheet, and a
ACTIVITY
credit balance 6-1shows a positive balance. Expenses lower the residual eq-
Illustrations and
uity, while income discussions
increases of accounting
it. As a result entries for all
of this kinds of transactions
relationship, income will are
quite
also havenumerous
a creditand lengthylike
balance andthe mayfund
not bebalance
necessary and feasible
accounts, and forexpenses
purposes
have a debit of this manual. To familiarize yourself with the financial operation of
balance.
NGAs, you are provided at the end of this module with a sample of a trial
Consequently, when government
balance of a national an expenseagency, is incurred andcontaining
and a box recordedthe in equalities
a journal,
thefor
expense
accounts account
or group is of
debited.
accounts. When
Use income
the sampleis received, the income
Trial Balance to checkac-
count
some isof
credited. The formula A = L + RE is now modified as follows:
the equalities.
The Balance Sheet
The Balance
Assets Sheet (BS) is=used
+ Expenses as one+ofResidual
Liabilities the bases of accounting
Equity reports. It
+ Revenue/Income
indicates the resources controlled by an organization and the sources of
or
financing. The main purpose of the BS is to show the financial position of an
agency at a =specific
Assets point
Liabilities + in time. The
Residual financial
Equity position is indicated
+ Revenue/Income by the
- Expenses
available resources (Assets) in comparison with the outstanding obligations
(Liabilities and Residual Equity) on a particular date (McKinney, 1986).
The source of information of the BS is the year-end Final TB. The Balance
Sheet represents the open real accounts in the Final TB (Pobre, 1993:317).
The balance sheet in government agencies follow the report format, where the A
UP Open University
Therefore, the actions of debits and credits on accounts is extended as

follows (Garner, 1991:127):
A Debit will Increase an asset account

Increase an expense account
Decrease a liability account
Decrease residual equity or fund account
Decrease a revenue account
A Credit will Decrease an asset account

Increase a liability account
Increase residual equity or fund account
Increase a revenue account
Decrease an expense account
Figure 6-5. Extended actions of debits and credits on accounts
At the end of the budget year, the books are closed, and the balances for
the revenues/income and expenses are changed to zero. The balances in
these accounts are transferred via journal entries into the equity or fund
balance account. If the revenue/income account balances are greater than
the total of the expense accounts, there is a positive impact on the equity
or fund balance. If the reverse is true, then the effect is negative (Garner,
1991:128).
Financial Statements and Reports

As discussed, financial statements are generated at the end of the operat-
ing year when the agency must report the results of its financial opera-
tions and its financial position as of the end of the year. Chief accountants
and other officials concerned are required to submit the Trial Balance,
Balance Sheet, and Statement of Operations at the end of the year.
The DBM also requires chief accountants to prepare and submit monthly
and quarterly trial balances. The chief accountant prepares and submits
financial statements to the agency head, with copies going to the resident
auditor, the DBM, and the Accountancy Office of COA on prescribed
dates.
UP Open University
Module 6 119
The chief accountant and other concerned officials who are not able to
comply with the reporting requirement are penalized through the imme-
diate suspension of payment of their salary and other emoluments until
they have complied. Non-compliance for the third time makes them sub-
ject to administrative disciplinary action. (Pobre, 1993:308)
The trial balance

The Trial Balance (TB) is a complete listing of the totals and balances of
control accounts. In the national government, the Trial Balance has six
columns consisting of one each for Account and Account Code, and four-
money columns, namely: Debit Balances column, Debit Totals column,
Credit Totals column, and Credit Balances column.
The TB has the general appearance of general ledger sheets. The accounts
are listed in the order they appear in the SGCA (Pobre, 1993:309).
The TB may be preliminary or final. The Preliminary TB is the trial bal-

ance before adjusting and closing entries are made. After the adjustments
are entered in the journals and posted to the general ledger accounts,
closing entries are made to close budgetary and temporary accounts. The
closing entries are recorded in the General Journal, through the Journal
Voucher, and posted to the general ledger accounts. Then the Post-Clos-
ing or Final TB is prepared.
What information is conveyed in a trial balance? Trial balances are pre-

pared by fund, and they show the following balances (Pobre, 1993:309):
• Assets and liabilities, major and minor code balances

• Surplus, major and minor code balances
• Income, major and minor code balances as subsidiary schedule in sup-
port of surplus account 0-91-000 under the account name column
• Obligations incurred, obligations liquidated, and allotments in terms of
one amount for each total balance. The breakdown of obligations in-
curred by expenditure classification is presented under the account name
column.
UP Open University
The following sub-totals and totals must be provided in the trial balance:
1. Total Current Assets

2. Total Contingent Assets
3. Total Fixed Assets
4. Total Assets
5. Total Current Liabilities
6. Total Contingent Liabilities
7. Total Appropriations Allotted
8. Total Income
9. Total Invested Surplus
10. Total Contingent Surplus
11. Total National Clearing Account
12. Total Surplus
13. Total Liabilities and Surplus
14. Grand Totals
Ascertain that the accounts are arranged in accordance with the Revised
SGCA, except the National Clearing Account (8-90-000), which shall be
placed in Cumulative Results of Operations Group. This can easily be
checked by examining the Account Code column.
There should be no abnormal balances. Normally, assets accounts have

debit balances, and liabilities and surplus accounts have credit balances.
Assets, Liabilities, and Surplus Accounts balances should not be in the
negative (Pobre, 1993:311).
With regard to the Grand Totals, the totals of the debit totals and credit
totals should be equal, and the totals of the debit balances and credit bal-
ances should likewise be equal.
The following are instances of abnormal accounts, which should be in-

vestigated for necessary adjustments:
• Credit Balances (Debit Balances in parentheses of asset accounts)

• Debit Balances (Credit Balances in parentheses of liability accounts)
• Overdraft in Appropriations (credit balance in parentheses of 0-90-000
or 8-90-700)
Credit balances in the appropriation section of the trial balance indicate

unexpended portions of the budget outlays, while debit balances are evi-
dences of overdrafts in appropriations.
UP Open University
Module 6 121
Errors in the trial balance need immediate adjustment or correction to

ensure accuracy and reliability of financial information/data. In govern-
ment accounting, adjustments are made by means of negative entries
(amount in parentheses).
Let’s look at some budgetary and/or temporary accounts which are closed
at the end of the year with account codes included for familiarization
(Pobre:1993:311):
1. The account 8-70-700 is a Current Asset (Cash) account. The account

is called “Treasury/Agency Account Current Deposits.” It is used to
record the deposits of national government agencies with the Bureau
of Treasury made directly or indirectly through the PNB, PVB, LBP or
DBP. This account should always have a debit balance. This account is
not closed at the end of the year. Accounts 8-70-702 and 8-70-703 rep-
resenting Treasury Warrant (TW) and Treasury Checking Account for
all Agencies (TCAA) drawn against the National Treasury are closed
against 8-70-700, which should not be overdrawn at any one time.
2. The accounts 8-70-702, 8-70-703, and 8-70-709 are also Current Asset
(Cash) accounts. They are always with a negative debit balance. The
total of these three accounts must not exceed the total of Account 0-99-
200, Cash Disbursement Ceiling. The accounts refer to:
8-70-702 Cash - Treasury/Agency Account Current TW Disbursements

8-70-703 Cash - Treasury/Agency Account Current Check Disbursements
8-70-709 Cash - Treasury/Agency Account Current-Other Disbursements
0-99-200 Cash Disbursement Ceiling
Check the account 0-99-200 for unused CDC.
Check account 0-90-000 for the unobligated balance of the allotment.
3. For obligations incurred and obligations liquidated, look at the follow-

ing in the Liabilities portion of the TB:
0-82-000 Obligations incurred

0-83-000 Obligations liquidated
8-81-400 Unliquidated obligations/vouchers
UP Open University
4. For income realized, look at accounts 0-91-000 and 8-99-000 in the

Residual Equity.
0-91-000 Income (Summary Account), a credit balance

8-99-000 National Clearing Account
5. You may also check the TB for the following equalities:
• The grand total debit totals equals the grand total credit totals.
• The total of the debit balances of the Current and Other Assets equals
the total of the credit balances of the Current and Other Liabilities
plus Cumulative Results of Operations.
• The total debits of Contingent Assets equals the total credits of Con-
tingent Liabilities plus Contingent Capital.
• The total debit balances of Investments and Fixed Assets equals the
total credit balances of the Long-Term Liabilities plus Invested Capi-
tal.
Only one revision of the Preliminary TB is allowed. In case such reports

are returned by the COA Accountancy Office due to non-compliance with
the requirements, re-submission shall be made within three days from
date of receipt/notice.
The supporting statements/schedules for the trial balance which may also
be examined are:
• For the Quarterly TB

Journal Vouchers for the National Clearing Account (8-99-000)
• For the Preliminary TB

Copies of Journal Vouchers covering the following items:
Closing entries
Transactions affecting the National Clearing Account and
Surplus Adjustments
Wiping out of overdrafts
Reclassification entry re-Continuing Appropriations (0-90-300)
Relief of accountability
Analysis of the National Clearing Account as provided in COA

Circular No. 92-142-A dated March 2, 1992
UP Open University
Module 6 123
Statement of Allotments, Expenditures and Balances, to support total

credits to 0-90-000 in the trial balance and serve as basis in reconciling
releases of allotment per Accountancy Office of COA and the agency
Statement of Expenditures by Object, to support total credits to 0-82-000

and 8-82-700 (less beginning balance plus or minus adjustments) in the
trial balance
Breakdown of Income as to Source, to support total credits to 0-91-100 in

the trial balance
The Final Trial Balance is prepared after recording the closing entries in
the General Journal and posting to the General Ledger. The Final TBs go
through the following process of submission:
• Operating units submit to the Regional Office on or before January 10

of the following year.
• Regional Offices submit to the Central Office on or before January 20
of the following year.
• Central Office submits to COA on or before February of the following
year.
Activity 6-1
Illustrations and discussions of accounting entries for all kinds of
transactions are quite numerous and lengthy and may not be
necessary and feasible for the purposes of this manual. Appended
to this module is a sample of a trial balance of a national govern-
ment agency. Use the sample trial balance to check some of the
equalities discussed above.
The Balance Sheet

The balance sheet (BS) is one of the bases of accounting reports. It indi-
cates the resources controlled by an organization and the sources of fi-
nancing. Its main purpose, in short, is to show the financial position of an
agency at a specific point in time. The financial position is indicated by
the available resources (Assets) in comparison with the outstanding obli-
gations (Liabilities and Residual Equity) on a particular date (McKinney,
1986).
UP Open University
The source of information of the balance sheet is the year-end Final Trial
Balance. The balance sheet represents the open real accounts in the Final
Trial Balance (Pobre, 1993:317).
The balance sheet in government agencies follows the report format, where
the assets are shown in the upper section of the report, and liabilities
appear with the residual equity in the lower section. The other format is
the account format, where the assets are shown on the left side of the
sheet, and the liabilities and residual equity on the right, forming a T shape
(popularly called T account) (Garner, 1991). The format of the balance
sheet is in accordance with COA Memorandum No. 80-119B dated Janu-
ary 25, 1980.
Familiarize yourself with the balance sheet of a national government

agency, a copy of which is provided at the end of this module. The bal-
ance sheet and the profit and loss statement (for corporations) represent
the financial profile of an agency. Full details of the financial profile are
contained in the annual report.
Assets
Assets are things of value that are owned. They constitute the resources
of an organization measured in monetary terms on a specific date. The
assets are composed of Current, Other, Contingent, Investment and Fixed
Assets, as well as Deductions from assets.
Current assets. These refer to cash or other assets that may reasonably be
expected to be converted or realized in cash, sold or consumed, usually
within a year or less, through the normal operation of a business. The
current assets are:
• Cash, which consists of currency, checks, treasury warrants, postal

money orders, and bank drafts on hand or in deposit.
• Receivables, which are claims of the government entity against others,
and usually expected to be settled by the receipt of money.
• Inventories, which represent goods that are consumed or used in the
normal course of operation, goods intended for sale, goods in produc-
tion or to be placed in production, and accountable forms with face
value acquired for use in the course of government operations.
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Module 6 125
Other assets. These are miscellaneous assets and other deferred charges
which refer to pre-payment, deposits subject to refund or for opening
letters of credit, temporary investment in securities, face value of backpay
certificates (RA 304 and RA 897) and Negotiable Certificate under RA
1400.
Contingent assets. These consist of the book value of assets lost from
whatever causes pending final settlement or disposition, the value of prop-
erty or cash held in custody pending the result of litigation of cases, the
amount of cash shortages, and the amount of disallowance indicated in
the Certificate of Settlement of Balances.
Investment and fixed assets. Investments refer to loans and advances,

whether interest bearing or non-interest bearing, to NGAs, LGUs or
GOCCs, including private individuals and entities. Long-term investment
in stocks and bonds are also classified under this account. Acquired assets
refer to fixed assets acquired by the government as a result of foreclosure,
mortgage or non-payment of installation due. Fixed assets are long-term
tangible assets acquired by an entity for use in its operations and not in-
tended for resale to customers or clients. The fixed asset accounts of a
government agency are classified into: land and land improvements; build-
ings and structures; and furniture and fixtures, equipment, work animals,
and books.
Deductions from assets. These are actually allowances for valuation and
accumulated depreciation.
A brief note on the depreciation of assets
An asset is depreciated in order to allocate the cost of an asset over

a period of time, such as a building or equipment. Depreciation is
not adjusting the market value of the asset. It is a way of distribut-
ing the cost of an asset over its expected life. Thus, the amount
shown for an asset minus depreciation represents its book value,
not market value, meaning the original cost minus charges (depre-
ciation) against that cost for use over time. The book value techni-
cally represents the asset's economic value to the organization--
what it gave up economically to own the asset. After an asset has
been completely depreciated, the remaining amount is considered
the salvage value. If an asset will continue to be used to the eco-
nomic benefit of the organization after it has been completely de-
preciated, it may be given a new value and then depreciated fur-
ther (Garner, 1991:120).
UP Open University
Liabilities
at the end of the year. Below is an example of a cash flow table.
Appropr
Liabilities comprise the second major category of balance sheet accounts .
Liabilities are the debts owed by an organization. These consist of Cur-
rent, Contingent, and Long-term liabilities.
Current liabilities. These are short term debts, regardless of source, in-
cluding any liabilities accrued and deferred, and unearned revenues that
are to be paid out of the current assets, or to be transferred to income
within a relatively short period, usually one year or less, or a period greater
than a year but within the business cycle of an enterprise. Examples of
these are: accounts, taxes, salaries payable, advance payments on third
party (insurance company) contracts, and current loans.
Contingent liabilities. These are claims pending litigation, or a decision

of the courts or authorities concerned. They are obligations relating to a
past transaction or other event or condition that may arise in consequence,
as a future event may now deem possible but not probable. If probable,
the obligation is not contingent but real (ordinarily, a current liability),
and recognition in the accounts is required, notwithstanding that its
amount must be estimated in whole or in part.
Long-term liabilities. These are obligations which will not become due
within a short period. Examples are mortgages, mortgage bonds, deben-
tures, and secured note issues.
The liabilities of an organization are important to the budget expendi-

tures. When a purchase order is authorized, approved, and released, it is
reported as an encumbrance. When the goods are received and not paid,
the encumbrance becomes a liability. When an expense is paid immedi-
ately upon receipt of the goods or service, a liability is not created. When
a liability is paid, the amount is deleted from the books via the double-
entry method. If carrying charges or interest charges are added to the
purchase price, these amounts are considered to be an expense to the
budget and are not added to the value of the merchandise purchased.
The amount in the expense account remains on record until the account-
ing books are closed at the end of the budget year. (Garner, 1991:120)
UP Open University
Module 6 127
Residual equity
The third category of BS accounts is the Residual Equity. It consists of:
• Cumulative Results of Operations, which represent the excess of cur-

rent assets over current liabilities;
• Invested capital, which reflects the equity of the national and local
governments in long-term investments and fixed assets;
• Appraisal capital, which represents the increase in the appraised value
of fixed assets;
• Contingent capital, which is a contra-account for all contingent as-
sets; and
• Capital, which is government equity in GOCCs.
The term equity implies ownership, and public organizations cannot be

owned, bought or sold by private individuals. Equity also implies a profit
motive. When a public organization receives a budget, the money is not
considered an investment. A surplus at the end of the year is not a profit.
The heading of a balance sheet is always as of a given date. See a sample

of a balance sheet for a national government agency and for a local gov-
ernment unit at the end of the module.
The statement of operations

The statement of operations (SO) shows the results of agency operations
for a given period of time. It is always for a period ended on a certain
date, not ending on a certain date. According to Pobre (1993:316), the
word “ended” refers to a period which is past, and “ending” refers to a
period which will end sometime in the future. It contains the elements
entering into the computation of the excess of allotments over obligations
incurred. Specifically, the data reflected therein are the allotments received
during the year, obligations incurred, reversion of unobligated allotments,
income realized, and cumulative results of operations from unappropri-
ated residual equity adjustments.
The SO is prepared by the Accounting Division from information taken

directly from the year-end Preliminary TB, or the Revised Preliminary TB,
if any.
A sample of a statement of operations of an NGA is found at the end of

the module. The format of the statement is in accordance with COA Memo-
randum No. 80-119B dated January 25, 1980.
UP Open University
SAQ 6-1
Write True if the statement is True and False if it’s not true.
________1. The trial balance looks like general ledger sheets.
________2. The trial balance includes assets and liabilities.
________3. The Preliminary Trial Balance can be revised several

times.
________4. The balance sheet shows the assets, liabilities, and

residual equity of the agency.
________5. The statement of operations shows the amount of

continuing appropriations, unused surplus and
materials and overdraft in appropriations; the total
allotments; the excess of allotments over obligations
incurred; the amount of income, borrowings, other
receipts, and current year's purchases of supplies and
materials; and the cumulative results of operations at
the end of the year.
ASAQ 6-1
True 5.
True 4.
False 3.
True 2.
True 1.
Additional Notes on Financial Statements

The financial statements should present an accurate picture of the finan-
cial health of the agency on a particular date. They should be comparable
on a monthly basis and by cumulative periods. In addition, the budget
should show actual results with budget figures on a monthly basis and on
a cumulative basis (Pobre, 1993:318).
UP Open University
Module 6 129
The monthly or quarterly reports alert the official concerned to variations

in the pattern of expenses and income (in the case of income-generating
agencies). Any deviation between budgeted and actual figures will be
clearly recognized. Management should immediately and carefully inves-
tigate any deviations. Then, if necessary, management should act quickly
to get the agency back on its budgeted track.
The statements should be useful in decision making. They should be accu-

rate, on time, and understandable. In general, it is helpful to list any ques-
tion that you believe should be asked. Below are some helpful tips in ana-
lyzing financial statements.
R Look for change. What are the fund balances and how have they
changed. If you have information of last year's financial performance,
how have the fund balances changed in comparison.
R What are the outstanding obligations?
R What are the accounts payable?
R What goes into the other expenses?
R What figures are overestimated? Grossly underestimated?
R What were the budgeted expenditures? What was actually spent? Is
there a deficit in the budget? How will a deficit be financed?
R What was the result of the expenditures? Have the objectives of the
agency been achieved?
R Have expenditures been evaluated? Why not?
Cash Management
One way to analyze problems is to look at the flow of budget releases and
expenditures in the previous year. Establish the time when releases are
received, and when expenses tend to occur on a more regular basis. Cash
allocation depends on the releases from the Bureau of Treasury. For in-
stance, it could be that 35% of allotments came in during the first quarter,
25% in the second, 10% in the third, and 30% in the final quarter. Take
note of unusual and non-recurring expenses. Anticipate the months when
allotments are usually received, and during which month the agency tends
to spend more. In this way, you can plan ahead for cash deficiencies.
Expenses, on the other hand, tend to occur on a more regular basis and
can be allocated by the simple method of dividing total estimated expen-
ditures by 12 months. Leave out unusual and non-recurring expenses of
the prorating calculation in the meantime. To preserve cash, pay obliga-
tions when they become due.
UP Open University
The flow of cash allocation and expenses throughout the year is therefore
expected to show a pattern. By using last year’s budget performance, pre-
pare a monthly plan to be able to anticipate the months when cash alloca-
tion is received, high-spending months, months of cash deficiencies, ex-
penses at the end of the year. Below is an example of a cash flow table.
Table 6-1. Example of cash flow table
Appropriations Month Cash Expenses Surplus Cumulative

received received (Deficit) (Deficit)
Activity 6-2
Get hold of your agency’s statement of operations and balance
sheet. Interpret them. What is the financial standing of your
agency?
References
Commission on Audit. (1992). Government accounting and auditing manual,

Volumes I, II, and III.
Garner, CW. (1991). Accounting and budgeting in public and nonprofit orga-
nizations: A manager’s guide. San Francisco: Jossey-Bass Publishers.
McKinney, JB. (1986). Effective financial management in public and nonprofit
agencies. New York: Quorum Books.
Pobre, HP and AB Magno. (1980). Government accounting: A self-instruc-
tional approach.
UP Open University
Module 7 131
Module 7
Supply and Property
Management
Y ou may have observed in some government agencies certain practices

in the procurement, distribution, custody, utilization, and disposal of
government supplies and property. There are clear-cut rules to follow,
particularly in the bidding process, in taking inventory, and in the dis-
posal of property.
You wonder why sometimes no public bid-

ding is conducted, or why a bidding pro-
cess fails, or why a particular contractor Objectives
wins a bid even if it is not the lowest bid.
At the end of the module, you
One mechanism introduced to facilitate the
should be able to:
process of procurement is the installation
by COA of a Government Purchases In- 1. Explain the various
formation System. These and related con- methods of procurement
cerns will be the focus of this module. in government;
2. Identify the steps involved
in public bidding as well
Definition of Terms as the documentary
requirements;
Supplies and property management in- 3. Identify the steps involved
volves the procurement, recording, inven- in the disposal of govern-
tory, custody, utilization, and disposal of ment property; and
supplies and property. 4. Assess the advantages and
disadvantages and the cost
Government property is classified into requirement of a GPIS.
three main groups: inventories, acquired
assets, and fixed assets.
UP Open University
Inventories refer to the following: (a) all expendable commodities which

are normally consumed within one year in connection with government
operations; (b) expendable commodities used in the process of manufac-
ture or construction; and (c) property used in government operations and
with a unit value of P10,000 and less, but the useful life extends beyond
the year of operation.
Supplies and materials are part of inventories. Supplies and materials

include all expendable commodities acquired or ordered for immediate
use in government operation, except real estate. Supplies and materials
are items normally consumed within one year after being put to use, those
converted in the process of manufacture or construction, other expend-
able property having a value of less than P1,500, and other expendable
property consumed in a function, activity or office.
Acquired assets refer to land, buildings and structure, furniture and equip-
ment, and other assets acquired or repossesed and intended for disposi-
tion.
Fixed assets overlap in definition with acquired assets. These consist of

land and land improvements, buildings and structures, furniture and fix-
tures, equipment, books and work animals, which are more or less per-
manent or capital in nature. Fixed assets, however, are not intended for
sale.
Modes of Procurement
There are at least eight methods of procuring supplies, materials, and
property:
1. Purchase through public bidding

2. Personal canvass of responsible merchants
3. Emergency purchase
4. Negotiated purchase
5. Direct purchase from licensed manufacturers
6. Purchase from the Procurement Service, DBM
7. Purchase from other government agencies and foreign governments
8. Purchase through repeat order
UP Open University
Module 7 133
Public bidding
Public bidding may be defined as the buying and selling of supplies, prop-
erty, and services through bids or offers by potential suppliers and service
providers, and acceptance by the requesting party, in this case the gov-
ernment, of the good or service subjected to the bid. As a matter of policy,
public bidding is the basic mode in the procurement or purchase of sup-
plies, materials, equipment, property, and services. Bidding must be open,
transparent, public, and competitive in order to enable the government to
secure the lowest possible price and curtail favoritism in the award of
government contracts.
Public bidding is the primary mode of procurement in government for

many valid reasons:
• It generally results in securing the lowest price.

• It curtails favoritism among suppliers.
• It avoids suspicion of anomalous transactions.
• It places suppliers on equal footing.
While public bidding is the general rule, the law also provides for exemp-
tions to the rule, or other modes of procurement (to be discussed later). At
this point, let us briefly discuss the process followed in a public bidding.
The head of the agency shall be responsible for establishing and imple-
menting the rules and procedures to be followed in public bidding based
on existing COA rules and regulations. Each agency head shall publish
these procedures through the issuance of orders. This includes the cre-
ation of a Bids and Awards Committee (BAC) to decide on winning bids
and questions regarding awards on procurement and disposal of prop-
erty. The BAC in NGAs shall be composed of at least three officials: a
chairman and two members who are regular employees of the agency. A
representative of the office procuring/buying the commodity shall be a
member of the BAC. The BAC shall be assisted by a secretary and a legal
officer who may not vote. The members of the committee shall be desig-
nated by the head of the agency through the issuance of a department
order. Depending on need and office policy, there may be more than one
BAC: a BAC for procurement of supplies and materials (small purchases),
a BAC for infrastructure, a BAC for foreign-assisted projects, and a BAC
for IT resources.
UP Open University
The bidding process
The bidding process commences with the release of the Call for or Invita-
tion to Bid to potential prequalified suppliers or service providers. The
Invitation to Bid contains the description or specifications of the supplies/
materials/equipment being procured. It shall be so worded in the adver-
tisements as to admit or include all makes and brands even if the supplies
called for are exclusively sold or manufactured. Reference to a particular
brand shall be avoided.
Specifically, the Invitation to Bid should contain the following informa-

tion:
• The terms and conditions of the proposed contract,

• Specifications of the merchandise advertised,
• Right of the government to accept or reject the bid or to waive any
defect,
• Period within which the government may accept or reject the bid,
• Period of delivery of merchandise and the liquidated damages for late
delivery, and
• Time and date of submission of bids.
The Invitation to Bid is issued through a combination or all of the follow-

ing means:
1. Publication of the Invitation to Bid. This is a brief announcement of the

proposed bidding or a copy of the invitation to bid which shall be ad-
vertised in the newspapers with general circulation within 10 days
before the opening of the bid.
2. Posting. Copies of the invitation to bid shall be posted in the bulletin

board of the DBM Procurement Service, in the bulletin board of the
requisitioning agency, at the main entrance of public buildings, and at
other public and conspicuous places.
3. Mailing. Solicitation by mail shall be effected through the use of the

bidders list which shall include the Philippine Chamber of Commerce
and Industries, and other trade and business organization.
4. Telegraph, radio, television, or other mass media when conditions per-

mit.
5. Personal delivery. Invitation to bid may be delivered in person or through

a messenger service.
UP Open University
Module 7 135
Who are bonafide dealers? These are duly licensed merchants, importers
or manufacturers, and authorized agents of manufacturers of recognized
standing.
A tender or offer shall not be accepted without a bidder’s bond of at least

10% of the amount of bid, but not to exceed P20,000 either in cash, certi-
fied check, or surety bond. Without a bond, the offer shall not be opened,
announced, or recorded in the minutes of proceedings. Bids submitted
after the date and time scheduled for their opening shall not be accepted.
Rule on awards
After the period of publication, the BAC and all interested bidders meet
on a set date, time and place for the opening of bids and awarding of
contract. In general, the rule on awarding of contracts is to give it to the
lowest price or the most advantageous offer. The following factors, among
others, shall be considered in making the award:
• Conformity with specifications;

• Reasonableness of the prices quoted;
• Time of delivery considering the necessity of the service. When time is
of the essence, the bidder who offers to deliver within the period stipu-
lated in the invitation to bid shall be awarded the contract, provided
that the price is not unreasonably higher than the lowest price offered;
• All things being equal, the bidder who offers to supply the whole quantity
shall be preferred, in order to obtain uniformity in quality, tensile
strength, color shade, etc.; and
• Reliability of the bidder as supplier.
Examination of bids
The COA Auditor or his/her representative is invited to witness the open-

ing of all bids and quotations. But the Auditor shall not participate in the
securing of bids or in the awarding of contracts.
If samples are required, management should also take the initiative to

submit materials for testing, especially if it has doubts on the quality of the
supply or material. Agencies authorized to test samples of deliveries are
as follows:
UP Open University
1. Public Health Research Laboratories of the DOH

• Drugs, chemicals and medicines
• Canned goods
• Inks and adhesive
2. Industrial Technology Institute of the DOST

• Paper and paper products
• Textile, flags, and glass materials, canvass, bandages, etc
• Leather and leather goods
• Soap and soap products
• Wires, telephones, electric, steel cables
• Wheelbarrows
• Alloys
• Paint and paint materials
3. Materials Testing and Physical Research Division of the DPWH

• G.I. Sheet (also NIST)
• G.I. pipes
• Reinforcing steel bars
• Concrete blocks, wall boards, asbestos, roofing materials (also to NIST)
• Asphalt and asphaltum products
4. Bureau of Plant Industry

• Cereals
• Fertilizers
Other modes of procurement

The following modes of procurement do away with the long, tedious, and
stringent requirements of public bidding, and are resorted to when public
bidding fails.
Emergency purchase
In NGAs and GOCCs, emergency purchase (EP) is allowed in cases where the
need for supplies, materials, furniture, equipment, or repair of equipment is ex-
ceptionally urgent or absolutely indispensable to prevent or avoid detriment to
public service. The purchase is based on a canvass of prices of at least three bona
fide dealers.
UP Open University
Module 7 137
An EP shall invariably be supported by a certification by the agency head or his/

her duly authorized representative (a) as to the necessity/justification for said
purchase; and (b) that the price paid or contracted for is reasonable at the time of
the purchase or order. The amount involved in an EP should not exceed the
limitations provided for in the corresponding GAA.
At the LGU level, an EP may be resorted to where the need for the sup-
plies is exceptionally urgent or absolutely indispensable and only to pre-
vent imminent danger to, or loss of, life or property. Supplies procured
through an EP must be utilized or availed of within 15 days from the date
of delivery or availability.
Negotiated purchase
Purchases made through this mode may be allowed in the following cases:
• Whenever the supplies are urgently needed to meet an emergency which

may involve the loss of, or danger to, life and/or property;
• Whenever the supplies are to be used in connection with a project or

activity which cannot be delayed without causing detriment to the public
service;
• Whenever the materials are sold by an exclusive distributor or manu-

facturer who does not have sub-dealers selling at lower prices and for
which no suitable substitute can be obtained elsewhere at more advan-
tageous terms to the government;
• Whenever the supplies under procurement have been unsuccessfully

placed on bid for at least two consecutive times, either due to lack of
bidders or the offers received in each instance were exorbitant or non-
conforming to specifications;
• In cases where it is apparent that the requisition or the needed supplies

through negotiated purchase is most advantageous to the government
to be determined by the department head concerned; and
• Whenever the purchase is made from an agency of the government.
UP Open University
Procurement from duly licensed manufacturers and

exclusive distributors
Procurement may be made directly from duly licensed manufacturers in

cases of supplies of Philippine manufacture or origin and in case there are
two or more manufacturers of the supplies desired. Canvass of the known
manufacturers should be made to obtain the lowest price for quality of
supplies desired.
Procurement from exclusive Philippine agents

or distributors
Procurement of supplies of foreign origin may be made from the exclusive

or reputable Philippine distributors or agents subject to the following con-
ditions and certifications:
• That the exclusive Philippine distributor has no sub-dealers selling at

lower prices;
• That no suitable substitutes of substantially the same quality are avail-

able at lower prices;
• A certificate executed by the supplier that he/she is the exclusive manu-

facturer or dealer of specific supplies, duly attested by the foreign or
local principal;
• A certificate by the requisitioning officer (approved by the agency head)

that no suitable substitutes of substantially the same quality are avail-
able for the supplies/materials/equipment which are exclusively manu-
factured or distributed.
Procurement through the Procurement Service
Executive Order No. 359 dated June 2, 1989 transferred the functions of
the Supply Coordination Office to the Procurement Service (PS). The EO
provides that all national government agencies procure supplies used on
a day-to-day basis from the PS.
However, agencies are allowed to procure directly from other sources

when the items are not available at the Procurement Service, and in case
of emergency or to prevent significant delay in the delivery of urgently
needed supplies by the PS, subject to existing accounting rules and regu-
lations.
UP Open University
Module 7 139
Procurement from other Philippine Government Agencies
Procurement may also be made direct from government entities produc-

ing supplies. In the case of standard accountable forms, the printing, bind-
ing, and distribution shall be undertaken by the National Printing Office.
Purchase through repeat order
An agency may repeat an order and buy from the same supplier the same
items at the same prices in addition to the quantity in the original con-
tract, subject to the following conditions:
• The price must be the same as, or lower than, the original price;
• The repeat order will not result in splitting of requisitions or purchase
orders;
• Repeat orders may be availed of only within a six-month period from
the date of the original purchase; and
• The repeat order should not exceed the quantity in the original order.
Unless otherwise provided in the purchase order or contract, deliveries

shall be made within seven calendar days “upon receipt of the order”
and during office hours at the place or places stipulated in the order.
Failure of the supplier to deliver on the due date allows the agency to
impose either of the following:
• Deduction of 1/10 of 1% of the unfilled balance for each day of delay.

• An open market purchase with the excess price charged to the default-
ing supplier, if any.
SAQ 7-1
Identify the type of procurement referred to by each item.
1. Used when the need for supplies, equipment, or repair of

equipment is particularly urgent to avoid detriment to the
public service
2. The primary mode of procurement in government
3. Used when bidding has failed twice due to lack of bidders or
exorbitant bids
4. Used when the same items are being bought for the same price
5. Used when supplies are of foreign origin and exclusively
distributed by certain local suppliers
UP Open University
ASAQ 7-1
1. emergency purchase
2. public bidding
3. negotiated purchase
4. repeat order
5. procurement from exclusive Philippine agents or distributors
Property Inspection, Inventory,

Custody and Disposal
All agencies of the national government are required to prepare a State-
ment of Annual Procurement Program (SAPP) showing the quantity, de-
scription, and estimated cost of supplies/materials/equipment required
for a calendar year. The SAPP is a supporting document of the agency’s
Work and Financial Plan, which is submitted to the DBM on or before the
end of every November pursuant to NBC No. 415 dated January 19, 1990.
The SAPP becomes the agency’s basis for purchasing supplies. Except in
emergency cases or where urgent indispensable needs could not have been
reasonably anticipated, no purchase of supplies shall be made unless in-
cluded in, or covered by, the approved SAPP.
In making purchases, three basic regulations must be observed by an

agency. First, procurement of supplies shall be through competitive pub-
lic bidding. In selecting goods and service providers, preference shall be
given to government providers and products manufactured by the gov-
ernment.
Moreover, it is better to buy supplies and materials in bulk to take advan-

tage of lower prices. The agency is also able to save time and money if it
buys like items at the same time. Moreover, regardless of the size of the
organization, procurement should be centralized in a single office rather
than having each department make purchases independently (Coe,
1989:88). This allows for better control and lower cost for the agency.
UP Open University
Module 7 141
Inspection of purchases
Inspection of purchases shall be done according to these rules:
• Purchases made by the agency must be inspected and verified by their

authorized inspector for conformity with specifications in the order.
• The chief of the Inspection Section may waive the inspection of pur-
chases of insignificant value, provided he/she is fully convinced that
the delivery in question is in accordance with the specifications of the
order. The waiver of inspection must be stamped on the original copies
of the order and invoice.
• All items to be inspected shall invariably be accepted first by the requi-

sitioning or property officer.
• Inspection shall be conducted based on a duly approved Purchase Or-

der/Letter Order or its equivalent.
• If necessary, the supplier’s representative should be present during the

inspection. All authorized persons present during the time of inspec-
tion shall be requested to sign the inspection report.
• In cases of modifications in the order or substitution in delivery, duly

signed addendum/amendment to the contract shall be required as ba-
sis of the inspection.
• A report of inspection of all consumables shall be submitted to the COA

auditors within 24 hours.
Payment of purchases
Claims for supplies and materials shall be supported with the following:
1. Original copy of the supplier’s invoice
2. An indication of acceptance by a duly authorized official or employee

on the invoice or on a separate document
3. Requisition for equipment or supplies approved by the agency head or

a duly authorized official of the agency
UP Open University
4. Purchase order issued by the agency supported with:

• Documentary evidence of the mode adopted for the purchase
• Memorandum receipts signed by the officials or employees to whom
the equipment/semi-expendable supplies are issued
• Where the supplies and materials are subject to test, results of the
test of the subject items
Custodianship of property
Custody or possession of property is the basis of accountability. The per-
son in possession of or having custody or control of supplies or property is
immediately accountable and shall be liable for its money value in case of
illegal, improper, or unauthorized use or misapplication thereof, by him/
herself or by any other person for whose acts he/she may be responsible.
He/She shall likewise be liable for all losses, damage, or deterioration oc-
casioned by negligence in the keeping or use of the property.
Recall our definition of accountability in Module 2. Briefly, accountability

means the answerability of every public officer whose duties permit or
require the possession or custody of government funds or property and
who shall therefore be accountable for its safekeeping in conformity with
law.
Persons primarily and secondarily accountable for government property

are the agency head and other officials or employees entrusted with the
possession or custody of funds and property. On one hand, the agency
head is immediately and primarily responsible for all government funds
and property pertaining to his/her agency. On the other hand, persons
entrusted with the possession or custody of the funds or property under
the agency head shall be immediately responsible to him/her without
prejudice to the liability of either party to the government.
Unless an accountable officer registers his/her objection in writing, he/

she shall not be relieved from liability by reason of his/her having acted
under the direction of a superior in using supplies or property with which
he/she is chargeable. An officer directing such acts shall first be required
to answer. The fair market value of equipment will be chargeable to the
officer/employee less some allowance for depreciation.
UP Open University
Module 7 143
Inventory of supplies, materials and equipment

Physical stock-taking is an indispensable procedure for checking the in-
tegrity of property custodianship. For effective control of government prop-
erty, the COA prescribes the following regulations:
• Chiefs of agencies are required to take a physical inventory of all equip-

ment and supplies belonging to their respective offices at least once a
year.
• The taking of inventory should be done by a committee of two or more

employees designated by the chief of agency, including the property/
administrative officer or custodian, depending on the extent of prop-
erty accountability in that particular agency. The activity may be wit-
nessed by a representative of the agency auditor.
• In the event of transfer of property from one accountable officer to an-

other, an inventory thereof shall be taken jointly by outgoing and incom-
ing officers, and a receipt accomplished on the basis of such inventory.
• No officer accountable for public property who is transferred, resigned,

retired or detailed abroad for more than six months shall be relieved
and cleared from accountability by the agency official concerned ex-
cept upon presentation of an absolute receipt from his/her successor
covering the full value of the property claimed to have been transferred.
• The required inventory shall be certified correct by the committee in

charge thereof attested by the representative of the auditor concerned
and approved by the chief of the agency.
• All discrepancies between the physical and book inventories must be

investigated and cleared immediately. If necessary, written explana-
tions shall be required from persons responsible.
The basic rule in stocking is to keep such amount of supplies, materials,

and equipment sufficient to cover needs over a three-month period. Pur-
chases in excess of the normal three-month requirement should be avoided.
Each requisition for any single commodity in excess of P1,000 in value
shall be accompanied by a stock position sheet of the article being requisi-
tioned.
In certain cases, agency heads may approve the build-up of stocks on

hand of critical increases or requirements of a national emergency, and
specifying maximum quantities of individual items, but in no case shall
these stocks exceed more than a year’s supply unless otherwise approved
by the President.
UP Open University
Inattaking anthe
t end of inventory of supplies
year. Below and equipment,
is an example of a cash flowformulate
table. and follow
a definite
Approprplan of action. The GAAM provides us with guidelines for tak-
ing an inventory:
1. Establish the date of physical inventory.
2. Determine the composition and tasks of the Inventory Crew (Super-

visor, Counter and Checker).
3. Prepare the written instructions to be observed/followed by the

Inventory Crew.
4. See to it that inventory tags are serially numbered and prepared in

duplicate with a perforation separating the top and bottom portions
of the tag.
5. Prepare the inventory sheets for the recording of the data on the
tags.
6. The inventory crew should count, weigh, or measure the objects of

inventory; write the name of the inventory item, its code number, its
location, the item count or weight or measurement on the tag in the
inventory sheets; and sign the tag and attach it to the goods.
7. A second crew may do a second count, sign on the lower portion of

the tag below the perforation, and independently record the count.
8. Upon completion of the inventory process, the lower portion of the

tags below the perforation, or the count tags of the second crew,
should be taken from the inventory items, collected and turned over
to the person in charge of the inventory process for transfer to the
inventory summary sheets.
9. A grand summary of all the inventory sheets shall then be prepared.
The process of inventory taking may vary. The following points must be
kept in mind in the conduct of the inventory.
• Withdrawals from and additions to inventory must be recorded on

the count tags or sheets during the time of taking the inventory.
• All discrepancies between physical and book inventories must be

investigated and cleared immediately. If necessary, written explana-
tions shall be required from persons responsible.
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Module 7 145
The proper cut-off date must be determined. If the cut-off date is Decem-
ber 31, 2000 and the date of the inventory taking is January 31, 2001, only
property considered as of December 31, 2000 shall be included in the
inventory count and report. Also, items disposed as of December 31, 2000
shall be included in the count.
Issuance of equipment/supplies to officers

and employees
Equipment issued by the property officer for official use of officials and
employees shall be covered by a Memorandum of Receipt (MR) for equip-
ment which shall be renewed every January of the third year after issue.
The transfer of expendable supplies or property from the Supply Officer
shall be covered by a Requisition and Issue Voucher (RIV).
SAQ 7-2
Write True if the statement is true and False if it isn’t. For false
statements, underline the part of the statement that makes it false.
____ 1. A claim for supplies shall be accompanied by a duplicate

copy of the supplier’s invoice.
____ 2. Agency heads are exempted from taking a physical inven-

tory of all office equipment and supplies.
____ 3. Purchases should be inspected and verified by the supplier

for conformity with specifications in the order.
____ 4. The report of inspection shall be submitted to COA audi-

tors within 72 hours.
____ 5. The Property Office is liable for all losses, damage, or

deterioration occasioned by negligence.
UP Open University
ASAQ 7-2
All items are False. Below are the words/phrases in each state-
ment that makes it false. Enclosed in parentheses is the correct
detail.
1. “duplicate copy” (the original is required)

2. “exempted from” (they are required)
3. “supplier” (the authorized inspector)
4. “72 hours” (24 hours)
5. “Property Officer” (the person in possession of or having
custody of)
A request for relief from accountability shall be supported by the follow-

ing documents:
1. Affidavit executed by the accountable officer stating the following

facts:
• Property lost and its valuation,

• Actual date in which the absence was first noted,
• Manner of disappearance,
• Efforts put forth to recover the same,
• Provisions made to safeguard the property, and
• Date when the loss was reported to the auditor and the police
authorities.
2. Joint affidavit of two disinterested persons cognizant of the facts
and circumstances about the loss. In case only one person is avail-
able, or none at all, such fact should be set forth in the affidavit of
the person requesting relief, giving the reasons therefor;
3. Final Police Report showing the steps taken by the police authorities
to recover the property lost and to apprehend the suspect/s and the
present status of the case;
4. Comments and/or recommendation of the agency head;
5. Comments and/or recommendation of the auditor as a result of the
investigation and evaluation of the causes of the loss and the evi-
dences submitted. This will take into consideration the degree of
diligence exercised by the accountable officer in the safekeeping of
government property under his custody so that negligence on the
part of the accountable officer is not an attributable factor to the
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Module 7 147
6. Certification from competent authority that the destruction was

brought about by natural calamity and/or insurgency;
7. Inventory of the lost/damage property and those retrieved;
8. Copy of the MR for property losses;
9. Comment and/or recommendation of the COA Director and the
auditor concerned on the propriety of the request, together with a
full statement of material facts;
10. A categorical determination by the auditor concerned and the COA
director on the absence of fault or negligence on the part of the
accountable officer in the handling, safekeeping, etc., of the prop-
erty under his custody as evidenced by a recital of the precaution-
ary/security measure as adopted to protect or safeguard them.
Disposal/Divestment of Property
Disposition means the sale or destruction of unserviceable property no
longer needed by the agency, property confiscated/forfeited by law en-
forcement agencies, as well as other records which are already unneces-
sary or valueless.
The full and sole responsibility for the divestment or disposal of property
and other assets shall be lodged in the heads of the agency who shall
constitute the appropriate committee to undertake the same.
When government property has become unserviceable for any cause, or is

no longer needed, it shall, upon application of the officer, be inspected by
the head of the agency or his/her duly authorized representative in the
presence of the auditor concerned and if found valueless or unusable, be
destroyed in their presence. If found to be valuable, it may be sold at a
public auction to the highest bidder.
The Disposal Committee shall be composed of a Chairperson (any senior

official) and two members (head of the administrative services and head
of the property unit).
The accountable officer in possession of the unserviceable property shall

submit to the Disposal Committee the Inventory and Inspection Report,
supported by individual equipment survey reports and current photo-
graphs.
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For waste materials and worn-out and obsolete spare parts, the Waste
Material Report shall be used.
Unserviceable property which can no longer be repaired shall be appraised

at scrap or junk value. Unserviceable property which can still be repaired
shall be appraised at current market value (CMV), if available; otherwise
the property shall be appraised at sound value (SV). The CMV is the esti-
mated price the property will bring if offered for sale in the open market.
The CMV may be taken from advertised prices of used equipment of the
same make and model or similar models, adjusted for the actual condi-
tion of the property being appraised relative to the condition of the adver-
tised model.
Modes of disposal
A public bidding is also required in the disposal of government property.
Still, in certain circumstances (which must be justified), other means of
disposing property may be used. These other modes of disposal of prop-
erty are discussed below.
Public auction
This is subject to the following procedure:
• Adequate publicity and notification so as to attract the greatest

number of interested parties;
• Sufficient time between publication and date of auction;
• Opportunity afforded to interested parties to inspect the property or
assets to be disposed;
• Confidentiality of sealed proposals;
• Bond and other pre-qualification requirements to guarantee perfor-
mance; and
• Fair evaluation of tenders and proper notification of award.
The announcement of a public auction must be published in the Official

Gazette for not less than three consecutive days. The announcement must
also be published in a newspaper of general circulation or by means of
notices posted, also for three days, in at least three public places in the
locality where the property is located.
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Module 7 149
Sale through negotiation
This can be resorted to taking into account the following:
• There was a failure of public auction.

• If there is only one tender of bid. In this case, the offer or bid, if
sealed, shall be opened.
• If all the offers/tenders are unacceptable or fail to comply with
prescribed legal, technical or financial requirements for pre-qualifica-
tion.
The negotiation may be conducted singly, on a one-on-one basis, or in a

group, provided that due communication between the organization mak-
ing an offer (called “offeror”) and the agency is established with a view to
ensuring that the agency gets the best prices. A record of the proceedings
of the negotiation must be maintained.
The prices agreed upon at the negotiation shall not be lower than the
floor price as fixed by the government of the highest offer submitted at the
failed public auction, whichever is higher.
Destruction or condemnation
This is resorted to only when the unserviceable property has no commer-

cial value, or is beyond economic repair, or there is no willing receiver,
and/or the appraised value is less than the administrative cost of sale,
subject to prior inspection by the auditor concerned.
Valueless property shall be condemned either by burning, pounding,

throwing beyond recovery, and the like. The head of agency shall ap-
prove the disposition.
Transfer of property
Upon the initiative of the owning agency or upon submission of a request

to the former, property recommended for disposal may be transferred to
another government agency, either with or without cost.
Donation
Property recommended for disposal may be donated to charitable, scien-

tific, educational, or cultural institutions.
UP Open University
Payment
Upon determination of the winning bidder, the bid bond shall be consid-
ered as partial payment and the difference between such payment and
the offered bid price shall be paid in the form of cash, cashier’s check, or
manager’s check. Full payment shall be made within five working days
from the date of the notice of award.
In case of failure of payment within the prescribed period, the awardee

may be penalized through cancellation of the award and forfeiture of the
bid bond in favor of the government.
Claims shall be made only after the bid price is fully paid as evidenced by
an official receipt. It shall be effected in the presence of the reporting ac-
countable officer and witnessed by the Disposal Committee.
The property officer shall accomplish the tally-out sheet as evidence of

actual delivery. The sheet must be signed by the authorized agency offi-
cial and the buyer acknowledging receipt of the items.
Claims shall be made within the period fixed by the Disposal Committee
but not more than 30 days after awarding. Failure on the part of the
awardee to claim the property within the stipulated period shall have the
effect of a cancellation of the award/contract.
SAQ 7-3
1. What is the extent of liability of an accountable officer in cases
of improper or unauthorized use of government property?
2. When can an agency resort to sale through negotiation in the

disposal of property?
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Module 7 151
ASAQ 7-3
1. Up to the extent of the money value of the property. The person
is also held liable for all losses, damages, or deterioration occa-
sioned by negligence in the keeping or use of the property.
2. There is a failure of public auction if there is only one offeror. In
this case, the offer or bid, if sealed, shall be opened. There is also
a failure of public auction if all the offers/tenders fail to comply
with requirements or are unacceptable.
Government Purchases Information System

Present day government officials are expected to be computer-literate and
up-to-date about information technology that can facilitate work opera-
tions. Technology-based information systems like the GPIS are now in
place to facilitate operations and promote work efficiency and effective-
ness and eliminate or reduce fraud.
You may have encountered the problem of overpriced office supplies at

least once. Overpricing is knowingly buying at a price higher than what
is otherwise available in the open market (Ursal/COA, 1999:175). Can-
vassers, supply officers, and other designated government personnel can
no longer claim to have acted in good faith in case of overpricing if agen-
cies are linked through the GPIS where one can find the lowest monitored
prices of certain procured supplies, materials, and equipment with the
name of suppliers, in a given area.
This portion of the module is a summary of the discussion of the topic by

former Commissioner Sofronio B. Ursal (COA, 1999). We are including it
here to heighten awareness of the GPIS as a mechanism to facilitate and
improve the procurement process of commonly used supplies and materi-
als in government.
GPIS features and advantages

The installation of the Government Purchases Information System (GPIS)
was spearheaded by COA in 1997. The GPIS is principally intended to
facilitate government procurement of supplies, materials and equipment,
and discourage overpricing.
UP Open University
The installation of the GPIS was impelled by the huge amount of resources
and time spent by the government for various kinds of procurement of
supplies, materials and equipment (SME) which can run to P50 billion
(Ursal/COA, 1994:172). A COA study in 1994 estimated the losses in
procurement through overpricing, misdelivery, delays, and similar irregu-
larities to amount to about P5.5 billion annually.
The GPIS has the following features and/or advantages:
• It enhances the policy of bidding and the procurement process.

• It removes administrative delays and red tape.
• It promotes price competition among suppliers.
• It harnesses the potential of computer technology, connecting office
work stations, from mere word processors into powerful electronic
collections of procurement transaction data which are fed into a
central memory bank for government-wide dissemination.
• It promotes transparency in government transactions, where agencies
can download basic data from a central data bank to their respective
work stations, evaluate data, investigate, and make their own pro-
curement.
The GPIS provides the following services to members:
1. access and use of the lowest monitored prices (LMP), including the
availment of the special GPIS-assisted Repeat Order, Negotiated Pur
chase, and other fast-track procurement procedures
2. advertisement through the Government Procurement Requirements in
the GPIS Website of the member’ invitation to bid and requests for
price quotations
3. access to the government Procurement Polices, also in the GPIS Website
Here is how the GPIS operates: The GPIS collects procurement data gen-
erated by the participating government agencies which undertook the
prescribed procurement procedures, and transmits it to a central infor-
mation center where these data are consolidated and grouped by techni-
cal specification, unit, cost, brand, supplier, date purchase, and agency
concerned, among others. Periodically, the GPIS publishes on the Internet
the lowest monitored prices of different supplies on the basis of which the
other participating agencies may purchase on repeat order the same quality
of supplies without duplicating the required procedure.
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Module 7 153
GPIS process modules

The GPIS consists of three process modules: a Field Unit Module, a GPIS
Center Module, and a GPIS Website Module.
The Field Unit Module refers to the processes at the participating agency
procurement offices which are considered GPIS Field Units. Each Field
Unit is tasked with the prompt capture of data on SME purchased by the
participating agency for a particular period. To facilitate data capture,
the Field Unit is provided with a purchase order data entry program to
automate the preparation of the agency’s purchase orders (PO). An agency
PO data file is then maintained by the Field Unit. Periodically, a copy of
the PO transaction file is encrypted and transmitted via e-mail to the GPIS
Center.
The GPIS Center Module pertains to the process undertaken at the GPIS
Center upon receipt of data from the Field Units. Primarily the GPIS Cen-
ter is tasked with maintaining the master PO Database, which is the
databank of all PO data file transmitted by the Field Units. Upon its re-
ceipt by the Project Center, the PO data files are decrypted, consolidated,
and appended to the master PO database. If there are new commodity
items, new specifications, new brands, or new suppliers included in the
transmitted data files, these new elements are subjected to a validation
process, after which valid GPIS codes are assigned to the new elements.
Consequently, the new elements are appended in the relevant reference
library file--i.e., the item description/specification library, the brand li-
brary, or the supplier library. A separate file is generated containing the
library updates, which are then sent as feedback to the respective Field
Units to be used for updating the reference libraries. Periodically, a Low-
est Monitored Price (LMP) report is generated from the PO database. The
current LMP report is then transmitted to the GPIS Website for Internet
broadcast.
The GPIS Website Module refers to the Internet presence of the GPIS,
which is the medium for broadcasting the LMP. Two other secondary
outputs are also broadcasted through this module, namely, the Govern-
ment Procurement Requirements and the Government Procurement Poli-
cies.
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The LMP file is a password-protected page in the COA website which

allows the authorized client or participating agency to query the LMP file
for the price and supplier of a specified item or product. The LMP file
produced by the GPIS Center is made available to a database server that
runs concurrently with the GPIS web server. When a query from an agency
Internet browser is received by the GPIS web server, a database program
processes the query, accesses the LMP file for the query results, then gen-
erates the appropriate HTML page for the answer. This HTML page is
then passed back to the GPIS web server, which in turn transmits it to the
client agency browser.
The Government Procurements Requirements is a supplementary feature

of the GPIS which advertises through its website invitations to bid and
requests for price quotations for specified SME with cost estimates not
below a minimum level.
The Government Procurement Policies presents HTML pages containing

the text of existing government regulations such as COA circulars, execu-
tive orders, and similar administrative issuances on procurement.
GPIS outputs
The GPIS produces five types of outputs (Ursal/COA, 1999:179), includ-
ing an Agency Procurement Analysis Report, a Comparative Procure-
ment Analysis Report, a Lowest Monitored Prices Report, a Supply or
Commodity Item Catalogue, and a Suppliers Directory.
The GPIS Center launched its Internet Access World Wide Web site at
<gpis.coa.gov.ph>, the vehicle for broadcasting the LMP, the Government
Procurement Requirements, and the Government Procurement Polices.
The GPIS was first launched with membership from government agen-
cies which were able to satisfy the minimum requirements for member-
ship as follows: IT infrastructure (hardware, telecommunications equip-
ment and facilities), IT architecture (software, operating systems, programs,
and the main GPIS application), manual based procedures interfacing
the electronic processes, people involved in GPIS processes, and the GPIS
Center itself as the brain of the system.
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Module 7 155
Specifically, the agency applying for membership to the GPIS has to have
the following minimum system platform requirements:
• Hardware configuration (Pentium processor, or better; 16 MB RAM or more,

minimum of 60 MB of free hard disk space, one 3.5” high density disk drive,
IBM detachable extended keyboard and PC mouse, Super Video Graphic Ar-
ray (SVGA) Monitor or better, 500 watts Automatic Voltage Regulator)
• Operating System (Windows ’95 or better)
• Internet Connection (dedicated phone line, a compatible modem, ISP of agency’s
choice, Internet account with e-mail account with a reputable ISP of agency’s
choice)
• Two Internet-connected computers (installed at the Procurement Office which
prepares the POs of the agency and another at the COA resident audit unit
of the agency)
As of 1999, the GPIS Filed Unit Module has been installed in seven agen-
cies: DAR, DECS, DOH, DENR, DSWD, NHA and COA. As of now,
membership with the GPIS is voluntary. Once the system is fully opera-
tional, it might be necessary to request the President to issue a directive
requiring all government agencies to be members of the GPIS.
GPIS limitations
GPIS is not a panacea for all procurement ills. While it may result in gov-
ernment savings, it cannot solve irregularities like ghost deliveries, low
quality materials, underdelivery, manipulation of the bidding process, etc.
Activity 7-1
Visit the COA or a government agency with an existing GPIS. In-
terview officials about the benefits and advantages gained, costs
incurred, training and other actions they need to do in the process
of installing and operating the GPIS. Comment on the feasibility of
the GPIS in improving government procurement activities.
UP Open University
References
Commission on Audit. (1999). Readings in Philippine state audit (A collec-

tion of lectures, observations, and writings of a COA commissioner). Quezon
City, Philippines.
COA. (1992). Government Accounting and Auditing Manual, Volume 1 -
Government Auditing Rules and Regulations.
Coe, 1989.
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Module 8 157
Module 8
Control Systems
in Government
I n 1995, the COA finally withdrew its

pre-audit function after years of with-
drawing and installing it. In the interim,
Objectives
agencies were required under Section 27 At the end of this module, you
of PD 898 to implement and monitor a should be able to:
sound system of internal control, and in-
stitute controls and other measures to 1. Define the scope of inter-
safeguard the efficient and effective utili- nal control at the agency
zation of agency resources. Administrative level;
Order No. 119, dated March 29, 1989, 2. Determine the general and
mandated every office, agency, corpora- specific standards of inter-
tion and local government “to strengthen nal control;
its internal control system and/or organize 3. Assess or evaluate an
systems and procedures to that effect in agency’s internal control
coordination with the DBM.” system;
4. Determine the scope of
Even after the withdrawal of pre-audit, COA audit; and
however, the COA resident auditor still 5. Differentiate between ir-
undertakes pre-audit activities, such as regular, unnecessary, ex-
pre-repair inspection, inspection of deliv- cessive, and extravagant
eries, and evaluation of ongoing infra- expenditures.
structure projects, but no longer as a pre-
requisite to the implementation/prosecution of projects and/or payment
of claims.
Without pre-audit, fiscal responsibility now rests solely on the head of

office. This is in agreement with Section 2 of PD 1445, which states that
every head or chief of government agency is responsible for assuring that
UP Open University
government resources are managed, expended, and utilized in accordance

with laws and regulations and safeguarded against loss and wastage.
This law clearly defines the fiscal responsibility of heads of agencies.
This and related concepts are discussed in this module.
Nature of Control
We noted at the beginning of the course that control is one of the basic
functions of management. The one in control is made responsible for his/
her actions. This responsibility is lodged in the person with commensu-
rate authority. And when there is responsibility, there is also accountabil-
ity. As Leclerc et al. (1996) said, “There is no accountability without re-
sponsibility. A responsibility cannot be fulfilled without commensurate
authority. The exercise of authority requires a structure, a
procedurecontrol and chosen instruments to effect itcontrols. Ac-
countability will thrive under a suitable management philosophy, an ap-
propriate approach to control, and well-chosen controls.”
Leclerc distinguishes between the terms “control” and “controls”. “Con-

trol” is the exercise of power or authority; “controls” are the chosen mecha-
nisms or instruments to effect control. Accordingly, to be in control means
to have agreed to performance expectations, program objectives and op-
erational objectives, as well as service standards. Moreover, to be in con-
trol implies being able to demonstrate that you are indeed in control.
Now we are ready to differentiate between the two types of control sys-
tems: internal control and external control.
Internal Control
Section 32, Vol 3 of the GAAM defines internal control as:
...the plan of organization and all the methods and measures

adopted within an agency to ensure that resources are used con-
sistent with laws, regulations and policies; resources are safe-
guarded against, loss, wastage, and misuse; financial and non-
financial information are reliable, accurate and timely; and opera-
tions are economical, efficient, and effective.
Internal controls are not specialized systems within an agency. Internal

audit for instance is part of internal control. Internal control is not limited
to fiscal control or auditing; therefore it is not only the finance, budget,
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Module 8 159
accounting, and auditing people who are involved. Internal controls are
not different from management controls. Management is responsible for
establishing an effective system of internal controls.
The Chartered Institute of Public Finance and Accountancy of England

(Tantuico 1994:30) gave a similar definition of the concept: an internal
control system “is the whole system of control, financial and otherwise,
established by the management in order to carry on the business of an
organization in an orderly and efficient manner, ensure adherence to
management policies, safeguard assets and secure as far as possible the
completeness and accuracy of records.”
In the Philippine set-up, an internal control system in every office or cor-

poration is intended to be the agency’s first line of defense against fraud,
waste, abuse, and mismanagement. When internal controls are established,
the organization takes the initiative and responsibility of protecting itself
from mismanagement, waste and corruption; it does not wait for some-
one else to discover them. Such safeguards also make the office more effi-
cient and responsive. In short, internal control is an in-house homegrown
mechanism to ensure systems efficiency. It goes beyond accounting and
financial management concerns. It goes into the very integrity of the or-
ganization.
Internal control at the agency level or the ability of the agency to properly
control its operation without COA intervention is a fundamental requi-
site to the withdrawal of the COA pre-audit functions. The law (PD 1445)
mandates the establishment not of an internal control unit nor an internal
audit unit, but of an internal control system. An internal control system is
more comprehensive and covers all other aspects of the operation of an
agency in addition to the financial aspects of its activities.
Objectives of internal control

The overriding justification for the installation of an internal control sys-
tem was stated in the introduction of this module. Specifically, the objec-
tives of an internal control system are:
• To ensure compliance with applicable laws, rules and regulations in

the management of government resources;
• To safeguard resources against waste, loss, unauthorized use and
misappropriation;
• To ensure the use of resources in the most economical and efficient
manner and in such a way as to attain the goals of the agency; and
• To ensure proper recording and reporting of transactions and ensure
the reliability, accuracy, and timeliness of records.
UP Open University
Moreover, it is a fact that agencies lack managerial continuity, and people

elect new government managers as often as every three years. Such change
in leadership calls for a strong internal control to ensure that organiza-
tion objectives are achieved, resources safeguarded, and efficiency and
economy in the use of resources.
Components of an internal control system

Internal controls are commonly classified into administrative controls and
accounting controls. Administrative controls are composed of procedures
and records that assist management in achieving an organization’s goals.
Accounting controls refer to procedures, records, and reports that have
been designed to safeguard assets and to promote the reliability of finan-
cial records and reports.
An internal control system has two components: (1) the plan of the orga-
nization, and (2) the coordinate methods and measures used by the agency
to attain its goals.
Plan of Organization. This refers to the organizational structure and the

personnel of the organization. The plan spells out and distributes powers,
functions, and responsibilities to various units and personnel of the organi-
zation to enable the various parts to meet overall goals. It spells out the del-
egation of authority from the top to the lowest level of the organization. Such
a plan makes distinct the operating and administrative functions and the
offices in charge of each. Organizational charts help visualize the division of
work and delegation of authority.
Coordinate Methods and Measures. This pertains to systems of authori-

zation, policies, standards, accounting systems and procedures, and re-
ports used by the agency to control its operations and resources and en-
able the various units to meet objectives.
There are broad internal control principles that should be considered in

implementing and monitoring internal controls. These are:
• Responsibility must be fixed. There should be clear lines of authority.

• Accounting control and operations must be separated.
• No one person should be in complete control of a transaction. There
should be appropriate separation of functions.
• Employees must be carefully selected and trained. There should be
occasional rotation of work.
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Module 8 161
• There should be adequate supervision. Instruction should be in writ-

ing. There should be flowcharts of transaction.
• Accountable officers must be bonded.
• Controlling accounts should be used extensively.
• All cash receipts should be deposited intact.
• There should be appropriate reporting relationships.
• Also, procedures for record keeping should be clear.
No one person or department should be in complete control over a trans-

action. The work of one should provide an automatic check on the work
of another person. The employee who handles cash payments should not
have access to the journal or ledger, to reduce the possibility of error and
embezzlement.
There should be segregation of responsibility for related duties. A single

individual should not be able to extend credit on account to customers,
record the account, and collect the payment at the same time.
Proofs and security measures should be put in place. Various techniques

include separate bank accounts, provision for safekeeping of cash and other
valuable documents, and encouragement of public observance and accep-
tance of printed receipts from clerks. When two people must be assigned to
the same cash register, each should be given a separate cash drawer and a
register key. If there is an Information Technology (IT) office or IT equip-
ment, it is necessary to limit access to the office to authorized personnel only.
Access to computer records and files should likewise be well defined.
Operations should be separate from accounting and the assignment of

responsibility must be clear. In a transaction, there are at least four em-
ployees or offices involved: the one who will authorize or approve the
transaction (management), the one who will execute the work (custodial
function), the one who will record the transaction (accounting function),
and the one who will finally review the transaction (internal audit func-
tion).
The Canadian Institute of Chartered Accountants (1995) provides a check-

list of criteria for assessing the effectiveness of an agency’s internal con-
trol system. The criteria are relevant to all types of agencies, though the
importance of some criteria may vary by agency. The elements are inter-
related and the effectiveness of internal control cannot be based solely on
the degree to which each criterion, taken separately, is met. Let’s check
out each of the elements.
UP Open University
1. Criteria for the Adequacy of Organization Structure
R Provide a clear-cut delegation of authority and definite assign-

ment of responsibility.
R Each employee should know his/her duties, to whom he/she re-
ports, and whom he/she directs.
R Authority to direct an employee should be limited to only one
supervisor.
R Every assignment should have limits within the range of a reason-
able workload.
R The responsibility of the supervisor over operations should be sepa-
rate from that of those who account for and report on results of
operation.
R A proper program for the selection and training of personnel
should exist.
R Each employee should be made aware of his/her place in the or-
ganization, what his/her duties are and how to do them, how his
work fits in with the job of his/her associates, and how his/her
work contributes to the operations of the organization as a whole.
R Work should be so distributed that the work of one employee au-
tomatically checks the work of another without unnecessary du-
plication of duties.
2. Criteria for Adequacy of Procedures
R Procedures should be simple, effective, and economical.

R They should spell out to individual employees the things to be
done and the most effective ways of doing them with the least
efforts.
R These instructions/procedures should be kept in written manu-
als; be made subject to revision as the need arises; and be made
available to employees for reference.
R Procedures should be explained before putting them into effect.
They should be fully accepted, supported, and followed by the em-
ployees.
3. Criteria for the Adequacy of Physical and Mechanical Facilities
R Fencing of property, and provision of window bars

R Presence of necessary equipment such as safes for safeguard-
ing financial assets
R Presence of devices to prevent alteration and forgery
R Acquisition of business machines designed to provide cross checks
on transactions
R Use of accountable forms and proper accounting for them
R Adequate storage for supplies, materials, and equipment
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Module 8 163
R Clean, well ventilated storage for supplies; bins should be pro-

vided
R Protection of equipment from the elements
R Proper care and maintenance of physical and mechanical facili-
ties
4. Criteria for adequate accounting and other records
R Accounting functions should be separated from operating func-

tions.
R Accounting records should be accomplished after the actual
transactions and should not be allowed to lag behind.
R Access to records should be to authorized personnel only.
5. Criteria for an Adequate Reporting System
R Reports should be prompt and accurate.

R Reports should be complete and impartial.
R Reports should truly serve management in appraising current opera-
tions. Reports should provide a means/basis for future planning.
6. Criteria for Adequacy of Standards of Performance
• The standards should gauge the quality of performance.

• They should be on a comparative form to serve as basis for comparison.
• Development must be based on present and expected conditions. They
should be intelligent forecasts of expected results rather than impossible
goals.
• They are reasonable and accepted.
7. Criteria for Adequacy of Internal Auditing System
R From the beginning, the agency head should define in general terms
the nature and scope of work to be performed by the Internal Audit-
ing Unit. This is necessary so that the duties, responsibilities, func-
tions, and stature of the unit will be recognized by all components of
the agency.
R The scope of work is not restricted to accounting and financial mat-
ters, but must extend to the review of operating matters.
R The Internal Auditing Unit shall not be responsible or be required to
perform assignments or functions of a routine operating character.
R The unit shall have the authority to examine all records, books, vouch-
ers, and files of the agency and will have access to its property and
premises.
R The staff of the Internal Auditing Unit should have ample educa-
tional background and experience in accounting and auditing.
UP Open University
These criteria are simple, specific, and straightforward. Remember these

and try to relate these to your work. For instance, it is worth examining
whether:
• Access to records is restricted to persons who have been duly autho-

rized.
• There is a system of rotating employees occupying sensitive positions.
• There are written manuals of procedures to be followed.
• There are safes for cash, storerooms for supplies and unused equip-
ment, lock and key for offices.
• Accountable forms are pre-numbered.
• Accountable officers are properly bonded.
Internal control accounting system

The most critical in an internal control system is the system of internal
accounting control. An internal accounting control system emphasizes:
• Authorization - to ensure that transactions are executed in accor-

dance with an agency’s specified guidelines.
• Recording - to ensure that transactions are recorded to permit prepa-
ration of reports in accordance with the GAAP and to maintain
accountability over assets.
• Access to assets - to permit only authorized personnel access to
assets.
• Asset accountability - to compare the record for assets with existing
assets from time to time, taking appropriate corrective action when
relevant differences occur.
Internal accounting controls may be classified as preventive or detective,

or a combination of the two. Preventive controls are implemented prior
to the occurrence of an event and may be viewed as instruments of deter-
rence, while detective controls occur after the event. Preventive controls
are preferred, but the typical organization should have both types of ac-
counting controls in place.
UP Open University
Module 8 165
Activity 8-1
1. Identify control systems in your organization.
2. Identify criteria other than those listed above that may be used to
assess the adequacy of your agency’s organizational structure
and accounting and other financial records.
Comment on Activity 8-1

This activity requires you to reflect on your organization, some-
thing which you may not have had the time to do in the past.
Examine existing control systems. Look into your organizational
structure, accounting system, and financial reporting system.
Assess them in terms of the criteria listed above.
UP Open University
Internal audit
To ensure reliability, an internal control system requires the establishment
of a regular internal audit program to monitor the system, to evaluate its
performance, and to provide management with the required feedback.
Internal audit is an independent appraisal function established by the

management of an organization for the review of the internal control
system as a service to the organization. It objectively examines, evaluates,
and reports on the adequacy of internal control as a contribution to the
proper, economic, efficient, and effective use of resources.
An important feature of an internal audit is that it can examine the rela-

tionship between the proposed program activities and services for which
the budget was awarded and the actual cost and delivery of services. The
internal audit should also examine the balances in the funds and the trans-
fers between funds. The improper use of fund reserves can be a serious
problem.
• Ascertain that forms authorizing the disbursement of funds are

complete and accurate;
• Determine that requests for payment are in accordance with adminis-
trative rules and procedures and comply with statutory requirements
and contractual agreements;
• Determine that appropriations are available for the request for pay-
ment; and
• Determine that the price and the purchase are reasonable.
Administrative Order 278 (April 29, 1992) outlines the internal audit ac-
tivities of an agency as follows (Tantuico 1994:31):
• Ascertaining the reliability and integrity of financial and operational

information and the means used to identify, measure, classify, and
report such information;
• Ascertaining the extent of compliance and reviewing the systems
established to ensure compliance with government policies, which
have an impact on operations;
• Ascertaining the extent to which the assets and other resources of the
state are accounted for and safeguarded from losses of all kinds;
• Reviewing and evaluating the soundness, adequacy and application
of accounting, financial and other operating controls, and promoting
the most effective control at reasonable cost;
• Reviewing operations or programs to ascertain whether or not results
are consistent with established objectives and goals and whether or
not such programs are being carried out as planned;
UP Open University
Module 8 167
• Evaluating the quality of performance of groups/individuals in

carrying out their assigned responsibilities; and
• Recommending corrective actions on operational deficiencies ob-
served.
It is emphasized that the Internal Audit Service be detached from all func-
tions of routine operating character, such as (Tantuico 1994:32):
• Pre-audit of vouchers and counter-signature of checks;

• Inspection of deliveries, although the internal auditor may, as part of
his examination, observe inspection;
• Preparation of treasury and bank reconciliation statements;
• Development and installation of systems and procedures; however, in
exceptional cases, the internal auditor may assist by way of giving
suggestions;
• Taking physical inventories; however, the internal auditor may
review the plans in advance and observe and test-check the accuracy
of counting, costing and summarizing;
• Maintaining property records; and
• All other activities related to operations.
External Audit
Government or state auditing
In any control system, there is no substitute for external audit (Garner,
1991). This is the job of the Commission on Audit, one of the government’s
oversight bodies and the supreme audit institution which exercises exter-
nal, public, and independent audit.
As defined in the Administrative Code, government auditing is:
... the analytical and systematic examination and verification of

financial transactions, operations, accounts and reports of any
government agency for the purpose of determining their accuracy,
integrity and authenticity and satisfying the requirements of laws,
rules and regulations. (Section 38, Title I-B, Book V, 1987 Admin-
istrative Code)
Auditing is an integral part of the accountability process in government.

It plays a vital role in pursuing sound and prudent government financial
management, as it aims to keep the spending activities of government
agencies within the bounds of laws, rules, and regulations and the stan-
dards of economy, efficiency, and effectiveness.
UP Open University
As “an instrument for ensuring open, regular efficient, and responsible

government,” state audit has a heavy responsibility in enforcing public
accountability.
Scope of government audit

State auditing should not be confused with accounting. Paman (2001)
recognizes that the two are usually intertwined but the dividing point is
that auditing starts when accounting ends.
A COA audit can vary in scope. In general, the COA conducts three kinds
of audit: financial, compliance, and comprehensive audit.
For a comparison at a glance, refer to the diagram on the scope of state

audit that is appended to this module.
Financial audit
A financial audit is performed primarily through an examination of fi-

nancial statements. It is conducted to determine whether:
• Financial operations are conducted in accordance with applicable

laws, rules and regulations, and accounting and auditing standards;
and
• Agency financial statements present fairly and accurately the finan-
cial position of the agency in accordance with generally accepted
accounting principles.
In a financial audit, the auditor determines whether the agency is main-

taining effective control over revenues, expenditures, assets and liabilities;
whether financial statements are fairly presented; and whether financial
reports contain accurate, reliable, and useful information.
Compliance audit
A compliance audit is an evaluation of the extent to which the agency has

complied with pertinent laws, policies, rules and regulations in the con-
duct of its operations. The auditor examines the agency’s financial trans-
actions and specific program, function, or activity to determine their le-
gality and regularity.
UP Open University
Module 8 169
Performance audit
A performance audit is a constructive examination and evaluation of the

financial and operational performance of an organization, program, func-
tion, or activity with the objective of identifying opportunities for greater
economy, efficiency, and effectiveness in agency operations. It entails a
broad review and diagnosis of agency policies, organization, and opera-
tions. It includes a comparison of plans with accomplishments, results
with targets and standards, practice with policy. It emphasizes the iden-
tification of problems and the formulation of appropriate solutions for
their correction.
A performance audit is also called value-for-money audit or 3Es audit, as

it looks at the economy, efficiency, and effectiveness of the agency’s per-
formance of its functions.
On the other hand, a financial and compliance audit together comprise a

fiscal audit.
Audit actions
Audit actions entail an examination of particular financial transactions.
An auditor reviews in post audit a financial transaction to determine com-
pliance with laws and regulations and satisfaction of the standards of
economy, efficiency, and effectiveness. One audit action that the auditor
may make is to pass the transaction in audit. This means that the ac-
countability and/or responsibility of the concerned officials and employ-
ees over the particular transaction has been settled at that point (Anis,
1993:259).
Otherwise, the auditor may either disallow the transaction or suspend

the transaction.
A transaction is disallowed if or when the expenditure contravenes any

provisions of the Constitution or applicable laws, while a transaction is
suspended when it is found to be deficient, questionable or improper, or
when it fails to comply with some requirements, such as the lack of a
signature on supporting documents.
A suspension is lifted when a satisfactory explanation or valid justifica-

tion has been submitted, or when the necessary signatures on the docu-
ments have been affixed. The transaction may be disallowed if the justifi-
cation is not satisfactory to the auditor. A suspension not settled within
90 days becomes a disallowance.
UP Open University
The
at tbasic
end ofdifference between
the year. Below is anaexample
suspension and flow
of a cash a disallowance
table. is that a
suspension
Appropr is not recorded in the books of accounts. In this case, a person
with a suspension requesting for clearance from money and property ac-
countability may be given one because his/her liability does not appear
in the books of accounts (Anis, 1993:261).
Determining the accountable and responsible persons is not always easy.

Auditors sometimes are unable to identify who, in a particular transac-
tion, are liable for the disallowance (Anis, 1993:264), and the CSB Manual
has no clear guidelines on who should be included in the Notice to Liable
Persons. Conspiracy or connivance is something that needs to be estab-
lished. It cannot be presumed. In case of a violation of a law or regula-
tion, the following will be held accountable, as well as other persons who
may be identified by the Auditor:
• The official who approved the voucher

• The official who certified that the expenditure was necessary, lawful,
and reasonable
• The official who certified that the travel was properly authorized and
in the interest of the service or that the cash advance was drawn for
official purposes
• The property custodian who certified that he/she received the sup-
plies and property in good condition as per purchase order and invoice
• The local/corporate treasurer/chief accountant/controller who certi-
fied that adequate funds were available, account codes were proper,
and the expenditure was properly certified and supported by docu-
ments that appeared to be legal and proper
• The Disbursing Officer/Cashier/Treasurer who made the payment.
• The Claimant-Payee who received the payment
Liability is relative; it depends on the extent of participation of the per-

sons involved. In a case of overpricing, the members of the Bids and
Awards Committee (BAC), those who conducted the price canvass, the
one who signed Box No. 3 of the DV, and the approving officials would
be included in the Notice to Liable Persons.
Control of government expenditure

Government expenditures, from the accounting and auditing point of view,
refer to all charges against the fund of the agency for COE, CO, and
provisions for retirement of long-term obligations. Charges cover both
the amounts actually paid and those incurred and recorded as liabilities
to be paid in the future.
UP Open University
Module 8 171
Expenditures, expenses, and disbursements may mean the same for an

ordinary person on the street. But for accountants and auditors, expenses
represent the amount of goods and services used or consumed during a
period. Expenditures measure the amount of goods and services acquired
during a period, some of which are used or consumed during the current
period while others are to be used in the future. Disbursements consti-
tute all cash paid out during a given period either in cash or check.
There is a whole spectrum of government controls to avoid, or at least

minimize, the irregular, unnecessary, excessive, and unconscionable (IUEE)
use of public funds. Four of these basic and common requirements can be
distilled from the fundamental principles governing government transac-
tions mentioned above and in many parts of the GAAM:
1. A law appropriating funds for a given purpose exist;

2. A contract, made by the proper officer, has been entered into;
3. The goods or services covered by said contract have been delivered or
rendered, as attested to by proper officers; and
4. Payment has been authorized by proper officials.
Also, Section 4 of PD 1445 contain fundamental principles governing the

financial transactions and operations of government. Many of these fun-
damental principles have been mentioned in previous modules. We reit-
erate them here:
1. No money shall be paid out of any public treasury or depository

except in pursuance of an appropriation law or other specific statu-
tory authority. (This is the basic rule.)
2. Government funds or property shall be spent or used solely for public
purposes.
3. Trust funds shall be available and may be spent only for the specific
purpose for which the trust was created or the funds received.
4. Fiscal responsibility shall, to the greatest extent, be shared by all those
exercising authority over the financial affairs, transactions, and
operations of the government agency.
5. Disbursements or disposition of government funds or property shall
invariably bear the approval of the proper officials.
6. Claims against government funds shall be supported with complete
documentation.
7. All laws and regulations applicable to financial transactions shall be
faithfully adhered to.
8. Generally accepted principles and practices of accounting as well as
of sound management and fiscal administration shall be observed,
provided that they do not contravene existing laws and regulations.
UP Open University
In addition, the 1987 Administrative Code (Section 45, Title I-B, Book V)
has supplementary rules on the disbursement of appropriated funds:
1. National revenue and trust funds shall not be withdrawn from the
National Treasury except upon warrant or other instruments of with-
drawal approved by the Secretary of Finance as recommended by the
Treasurer of the Philippines.
2. Temporary investment of investible cash in the National Treasury in any

securities issued by the National Government and its political subdivi-
sions and instrumentalities, including GOCCs as authorized by the
Secretary of Finance, shall not be construed as disbursements of funds.
The same rules are reiterated in the 1991 Local Government Code (RA
7160), and apply to all local government units. The same or similar rules
apply also to GOCCs.
IIUEE expenditures
The COA has issued rules and regulations on what constitutes irregular,
unnecessary, excessive, extravagant, and unconscionable expenditures or
uses of government funds and property. The same rules and regulations
(COA Circular 85-55-A) spell out ways for preventing such expenditures.
It is observed that the classification is dependent on a number of factors,
making the process of labeling expenditures as I, U, E or E, subjective,
relative, and difficult. Such factors include the office or level/rank of the
person who incurred the expenses and the nature of agency operation or
agency mission. What may not be extravagant to one office (Office of the
President of the Republic, Office of the Supreme Court Justices) is ex-
travagant to another.
The same rules apply to government corporations and local government

units exercising proprietary functions. For such corporations and units,
factors such as profitability of operations, availability of resources, ability
to operate on their own without appropriation or subsidy from the gov-
ernment, industrial setting, nature of their business operations, and other
appropriate performance standards are applicable.
COA Circular 85-55-A defines the nature of irregular, unnecessary, ex-

cessive, extravagant, and unconscionable expenditures thus:
Irregular expenditure - an expenditure incurred without adhering to

established rules, regulations, procedural guidelines, policies, principles,
or practices that have gained recognition in law.
UP Open University
Module 8 173
Illegal expenditure - expenses incurred in violation of the law.
Unnecessary expenditure - expenditures that cannot pass the test of

prudence or the diligence of a good father of a family, thereby denoting
non-responsiveness to the exigencies of the service; expenditures not
supportive of agency objectives and mission; expenditure not dictated
by the demands of good government; expenditures that are not essen-
tial and which can be dispensed with without loss or damage to prop-
erty; or expenditures the utility of which cannot be ascertained at a
specific time.
Excessive expenditures - “excessive” pertains to the variable of price

and quantity. The price is excessive if it is more than the 10% allowable
price variance between the price paid for the item bought and the price
of the same item per canvass of the auditor. Also, the price is excessive
if the discounts allowed in bulk purchases are not reflected in the price
offered or in the award or in the purchase/payment document. Pay-
ment for repair of government equipment at a cost exceeding 30% of
the current market price of the same or similar equipment is also an
excessive expenditure. Expenditures for supplies and materials in quan-
tities beyond what is needed by the agency for a determinable period,
resulting in overstocking, is excessive. The volume of purchases must
be enough only to fill an agency’s needs over a three-month period.
Extravagant expenditures - those incurred without restraint, judicious-

ness and economy; expenditures that exceed the bounds of propriety;
expenditures that are immoderate, prodigal, lavish, luxurious, waste-
ful, and grossly excessive.
Again, these terms are relative and subjective. What may be excessive for
a regular government agency may not be excessive for other offices like
the offices of the President, Supreme Court Justices, Constitutional Com-
missioners, Department Secretaries, Members of Congress, Mayors, Bu-
reau Directors, and their equivalents in GOCCs and other agencies.
UP Open University
SAQ 8-1
1. Differentiate internal audit from external audit.
2. What options does a person with a suspension or disallowance

have to settle his/her obligations?
3. If the 30-day period after receipt of the Notice to Liable Per-

sons has lapsed and no action was taken by the persons con-
cerned what can happen?
4. How is civil liability enforced by COA?
5. Give examples of expenditures that are excessive if made by a

regular government office/agency.
6. Will a pair of shoes for an athlete worth P5,000 pass COA

audit? How about a set of Solingen dental instruments?
UP Open University
Module 8 175
ASAQ 8-1
1. An internal audit is an independent appraisal function estab-
lished by the management of an organization for the review of
the internal control system as a service to the organization. On
the other hand, an external audit is the function of COA and is
defined as the analytical and systematic examination and
verification of financial transactions, operations, accounts and
reports of any government agency for the purpose of determin-
ing their accuracy, integrity and authenticity and satisfaction
of the requirements of laws, rules and regulations.
2. To comply with the requirements; or, in writing, to request
reconsideration or appeal to the supervising COA Regional
Director or directly to the Commission Proper; or to request for
an extension of the time period within which to settle the
suspension or disallowance and give valid reasons.
3. The COA Auditor shall: (1) order the Cashier/Treasurer/
Disbursing Officer to withhold payment of any money due the
person liable; (2) initiate appropriate administrative charges
and/or civil action, whichever is applicable, against the per-
sons found to be liable; and/or (3) if the Cashier/Treasurer/
Disbursing Officer refuses to withhold payment, appropriate
administrative charges shall be initiated against him.
4. The Auditor submits a report on the disallowances to the COA
Chairman with the request to refer the matter to the Office of
the Solicitor General (if the agency concerned is National), or to
the Office of the Government Corporate Counsel (if the agency
is a GOCC), or to the Provincial or City Attorney (if it is an
LGU).
5. some examples are rugs, carpets, draperies, lamps, wall decors,
luxury cars, etc.
6. If there is expressed authorization for such purchases.
UP Open University
References
Anis, N. (1993). Audit of government expenditures. Canadian institute of char-

tered accountants, guidance and control. (1995).
Courtenay, T. (1999). Internal controls against fraud: Fraud awareness for
management, 13th Annual International Conference on New Devel-
opment in Government Financial Managers, Miami, Florida, March
24.
COA. (1992). Government accounting and auditing manual, Volume III. Gov-
ernment Auditing Standards and Procedures and Internal Control
System.
De la Rea-Tan, A. (1985). Comprehensive audit: concepts, standards and
supplementary reporting guidelines.
Garner, CW. (1991). Accounting and budgeting in public and nonprofit orga-
nizations A manager’s guide. San Francisco: Jossey-Bass Publishers, Inc.
Leclerc, GW, D Maynagh, JP Borsclair, & HR Hanson. (1996). Account-
ability, performance, comprehensive audit: An integrated perspective.
CCAF-FCVI, Inc.
Manual on improving local financial administration, part I: Organization for fi-
nancial management and internal control systems. (1988). LRM Local Finan-
cial Administration Project, Local Government Center, UP College of
Public Administration.
Paman, G. (2001). Value for Money Audit. Paper submitted in partial
fulfillment of the requirements of the course PA 231, UPNCPAG,
March.
Tantuico, FS Jr. (1994). Performance and accountability central pillars of de-
mocracy. Fiscal Administration Foundation, Inc.
____________. (1982). State audit code of the Philippines (Annotated). COA
Research and Development Foundation, Inc.
UP Open University
Module 9 177
Module 9
Fraud, Waste And Abuse
I n Module 2 we emphasized the importance of the ethic of accountabi-

lity in government. We noted the profusion of laws, rules, and regula-
tions spelling out accounting and budgeting processes for the guidance of
officials and employees of government in every transaction that they en-
ter into for and in behalf of government and in the exercise of their duties
and responsibilities.
Yet, you will surely agree that we cannot Objectives

blink our eyes even for a moment and still
find government funds intact. Time and At the end of this module, you
again, we hear about alleged irregulari- should be able to:
ties in the handling and utilization of gov-
ernment funds and property, abuse of au- 1. Explain what constitutes
thority, and the lack of responsibility and fraud, waste, abuse, and
sense of accountability of some govern- graft and corrupt practices
ment personnel. in government;
2. Describe the various condi
A brief review of some of the findings of tions that give rise to fraud
the COA in its audit report of national gov- and other irregularities in
ernment agencies, local government units, government;
and government corporations shows fre- 3. Assess agency vulnerability
quent violations of rules that can be con- to fraud and other irregu
sidered simple and easy to comply with. larities;
4. Examine the anti-graft
efforts of government; and
Fraud, Waste and Abuse 5. Assess cases of fraud and
other irregularities in
Books on government auditing classify government agencies.
fraud together with unlawful activities and
define it by giving examples, like illegal exactions, malversation of public
UP Open University
funds, falsification of public documents, and other offenses punishable

under the Revised Penal Code and the Anti-Graft and Corrupt Practices
Act 3019 (Anis, 1993:267). The dictionary definition indicates that fraud,
as well as waste and abuse, involves behavior which violates norms and
standards. Fraud is synonymous with deceit and trickery. A fraudulent
act involves “intentional perversion of truth in order to induce another to
part with something of value or to surrender a legal right. It may also
involve misrepresentation” (Webster).
To waste means to spend or use carelessly, to squander, or to allow some-

thing to be used inefficiently or become dissipated, to spend money or to
consume property extravagantly or improvidently.
Abuse is a corrupt practice or custom, a deceitful act. The definition like-

wise strongly suggests inefficiency, lack of accountability, and lack of re-
sponsibility, which could be intentional on the part of the person.
The foregoing definition of fraud, waste and abuse do not differ with the
definition given by McKinney (1986:324). He defines fraud as something
that “involves trickery, cheating, and intentional deception that causes
an individual or individuals to give up some lawful rights or ownership of
property.” He identifies two kinds of fraud: actual fraud and construc-
tive fraud. Actual fraud is when someone relies on an individual’s inten-
tional misinterpretation of material fact. Constructive fraud is unlike ac-
tual fraud in that it is not caused by self-interest or evil design but by “the
very nature of the fact.”
On the other hand, “waste most often is comprised of unintentional acts

that result in inefficient practices or misapplication of resources, causing
increased public costs or reduced benefits to potential recipients.”
Finally, abuse “involves the violation of agency rules, procedures and

regulations, impairing the effective and efficient implementation of an
agency’s programs. Acts of abuse typically involve the reduction or de-
nial of goods and services rightfully due to eligible participants. There is
an element of ambiguity about abuse because value judgment plays a
bigger role here than in the case of fraud. Abuse is often more insidious
than fraud; therefore it is more difficult to combat.”
Whether or not it is intentional or unintentional, fraud is an illegal and
wrongful act employed explicitly for obtaining money or benefits from
public programs (McKinney).
UP Open University
Module 9 179
In sum, there are general attributes that might reasonably be identified

with fraud, waste and abuse (McKinney, 1986:324). An act that is fraudu-
lent, wasteful and or abusive is:
• A violation of public trust;

• A conversion of public benefit to private ends;
• A perversion of authority and the commission of an unacceptable act;
• A failure to enforce laws, rules and regulations, or to apply sanctions
to a given situation; and
• An intentional or unintentional misapplication of wasteful use of
public resources.
The common forms and methods of fraud include:
• Intentional mistakes, such as arithmetical or clerical errors, i.e.,

purposely omitting an entry or making incorrect calculations
• Purposeful misinterpretation of facts
• Recording of non-existent transactions
• Intentional miscalculation of contract costs
• Embezzlement and theft by means of deceit and suppression of the
truth
• Removal of varying amounts of money from cash funds and registers
• Overcharging of clientele or service recipients while pocketing the
difference
• Placement of fictitious names on the payroll
• Advances made to non-existent employees
• Kickbacks from suppliers for overpriced goods
• Payment for self-completed false invoices
• Taking of agency materials, equipment, and services
Fraud is sometimes used interchangeably with such terms as bribery, graft,

and corruption. There is graft when the act is performed by a civil servant
or a group of civil servants acting alone, without involving any person
external to the bureaucracy or compromising the performance of duties
of another bureaucrat. Examples of graft are falsification and manipula-
tion of financial documents and records and delaying remittances.
Webster defines corruption as impairment of integrity, virtue, or moral

principle. There is inducement to wrong by improper or unlawful means
(as bribery). To be corrupt is to engage in improper conduct (such as brib-
ery or the selling of favors). Corruption is deviation from accepted norms
in order to serve private ends. It is using unlawfully the power and au-
thority attached to one’s office or position, breaching laws and regula-
tions, and making private gain. Similarly, graft is the acquisition of gain
(as money) in dishonest or questionable ways. The gain is something ille-
gal or unfair.
UP Open University
Corruption has two variants:
1. the activity that damages (e.g., sale of lucrative posts or bidding for
promotion; giving or accepting bribes so that the briber can receive more
lenient treatment than he/she deserves); and
2. the activity that involves the client and may be initiated either by him/
her or by the bureaucrat (e.g., circumvention of specified steps in pro-
cessing of documents; receipt of retainers for regular expeditious pro-
cessing of license; collusion in purchasing; “areglo” in income taxes;
granting licenses to unqualified but bribe paying applicants).
Graft is an individual act. It may be more directly a product of personal

morality or lack thereof and only indirectly of systematic factors. On the
other hand, corruption involves collusion and may necessitate more com-
plex modes of control.
Graft and corruption, therefore, are fraudulent acts. In graft, the person
involved is the government official or employee. In corruption, there is
collusion between a government person and a person(s) external to the
agency (Cariño and De Guzman, 1979).
The most frequent offense under graft and corruption is malversation of

public funds and property. There is malversation when a public officer
responsible for the custody of public funds and effects does not have them
when he/she says he/she has them (People vs. Tolentino, 69 Phil. 715).
Malversation of public funds is a crime that may be committed through
negligence (Art. 217, RPC) or through falsification (People vs. Barbas, 60
Phil. 214). Malversation may also be committed by one who is not a pub-
lic officer but who aids, induces or conspires with another who is, or
cooperates, with him/her in its commission by acts without which it could
not have been accomplished (cited in Husmillo, 1998).
Malversation is not necessarily connected with money, though in most

cases it involves money. The return of funds or property malversed is only
mitigatingnot exemptingcircumstances (People vs. Velasquez, 72 Phil.
98) (Ibid).
UP Open University
Module 9 181
Below are examples of cases of malversation:
• A collector of fees or debts collects a sum of money and deliberately

neglects to issue a receipt. By not issuing a receipt, the collector now
has the opportunity to underwrite or declare an amount received to be
lesser than the actual price paid by the payee or debtor. This would
enable him/her to keep the excess of the actual amount paid for his/
her personal benefits.
• A payroll has been falsified by a paymaster. The clerk who initials the
payroll without verifying its correctness could be held liable as princi-
pals together with the paymaster. They can be charged of the crime of
malversation of public funds through falsification of public document
by reckless negligence.
• Malversation is committed when an employee falsifies office documents,

reports and files in order to appear competent and worthy of his/her
job.
From 1990 to 1997, a total of 3,634 malversation cases involving more

than P912 million were filed with the Sandiganbayan. This number is in
addition to the estafa cases, cases of violation of RA 3019 (Anti-Graft and
Corrupt Practices Act), and cases of falsification of public documents filed
with the Sandiganbayan. While these figures seem alarming, it is believed
that most irregularities and anomalies in government go unreported.
Moreover, people who are known to have committed graft are not brought
to court. If they are guilty, they are not punished. Cases filed with the
Sandiganbayan go through a long and tedious process of litigation. In
some cases, the inefficient and corrupt are only removed from office; oth-
ers are kicked “upwards” to occupy more juicy positions in government
(Husmillo, 1998).
COA report on FWA in government

The following data is from Ursal’s report on the COA’s performance for
the period 1989-1993.
COA audited 5,354 government instrumentalities, including 2,547 NGAs;

1,074 GOCCs; and 1,733 provinces and municipalities.
COA disallowed approximately 350,000 government transactions, with

an estimated value of P3.4 billion.
UP Open University
Fraud was found to have occured in 726 cases with a money value of P1.3
billion. Officials involved in fraud cases included bill collectors, accoun-
tants, postmasters, local chief executives, local treasurers, chairmen of
GOCC boards, a general of the army, deputy ministers, department sec-
retaries, and a Chief Justice of the Supreme Court.
Table 9-1 shows the amounts of unliquidated cash advances from 1992 to
1997:
Table 9-1. 1997 COA Financial Report on Government

Year Amount (Billion Pesos)
1992 19.8
1993 22.9
1994 25.6
1995 27.9
1996 28.1
1997 37.8
Source: 1997 COA Annual Report, Vol. I.
The COA also found violations of Chapter 3, Section 68 of PD 1445 (on

the issuance of official receipts) by the several agencies which did not
issue proper official receipts and/or did not record collections. (Table 9-2)
Table 9-2. 1996-97 Violations of Ch. 3, Sec. 68 of PD 1445
Department/ Amount in 1997 Amount in 1996

Agency (in Pesos) (in Pesos)
OP -- 5,526,715.53
DA 3,562,410.15 1,009,500.00
DECS 4,115,408.15 560,820.58
DoE -- 7,804,030.62
SUCs 1,750.00 528,125.00
DOH 1,130,000.00 133,940.57
DILG 139,557,413.53 --
DOLE 94,470.10 370,109.64
DND 24,300,241.38 --
DPWH -- 1,068,134.74
DOST -- 890,481.55
DTI 15,155.00 --
DOTC 137,350.75 --
CSC 109,200.00 --
MMDA 36,252,511.53 --
Total P209,422,537.46 P17,891,858.23
Source: 1997 COA Annual Report, Vol. I.
UP Open University
Module 9 183
Several agencies were found to have failed to collect amounts due the
government, in violation of Chapter 2, Section 35, PD 1445. The amount
of outstanding collectibles and/or unrecorded receivables are shown in
Table 9-3.
Table 9-3. 1996-97 Violations of Ch. 2, Sec. 35, PD 1445
Department/ Amount in 1997 Amount in 1996

Agency (in Pesos) (in Pesos)
OP -- 7,300,000.00
DAR 4,763,574.94 2,195,073.55
DA 2,264,278.28 --
DECS -- 18,908,735.04
DENR -- 11,953,570.14
SUCs 1,326,035.30 1,398,975.89
DOF 16,399,655.24 418,921,880.66
DOH 4,133,770.34 6,161,285.67
DILG -- 24,769,690.90
DOJ 162,376,363.91 9,254,490.36
DOLE -- --
DND 9,369,595.94 307,062.26
DPWH 76,083,798.42 128,984,460.33
DSWD -- 77,641.92
DOST 14,178,449.09 --
DTI -- 3,909,972.09
DOTC 1,229,717,136.87 179,864,884.00
DOT -- --
NEDA 652,616.26 279,432.16
OES 76,083,798.42 --
OSCC 2,880,625.32 --
Judiciary 99,338.20 --
MNHS 485,229.45 121,600.00
Total P1,601,134,354.79 P814,408,754.97
OES - Office of the Executive Secretary

OSCC - Office of the Southern Cultural Commission
MNHS - Maguindanao National High School
Source: 1996 and 1997 COA Annual Reports
The total unrecorded fixed assets in 1996 and 1997 totaled P1,029,
212,294.85 and P2,721,498,176.03, respectively. Failure to record fixed
assets is a violation of PD 1445.
UP Open University
Causes of fraud
Fraud does not just happen. Certain conditions give rise to it. McKinney
(1986) categorize these conditions into three:
• Situational pressures, such as heavy losses and high debt;

• Opportunities encouraging fraud, such as inadequate internal con-
trols and poor accounting records; and
• Personal characteristics, such as moral character and poor credit
rating.
Cariño and De Guzman (1979), in “Negative Bureaucratic Behavior in

the Philippines,” identify some of the causes of graft and corruption in
government. They find that government officials and employees tend to
commit graft and corruption, as well as malversation of public funds and
property, because of individual weaknesses and weaknesses of the orga-
nization they are in, as follows:
• Economic needs: A low salary overwhelms the individual’s moral fi-

ber.
• Excessive desire for wealth and the good life, to the detriment of
government.
• Blow-out mentality, and the need to repay a personal debt of grati-
tude for helping one win an election or get an appointment in govern-
ment, forcing the government employee to augment his/her income by
whatever means, or to defy prescribed rules and regulations.
• At the level of the organization, there are instances when corruptive
behavior is the prevailing norm, especially when a kinship network
system exists in the agency and involves top and middle managers
who are supposed to be the models of good organizational behavior.
• Weak or no internal control systems.
Refer also to our discussion of internal control systems and examine how
weak internal controls or their absence can encourage fraud and ineffi-
ciency in government.
In addition to these factors, a number of developments have contributed

to the occurrence of fraud, as follows:
• A huge budget deficit

• Absence of detailed audit of certain funds like the CDF and other
pork barrel funds
• Rising cost of conducting the business of government, causing an
increase in complaints about the quality and quantity of goods delivered
• Peso devaluation
UP Open University
Module 9 185
• Social and economic costs of deregulation, privatization and liberal-

ization
• Widespread reports of kickbacks, collusion and corruption among
public officials
• Massive amounts of resources for the military compared to the alloca-
tion for education
On the positive side, these same developments have helped raise public
consciousness and concern about fraud, waste, and abuse (McKinney, 1986).
SAQ 9-1
1. Fraud, waste and abuse have five things in common. List them
down here.
2. Below are three categories of fraud. Give an example for each

category.
• Situational pressures
• Opportunities to commit fraud
• Personal characteristics
UP Open University
ASAQ 9-1
1. Fraud involves the intentional perversion of truth in order to
induce another to part with something of value or to surrender
a legal right. It may also involve misrepresentation, trickery,
and cheating that cause an individual or individuals to give up
some lawful rights or ownership of property.
Waste often involves unintentional acts that result in
inefficient practices or misapplication of resources, causing
increased public costs or reduced benefits to potential recipi-
ents.
Abuse involves the violation of agency rules, procedures and
regulations, impairing the effective and efficient implementa-
tion of an agency’s programs.
Fraud, waste and abuse have the following in common:
• a violation of public trust,
• a conversion of public benefit to private ends,
• a perversion of authority and the commission of an
unacceptable act,
• a failure to enforce laws, rules and regulations or to apply
sanctions to a given situation, and
• an intentional or unintentional misapplication of wasteful
use of public resources.
2. Examples of situational pressures are heavy losses and high

debt. Opportunities that encourage fraud include inadequate
internal controls and poor accounting records. Personal char-
acteristics that give rise to fraud include low moral character
and poor credit rating.
UP Open University
Module 9 187
Measures Against Fraud

Assessing agency vulnerability
McKinney (1986:330) talks about agency vulnerability assessment (VA),
a predominantly quantitative systematic technique used for measuring
an agency’s exposure to fraud, waste, and abuse. VA may be viewed
essentially as an analysis of the susceptibility of an agency or any of its
units to avoidable loss, inaccurate reports and information, unethical or
unlawful actions, and other activities that may adversely affect the public
image and standing of that agency.
VA not only identifies the potential for fraud, waste, and abuse; it also
outlines the risks and abuses that may occur if adequate management
controls are not installed at the front end.
As the first stage of VA, the structure of the organization should be ana-
lyzed in terms of its administrative functions, and its various components
classified. The analysis should include:
• Programs, or functions broken down by subprograms or sub-functions

• The matrix of the organization indicating each department’s contribu-
tion to the operation of the program
• The degree of independence exercised by the program function
• Allocated budget
• Relative centralization and decentralization
• Personnel assigned to each program
• Determination of goals, objectives, and the delivery system
• Management sanctions in place
• Management incentives in place to motivate sound management ac-
tion against FWA
VA has three main steps (McKinney, 1986:332):
1. Conduct an analysis of three general control environments. The analy-

sis includes an examination of personnel competence and integrity, as
well as the effectiveness of the delegation and communication of au-
thority; an overview of the organizational structure, budgeting and re-
porting practices; and the identification of organizational checks and
balances to financial control and internal auditing.
2. Examine the inherent risks, such as outside pressures on the agency,

unclear or confusing goals and objectives, budgeting constraints, de-
centralization, age and life expectancy, and potential problems sug-
gested by prior studies.
UP Open University
3. Make a preliminary evaluation of the adequacy of internal controls.
Once these three VA steps are completed, a determination of the vulner-

ability of the program or function can be made. The results provide the
input in the conduct of internal control reviews on each program and
administrative function.
Activity 9-1
Assess the vulnerability of your agency to FWA by doing the
following activities:
1. Analyze known occurrences of program abuse.

2. Prepare a description of abuses and causes.
3. Determine whether a program or activity is subject to risks.
4. Identify controls to prevent or minimize risks.
5. Assess whether issuances are clear and address fraud, waste
mismanagement.
6. Determine areas for strengthening or instituting internal con-
trols.
7. Identify actions to be taken.
Improving financial management

Improvement of the financial management system can minimize fraud.
The following courses of action seem relevant for the purpose (Tantuico,
1994:24, quoting Price Waterhouse Chairman Joseph E. Connor):
• Adequate financial reporting. This means strengthening accounting

and financial information systems to enable them to produce timely,
reliable, and compatible information for decision making, and finan-
cial statements which convey relevant information on financial condi-
tion and results of operations.
• Sound internal control systems. Sound, integrated systems of internal

accounting and administrative controls should be put in place to en-
sure that transactions are properly recorded and assets are adequately
safeguarded.
UP Open University
Module 9 189
• Independent examinations. Financial statements of governments

should undergo annual examinations, including an internal control re-
view by qualified independent auditors.
• Program evaluation auditing. Governments should ensure that public

resources are being used economically and efficiently and that intended
objectives are being achieved.
• Financial management leadership. The other components of the fi-

nancial management infrastructure are crucial, but leadership is indis-
pensable. Provide strong, sustained financial management leadership
at the highest level of government and the other elements will follow.
• Incentive mechanisms to minimize fraud, waste, and abuse. Manag-

ers should strive to establish a conducive, accommodative, and effec-
tive organizational environment. This becomes an effective deterrent to
fraud, waste, and abuse (McKinney, 1986:334). Positive practices that
foster such an environment include:
• Maintenance of an open line of communication with employees
• Hiring and promoting only competent and trustworthy employees
• Close examination of the work of employees on a continuing basis
• Regular review and appropriate changes in weak control areas
• Unannounced inspection tours
• Thorough investigation of public complaints, tips and rumors
• Careful review of budgetary and MIS reports, giving attention to ma-
terial deviations
• Clear and early assignment of responsibility
• Prompt issuance of agency policy
COA fraud alert

Through the Internet, the COA encourages people to report allegations of
fraud, waste, abuse, or mismanagement of funds. The procedure is made
simple: The person who wishes to make a report fills out a Fraud Alert
Form and sends this via the Internet. The person need not give his or her
name, although the COA cannot ensure total confidentiality of the Internet
address and message submitted because of the inherent openness of the
Internet.
UP Open University
Attany
end rate,
of theityear.
is important to be
Below is an awareofofa the
example cashavailability
flow table. of this means or
method
Aproprof reporting irregularities in government. The information that
the one making the report must provide is as follows:
• How do you wish to be identified? (optional)

• What agency is involved?
• In what area did the wrongdoing occur?
• Describe the subject of your allegations.
• What is the nature of your allegation?
There are guidelines about the kind of information that the person may
be able to provide. Examples are:
1. Type of funds or programs involved and any specific restrictions,

rules, or regulations that relate to them.
2. What the individual(s) did. Include anything the individual may
have done to avoid detection.
3. Names, positions, organizations involved in the activity, as well as
the names of individuals involved. Include the name, address, and
telephone numbers, if possible.
4. Date(s) of the misconduct or wrongdoing.
The COA requests that information concerning contractor and/or grantee

of fraud contain the following:
1. name and address of the contractors

2. nature of wrongdoing (e.g., intentional misuse of funds for other
purposes, cost mischarging, defective pricing, or conflict of interest);
3. type of contract
4. bid, contract or grant number
5. date of the contract or grant award
6. name of the agency official responsible for the contract or grant
7. cost and terms of the contract
The person making the report should provide as much information as

possible. If the misconduct has been reported to another agency/office,
the date when it was reported and who received the report must be given
as well. He or she may also give special instructions.
Box 9-1 includes samples of complaints of fraud filed with the COA via
the Internet. There is no intention here whatsoever to implicate or smear
the record of the agency involved. These are included here for the pur-
pose of academic discussion.
UP Open University
Module 9 191
Box 9-1. Sample complaints of fraud
FRAUD COMPLAINT NO. 1 FRAUD COMPLAINT NO. 2
Agency Involved: Agency Involved:

Philippine National Police (PNP) National Electrification Administration
Records Center, Camp Crame, Quezon City
Quezon City
Subject of Allegation:
Subject of Allegation: Department Managers are collecting Represen-
Processing of retirement papers tation and Transportation Allowance (RATA)
takes so long and retirees coming equivalent to 40% of their basic pay retroac-
from the provinces have to pay tively, to go around the CC # 10 ruling limiting their
grease money for their papers to be RATA to only 20% of the basic salary.
acted on.
Complaint Received:
Complaint Received: September 1999
September 1999
Action Taken:
Actions Taken: The complaint was referred by the Director, In-
The complaint was referred by the formation Technology Center (ITC) in a memo-
Director, Information Technology randum dated September 15, 1999 to the Office
Center (ITC) in a memorandum to of the Chairman and Special Audit Office.
the Director, National Government
Audit Office (NGAO) I dated
September 20, 1999.
FRAUD COMPLAINT NO. 3
The Director, NGAO I forwarded the
said complaint to the COA Resident Agency Involved:
Auditor, Philippine National Police Commission on Audit Regional Office No. XIII
(PNP) in a memorandum dated CARAGA Administrative Region, Butuan City
October 5, 1999.
Subject of Allegations:
The COA Resident Auditor sent a 1. Vacant positions were not posted or adver-
letter to the Director, Internal Affairs tised in the newspapers as required by the Civil
Service (IAS), PNP, Camp Crame, Service Commission.
Quezon City last October 7, 1999 2. Application letters of walk-in applicants were
re: complaint received. not given consideration nor the applicant in-
formed of the results.
In a memorandum to the Inspector 3. Relatives and friends of the Director and the
General, IAS, PNP, the Acting Chief Administrative Officer were given priority to va-
of Complaints Investigation and cant positions.
Prosecution Office (CIPO) approved
the request for the constitution of a Complaint Received:
team to conduct a Management March 27, 2000
Audit of PNP Records Center and
look into the reported fraud/ Actions Taken:
anomalies. The complaint was referred by the Director, In-
formation Technology Center (ITC) in a memo-
The COA Resident Auditor randum dated April 3, 2000 to the Office of the
transmitted a report to the Director, Regional Coordinator, Office of the Chairman.
National Government Audit Office I
dated October 18, 1999 regarding The COAWEB Project Center received a reply/
the result of the fact-finding comment from Director Paquita A. Cabegin, COA
investigation conducted relative to Regional Office No. XIII, Butuan City dated May
the complaint. 30, 2000 regarding the allegations.
UP Open University
Anti-graft efforts
Oversight agencies led by the COA have held and continue to hold meet-
ings, seminars, and conferences to assess and coordinate government ef-
forts against graft and corruption.
The oversight agencies have identified several factors that tend to contrib-
ute to the inability of government to effectively deal with the problem of
corruption: (1) the need for agencies engaged in the fight against corrup-
tion to closely coordinate and present a united front against the common
enemy; and (2) the need for the officers of these agencies to acquire new
skills and expertise in preventing, detecting, investigating, and prosecut-
ing graft and corruption (COA, 1999:88).
It is clear that agencies engaged in the anti-corruption effort lack coordi-

nation. They have no clear-cut concept of their respective institutional
roles in the fight against corruption. They also lack personnel who are
especially trained and skilled in undertaking successful graft prevention,
investigation, and prosecution.
However, these agencies are doing something to improve the situation:

They have agreed to share information on graft cases. They have met to
clarify issues and problems. In the process of consultation and coordina-
tion, the COA, Ombudsman, PCAGC, NBI, and CSC have agreed to the
following, among other things:
• Auditors should not be named as complainants.

• Utilize COA’s authority over accounting to penetrate BIR records.
• The NBI must assign operatives to support COA graft cases upon re-
quest.
• The COA-NBI-Ombudsman must form a quick reaction team to follow
up graft cases.
• An interagency training on fraud investigation must be conduted.
• A dialogue among COA Resident Auditors, Ombudsman, PCAGC, CSC
and NBI to establish working relationships must be held.
Breaking the cycle of corruption
In 1997 COA and concerned oversight bodies entered into a Memoran-

dum of Agreement to pledge closer coordination and mutual assistance
in the common fight against graft and corruption. Tasks were delineated
and inter-agency seminars and meetings conducted to come up with a
concerted plan of action to better deal with the problem.
UP Open University
Module 9 193
A prerequisite to this is to understand corruption and how it may suc-

cessfully be stopped. Ursal considers corruption as a social phenomenon
that tends to repeat itself over time in a series of sequential stages (COA,
1999:48): the motivation stage, opportunity stage, execution stage, and
gratification stage (Figure 9-1).
The individual (employee or official) is motivated to commit a corrupt act

not only for economic reasons, which are socially acceptable, but also for
greed (which is socially abhorred). The fact that internal controls are not
in place or are weak gives him/her the opportunity for corruption. Graft-
prone transactions are those involving the collection, custody and dis-
bursement of funds, and the handling of foreign-assisted project funds
and other lump sum funds. Corruption manifests itself in lavish lifestyles
and conspicuous consumption.
Breaking the cycle is a long and tedious process which needs the coopera-
tion and coordination not only of the COA and other oversight bodies but
also of civil society. Checks have to be placed at all stages, starting from
enforcing ethical standards and possibly raising salaries to realistic levels.
Many things need to be done to strengthen internal controls, raise ac-

countability and managerial competence, and promote transparency. At
the same time, the legal system should efficiently perform its role of inves-
tigating, gathering/handling information, and prosecuting cases of cor-
ruption. Such efforts should succeed in pinning down the “big fry” as
they do the “smaller fry” and thereby recover the wealth that properly
belongs to government.
Also, the inventory of supplies and materials must be watched carefully.

Take inventories as frequently as necessary. Assign a person other than
the one normally in charge of the stockroom to do the job.
Beware of changes in cashiering, accounting, bookkeeping, and other pro-

cedures. Have the treasurer and auditor confirm the usefulness of any
changes. Monitor cash receipts. Cash receipts should be deposited in the
bank as quickly as possible after they are received. Payroll distribution
and payroll computation are two separate tasks and should be done by
two different persons. This separation of duties will prevent individuals
the issuance of several checks to themselves.
Take note of employees who do not take vacations. It could be that they
are afraid someone will detect fraud attempting to cover up. Watch out
for employees who seem to be living beyond their means.
All of these measures and the specific stage of corruption they address are
shown in Figure 9-1.
UP Open University
Effective prosecution Decent living wage

Imposition of penalties Housing & other benefits
Recovery of ill-gotten wealth Enforce ethical standards
(Agencies: Ombudsman, Strengthen integrity factor
Sandiganbayan, courts) (Agencies: CSC, PCAGC)
Gratification Stage Motivation Stage

Lavish lifestyle Economic – survival; better life
Conspicuous consumption Greed – materialism; insatiable
Ill-gotten wealth appetite
Execution Stage (Graft prone areas) Opportunity Stage

internationally funded projects Poor internal control
revenue administration Breakdown in accountability
custodianship of funds General mismanagement
fund disbursement Absence of transparency
Strengthen internal control

Fraud detection
Emphasize accountability
Investigation
Evidence gathering Enhance managerial
(Agencies: Ombudsman; competence
Promote transparency (GPIS)
NBI; Sandiganbayan)
(Agencies: DBM; COA)
Figure 9-2. Breaking the cycle of corruption

(Source: Ursal, SB in COA, 1999)
UP Open University
Module 9 195
SAQ 9-2
1. What factors tend to favor the existence of corruption or to
encourage people to be involved in corruption?
2. What measures may be taken to prevent or minimize corruption

in government?
ASAQ 9-2
1. The dire economic condition of a person (although this is not a
justifiable reason for one to commit corruption); low ethics and
weak moral values; weak organizational controls; the organiza-
tional leadership and culture.
2. Strengthen existing control measures and institute new ones;

define roles; conduct periodic evaluation of policies and proce-
dures; evaluate performance; take corrective and preventive
action against, fraud, waste and abuses, etc.
Activity 9-2
In a group, discuss the fraud complaints sent to COA (in Box 9-1).
Come up with actions or solutions that should be taken by the
agency concerned.
UP Open University
References
Cariño, LV & RP De Guzman. (1979). Negative bureaucratic behavior in the

Philippines, UP CPA.
COA. (1992). Government accounting and auditing manual, Volumes I, II and
III.
Husmillo, LB. (1998). Malversation of public funds and property. Paper sub-
mitted in partial fulfillment of the requirements of the course PA 231,
UP CPA.
Padilla, PL. (1994). Wastage of material and financial resources of the govern-
ment, UP CPA and the Office of the Vice-President of the Philippines.
PD 1445.
UP Open University

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Module 5 91

T his module will look full as we try to

Nature of Appropriations, Allotments,

Allotments are authorizations issued by the DBM allowing an agency to

Obligations are amounts that a government agency is committed to pay.

Then we have Special Appropriations. This is intended for programs/

There are also Supplementary Appropriations. This is an appropriation

Continuing Appropriations are appropriations available for incurring

Standing or Automatic Appropriations are annual appropriations which,

Interim appropriation is a provisional appropriation set to the ceiling of

Accounting for appropriations, allotments,

One of the first of these policies is the Constitutional prohibition on agen-

On this rule, there are three exceptions:

• An unobligated amount for Current Operating Expenditures reverts to

To determine whether an expenditure certified to be an account payable

No money shall be paid out of the Treasury except in pursuance of an

Obligations arise from an act of a duly authorized administrative office.

1. Section A, to be accomplished by the official requesting for the obligation;

After proper accomplishment of Sections A and B, the ROA is recorded in

In case there are major changes in obligations, a cancellation of the origi-

Revenue, Receipts, and Income

Receipts refer to cash inflow, whether actual or constructive, regardless

Income includes revenues, receipts, and proceeds from loans or borrowing.

Categories of income in NGAs

Income totally accruing to the General Fund. This category of income is

Income collected in excess of the Approved Agency Income Estimate.

Income made available in whole for Agency expenditures. This income

Income made available in part for agency expenditures. This is income

Income treated as Special Account in the General Fund. This income

Income constituted as agency revolving account in the GF. This is in-

Income Automatically Appropriated. This is income collected over and

General principles governing the accounting

1. Make sure that all collections, whether from income or non-income

3. See to it that collections are deposited intact with the BTR/authorized

Table 5-1. Frequency of deposits

Distance Travel time Accumulated Frequency of deposits

Less than Less than l P500 or more l Daily

15-30 kms Less than l P2000 or more l Daily

More than Less than l P2000 or more l Daily

1. tax and non-tax items such as those earned or realized from

2. includes revenues, receipts, and proceeds from loans or

3. cash inflow whether actual or constructive, regardless of

B. There are 7 categories of income. Five are listed below. Write

• Income collected in excess of the Approved Agency Income

B. The categories of income are:

Accounting for Disbursements

Accounting for disbursements

We classified expenditures when we discussed line-item budgeting in other

1. Current operating expenditures, referring to appropriations for the

2. Capital outlays, referring to appropriations for the purchase of goods

As in accounting for appropriations, allotments, and obligations, there

Basic requirements applicable to all classes

1. Certification of availability of funds. In national government, the Chief

• All funds appropriated in the GAA

• Revolving fund transactions for business-type activities authorized to

The NCA shall be recorded as a memorandum entry in the Allocation

It is important to emphasize that balances of the NCA at the end of the

Balance of deposits per book of POs/OUs (not receiving NCA directly

Other modes of disbursement