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Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor AOM No. 2014-001 (LnB) Date: September 24, 2014

AUDIT OBSERVATION MEMORANDUM The Board of Directors Liga ng mga Barangay – Province of Tarlac Chapter Attention: President - Liga ng mga Barangay – Municipality of ____________ HON. FEDERICO T. TALBO Treasurer - Liga ng mga Barangay – Municipality of ____________ Absence of Internal Control The Federation of Liga ng mga Barangay did not install internal control system that resulted in: (a) failure of the management to operate under policies and procedures which aim to deter the instance of error or fraud; (b) complete disregard to monitor the achievement of organizational objectives; and (c) inability to report accurately the financial transactions, operations and/or results thereof through financial reports contrary to existing accounting and auditing regulations. Sections 123 and 124 of Presidential Decree No. 1445 provide: Definition of internal control. Internal control is the plan of organization and all the coordinate methods and measures adopted within an organization or agency to safeguard its assets, check the accuracy and reliability of its accounting data, and encourage adherence to prescribed managerial policies. Installation. It shall be the direct responsibility of the agency head to install, implement, and monitor a sound system of internal control.

On the preparation and submission of financial reports, Section 121, supra, is instructive, thus: 1. The financial reports prepared by the agencies shall comply with the specific requirements of applicable laws and regulations as to nature, accounting basic, content, frequency, and distribution as well as with all applicable restrictions pertaining to information that is classified for national security purposes. 2. The financial statements shall be based on official accounting records kept in accordance with law and the generally accepted accounting principles and standards. Liga ng mga Barangay AOM No. 2014-001 Page 1

Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor In fulfilling their mandate and missions, departments and agencies must consider and observe the general objectives of internal control, namely to:     

Safeguard assets; Check the accuracy and reliability of accounting data; Ensure efficient, effective, ethical and economical operations; Comply with laws and regulations; and Adhere to managerial policies. 1

A fundamental element of internal control is the segregation of certain key duties. The basic idea underlying separation of duties is that no employee or group of employees should be in a position both to perpetrate and to conceal errors or fraud in the normal course of their duties. In general, the principal incompatible duties to be segregated are:   

Custody of assets. Authorization or approval of related transactions affecting those assets. Recording or reporting of related transactions.

Traditional systems of internal control rely on assigning certain responsibilities to different individuals or segregating incompatible functions. The general premise of separation of duties is to prevent one person from having both access to assets and responsibility for maintaining the accountability of those assets. (https://iaonline.theiia.org/simplifying-segregation-of-duties) The Board of Directors, Liga President including other officers of the Chapter were unaware on the appropriate internal controls relative to the management of Liga’s funds and properties as well as the operations thereof. All transactions seemed to be managed by its President. Despite the provisions of RA 7160 and the Constitutions and By-Laws of the National Assembly, they failed to effect and install the outlined procedures and established processes to run their offices, conduct its undertakings and achieve its mandates. Overall, the management could not achieve the objectives of internal control by having nominal officers to satisfy the requirements of the regulations. The offices within the Liga organization should function with coordinated actions and legitimate transactions for the efficient and effective delivery of the Liga’s ultimate outputs and purposes. We recommend that the agency head install, implement, and monitor a sound system of internal control in order to achieve its objectives on the safeguarding of assets and property, checking the accuracy and reliability of financial information and compliance with laws, rules, and policies governing the activities and operations of the Liga. Collapsed and uncoordinated functions of officers

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Page 2, Introduction -Philippine Government Internal Audit Manual Liga ng mga Barangay AOM No. 2014-001 Page 2

Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor The official functions as delineated in the Constitutions and By-laws 2 of the Liga ng mga Barangay were not effectively exercised by the elected officers which caused the disintegration of management actions, incurrence of unregulated or unauthorized operational activities, and non-preparation of reports of the Federation of Liga ng mga Barangay. Section 493 of RA 7160, otherwise known as the Local Government Code of 1991, states that: The liga at the municipal, city, provincial, metropolitan political subdivision, and national levels directly elect a president, a vice-president, and five (5) members of the board of directors. The board shall appoint its secretary and treasurer and create such other positions as it may deem necessary for the management of the chapter. A secretarygeneral shall be elected from among the members of the national liga and shall be charged with the overall operation of the liga on national level. The board shall coordinate the activities of the chapters of the liga.

Article VIII of the Liga ng mga Barangay’s Constitution and By-laws designates the following powers and duties to the local chapter’s board and its officers, to wit: Section 1. Powers and Duties of the Board of Directors of Local Chapters. The Board of Directors at each level of the Liga, aside from exercising the powers, functions and duties stipulated in Article VI of this Constitution and By-Laws shall have supervision over all officers and members of their respective chapters; and shall undertake necessary and proper steps in pursuing the objectives stated in the Preamble and Article I of this Constitution. Further, the corporate powers of this organization, expressed and implied, shall be vested in the Board of Directors of each level of the Liga, which shall, among others: a. Have jurisdiction over all officers and committees of the said Board; b. Have general management of the business, property and funds of said Liga chapter; c. Prepare and approve a budget showing anticipated receipts and expenditures for the year, including the plans or schemes for funding purposes; d. Hold regular meetings at least once a month, and for this purpose, enforce regular attendance. e. Remit the prescribed dues and/or fees; and f. Submit an annual report to the office of the National Liga, through proper channels, on the activities and financial condition of the local chapter. Section 2. Powers and Duties of Liga Chapter Offices. The Officers at all levels of the Liga shall have the following powers and duties: a) The President xxx

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3. To formulate and recommend plans and programs to the Liga Board for implementation; 2

The 2010 Constitution and By-Laws downloaded from ligangbarangay.tumblr.com/constitution Liga ng mga Barangay AOM No. 2014-001 Page 3

Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor 4. To negotiate, sign and enter into contracts for and in behalf of the Liga, upon authorization by the Board of Directors of the Liga chapter concerned; xxx

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10. To approve vouchers covering disbursement of funds of the Liga Chapter with the Treasurer as his co-signatory to said account; 11. To create committees and make appointments thereto, upon authorization by the Board of the Liga chapter concerned, for the undertaking of particular projects and/or activities; 12. To represent the budget for the operations, functions and activities of the chapter in consultation with the Treasurer and the Committee on Finance for the approval of the Board; and xxx xxx xxx b) The Vice-President xxx

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c.) The Secretary xxx

2. To be custodian of all records and seal of the Liga chapter and to keep accurate membership records; xxx

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d.) The Treasurer 1. To be the custodian of all Liga Chapter’s assets, properties, funds and securities, and to submit to the Board of Directors, through the President, an annual inventory thereof at the end of the year and for the above purpose, to maintain a bank account, if necessary, with the President as co-signatory, in the name of the Liga Chapter; 2. To collect and receive fees, contributions, donations, money, materials and all other resources accorded to the Liga Treasury, for which he/she issue the corresponding official receipts; 3. To disburse funds, under the authority of the President, in accordance with standard accounting and auditing procedures; 4. To render monthly report to the Board of Directors during monthly meetings or whenever called upon by the Board to do so; 5. To submit to the President an audited annual financial statement duly certified by him/her; 6. To certify the availability of funds whenever necessary; 7. To post bond for the faithful performance of duties; and xxx Liga ng mga Barangay AOM No. 2014-001 Page 4

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Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor e.) The Auditor 1. To examine and audit periodically the books of the Liga chapter; and 2. To do such acts or perform such measures to protect the interest of the Liga chapter. xxx

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The foregoing provisions require the Liga to produce, among others, the following records/reports: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Plans, programs or budget Disbursement vouchers Contracts Board Resolutions Official receipts Annual audited financial statements Books of Liga Bank accounts Annual inventory

Our verification disclosed that the management did not comply with the established rules and practices that brought about the non-preparation and non-maintenance of the above documents and reports. The officers were short of consciousness and efforts to conduct their respective official business as provided for by their own regulations. As regards the day-to-day activities of the Liga, our inquiry revealed the following conditions: 1. Either the President or his assistant o receives the remittances from the barangay members o disburses or pays the expenses chargeable against the Chapter 2. Neither the President nor his assistant prepares the disbursement voucher and collates the supporting documents for payments. 3. The Chapter maintains a current account in LBP Tarlac City with its President as lone signatory. 4. The Chapter held official receipts transferred by previous Liga President and contracted local printing press for additional official receipts. 5. The Chapter did not maintain membership records or any other financial records. The collapsed organizational functions led to the encroachment of functions, wrongful exercise of authority, or irregularity of transactions - a clear defiance and circumvention of Section 2 of PD1445 which reads: Liga ng mga Barangay AOM No. 2014-001 Page 5

Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor It is the declared policy of the State that all resources of the government shall be managed, expended or utilized in accordance with law and regulations, and safeguard against loss or wastage through illegal or improper disposition, with a view to ensuring efficiency, economy and effectiveness in the operations of government. The responsibility to take care that such policy is faithfully adhered to rests directly with the chief or head of the government agency concerned

We recommend that the Board of Directors, being the supervising body, require all officers to perform regularly their duties and functions as prescribed by the existing laws and regulations governing the affairs of the Liga. We also recommend that the Board of Directors oversee and ensure the proper disposition of powers by its officers. Collections not supported with complete records and reports The designated collecting officer was: (a) unauthorized to receive government funds incompetent to execute the functions of Treasurer, (b) not properly bonded in accordance with law, and (c) unaware of the proper maintenance of records and reports for collections as well as accountable forms. As provided for under Section 493 of RA 7160, it is the board of directors who shall appoint its secretary and treasurer. Moreover, Section 505 (b) of RA 7160 provides that the treasurer shall be bonded in an amount to be determined by the board of directors. On the receipt and disposition of funds, PD 1445 provides the following pertinent provisions: Section 63. Accounting for moneys and property received by public officials. Except as may otherwise be specifically provided by law or competent authority all moneys and property officially received by a public officer in any capacity or upon any occasion must be accounted for as government funds and government property. xxx Section 64. Designation of collecting officers for government agencies. The head of an agency may designate such number of collecting officers or agents may be deemed necessary. They shall render reports of their collections, under the regulations of the Commission, to be submitted promptly to the auditor concerned who shall conduct the necessary examination and audit within thirty days from receipt thereof. Section 69. Deposit of moneys in the treasury. 1. Public officers authorized to receive and collect moneys arising from taxes, revenues, or receipts of any kind shall remit or deposit intact the full amounts so received and collected by them to the treasury of the agency concerned and credited to the particular accounts to which the said moneys belong. Liga ng mga Barangay AOM No. 2014-001 Page 6

Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor 2. xxx 3. Pending remittance to the proper treasury, collecting officers may temporarily deposit collections received by them with any treasury, subject to regulations of the Commission. 4. The respective treasuries of those agencies shall in turn deposit with the proper government depository the full amount of the collections not later than the following banking day.

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Authority to receive collections

Our inquiry disclosed that the collections of the Liga were being received by the Provincial Chapter President or by his designated employee who is not a punong barangay and they issued official receipts corresponding thereto. Their actuations were clearly unauthorized and encroaching the functions assigned to the Liga Treasurer. There was no written appointment designating anyone to receive the payment other than the treasurer. 

Treasurer’s bond

No records would show that the board set the amount of bond for the Liga’s treasurer or that the treasurer himself caused the required steps to secure a bond. 

Maintenance of reports of collections and accountable forms

The receivers of accountable forms issued receipts for collections but they ignored the preparation, maintenance and submission of corresponding collection reports. Partial reports of our confirmation showed that for the period of June 2013 to August 30, 2014, the Liga received the amount of P212,000.00 (Annex “A”) as annual dues for CY 2013 from the city and municipal chapters. Furthermore, the President commented that he maintained account in behalf of the Liga with the following details: Bank Account No.

Land Bank of the Phil./ 0072-1122-53

Type

Current account

We could not establish, however, whether all collections were deposited in the said account because of incomplete documentation of bank records including the statements that were being sent by the bank to the President.

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Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor Meanwhile, the designated employee shared that the incumbent Liga President had received unissued official receipts from his predecessor and they had procured additional receipts from local supplier. Her admission divulged the information of their failure to prepare reports on the accountability of official receipts. As of September 23, 2014, the Liga had unissued receipts totaling 2,179 pieces (Annex “B”) but this quantity may not be the fixed accountability because: o there were no reports of accountability that show the receipts and issuances of the accountable forms; o the receipts of accountable forms were not supported with any invoice that indicates the source and quantity received or transferred in the custody of Liga; o the issuances of accountable forms including those transferred to Liga members were not properly documented; and o the series of unissued official receipts were broken that presupposed the consumption hereof. The foregoing situations may become the reason for error, the opportunity to commit fraud and negligence and ultimately may result in loss or wastage through illegal or improper disposition of government funds. We recommend that the Board of Directors: 1. appoint competent Liga Treasurer who shall be responsible in the keeping of collections, funds, and properties of the Liga; 2. instruct the appointed Liga Treasurer to adhere strictly on the preparation of records and reports relevant to the status, condition, and operations of the Liga including the accountability of accountable forms; and 3. determine the amount of bond which would be the basis in procuring Treasurer’s insurance.

Unauthorized and undocumented disbursements Due to absence of board resolutions and complete documentation, disbursements of the Liga amounting to P1,081,321.05 were highly irregular, in violation of pertinent provisions of RA 7160 and PD 1445. Section 505 (b) of RA 7160 provides: Liga ng mga Barangay AOM No. 2014-001 Page 8

Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor All funds of leagues shall be deposited as trust funds with its treasurer and shall be disbursed in accordance with the board of director's resolutions, subject to pertinent accounting and auditing rules and regulations: xxx

Furthermore, Section 4 of PD 1145 states that financial transactions and operations of any government agency shall be governed by the fundamental principles set forth hereunder, to wit: 1. No money shall be paid out of any public treasury of depository except in pursuance of an appropriation law or other specific statutory authority. 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. Finally, COA Circular No. 2012-003 dated October 29, 2012 defines irregular expenditure as follows: The term “irregular expenditure” signifies an expenditure incurred without adhering to established rules, regulations, procedural guidelines, policies, principles or practices that have gained recognition in laws. Irregular expenditures are incurred if funds are disbursed without conforming with prescribed usages rules of discipline. There is no observance of established patter, course, mode of action, behavior, or conduct in the incurrence of an irregular expenditure. A transaction conducted in a manner that deviates or departs from, or which does not comply with standards set is deemed irregular. A transaction which fails to follow or violates appropriate rules of procedure is, is likewise, irregular.

The President presented total disbursements or expenditures for the period February 2011 to May 2014 amounting to P1,081,321.05 (Annex “C”). Liga ng mga Barangay AOM No. 2014-001 Page 9

Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor The above transactions were deemed irregular because: 1. the disbursements were not supported with duly accomplished disbursement vouchers and complete documentation; 2. the instances of payments were not backed up by board resolutions; 3. there was no duly approved budget containing details where expenses could be properly charged against; and 4. the disbursements were made by persons other than the Treasurer. It is the policy of the State that all resources of the government shall be managed, expended or utilized in accordance with law and regulations, and safeguard against loss or wastage through illegal or improper disposition. Without adherence to the existing laws and regulations, personnel who committed infractions thereof shall be subject to liability under Section 103 of PD 1445 which states: Expenditures of government funds or uses of government property in violation of law or regulations shall be a personal liability of the official or employee found to be directly responsible therefor.

We recommend that the Board of Directors: 1. require the Liga Treasurer to perform his duties and functions as prescribed by law and promulgated by the overseeing body or authority; and 2. instruct the Liga President to conscientiously observe the rules and regulations on the proper disposition of Liga funds, appropriate documentation of disbursements and relevant reporting of legitimate expenditures.

May we have your comments on the foregoing audit observations within fifteen (15) working days from receipt hereof. Audit Team Leader

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Republic of the Philippines COMMISSION ON AUDIT ___________________ Office of the Auditor Supervising Auditor PROOF OF SERVICE: Received by: (Printed Name and Signature) Date:

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