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Management ServicesReport No. 2007-05B

Government-wide Performance Audit

Discretionary, Extraordinary

and

Miscellaneous Expenses

Philippine Charity Sweepstakes Office

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Republic of the Philippines

Commission on Audit

MANAGEMENTSERVICESCommonwealth Avenue, Quezon City, Philippines

Telephone Nos.: 931-9235, 931-74-55

June 10, 2008

MS. ROSARIO C. URIARTE

General Manager

Philippine Charity Sweepstakes Office

E. Rodriquez Ave., Quezon City

Madam:

We are pleased to transmit the report on the government-wide performance

audit on the allocation and utilization of discretionary, extraordinary and miscellaneous

funds by the Philippine Charity Sweepstakes Office. The government-wide

performance audit covering six government-owned and controlled corporations and

twelve local government units was conducted in compliance with MS/TS Office Order

No. 2007-011 dated March 22, 2007. The results of the audit were forwarded to that

Office on March 6, 2008 for comments, which were incorporated in the report, where

appropriate.

The audit covered the review and evaluation of appropriations and reported

expenses charged against discretionary, extraordinary and miscellaneous expensesaccount from CYs 2004 to 2006. It also covered detailed analysis of selected CY 2006

expenditures charged against these funds and similar expenses charged against other

accounts.

We look forward to the proper implementation of the recommendations and we

would appreciate being informed on the actions taken thereon within one month from

receipt thereof.

We acknowledge the cooperation and assistance extended to the team during

the audit by the officials and staff of that Office.

Very truly yours,

By Authority of the Chairman:

SUSAN P. GARCIA

Director IV

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Contents Page

Part I Executive Summary 1

Introduction 2Audit Objective 2

Evaluation Criteria 2

Audit Scope and Methodology 3

Audit Conclusion 4

Managements Comments 5

Teams Rejoinder 5

Audit Recommendations 6

Part II The Allocation and Utilization Guidelines 7

Introduction 8

Governing Laws, Rules and Regulations 10

Part III The Philippine Charity Sweepstakes Office 13

Background 14

Five Vision Pillars 14

The Products of PCSO 15

Revenue Allocation 16

Social Welfare and Health Programs17

Mandatory Contribution 17

Organizational Structure 18

Personnel Complement 19

The Board of Directors 19

Appropriations and Expenditures 20

Part IV Audit Observations 21

Chapter 1 Conformity with Prescribed

Limitations 22

Introduction 23

Observation 23

Managements Comments

and Teams Rejoinder 26

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Contents Page

Chapter 2 Judicious Spending 29

Introduction 30Observation No. 1 30



Observation 32



Part V Recommendations 35

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Part I

Executive Summary

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EXECUTIVE SUMMARY

INTRODUCTION

The allocation and utilization of funds for extraordinary and miscellaneousexpenses by government agencies are generally governed by COA Circular No.

85-55A, and Section 25 of the General Provisions of the General Appropriations

Act (GAA) for national government agencies (NGAS), COA Circular No. 2006-

001 for government owned and controlled corporations (GOCCs) and Section

325 (h) of R.A. 7160 for local government units (LGUs).

Extraordinary and miscellaneous expenses as prescribed under these rules and

regulations, shall include, but shall not be limited to expenses incurred for:

Meetings, seminars and conferences Official entertainments

Public relations

Educational, athletic and cultural activities

Subscriptions to professional technical journals and informative

magazines, library books and materials

Contributions to civic and charitable institutions

Membership in government associations, national professional

organizations duly accredited by the Professional Regulations

Commission, and in the Integrated Bar of the Philippines

Other similar expenses not supported by the regular budget allocation.

AUDIT OBJECTIVE

The audit was conducted to assess whether the existing systems on the allocation

and utilization of discretionary, extraordinary and miscellaneous funds were

effective in ensuring that the limitations prescribed under existing rules and

regulations were observed and that funds were used for the purposes intended.

EVALUATION CRITERIA

To achieve the audit objective, the team considered the following evaluation

criteria for assessing the agencies effectiveness in controlling the allocation and

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EXECUTIVE SUMMARY

utilization of discretionary, extraordinary and miscellaneous funds:

o

Conformity with the following prescribed limitations:

LGUs 2% of Real Property Tax collection in the

next preceding year

GOCCs amount prescribed in their respective

charters or, in its absence, rates provided in the GAA

o Judicious spending of funds focusing on:

Spending funds for purposes intended

Proper documentation of expenses

AUDIT SCOPE AND METHODOLOGY

The audit covered the review and evaluation of appropriations and reported

discretionary, extraordinary and miscellaneous expenses incurred from CYs

2004 to 2006 by selected GOCCs including the Philippine Charity Sweepstakes

Office (PCSO) and LGUs in the National Capital Region, Regions I, III, VII andX. The audit also covered detailed analysis of selected CY 2006 expenditures

charged against these funds and similar expenses charged against other accounts.

During the audit, the team employed the following audit techniques, among

others:

Reviewed and evaluated extent of compliance with existing

rules and regulations on the allocation and utilization of funds

intended for discretionary, extraordinary and miscellaneousexpenses and analyzed nature of selected expenses charged

thereon;

Interviewed concerned GOCC and LGU officials and

employees involved in the allocation and utilization of these

funds; and

Assessed the control/monitoring mechanism for the allocation

and utilization of these funds.

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EXECUTIVE SUMMARY

AUDIT CONCLUSION

The audit concluded that the PCSOs existing systems on the allocation and

utilization of funds intended for extraordinary and miscellaneous expenses were

not effective in ensuring that the limitations prescribed under existing rules and

regulations were observed and that funds were used for the purposes intended.

The allocation of P20 million yearly for CYs 2004 and 2005 and P7.812 million

for CY 2006 approved by the Board of Directors (BOD) for these expenses were

computed based on actual expenses previously incurred without taking into

consideration the rates prescribed for each official under the GAA.

Thus, the BOD-approved allocations of P47.812 million for the three-year

period far exceeded the computed allowable allocations of P6.141 million by

P41.671 million. In CY 2006, reported expenses even exceeded the BOD-

approved allocation by P179.493 million. The total reported expenses then of

P204.762 million exceeded the prescribed limitation by P198.621 million as

tabulated below:

Excess Expenditures Over

CY

Allowable

Allocation(a)

BOD

Approved

Budget(b)

Reported

Expenses(c)

Excess

Allocation

Over

Allowable(d=b-a)

BOD Approved

Budget(e=c-b)

Allowable

Allocation(f=c-a)

2004 P 2,047,000 P20,000,000 P 10,355,681.00 P 17,953,000 P - P 8,308,681.00

2005 2,047,000 20,000,000 7,101,806.00 17,953,000 - 5,054,806.00

2006 2,047,000 7,812,000 187,304,603.47 5,765,000 179,492,603.47 185,257,603.47

Total P 6,141,000 P47,812,000 P 204,762,090.47 P 41,671,000 P 179,492,603.47 P 198,621,090.47

Of the total expenses of P187.305 million in CY 2006, P163.022 million were

used to pay various types of allowances, advertisement and other expenses

which were not properly chargeable against this account and which should have

been covered by separate appropriations.

Under COA Circular No. 2006-001, the amounts fixed in the GAA shall be

considered as the ceiling for disbursements in case the authority to grant these

expenses is derived from the GAA and was not specifically provided in the

GOCCs charter. In the case of PCSO, as the ceiling for these expenses was not

provided in its charter, the GAA provisions apply.

This provision was likewise imposed by the DBM in its reviews of the PCSOs

budgets for CYs 2004 to 2006. It then instructed PCSO to limit expenditures for

these expenses within the rates prescribed under the GAA, an instruction which

was not adhered to.

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EXECUTIVE SUMMARY

The propriety of some charges could also not be validated. Meals and snacks

incurred by members of the BOD amounting to P.671 million from January to

June 2006 alone were not properly documented with P154,400 spent on

Saturdays and Sundays. These expenses were merely supported with invoiceswithout indicating the purpose for which these expenses were incurred.

MANAGEMENTS COMMENTS

The results of the audit were forwarded to PCSO Management for comments.

Their comments were incorporated in the report, where appropriate. In general,

PCSO claimed that:

While it was instructed to limit extraordinary expenses within the rates

prescribed in the GAA, its budget for discretionary expenses in CYs 2004 and

2006 were nonetheless approved by the DBM.

Of the P181.06 million charged under the extraordinary and miscellaneous

expenses in CY 2006, only P9.167 million were actually incurred under this

account as the balance were chargeable to other miscellaneous expenses

account.

There should be a distinction between the miscellaneous expense accountclassified as discretionary and extraordinary and the general miscellaneous

account that will take care of expenses that are not covered by any of the regular

budget item.

Claims for meals and snacks incurred by the Members of the BOD are

supported with official receipts or, for expenses of minimal amounts, by

reimbursement receipts. By the nature of their position, being Presidential

appointees, there is no need to ask for the purpose of expenses as the Board has

to conduct various meetings and consultations with a number of sectors to

generate sufficient funds to attain its objective of serving the greatest number of

beneficiaries. These meetings were sometimes held on holidays.

TEAMS REJOINDER

As discussed in the report, while the DBM did not recompute for the total

allowable discretionary expenses before approving PCSOs budgets, the imposed

condition that expenses for discretionary and miscellaneous expenses be limited

to the rates prescribed in the GAA is tantamount to limiting its approval within

such rates.

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EXECUTIVE SUMMARY

On the other hand, the team agreed and in fact taken note of substantial charges

under the Miscellaneous Expenses account which should not have been charged

therein as these should be covered by separate appropriations. These expenses

have their own accounts under the NGAs Chart of Accounts such as AdvertisingExpenses, Repair and Maintenance-Motor Vehicles, Honorarium, etc. There is

also a sub-code under account Other Maintenance and Operating Expenses

where miscellaneous expenses not classified as discretionary and extraordinary

expenses can be charged.

In addition, while PCSO generates its own funds, such funds being spent for

various meetings and consultations were nonetheless government funds which

should be spent only for public purpose and properly accounted for even by

Presidential appointees. As such, these expenses should be supported with

sufficient documents to assess propriety and legality.

AUDIT RECOMMENDATIONS

Considering that extraordinary and miscellaneous expenses are recurring

expenses, the team recommended measures under Part V of the report to address

these deficiencies. In general, the team recommended that PCSO should limit

the allocation and expenditures for extraordinary and miscellaneous expenses of

each official to the rates prescribed under the GAA. It was also recommendedthat henceforth, only duly supported claims should be paid and that concerned

officials be required to submit sufficient documentation on disbursements

amounting to P.671 million.

The Resident Auditor was also advised to take appropriate actions on excessive

allocation and expenditures under this account and on disbursements which were

not properly documented.

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Part II

The Allocation and Utilization Guidelines

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THE ALLOCATION AND UTILIZATION GUIDELINES

INTRODUCTION

On September 8, 1985, COA issued COA Circular No. 85-55A to prescribe theamended rules and regulations on the prevention of irregular, unnecessary,

excessive or extravagant expenditures or uses of funds and property. These rules

and regulations included the use of funds for extraordinary and miscellaneous

expenses formerly known as discretionary fund.

In 1986, COA issued the State Audit Manual to consolidate current laws,

regulations and modern concepts in state auditing and prescribe new objectives

and procedures consistent with the goals of efficient and effective audit of

government expenditures. It also defines the different expenditure accounts

including the following expense accounts:

Discretionary Expenses (3-18-000) includes the cost of services

which are confidential in nature, rendered by persons who are

temporarily employed by authorized administrative or executive

officers to carry on successfully administrative activities;

compensation of informers employed to detect the whereabouts of

criminals or the existence of prohibited games, which

compensation shall not exceed ten percent of the fines imposed

upon the convicts; and expressly authorized confidential expenses

for which appropriations have been approved specifically for the

purpose.

Extraordinary Expenses (3-20-000) includes but not limited to,

expenses incurred for or during meetings, seminars and

conferences, official entertainment, public relation, educational,

athletic and cultural activities, contributions to civic or charitable

institutions, membership fees in government associations,

subscriptions to professional magazines, library books and

materials, office equipment and supplies and other similar

expenses that are not supported by the regular budget allocations.

Contingency/Emergency Expenses (3-20-000) includes unforeseenexpenditures arising from the occurrence of natural calamities or

financial dislocations on account thereof which are chargeable

against the appropriation reserve. It shall also include losses

incurred in converting foreign currencies to Philippine peso.

On December 19, 1991, COA Circular No. 91-368 was issued to institute a

Government Accounting and Auditing Manual (GAAM) and prescribe its use.

The account Discretionary Expenses (3-18-000) was changed thereon to

Confidential and Intelligence Expenses (3-19-000) while account

Extraordinary/Contingency/Emergency Expenses (3-20-000) was split into

Extraordinary and Miscellaneous Expenses (3-18-000) and Anti-

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insurgency/Contingency/Emergency Expenses (3-20-000). Extraordinary and

Miscellaneous Expenses now includes not only those expenses enumerated

under 3-20-000 of the State Audit Manual but also expenses for the official

entertainment of the Officials authorized representative. It also provides a

condition that no portion of the amounts authorized thereon shall be used for thecreation of positions, for salaries, wages, allowances, intelligence or confidential

expenses.

Under the New Government Accounting System (NGAS), the accounts

Extraordinary and Miscellaneous Expenses (3-18-000) and Confidential and

Intelligence Expenses (3-19-000) were broken down into the following expense

accounts:

Account

Title Number

Description

Confidential Expenses 881Cost of services which are

confidential in nature

Intelligence Expenses 882Amount of expenses for highly

sensitive activities

Extraordinary Expenses 883

Amount of expenses of government

officials for authorized public

relations activities

Miscellaneous Expenses 884

Amount of expenses other than those

classified under specific confidential,

intelligence and extraordinary

expense accounts

The foregoing definitions are applicable to all national government agencies

(NGAs), local government units (LGUs), and government-owned and controlled

corporations (GOCCs).

As reported by the Government Accounting and Financial Management

Information System (GAFMIS) of the Commission on Audit, the consolidated

extraordinary and miscellaneous expenses of NGAs, LGUs and GOCCs for CYs

2004 to 2006 amounted to P29.054 billion as tabulated below:

In Thousand Pesos

Sector CY 2006 CY 2005 CY 2004 Total

NGAs P 861,432.88 P 691,664.09 P 739,620.60 P 2,292,717.57

LGUs 1,131,643.02 892,727.00 900,740.30 2,925,110.32

GOCCs 7,089,916.37* 7,461,054.70* 9,285,535.70 23,836,506.77

Total P 9,082,992.27 P9,045,445.79 P10,925,896.60 P29,054,334.66* Includes confidential and intelligence expenses

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The allocation and utilization of funds intended for discretionary, extraordinaryand miscellaneous expenses in GOCCs and LGUs are governed by the following

laws, rules and regulations:

Laws, Rules and

Regulations Provisions

GOCCs

COA Circular No. 2006-001 dated January 3, 2006

Para. I- Scope and

Coverage

It shall cover extraordinary and miscellaneous

expenses and other similar expenses, such asdiscretionary, business development expenses,

representation expenses and the like, provided that the

nature or purpose of said expenditures pertain to any of

the following:

meetings, seminars and conferences;

official entertainment;

public relations;

educational, athletic and cultural activities; contribution to civic and charitable institutions;

membership in government associations; membership in national professional organizations duly

accredited by the Professional Regulation Commission; membership in the Integrated Bar of the Philippines;

subscription to professional technical journals and

informative magazines, library books and materials; and

other similar expenses not supported by regular budget

allocation.

Para. III- Audit

Guidelines

The amount of extraordinary and miscellaneous

expenses, as authorized in the corporate charters of

GOCCs/GFIs, shall be the ceiling in the disbursement

of these funds. Where no such authority is granted in

the corporate charter and the authority to grantextraordinary and miscellaneous expenses is derived

from the General Appropriations Act (GAA), the

amounts fixed thereunder shall be the ceiling in the

disbursements. Under Section 25 of the GAA,

appropriation for this purpose for officials and those of

equivalent rank as may be authorized by the DBM shall

not exceed:

(a) P180,000 for each Department Secretary;

(b) P65,000 for each Department Undersecretary

(c) P35,000 for each Department Assistant Secretary;

GOVERNING LAWS, RULES AND REGULATIONS

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Laws, Rules and


(d) P30,000 for each head of bureau or organization of

equal rank to a bureau and for each Department

Regional Director;

(e) P18,000 for each Bureau Regional Director; and

(f) P13,000 for each Municipal Trial Court Judge,

Municipal Circuit Trial Court Judge, and Sharia

Circuit Court Judge.

In addition to the prescribed rate, miscellaneous

expenses not exceeding Fifty Thousand Pesos

(P50,000) for each of the offices under the above

named officials are also authorized under the said

Section.

Payment of these expenditures shall be strictly on a

non-commutable or reimbursable basis;

The claim for reimbursement of such expenses shall be

supported by receipts and/or other documents

evidencing disbursements; and

No portion of the amounts appropriated shall be used

for salaries, wages, allowances, intelligence and

confidential expenses which are covered by separate

appropriations.

LGUs

R.A. 7160

Section 325-

General Limitations

The annual appropriations for discretionary purposes of

the local chief executive shall not exceed two percent

(2%) of the actual receipts derived from the basic real

property tax in the next preceding calendar year.

Discretionary funds shall be disbursed only for public

purposes to be supported by appropriate vouchers and

subject to such guidelines as may be prescribed by law.No amount shall be appropriated for the same purpose

except as authorized under this Section.

GOCCs and LGUs

COA Circular No. 85-55A dated September 8, 1985

Item 4.7-

Extraordinary and

Miscellaneous

Expense (formerly

Discretionary Fund)

For National Government Sector

Extraordinary and miscellaneous expenses shall

include, but not limited to expenses incurred for or

during meetings, seminars and conferences, official

entertainment of the official or through his authorized

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Laws, Rules and


representative, public relations, educational, athletic

and cultural activities, contributions to civic orcharitable institutions, membership fees in government

associations, informative magazines, library books and

materials, office equipment and supplies and other

similar expenses that are not supported by the regular

budget allocations, Provided, that no portion of the

amounts authorized thereon shall be used for the

creation of positions, nor for salaries, wages and

allowances, intelligence or confidential expenses.

For Local Government and Corporate Sectors

The above provision contained in 4.7.1 shall also apply

to the local government and corporate sectors.

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Part III

The Philippine Charity Sweepstakes Office

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THE PHILIPPINE CHARITY SWEEPSTAKES OFFICE

BACKGROUND

Lotteries have been in existence in the Philippines as early as 1833. Under the

auspices of private enterprises called Empresa de Reales Loteria Espanolas de

Filipinas, the Spanish Government conducted loterias to generate revenues.

With the outbreak of the Philippine Revolution, the loteria was forced to stop

operations. It was not until the early 1930s that the idea of holding lottery games

was revived. In 1932, the first Sweepstakes draw was conducted by the

government to raise funds to support sports projects for the Filipino youth

through the Philippine Amateur Athletic Federation (PAAF), the beneficiary of

the first draw.

With the success of PAAF Sweepstakes, more draws were conducted for the

benefit of the Philippine Anti-Tuberculosis Society, now the Philippine

Tuberculosis Society (PTS). Draws were held under the auspices of an

organization called the National Charity Sweepstakes (NCS).

In March 1935, then President Manuel L. Quezon approved Act 4130 creating

the Philippine Charity Sweepstakes (PCS) to replace the NCS. Under this law,

PCS was authorized to secure loan amounting to P250,000 from the National

Treasury to organize and print tickets for the draw. Its first sweepstakes draw

was held on September 8, 1935.

In 1954, under R.A. 1169, as amended in September 1979 by Batas Pambansa

Blg. 42, the Philippine Charity Sweepstakes Office (PCSO) was created to act as

the principal government agency responsible for raising and providing funds for

health programs, medical assistance and services, and charities of national

character.

FIVE VISION PILLARS

The PCSO commits to the following principles to realize its vision and mission:

Professional workforce with integrity, competence and a deep sense of

accountability and transparency in all its official transactions;

Timely adequate services;

Increased number of satisfied beneficiaries with improved health and other

social conditions;

Effective, efficient and self-reliant organization with strong operating system

and infrastructure; and,

Good corporate image.

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THE PRODUCTS OF PCSO

The main products of the PCSO are sweepstakes and lottery games. The

Sweepstakes game has steadily been evolving through the years to conform with

the changing times, to keep the game interesting to all Sweepstakes enthusiasts,

to attract more clients and to maintain a variety of Sweepstakes products readily

available in the market. Various game types have been introduced and game

innovations are constantly being conceptualized.

Changing times and new technology placed the sweepstakes behind the lotto

numbers game. However, the charity agency has learned to devise ways to make

the sweepstakes survive through niche marketing.

PCSO holds three 6-pick number games, 6/42 Lotto, 6/45 Mega Lotto, and 6/49

Super Lotto. All of these number games can be played using the systems play

(systems 7 to 12), 5 Roll, and Lucky Pick. PCSO also conducts 6-digit (6D), 4-

digit (4D), 3-digit (Suertres Lotto), and 2-digit (EZ2) games. These are drawn

on the following days with the minimum jackpot prize/minimum guaranteed

amounts ranging from P4,000 to P8,000,000:

Games Days Drawn

Minimum Jackpot

Prize

6/42 Lotto Tuesdays and Saturdays P3,000,000

6/45 Mega Lotto Mondays, Wednesdays and Fridays 4,500,000

6/49 Super Lotto Thursdays and Sundays 8,000,000

6D Tuesdays, Thursdays and Saturdays 150,000

4D Mondays, Wednesdays and Fridays Depending on sales

Suertres Lotto/3D Daily 4,500

EZ2 Daily 4,000

In 2005, the Small Town Lottery or STL was introduced. Under the STL charity

fund scheme, revenues accruing to STL will be divided as follows:

Agency Share (In%)

City or Municipality 10.0

Provincial Government 5.0

Congressional District 2.5

PNP 5.0

PCSO 7.5

Total 30.0

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To date, the processing of new applications for STL was temporarily stopped

pending a comprehensive review of the project. The comprehensive review is

being undertaken for the purpose of putting in place all necessary features to

make its operations as transparent, honest and credible as the lotto draws.

REVENUE ALLOCATION

PCSO generates revenues from the sale of sweepstakes and lotto tickets. After

deducting the printing cost which shall not exceed two percent (2%) of the gross

receipts, the net receipts generated from the sales of sweepstakes and lotto

tickets as prescribed under Section 6 of RA 1169 are allocated as follows:

The Prize Fund is used for the payment of prizes, including those for owners

and jockeys of running horses and sellers of winning tickets. This is a trust

liability account. Unclaimed prizes or balances in Prize Fund reverts and forms

part of the Charity Fund after one (1) year.

Prize Fund55%

Operating Fund15%

Charity Fund

30%

The Charity Fund is also a trust liability account and is used exclusively to

finance and support health programs, medical assistance and services and/or

charities of national character. Any disbursements from the Charity Fund,

regardless of the amount must be authorized by the PCSO Board of Directors

and approved by the Office of the President. The PCSO also extends financial

assistance and contributions to certain national programs created as a result of

various legislative enactments.

The Operating Fund is used to support the day-to-day operating/maintenance

and capital expenditures of the PCSO. Any balance on the Operating Fund at the

end of the fiscal year is reverted to the Charity Fund.

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In adherence to its main thrust of providing funds for health programs and other

charities, PCSO is engaged in the following social welfare and development

programs among others:

PCSO endowment fund/quality health care program

Individual medical assistance program

Ambulance donation program

National calamity and disaster program

Hospital renovation and improvement of health care facilities.

In addition to the different programs supported by PCSO, it is also mandated to

provide contributions to the following agencies/programs:

Legal Basis Agency/Program Contribution

RA 6847 Philippine Sports Commission Six (6) Sweepstakes Draws

RA 7722 Commission on Higher Education 1% of lotto gross sales

RA 7660 Documentary Stamp Tax 10% of gross sales

RA 7835 Comprehensive and Integrated Shelter

and Urban Development Financing

Program (National Shelter Program)

10% of Charity Fund

RA 8042 Shared Government Information System

on Migration (SGISM) under the

Department of Foreign Affairs

P10 million

RA 8042 Congressional Migrant Workers

Scholarship Fund

P150 million from proceeds of

lotto draws taken from the

Charity Fund

RA 8175 Crop Insurance Program 10% of net incomeRA 8313 Upgrading of Quirino Memorial Medical

Center

P100 million from lotto agents

RA 8371 National Commission on Indigenous

Peoples for the Ancestral Domain Fund

P50 million

RA 8492 Museum Endowment Fund P250 million from the annual net

earnings from lotto

RA 9165 Dangerous Drugs Board 10% share on forfeited prizes

EO 201 Standby Fund for the financial

requirements for Severe Acute

Respiratory Syndrome (SARS)

awareness and health promotion

campaign

P1.0 billion

MANDATORY CONTRIBUTION

SOCIAL WELFARE AND HEALTH PROGRAMS

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Legal Basis Agency/Program Contribution

EO 218 Standby Fund for the operations and

programs of the Philippine Drug

Enforcement Agency

P1.0 billion

EO 280 Standby Fund for the financialrequirements of the Avian Influenza or

Bird Flu Viruses

P250 million

EO 357 LGUs 5% lotto share from the Charity

Fund

ORGANIZATIONAL STRUCTURE

The operation of PCSO is being managed by a General Manager. It is divided

into five (5) sectors, each headed by an Assistant Manager. The departments

under each Sector, headed by a Department Manager, follow:

Sector Departments

Administrative Department

Charity Clinic Department

Draw and Races Department

Administration

Legal Department

Assets and Investment Department

Special Projects Department

Corporate Planning

Publicity and Public Relations

Department

Budget and Accounting Department

Fund Allocation Department

Internal Audit Department

Finance

Treasury Department

Central Operations Department

Northern and Central LuzonSouthern Tagalog and Bicol

Online Lottery

Visayas and Mindanao

Planning and Production Department

Sales Department

Production and

Marketing

Security Printing Department

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PERSONNEL COMPLEMENT

During the period covered in the audit, the PCSO was manned by officials and

employees of different employment status as presented below:

Employment Status 2004 2005 2006

Appointed 5 5 5

Co-Terminus 10 14 11

Regular 1,101 1,178 1,179

Casual 540 494 482

Contractual 44 43 36

Job Order 12 12 10

Total 1,712 1,746 1,723

THE BOARD OF DIRECTORS

The corporate powers and functions of the PCSO are vested in and exercised bythe Board of Directors with compensation and term of Office fixed by the

President. It is composed of six (6) members, five (5) of whom are appointed

by the President of the Philippines and confirmed by the Commission on

Appointments. The office administration is handled by a General Manager,

appointed by the Board of Directors. As of December 31, 2006, the Board

consisted of the following members:

Chairman Sergio O. Valencia

Vice Chairman and General

Manager Rosario C. UriarteManuel L. Morato

Strike B. Revilla

Victor A. Domingo

Members

Teresita T. Gonzales

The Board shall exercise the following powers and functions:

To adopt or amend such rules and regulations to implement the

provisions of RA 1169;

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Consistent with the purposes of the Act, to determine and approve

the most effective organizational framework for the Office and its

staffing pattern; to fix the salaries and determine the reasonable

allowances, bonuses and other incentives of its officers and

employees as may be recommended by the General Manager; and toprescribe the manner of hiring and compensating on a contractual

basis such sales and other personnel as may be required for its

operations, subject to pertinent civil service and compensation laws;

To contract loans, credits and indebtedness, whether domestic or

foreign, on such terms and conditions as it may deem appropriate for

the accomplishment of its purposes, subject to applicable laws, rules

and regulations; and

To promulgate rules and regulations for the operation of the Office

and to do such act or acts as may be necessary for the attainment ofits purposes and objectives.

APPROPRIATIONS AND EXPENDITURES

For the three-year period, the appropriations and expenditures of the PCSO

under the General Fund for Extraordinary and Miscellaneous Expenses in

relation to the total appropriations and expenditures follow:

Appropriation Expenditures

CY Total

Extraordinary

& Miscellaneous

Expenses % Total

Extraordinary

& Miscellaneous

Expenses %

2004 P 9,730,526,600.00 P 20,000,000.00 0.21 P1,647,381,587.00 P 10,355,681.00 0.63

2005 10,813,069,300.00 20,000,000.00 0.19 1,811,317,196.00 7,101,806.00 0.40

2006 10,698,209,050.00 81,193,000.00 0.76 2,029,801,915.28 181,105,772.70 8.92

Total P31,241,804,950.00 P 121,193,000.00 0.39 P5,488,500,698.28 P 198,563,259.70 3.62

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Part IV

Audit Observations

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Chapter 1

Conformity with Prescribed Limitations

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CONFORMITY WITH PRESCRIBED LIMITATIONS

INTRODUCTION

Limitations on certain government expenditures are prescribed under existing

rules and regulations to eliminate unnecessary expenses and prevent possible

abuse of power by those exercising authority. Thus, while the State recognized

that government officials are incurring extraordinary and miscellaneous

expenses in the performance of their duties, the amount intended for this purpose

is limited.

In the case of GOCCs/GFIs, the limitations were prescribed under COA Circular

No. 2006-001 issued on January 3,2006. Under this Circular, the amounts fixed

in the GAA shall be the ceiling for disbursements in case the authority to grantextraordinary and miscellaneous expenses is derived from the GAA and not

specifically provided in their corporate charters.

The audit disclosed that the ceiling for extraordinary and miscellaneous expenses

of PCSO was not specified in its corporate charter. Thus, upon review by the

Department of Budget and Management (DBM) of its budget, the PCSO was

advised that disbursements for these expenses shall be subject to the limitations

prescribed under Section 25, General Provisions of the GAA.

Audit disclosed that despite DBMs reviews and comments, PCSOs allocationfor extraordinary and miscellaneous expenses which exceeded the prescribed

limitation were not accordingly adjusted. Further, review disclosed that

expenditures in CY 2006 even exceeded the PCSOs allocation by

P179,492,603.47. Thus, expenditures for the three-year period exceeded the

limitations by P198,621,090.47.

OBSERVATION

Allocation for discretionary fund in CYs 2004 to 2006 exceeded the prescribed

limitation by P41,671,000. Despite DBMs reviews that disbursements for

these expenses should comply with the limitations prescribed under Section 25

of the GAA, the allocations were not adjusted with expenditures in CY 2006

even exceeding the Board-approved allocation by P179,492,603.47. Thus, the

total expenditures during this period exceeded the limitation by

P198,621,090.47.

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Under COA Circular No. 2006-001, the amounts of extraordinary and

miscellaneous expenses, as authorized in the corporate charters of GOCCs/GFIs,

shall be the ceiling in the disbursements of these funds. It is also provided that

where no such authority is granted in the corporate charter and the authority to

grant extraordinary and miscellaneous expenses is derived from the GAA, the

amounts fixed therein shall be the ceiling in the disbursements.

The PCSO was operating pursuant to R.A. No. 1169, as amended by various

laws, where the authority to approve the budget was vested with the Board of

Directors (BOD). The ceiling for extraordinary and miscellaneous expenses was

not among those specifically provided under these laws. Thus, the PCSOs

budget for these expenses should be based on the rates prescribed under Section

25 of the General Provisions of the GAA. This Section provides, among others,

the agency officials and those of equivalent rank allowed to claim extraordinary

and miscellaneous expenses with the corresponding rates. The budget approvedby the BOD is subject to DBMs review.

Based on PCSOs organizational structure and approved plantilla of personnel,

there were thirty (30) officials of equivalent rank entitled to claim extraordinary

and miscellaneous expenses with combined rates ranging from P63,000 to

P85,000 or a total of P2,047,000 yearly, as computed below:

GAA

Officials No.

Salary

Grade Rate/yr. Amount

Extraordinary Expenses

Board of Directors 5 P 35,000 P 175,000

Vice Chairman / Gen.Manager 1 29 35,000 35,000

Assistant General Manager 5 27 18,000 90,000

Department Manager 19 26 13,000 247,000

Sub-total 30 547,000


Board of Directors 5 50,000 250,000

General Manager 1 29 50,000 50,000

Assistant General Manager 5 27 50,000 250,000

Department Manager 19 26 50,000 950,000Sub-total 30 1,500,000

Total P 2,047,000

Review of PCSOs budgets for CYs 2004 to 2006, however, revealed that the

above limitations were not observed in allocating funds for Extraordinary and

Miscellaneous Expenses. Instead, allocation of funds for these accounts was

determined based on actual expenses incurred previously. Thus, the allocation

of P20 million yearly for CYs 2004 and 2005 and P7.812 million for CY 2006

far exceeded the total allowable yearly allocation of P2,047,000 computed based

on the rates prescribed in the GAA.

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The total excess allocation for the three-year period amounted to P41,671,000 as

computed below:

Year Limitation BoardApproved

Budget

ExcessAllocation

2006 P 2,047,000 P 7,812,000 P ( 5,765,000)

2005 2,047,000 20,000,000 (17,953,000)

2004 2,047,000 20,000,000 (17,953,000)

Total P 6,141,000 P 47,812,000 P (41,671,000)

As the allocation exceeded the allowable amount, the DBM upon review,

instructed PCSO to limit expenditures within the rates prescribed in the GAA.

Despite DBMs reviews, the PCSOs annual budgets were not correspondingly

reduced with expenditures in CY 2006 even exceeding the PCSOs approvedbudget by P179,492,603.47. Thus, expenditures for the three-year period

exceeded the allowable limitation by P198.621 million as tabulated below.

Difference

Under (Over)CY

Board

Approved

Budget

(1)

Allowable

Budget

(2)

Expenses

(3) (1-3) (2-3)

2004 P 20,000,000 P 2,047,000 P 10,355,681.00 P 9,644,319.00 P (8,308,681.00)

2005 20,000,000 2,047,000 7,101,806.00 12,898,194.00 (5,054,806.00)

2006 7,812,000 2,047,000 187,304,603.47 (179,492,603.47) (185,257,603.47)

Total P 47,812,000 P 6,141,000 P 204,762,090.47 P(156,950,090.47) P (198,621,090.47)

As discussed in Chapter II, out of the total charges in CY 2006 of

P187,304,603.47, P163,022,419.68 were not chargeable against these accounts

and should have been covered by separate appropriation.

Evaluation of available documents revealed that in considerable number of

disbursements, the concerned departments/offices that incurred such expenses

were not identified. Thus, detailed analysis to determine the particular

department/office with significant expenditures for this purpose could not be

undertaken. Based on selected disbursements in CY 2006 with identified

departments/offices, the excessive expenses were noted to have been incurred by

the following offices:

Position Amount

Extraordinary Expenses

Board of Directors

Chairman P 974,585.26

Vice-Chairman and General Manager 2,225,986.81

Members 5,242,068.34

Sub-total P8,442,640.41

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Position Amount


Administrative Department P6,225,938.75

Draw and Races Dept. 4,719,872.95 Administration 1,243,772.54

AGM-Administration 262,293.26

Corporate Planning 2,653,504.70

Special Projects Department 2,653,504.70

Finance 668,384.44

Budget and Accounting Department 342,001.62

Treasury Department 195,342.91

AGM-Finance 131,039.91

On-line Lottery 481,999.02

Central Operations Dept. 481,999.02

Production and Marketing 402,877.25

Publicity and Public Relations

Department

402,877.25

Board of Directors 1,013,384.65

Office of the General Manager 245,000.00

Sub-total P11,691,088.81

Total P20,133,729.22

Managements Comments Teams Rejoinder

On allocation for discretionary funds for CYs 2004 to 2006 exceeding the rates

prescribed for each official in the GAA.

The yearly appropriation for this account

amounts to P15 million since 1997 allotted

to the following offices:

Office of the Chairman ..P5 million

Office of the Vice-Chairman

And General Manager 5 million

Office of the Members of the

Board of Directors 4.8 million

The total allotment of P14.8 million was

rounded to P15 million. However, in

2004, the Board passed a resolution

increasing their discretionary fund from

P100,000 to P200,000 a month, the

appropriation was increased to P20

million. The appropriation which was

included in the Corporate Operating

Budget of the office was approved by

DBM. However, in 2006 the amount of

While the DBM did not recompute for

the total allowable amount for

discretionary expenses when the PCSOs

budgets were approved, the imposed

condition that expenses of this nature

should not exceed the rates prescribed in

the GAA is already an indication that the

amounts approved for this purpose is

limited to such rates.

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appropriation was reduced to P7.812

million based on actual expenses of P7.102

million incurred in 2005 plus 5% provisionfor increase. This amount remains

unadjusted at the end of the accounting

period, thus, the allocation. Normally, the

expenses incurred from the discretionary

fund are adjusted to medical or health and

welfare related services and programs.

The difference of P76.381 million

represents budget for miscellaneous

account which include RATA of officers

in charge, janitorial services, security

services, professional services,

consultants fees and allowance and other

expense items that were not included in the

regular budget.

While there was mentioned in the budget

to limit extraordinary expenses within the

provision of GAA, in the 2006 and 2004

budget, the amount as budgeted for

discretionary was approved. In 2005, the

DBM failed to provide a copy our

approved budget, thus signified tacit

approval.

On expenditures exceeding the Board approved budget for CY 2006

The expenses incurred on this particular

account was only P9.167 million and

balance is chargeable to the main

miscellaneous account which included the

amount of P137 million spent for

advocacy campaign of the PCSO and the

national government.

As reflected in CY 2006 General

Ledger, the amount of P181.106 million

represents combined charges of P9.167

million under Extraordinary Expenses

(883) and P171.939 million under

Miscellaneous Expenses (884). The

Consolidated Detailed Statement ofIncome and Expenses for CY 2006 even

reflected bigger amount of P187.304

million representing Extraordinary

Expenses of P9.167 million and

Miscellaneous Expenses of P178.137

million. Based on this Statement, there is

a separate Other Maintenance and

Operating Expenses (969) which

includes other miscellaneous expenses.

Moreover, even if the amount of

P171.939 million under Miscellaneous

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Expenses account was excluded,

expenditures charged under the

extraordinary expenses account alone ofP9.167 million would already exceed the

appropriation of P7.812 million by

P1.355 million.

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Chapter 2

Judicious Spending

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JUDICIOUS SPENDING

INTRODUCTION

To ensure that the funds allocated for extraordinary and miscellaneous expenses

were properly utilized, control mechanism in the disbursement, accounting and

reporting were likewise prescribed under existing rules and regulations. These

policies provide, among others, the nature of expenses authorized to be charged

against the funds, the manner of payment, the prescribed rates and the accounts

to be used in recording the expenses.

The audit disclosed that funds appropriated for extraordinary expenses were not

properly managed. Of the total expenses incurred in CY 2006, P163,022,419.68were used for expenses which are not properly chargeable therein. Moreover, as

the allocations provided were apparently excessive, expenses for meals and

snacks from January to June 2006 amounting to P671,061.23 could not be

properly documented with meals amounting to P154,400.67 spent on Saturdays

and Sundays.

OBSERVATIONS

1. In CY 2006, expenses amounting to P163,022,419.68 not properly

chargeable against extraordinary and miscellaneous funds were

nonetheless charged thereon. These expenses should have been covered by

separate appropriations.

The nature of expenses to be charged against extraordinary and

miscellaneous expenses are provided in COA Circular No. 85-55A and

reiterated in COA Circular No. 2006-001. It further provides that no portionof the amounts appropriated therein shall be used for salaries, wages,

allowances, intelligence and confidential expenses which are covered by

separate appropriations.

Review of disbursements under these accounts, however, revealed that in

CY 2006 alone, P163,022,419.68 were used for expenses not properly

chargeable therein and should have been covered by separate appropriations.

The expenses which could not be classified as miscellaneous accounts and

should be covered by separate appropriations follow:

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JUDICIOUS SPENDING

Charged to

Nature of Expense 883 884 Amount

Allowance/overtime pay of staff of

PCSO Dial M TV program

P 84,800.00 P 84,800.00

Equipment, furniture, accessories 20,970.00 20,970.00

Communication expenses 38,187.45 38,187.45

Fuel and gasoline 469,182.77 P 3,556.90 472,739.67

Vehicle spare parts and repair service 40,155.00 3,616.13 43,771.13

Repairs and maintenance of office

facilities and equipment

44,449.30 44,449.30

Advertising expenses reclassified as

miscellaneous expenses

137,073,501.00 137,073,501.00

Horse owners prize 4,590,000.00 4,590,000.00

RATA and other employees benefits 19,655,686.38 19,655,686.38

Printing services of PCSO Ngayon

Newsletter

490,000.00 490,000.00

Print ads (Invitation to Bid) 151,478.40 151,478.40Small Town Lottery Bunting 137,000.00 137,000.00

Small Town Lottery T-shirts and

uniform for STL Project

128,800.00 128,800.00

Pest control services 46,200.00 46,200.00

Honorarium 38,836.35 38,836.35

Car insurance 4,000.00 4,000.00

Services rendered for fencing of

PCSO property

2,000.00 2,000.00

Total P 697,744.52 P162,324,675.16 P 163,022,419.68


As we said while ago there should be

distinction between the miscellaneous

expense account classified as discretionary

and extraordinary and the general

miscellaneous account which form part of

the operating budget of the office to take

care of expenses that are not covered by

any of the regular budget item that

incurred by the Office. We believe that

the expenses incurred for equipment,communication, fuel, spare parts and

repairs on emergency basis will justify the

charging of these expenses against the

discretionary fund, but we are amenable if

these expenses will be reclassified to

appropriate account in the operating

budget. With regards to expenses incurred

for advocacy program and campaign of the

office and national government, COA

PCSO auditors have reclassified the

amount of P137 million from

PCSO was already using Other

Maintenance and Operating

Expense (969) account which

includes Other Miscellaneous

Expenses as one of its subcodes to

record miscellaneous expenses

other than those specifically

classified as discretionary and

extraordinary expenses.

Moreover, most of the expensescharged against discretionary

funds have their own accounts in

the NGAS Chart of Accounts.

These accounts include

Advertising Expenses, Repair/and

Maintenance-Motor Vehicles,

Honorarium, etc.

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JUDICIOUS SPENDING


miscellaneous to advertising account in the2006 PCSO annual audit report. The rest

of the expenses were correctly charged as

miscellaneous account.

2. Meals and snacks incurred by members of the Board from January to June

2006 amounting to P671,061.23 were not properly documented. Thus,

validity of such expenditures could not be assessed. Of this amount,

P154,400.67 were spent on Saturdays and Sundays.

Under Section 4(6) of P.D. 1445, claims against government funds shall be

supported with complete documentation. Review of selected disbursement

vouchers and supporting documents revealed that of the reported

expenditures from January 1 to June 30, 2006, P671,061.23 represent

payments for meals and snacks. Further analysis revealed that these

expenses were not properly documented. The same were supported only

with invoices without indicating the purpose for which such expenses were

incurred. Thus, the validity and propriety of such payments could not be

assessed.

These expenses are covered by the following disbursements:

Name/Designation DV No. Month Amount

0206000492 January P 29,017.05

0206000632 Jan & Feb 25,873.17

0406000417 Jan, Feb, Mar. 27,521.46

0706000310 May, June 69,222.89

0806000125 May, June, July 21,233.26

Vice-Chairman &

Gen. Manager

1006000056 March, April 100,391.56

Sub-Total 273,259.39

0206000481 January 36,082.83

0306000738 Jan, Feb, Mar. 20,606.58

0306000212 Jan & Feb 40,125.16

0506000135 No date 26,525.47

0506000136 March, April 40,031.24

0506000414 March, April 9,097.04

0606000081 April, May 15,054.70

Member, Board of

Directors

0806000126 May, June 24,804.04Sub-Total 212,327.06

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JUDICIOUS SPENDING

Apparently, in view of excessive annual allocation for extraordinary andmiscellaneous expenses, substantial amount of expenditures could no longer

be documented. Of this amount, P154,400.67or23.01% were noted to have

been used by the following officials on Saturdays and Sundays which are

normally nonworking days.

Expenses Incurred on

Position

Total

Payments Sat. Sun. Total

Gen. Manager P 273,259.39 P 20,960.56 P 26,381.63 P 47,342.19

212,327.06 24,195.39 15,122.21 39,317.60

63,712.15 7,988.71 32,333.12 40,321.83

Board Members

121,762.63 11,024.75 16,394.30 27,419.05

Total P 671,061.23 P 64,169.41 P 90,231.26 P 154,400.67


With due respect to the audit team, PCSO

would like to take exception on the claim

that meals and snacks in the amount ofP0.671 million incurred by the Members

of the Board of Directors were not

documented. All expenses of this nature

are supported by official receipts (OR)

which are the main documents attached to

the voucher. Only expenses that are

minimal in amount are supported by

Reimbursement Receipt.

We believe that by the nature of their

position, being Presidential Appointees,

The team acknowledged that

disbursements were supported with

Official Receipts (ORs). These ORsalone, however, were not sufficient

to assess the propriety of

expenditures. The purposes for

which such expenses were incurred

were not disclosed therein. While

PCSO generates its own fund, such

funds being spent for various

meetings and consultations were

nonetheless government funds

which should be used only for

public purposes and be properly

Name/Designation DV No. Month Amount

0206000350 Jan. P 29,655.00

0206000362 Jan & Feb 11,538.18

Member, Board of

Directors

0806000415 April, May 22,518.97

Sub-Total 63,712.15

0602000301 Jan. 21,958.57

0604000219 Feb, March 44,868.63

Member, Board of

Directors

0605000130

March, April,

May 54,935.43

Sub-Total 121,762.63

Total P 671,061.23

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JUDICIOUS SPENDING


there is no need to ask for the purpose ofthe expense incurred for meals and snacks.

Considering that we are not dependent or

receive subsidy from the national

government and considering further that in

order to generate sufficient funds to

achieve our objective of serving the

greatest number of beneficiaries, the Board

has to conduct many meetings and

consultations with all sectors. These

meetings which include the clergy and

local officials should always be consulted

in order to avoid opposition when these

number games are introduced in their areas

of responsibilities, thus the incurrence of

such expenses. These meetings were

sometimes held on holidays.

accounted for even by PresidentialAppointees. As such, mere ORs

would not suffice. Each

disbursement should be supported

with documents sufficient to assess

its propriety and validity.

The team recognized that at times,

PCSO officials would render

services on Saturdays and Sundays.

However, it would be difficult to

assess whether such expenses were

incurred for public purpose or in the

performance of their official duties

and functions without sufficient

explanation/ documentation.

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Part V

Recommendations

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RECOMMENDATION

RECOMMENDATIONS

In order to address the noted deficiencies, the team recommends the following

measures:

Limit the allocation and disbursement of funds for extraordinary

and miscellaneous expenses by each official within the rates

prescribed under the GAA as required under COA Circular No.

2006-001;

Exercise prudence in the utilization of the funds. Ensure that

funds are utilized only for the purpose for which these were

established. Classify expenses to the appropriate accounts andrefrain from charging expenses to this account which should be

covered by separate appropriation;

Strengthen control on the disbursement of funds. Comply with

the provisions of Section 4(6), P.D. 1445. Refrain from paying

disbursements not supported with documents adequate to assess

the propriety and legality of expenses; and

Require concerned officials to submit documents for expenses

amounting to P671,061.23 to the Office of the Resident Auditor

for evaluation and post audit including disbursements duringweekends.

The team likewise advised the Resident Auditor to take appropriate actions on

excessive allocation and expenses, and on disbursements without sufficient

documentation.

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Submitted in compliance with MS/TS Office Order No. 2007-011 dated March

22, 2007.

Documents

ouok