CHAPTER I

OVERVIEW ON FISCAL RESPONSIBILITY

Chapter Overview

In this Chapter, the Local Government Executives are provided with the laws, rules
and regulations governing fiscal responsibility. The responsibility, accountability and
liability of the Head of the Agency and the Accountable Officers are discussed.

Learning Objectives

 Understand the legal basis on fiscal responsibility and the declaration of the policy
of the state pertaining to all government resources.
 Differentiate responsibility, accountability, and liability over government funds and
properties.
 Learn about the responsibilities, accountabilities, and liabilities of the head of the
agency and the accountable officers.

Legal Basis

Section 1, Article XI of the 1987 Philippine Constitution provides:

“A Public Office is a public trust. Public officials and employees must at all times
be accountable to the people, serve them with utmost responsibility, integrity, loyalty
and efficiency, act with patriotism and justice and lead modest lives.”

Declaration of Policy.

Section 2, Government Auditing Code of the Philippines (P.D. 1445) provides:

“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
safeguarded 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.”

This declaration articulates the concern of the state for the safekeeping of the
people’s treasure, which in real sense lies at the very root of government auditing.

This state policy focuses on how the resources of government shall be handled by
those given the public trust to manage, spend, or use such resources. The first requirement
is compliance with laws and regulations. The second is to safeguard it against loss or

1
wastage, to protect the interest of the government, the public officials being expected to act
always in the public interest. The third is a result-oriented expectation.

In the evaluation of programs of government, it should be ultimately asked whether

the implementing entity or officials concerned managed or utilized its resources in an
economical and efficient manner and whether the desired goals or results were effectively
achieved.

RESPONSIBILITY

Responsibility refers to -

 Accountability for the achievement of goals, the efficient use of resources, and the
adherence to organizational plans, rules and procedures.
 The acceptance of assigned authority. The obligation prudently to exercise
assigned or imputed authority attaching to the assigned or imputed role of an
individual or group participating in organizational activities or decisions.
 It is the obligation of subordinates to their superiors for performing the duties of
their positions.
 The term “responsibility” as used in the context of the law refers to the state of
being answerable for the discharge of a duty.

Responsibility of the Head of Agency

The Head of the Agency is the highest official in any government agency.

The head of any agency of the government is immediately and primarily

responsible for all government funds and property pertaining to his agency (Sec. 102(1),
PD 1445).

The primary responsibility of the head of agency is -

1. To develop and install the internal control structure of the agency to include the
internal control environment, accounting systems and procedures.

2. To maintain the internal control environment in order to safeguard the assets,

produce reliable accounting data and promote operational efficiency and
effectiveness.

This responsibility is lodged squarely on the shoulders of the local chief executive.
This refers more to the administrative responsibility of the head of agency, for indeed the
management of an office is the first and foremost concern of the manager and not anybody
else. The manager has the obligation to see to it that the laws and regulations are faithfully
executed and that resources are protected from fraud and irregularities, from
misappropriation and misdirection, from extravagant and unnecessary expenditures, from
2
losses, wastage and excessive expenses. This responsibility is to be shared by all those
exercising authority over fiscal affairs, transactions and operations of the government
agency.

Moreover, in line with the principles of fiscal responsibility, the head of the agency,
who is primarily responsible for all government funds and property pertaining to his
agency, shall ensure that:

1. The required financial and other reports and statements are submitted by the
concerned agency officials in such form and within the period prescribed by COA;

2. Appropriate action are taken on the deficiencies noted as contained in the Audit
Observation Memorandum (AOM), Notice of Suspension (NS), Notice of
Disallowance (ND), Notice of Charge (NC), and Annual Audit Report (AAR);

3. The requirements of transactions suspended in audit are complied with; and

4. The settlement of disallowances and charges are made within the prescribed period.

The agency head shall not approve any clearance from money and property
accountabilities in favor of any employee, unless all suspensions, disallowances and
charges are first settled; otherwise, he shall be jointly and severally liable with the
employee concerned.

The head of the agency shall initiate the necessary administrative and/or criminal
charges in case of unjustified failure/refusal to effect compliance with the above
requirements by subordinate officials. Gross negligence in disciplining subordinates who
are the subject of repeated adverse audit findings shall subject the officials concerned to
disciplinary action by the proper authorities, as the evidence may warrant.

Responsibility of the Accountable Officer

An accountable officer is the person who by reason of his office or duty ought to be
or deemed to be in possession or custody of government funds or property.

Fiscal responsibility shall be shared by all those exercising authority over the
financial affairs, transactions, and operations of the local government units (Sec. 305(l),
RA 7160).

Persons entrusted with the possession or custody of the funds or property under the
agency head shall be immediately responsible to him without prejudice to the liability of
either party to the government (Sec. 102(2), PD 1445).

Therefore, officials entrusted with the possession or custody of government funds

and/or property, such as the cashier, treasurer, collecting officer, disbursing officer, and
3
property officer under the agency head, shall be immediately responsible to him without
prejudice to the liability of either party to the government.

Responsibility for Proper Use and Care of Government Property - The person in
actual possession of government property or entrusted with its custody and control shall be
responsible for its proper use and care and shall exercise due diligence in the utilization
and safekeeping thereof (Sec. 376, RA 7160).

ACCOUNTABILITY

 Accountability is defined as holding people answerable to someone for doing

specific things, according to specific plans and timetables to accomplish tangible
performance results.
 Accountability is the requirement that decision makers justify their use of power
and demonstrate that it has been used appropriately.
 It is a person’s obligation to carry out responsibilities and be answerable for
decision and activities.
 Accountability refers to the answerability of every officer whose duties permit or
require the possession or custody of government funds or property and who shall
be accountable therefor and for the safekeeping thereof in conformity with law.

Accountability and Public Confidence

The fabric of confidence that binds the governed to their government relies on the
kind of men and the manner they administer government. The confidence of the people in
the public officials who serve or govern them largely depends on the manner public
resources are managed, expended and accounted for. This is the most critical aspect of the
public trust bestowed by the people upon those who are called upon to serve in government
and who must give a full and periodic accounting of their stewardship.

State audit shares a heavy responsibility in this process of enforcing public

accountability for it must verify, examine, evaluate, review, settle and attest to such
stewardship as “an instrument for ensuring open, regular, efficient and responsible
government.” Accountability, which is open and made public is the crux of public trust.
It is based not only on the need to establish confidence in government, but on the right of
the people to know how public funds and properties are being spent and utilized by those
entrusted to administer them.

Accountability of the Head of Agency

The fixing of the direct responsibility on the head of office has by this statement of
policy established the four facets of public accountability, which according to E. Gopez,
arises from “the pattern of responsibility running throughout the organizational structure
of the government with each public administrator being accountable to some higher level
4
executive suggests that such managerial level has a complementary and corollary
accountability.” These are:

1. Accountability for financial and other resources is a simplified version of the custodial
or stewardship concept of protecting and maintaining government property and
resources. Periodic reporting of account balances and other financial information to
appropriate authorities is the key accounting objective for this type of accountability.

2. Accountability for compliance means the accountability of agency administrators to

increasingly higher level of management for adherence to laws, administrative rules
and policies. In general, the formal accounting system should accommodate reporting
for this aspect of accountability.

3. Accountability for efficient and economical operation if fraught with measurement

problems. The traditional economic concept of efficiency as an input-output
relationship cannot be ignored. The concept of economical operations is also used in
the sense that unnecessary, excessive, extravagant, luxurious or irregular expenses are
avoided. This concept of operational accountability may be built in the formal
accounting system by the use of standard costs.

4. Accountability for program results is a relatively new field requiring measurements not
usually incorporated in the framework of the traditional accounting systems. For
instance, one cannot conclusively determine whether public good is improved by
spending more for education or for health. Nevertheless, the quantifiable objective and
verifiable accounting information from an entity is the starting point for measuring and
reporting program effectiveness.

Accountability of the Accountable Officer

Any officer of the local government unit whose duty permits or requires the
possession or custody of local government funds shall be accountable and responsible for
the safekeeping thereof in conformity with law. Other local officers who, though not
accountable by the nature of their duties, may likewise be similarly held accountable and
responsible for local government funds through their participation in the use or application
thereof (Sec. 340, RA 7160).

Every officer of any government agency whose duties permit or require the
possession or custody of government funds or property shall be accountable therefor and
for the safekeeping thereof in conformity with law. (Sec. 101(1), PD 1445).

When money and/or property is transferred from one Accountable Officer to another
or from an outgoing officer to his successor, the outgoing officer shall secure clearance
from money and property accountabilities. Outgoing officials and employees shall be
cleared from money and property accountabilities by accomplishing the Property Transfer

5
Report (formerly Invoice Receipt for Property). The transfer of accountabilities may be
due to suspension, resignation, retirement or completion of term.

Primary and Secondary Accountability for Government Property

a) Each head of department or office of a province, city, municipality or barangay

shall be primarily accountable for all government property assigned or issued to his
department or office. The person/s entrusted with the possession or custody of the
government property under the accountability of any head of department or office shall be
immediately accountable to such officer.

b) The head of a department or office primarily accountable for government

property may require any person in possession of the property or having custody and
control thereof under him to keep such records and make reports as may be necessary for
his own information and protection.

c) Buildings and other physical structures shall be under the accountability and
responsibility of the provincial or city general services officer or municipal mayor, or
punong barangay, as the case may be.

d) Every officer primarily accountable for government property shall keep a

complete record of all properties under his charge and render his accounts thereof semi-
annually to the provincial or city general services officer or the municipal mayor, or punong
barangay, as the case may be (Sec. 375, RA 7160).

CSC Resolution No. 00-1427 dated June 16, 2000 provides in part that repeated
failure to submit required reports constitute inefficiency and incompetence in the
performance of official duties. This requirement is supported by Sections 107 and 122 of
PD 1445, which provide:

Sec. 107. Time and mode of rendering account. In the absence of specific
provision of law, all accountable officers shall render their accounts, submit their vouchers,
and make deposits of money collected or held by them at such times and in such manner
as shall be prescribed in the regulations of the Commission.

Section 122. Submission of reports.

1) Whenever deemed necessary in the exigencies of the service, the Commission may
under regulations issued by it require the agency heads, chief accountants, budget officers,
cashiers, disbursing officers, administrative or personnel officers, and other responsible
officials of the various agencies to submit trial balances, physical inventory reports, current
plantilla of personnel, and such other reports as may be necessary for the exercise of its
functions.

6
2) Failure on the part of the officials concerned to submit the documents and reports
mentioned herein shall automatically cause the suspension of payment of their salaries until
they shall have complied with the requirements of the Commission.

3) No appropriation authorized in the General Appropriations Act shall be available to pay

the salary of any official or employee who violates the provisions of this section, without
prejudice to any disciplinary action that may be instituted against such official or employee.

The submission of the financial statements by the Municipal Accountant is covered

by the above-mentioned provisions as well as GAFMIS Circular Letter No. 2003-007 dated
December 19, 2003 and Section 26(2)(3), Chapter 4, Title I-B of Executive Order No. 292,
the Administrative Code of 1987.

LIABILITY

 In law, the term liability is comprehensive and embraces all obligations, which a
person is bound to discharge or meet either in law or in equity.
 Liability is a personal obligation arising from an audit disallowance/charge which
may be satisfied through payment or restitution as determined by competent
authority and in accordance with law.

Liability of the Head of Agency

The officer directing any illegal payment or disposition of the funds or property shall
be primarily liable for the loss.

Liability of the Accountable Officer

Every officer accountable for government funds shall be liable for all losses resulting
from the unlawful use, or application thereof and for all losses attributable to negligence in
the keeping of the funds (Sec. 105(2), PD 1445).

Measure of Liability of Persons Accountable for Government Property

a) The person immediately accountable for government property shall be liable for
its money value in case of illegal, improper or unauthorized use or misapplication thereof,
by himself or any other person for whose acts he may be responsible, and shall be liable
for all loss, damage, or deterioration occasioned by negligence in the keeping or use of
such property unless it is proved that he has exercised due diligence and care in the
utilization and safekeeping therefor.

b) Unless he registers his objection in writing, an accountable officer shall not be

relieved from liability by reason of his having acted under the direction of a superior officer

7
in using property with which he is chargeable; but the officer directing any illegal,
unauthorized or improper use of the property shall first be required to answer therefor.

c) In cases of loss, damage, or deterioration of government property arising from,

or attributable to, negligence in security, the head of the security agency shall be held liable
therefor (Sec. 377, RA 7160).

Public officials have three-fold liability for government funds and property
consisting of administrative liability, civil liability, and criminal liability. Administrative
liability has the maximum penalty of separation from the service. Civil liability is being
liable for pecuniary losses or damages suffered by the government. Criminal liability is
being deprived of liberty in case the law violated carries a penal sanction, such as:
malversation of public funds and property and failure to render accounts.

8
 CHAPTER II

THE BUDGET PROCESS

Chapter Overview

Budgeting is one of the management tools necessary for good governance. This
chapter aims to guide the local government executives on the basic concepts of local
governance which are directly related to budget administration. Discussions are based on
the CY 2008 Edition of Updated Operations Manual for Local Government Units published
by the Department of Budget and Management.

Learning Objectives:

1. To know what is a government budget and the purposes of budgeting;

2. To understand the planning and budgeting linkage, and how the budget of a local
government unit is harmonized with national development goals;
3. To know the budget cycle and the sequential steps involved in the budget process; and
4. To learn and appreciate the role of the Local Chief Executive in planning and budgeting
in relation to fiscal responsibility.

Definition of a Government Budget

A budget is a plan expressed in financial terms which describes the sources and uses
of funds. It is the blue print of the financial and policy decisions that the local government
will implement during a fiscal year. It is also a document for establishing control over the
direction of change and determining the future.

Annual Budget refers to the financial plan embodying the revenue and expenditures
for one (1) fiscal year.

What is government budgeting?

Government budgeting is the critical exercise of allocating revenues and borrowed

funds to attain the economic and social goals of the country/province/city/
municipality/barangay. It also entails the management of government expenditures in such
a way that will create the most economic impact from the production and delivery of goods
and services while supporting a healthy fiscal position.

Purposes of Budgeting

1. Establishes in advance the objective or end result of the budget period.

2. Provides a means of coordinating the activities of the various subdivisions and
departments.

9
 3. Provides a period-to-period basis of comparison to show whether the plan is being
realized and if not realized, indicate when changes must be made if current
objectives are to be obtained.
4. Serves as a basis of orderly management of public finances.

Article 406 of the IRR of RA No. 7160, otherwise known as the Local Government
Code of the Philippines, enumerates the following definition of terms relative to
government budgeting, namely:

a) Annual Budget refers to a financial plan embodying the estimates of income and
expenditures for one (1) fiscal year;
b) Appropriation refers to an authorization made by the ordinance directing the
payment of goods and services from local government funds under specified
conditions or for specific purposes;
c) Budget Document refers to the instruments used by the local chief executive to
present a comprehensive financial plan to the sanggunian concerned;
d) Capital outlay refers to appropriation for the purchase of goods and services, the
benefits of which extend beyond the fiscal year and which add to the assets of the
LGU concerned, including investments in public utilities such as public markets
and slaughterhouses;
e) Continuing appropriation refers to an appropriation available to support
obligation for a specific purpose or project, such as those for the construction of
physical structures or for the acquisition of real property or equipment, even when
these obligations are incurred beyond the budget year;
f) Current Operating Expenditures refer to appropriations for the purchase of
goods and services for the conduct of normal local government operations within
the fiscal year, including goods and services that will be used or consumed during
the budget year;
g) Expected Results refer to services, products, or benefits that will accrue to the
public, estimated in terms of performance, measures, or physical targets;
h) Fund refers to a sum of money or other assets convertible to cash, set aside for the
purpose of carrying out specific activities or attaining certain objectives in
accordance with special regulations, restrictions, or limitations and constitutes in
independent fiscal and accounting entity; Sec. 3(2) of PD 1445 defines
Government Funds to include public moneys of every sort and other resources
pertaining to any agency of the government;
i) Income refers to all revenues and receipts collected or received forming the gross
accretions of funds of the LGU;
j) Obligations refer to an amount committed to be paid by the LGU for any lawful
act made by an accountable officer for and in behalf of the LGU concerned;
k) Personal Services refer to appropriations for the payment of salaries, wages, and
other compensation of temporary, contractual, and casual employees of the LGU;
l) Receipts refer to income realized from the operations and activities of the LGU or
are received by the LGU in the exercise of its corporate functions, consisting of
charges for services rendered, conveniences furnished, or the price of a commodity
10
 sold, as well as loans, contributions or aids from other entities, except provisional
advances for budgetary purposes;
m) Revenues refer to income derived from the regular system of taxation enforced
under the authority of law or ordinance and as such, accrue more or less regularly
every year.

PARTICIPATIVE BUDGETING IN LOCAL GOVERNANCE

Legal Basis

Section 3(1) of Republic Act No. 7160 provides that participation of the private
sector in local governance, particularly in the delivery of basic services, shall be
encouraged to ensure the viability of local autonomy as an alternative strategy for
sustainable development.

Section 34 of the same law provides that local government units shall promote the
establishment and operation of people’s and non-governmental organizations to become
active partners in the pursuit of local autonomy.

Guidelines on Participative Budgeting

1. LGUs shall allow and practice genuine participation of people in the planning and
budgeting processes to promote and establish transparency and accountability in all
their fiscal transactions.
2. LGUs shall expand participation and involvement of people in Local Development
Councils (LDC) and Local Finance Committees (LFC) in the sharing of ideas,
information, and experiences in setting directions and allocating available resources.
3. LGUs shall apply democratic principles in group decision-making techniques arriving
at choices and preferences that are genuinely responsive to people’s needs, especially
to those of the marginalized and disadvantaged segments of society.
4. LGUs shall embody decisions arrived at in the plan and budget as products of broad-
based consultation and participation that engender people’s collective consensus,
commitment, and ownership.
5. LGUs are encourage to enhance participative planning and budgeting in different
venues such as formal institutions, digital governance and workshops.
6. LGUs shall establish priorities and allocate resources during investment programming
of PPAs as major links to budgeting. The ranked PPAs and their corresponding
resource requirements become the bases for preparing annual budget proposals.

Table 1 shows the expected results of the Budget Process to indicate the relevance
of participation and involvement of stakeholders in local government budgeting.
Budget Process Expected Results
Projections of Income and Expenditures  Income and Expenditure Levels
and Establishment of Priorities  Ranked Development PPAs

11
 AIP Preparation  Approved AIP for the Budget Year by
the Local Sanggunian

Budget Preparation  Executive Budget

Budget Authorization  Approved Appropriation Ordinance

Budget Review  Review Action

Budget Execution  PPAs Implemented and Major Final

Outputs Produced/Delivered
Budget Accountability  LGU Performance Measured

Role of Stakeholders in the Budget Process

Budget Preparation
Step 1 Stakeholders, such as civil society group, NGOs, the private sector, etc.
as observers of the LFC, shall represent the aggregate needs of the
people, particularly the weak and the disadvantaged.
Step 2 Stakeholders may also provide inputs to department heads of line
agencies that could help these decision makers in the accurate
determination of targets or in the identification of beneficiaries in the
delivery of agency services.
Budget Authorization
Step 3 Stakeholders may participate in the Sanggunian deliberation of the
Executive Budget during public committee hearings and consultation
with specific sector groups affected by the budget.
Step 4 Stakeholders may clarify or ask questions on changes in the executive
budget not found in the approved AIP.
Budget Review

Step 5 Stakeholders may relay information to the reviewing authority on the

consistency or inconsistency of the budget with the AIP.

Budget Execution
Step 6 Stakeholders may assist implementers in advocating the benefits of the
PPAs to prospective clients.
Step 7 Stakeholders may also assist the LGU in providing for the service gaps
due to fund constraint.
Step 8 Stakeholders shall see to it that the standards of service delivery, in terms
of quality and proper specifications, are observed by the LGU.
Budget Accountability

Step 9 Stakeholders shall serve as monitors during PPA implementation to

ensure that services and goods are properly delivered to target
beneficiaries.

12
 PLAN – BUDGET LINKAGE

Legal Basis

Local budget plans and goals shall, as far as practicable, be harmonized with national
development plans, goals and strategies in order to optimize the utilization of resources
and to avoid duplication in the use of fiscal and physical resources (Sec.305 (h), RA 7160).

Local budgets shall operationalize approved local development plans (Sec. 305(i),
RA 7160). Local governments shall formulate sound financial plans, and the local budgets
shall be based on functions, projects and activities in terms of expected results (Section
305 (g), R.A. No. 7160).

Budgets of LGUs shall include a brief description of the functions, projects and
activities for the ensuing fiscal year; expected results for each function, project and activity;
and the nature of work to be performed, including the objects of expenditure for each
function, project and activity (Section 317 (b) (3), R.A. No. 7160).

Harmonizing Plans with the Budget

The purpose of harmonizing local plans with budgets is clearly provided in DBM-
NEDA-DILG-DOF JMC No. 1, Series of 2007 dated March 8, 2007. It will set a common
direction in the implementation and achievement of local endeavors in harmony with
national development goals and objectives. It will strengthen the interface and
complementation between LGUs, national government agencies (NGAs), among all LGUs
in all levels (vertically and horizontally), and funding institutions and donor agencies in
the planning, investment programming, budgeting and expenditure management, and
revenue administration.

The harmonization of local plans with national development goals is essential in

achieving efficiency and effectiveness in the allocation of resources. It starts with the
preparation of a development plan at least for six (6) years for provinces.

1. Development Plan for Provinces and Highly Urbanized Cities

The Provincial Development and Physical Framework Plan (PDPFP) is a six-year plan
that merges the traditionally separate provincial physical framework plan and
provincial development plan to address the disconnection between spatial and sectoral
factors and between medium-and long-term concerns. The PDPFP contains the long-
term vision of the province, and identifies development goals, strategies,
objectives/targets and corresponding PPAs which serve as primary inputs to provincial
investment programming and subsequent budgeting and plan implementation (DBM-
NEDA-DILG-DOF JMC No. 1, Series of 2007).

13
2. Development Plan for Cities and Municipalities

The long-term development plan for cities and municipalities is called the
Comprehensive Development Plan (CDP). The CDP is a multi-sectoral plan
formulated at the city/municipal level embodying the vision, sectoral goals, objectives,
development strategies, and policies within the term of LGU officials and the medium-
term. It contains corresponding PPAs which serve as primary inputs to investment
programming and subsequent budgeting and implementation of projects for the growth
and development of local government territories (DBM-NEDA-DILG-DOF JMC No.
1, series of 2007).

3. Local Development Investment Program

Sec. 305(1) of R.A. No. 7160 explicitly provides that local budgets shall operationalize
approved local development plans. This implies that the preparation of local plans shall
precede the preparation of local budgets. On the basis, therefore, of the approved
PDPFP for provinces and CDP for cities and municipalities, a programming document
called the Local Development Investment Program (LDIP) shall be prepared.
Investment programming covers 3 to 6 years. The LDIP at the provincial level is a six-
year rolling program coinciding with the time frame of the PDPFP.

The LDIP is a basic document linking the local plan to the budget. It contains a
prioritized list of PPAs which are derived from the CDP in the case of cities and
municipalities, and the PDPFP in the case of the provinces, matched with financing
resources, and to be implemented annually within a three to six-year period. The first
three (3) years of the LDIP shall be firmed up along with the priorities of the incumbent
LCEs (DBM-NEDA-DILG-DOF JMC No. 1, series of 2007).

4. Annual Investment Program

Another document to be submitted by the LDC to the LFC as mandated under Art. 410
of the IRR of R.A. No. 7160 is the AIP prepared and approved during the fiscal year
before budget preparation.
The AIP refers to the annual slice of the LDIP which constitutes the total resource
requirements for all PPAs, consisting of the annual capital expenditure and regular
operating requirements of the LGU.

The AIP, therefore, is the yearly program of expenditures both for capital and current
operating requirements of the LGU that will serve as basis for the preparation of Annual
and Supplemental Budgets. As a document reflecting the total resource requirements
for the year, the AIP is a document that reinforces plan-budget linkage.

14
 Schematic diagram illustrating the plan-budget linkage:

PLAN
DEVELOPMENT
PLANNING
PDPFP/CDP
(6 – 15 Years)

(3 – 6 Years)
LDIP

INVESTMENT
PROGRAMMING

(1 Year)
AIP

LINK

ANNUAL BUDGET
AND
SUPPLEMENTAL
BUDGET
BUDGETING
BUDGET (1 Year)

Plan-Budget Link Model

THE PLAN-BUDGET CYCLE

1. The planning-budgeting cycle is a continuous process of improving and evolving a

systematic and local procedure of validating data from the field to come up with an
accurate database necessary for selecting the best alternative choice in planning and
decision-making.

2. The plan needs to be linked to the budget. LGU plans and budget must see to it that
development issues are clearly identified within the context of improving general

15
 welfare and basic services delivery. PPAs to be implemented must be consistent with
the plan objectives. They must determine the extent to which these objectives can be
achieved on the basis of available resources.
3. Flexibility in adjusting local plans and budgets with national goals is an important
ingredient in planning but must be matched with the financial capacity and resource
endowment of LGUs.

4. LGUs shall determine what MFOs or goods and services will impact on the long-term
goals. They shall evaluate what goods and services are within their capability to
produce. Priority projects and activities of LGUs whose funding/technical
requirements are beyond their capacity to implement may be proposed to a higher-level
LGU or to the NGA concerned or to civil society for possible assistance.

5. The annual projected output targets of PPAs to be implemented during the budget year
as reflected in the AIP shall be synchronized with outputs of NGAs in the regions,
provinces, cities and municipalities to determine their synergy and impact on society.

The Plan-Budget Cycle

Develop-
ment
Planning
(6-15 yrs.)

Invest-
Budget ment
Program-
Account-
ming (3-
ability Current 5 yrs.)
Year
(Jan.-June)
Budget
Budget Year
(Jan.-Dec.) AIP
Execution
(1 yr.)

Current
Year
(July-Dec.) Budget
Pre-
Budget paration
Review
Budget
Author-
ization

16
AIP Preparation - Key Players:

1. Local Development Council – The LDC, through its technical secretariat, the
PPDO/CPDO/MPDO for provinces, cities and municipalities respectively shall:
 align development plan with current development issues;
 determine resource requirements of PPAs for basic services delivery; and
 prepare draft AIP Summary Form and present to the LCE for comment/review.
2. Local Planning and Development Coordinator – The LPDC shall input the annual
component of the Capital Expenditure (CapEx) into the AIP Summary Form.
3. Local Budget Officer - The LBO shall integrate the CapEx together with the PS,
MOOE, and other CO into the total resource AIP to be reflected in the AIP Summary
Form.
4. Local Chief Executive – The LCE shall present the AIP Summary Form to LDC for
deliberation and concurs with the AIP Summary Form as agreed upon by the LDC.
5. Sanggunian - The Sanggunian shall approve the AIP.
6. NGOs, Civil Society Groups and Other Stakeholders – NGOs, civil society groups and
other stakeholders shall serve as informants on major development issues in the LGU.
They shall provide relevant information in the identification and prioritization of PPAs
for inclusion in the AIP.

Program, Project and Activity Structure

A PPA structure consists of programs, projects and activities designed to achieve specific
objectives or MFOs with corresponding Performance Indicators.

A program is a homogenous group of activities necessary for the performance of a major

purpose for which the government agency is established, for the basic maintenance of the
agency’s administrative operations, or for the provision of staff support to the agency’s
administrative operations or the agency’s line functions.

A project is a special undertaking to be carried out within a definite time frame which is
intended to result in some pre-determined measure of goods and services.

An activity is a work process designed to contribute to the accomplishment of specific

objectives and the implementation of a program, sub-program, or project.

PPA Performance

The PPA structure is the primary link between the plan and budget. It should be
understood, however, that the strength or weakness of this linkage depends on the
efficiency, effectiveness, and quality of service delivery.

The review of PPA structures shall ensure that there is a clear policy statement of
objectives that define the purpose of the program and the expected results to be used as
basis in assessing performance. Identification of PPAs constitutes the strategy for the
17
delivery of MFOs. In this step, it is basic that the programs, projects and activities shall be
established as directly connected and aligned to MFOs to determine which are directly
relevant and contributory to MFO delivery. With budget allocated at the PPA level,
expenditure may be integrated at the MFO targets.

Major Final Output and Performance Indicators

Each program, project, activity structure shall produce an identifiable major final
output and measures/indicators or performance for easy comparison as to consistency and
non-duplication in the use of fiscal and physical resources. A major final output (MFO) is
defined as the goods and services that an agency or LGU is mandated to deliver to external
clients or constituents through the implementation of programs, projects, and activities.

A performance indicator is an explicit measure used to determine performance; a

signal that reveals progress towards objectives; a means of measuring what actually
happened against what has been planned in terms of quality, quantity and timeliness. Well
defined indicators are neutral, valid, reliable, simple, useful and affordable to use.

Performance Indicators should have the SMART attributes:

Specific (results the department/office is trying to achieve)

Measurable (stated in quantifiable terms)
Achievable (realistic or capable of being achieved)
Relevant (logically related to the MFO)
Time-bound (with specific target dates)

Performance Indicators should have the CREAM attributes:

Clear, precise, unambiguous

Relevant, appropriate, timely
Economical, available at reasonable cost
Adequate, sufficient for performance assessment
Monitorable, or can be independently measured

THE UPDATED BUDGET PROCESS

The budget process among LGUs consists of five (5) phases. These are:

(1) Budget Preparation

(2) Budget Authorization
(3) Budget Review
(4) Budget Execution; and
(5) Budget Accountability

18
 All of these phases are shown as a continuing and sequential process. The whole
process follows 20 sequential steps from budget preparation to budget accountability.

The Budget Cycle

BUDGET
PREPARATION
Steps 1-6

BUDGET
ACCOUNTABILITY BUDGET
Steps 19-20 AUTHORIZATION
Steps 7-9

BUDGET
BUDGET REVIEW
EXECUTION Steps
Steps 10-12
13-18

I. BUDGET PREPARATION

The budget preparation is the first phase in the local budget process. It involves cost
estimation per PPAs, preparation of budget proposals, executive review of budget
proposals, and preparation of the Budget Message, Local Expenditure Program (LEP),
and the Budget of Expenditures and Sources of Financing (BESF).

Legal Basis. The local chief executive prepares the budget for the ensuing fiscal year in
accordance with the provisions of Section 318- Chapter 3, Article One, Title Five, Book
11 of R.A. 7160.

19
 Budget Preparation Flow Chart

ACTIVITY INDICATIVE OFFICIALS

SCHEDULE RESPONSIBLE
1
ISSUE BUDGET CALL June 5 LCE

LCE/LFC/DEPT.
CONDUCT BUDGET FORUM July 5 HEADS

2
PREPARE AND SUBMIT July 15 Dept. Heads
BUDGET PROPOSALS

REVIEW AND LBO

CONSOLIDATE BUDGET
PROPOSALS

3
CONDUCT BUDGET August 15 LCE/LFC
HEARING

4
PREPARE THE LEP Sept. 30 LCE/LFC

5
PREPARE BUDGET Oct. 10 LCE/LFC
MESSAGE AND BESF

6
SUBMIT EXECUTIVE Oct. 16 LCE
BUDGET TO THE
SANGGUNIAN

There are six (6) steps in Budget Preparation, namely:

Step 1. Issue the Budget Call

20
 The Budget Call signals the start of the budget preparation phase. This executive
directive is prepared based on the approved AIP.

A Budget call is a directive from the LCE that contains the general objectives,
specific sectoral objectives, policy decisions, etc. prioritized PPAs by sector/office
as reflected in the AIP. It provides specific guidelines in the preparation of
individual budget proposals in terms of:
 Expenditure ceilings by sector/office
 Allocation scheme by MFO and PPA
 Budget calendar and budget preparation form
 Other administrative guidelines.
This directive shall be issued between June 15 and June 30 to allow more time for
the Department Heads to formulate reasonable proposals for the budget year.

Step 2. Prepare and Submit Budget Proposals

The budget proposals are prepared by the Department Heads and submitted to the
LBO for review and consolidation. There are two (2) factors to consider in
preparing the budget proposal for the budget year:
 The objectives and expected outputs; and
 The cost estimates within budgetary ceilings.

Step 3. Conduct Budget Hearings and Evaluate Budget Proposals.

 Conduct technical budget hearings

 Evaluate budget proposals

Step 4. Prepare the LEP (Local Expenditure Program)

The first document of the executive budget to be prepared is the LEP.

Legal basis. Local government budgets shall primarily consist of two (2) parts,
namely, the estimates of income; and the proposed appropriations covering the
current operating expenditures and capital outlays (Section 314(a), R.A. 7160).

Guidelines in the preparation of the LEP:

1. The first part of the LEP is the receipts program. The income structure shall
cover the immediate past year, the current year, and the budget year.
2. The second part of the LEP is the expenditure program. The details of the
expenditure program shall be presented by sector, department or office,
special purpose appropriations, PPA and expense class for a three year
period (past year, current year, budget year)
3. Special purpose appropriations shall be provided for the following
purposes:
21
  Appropriation for Development Projects – 20% of IRA (Section 287,
R.A. No. 7160)
 Appropriation for Unforeseen Expenditures arising from the
Occurrence of Calamities – 5% of regular income (Section 324, R.A.
No. 7160)
 Appropriation for Debt Service – Not exceeding 20% of the regular
income (Sec. 324 (b), R.A. No. 7160)
 Budgetary Support to Local Economic Enterprises/Public Utilities
(Section 313, R.A. No. 7160)
 Aid to Barangays (Sections 324 ©, R.A. No. 7160)
 Other authorized special purpose appropriations
4. The fourth part of the LEP, the General Provisions, includes guidelines on
receipts, income and expenditure policies.
5. The last part of the LEP is a Summary of the Fiscal Year New
Appropriations by Department/Office and Special Purpose Appropriations.
It reflects the total proposed budget for the budget year.

Step 5. Prepare the Budget Message and Budget of Expenditures and

Sources of Financing.

Legal basis. The budget document shall contain “A budget message of the local
chief executive set forth in brief the significance of the executive budget,
particularly in relation to the approved local development plan. (Section 314 (b),
R.A. No. 7160).

A budget message is a summary of the proposed executive budget prepared by

the LCE highlighting the following:

 Previous Years’ fiscal performance

 Development Goals and Objectives
 Policy Thrusts
 Priority PPAs
 Estimates of Income and Sources thereof
 Major Items in the Expenditure Program
 Expected Outputs

Step 6. Submit Executive Budget to the Sanggunian not later than the 16 th of
October of the current year (Section 318, R.A. No. 7160).

II. BUDGET AUTHORIZATION

Budget authorization is the second phase in the local budget process. This legislative
function of enacting the ordinance authorizing the budget is in accordance with the
fundamental principle that no money shall be paid out of the local treasury except in
22
 pursuance of an Appropriation Ordinance or law. This phase starts from the time the
Sanggunian receives the executive budget submitted by the LCE and ends with the
enactment of the Appropriation Ordinance and approval thereof by the LCE.

Legal Basis

On or before the end of the current fiscal year, the Sanggunian concerned shall enact,
through an ordinance, the annual budget of the local government unit for the ensuing
fiscal year on the basis of the estimates of income and expenditures submitted by the
local chief executive (Section 319, R.A. No. 7160).

The Budget Authorization Flow Chart

Heads of Dept.
Local Chief Local Finance and Offices
Sanggunian
Executive Committee
Assists the
Presents the Conducts a Sanggunian in the Justify their
Executive Budget preliminary review analysis and review budget
and evaluation of of the annual and proposals
the executive budget supplemental
(Comm. on Approp. budgets.
& Finance)

Deliberates on the
budget

Authorizes the
Annual Budget

Forwards the
Appropriation
Ordinance to the
LCE (Secretary to
the Sanggunian)
Vetoes Approves
the the
Approp. Approp.
Ord. Ord.
Overrides the veto Posts the
by 2/3 vote of the Appropriation
majority of all Ordinance and
members forwards copies
thereof to the
reviewing authority
(Secretary to the
Sanggunian.

23
Steps in the Budget Authorization Phase

Step 1. Enact the Appropriation Ordinance

Section 319 of R.A. No. 7160 provides that “On or before the end of the current fiscal
year, the Sanggunian concerned shall enact, through an ordinance, the annual budget
of the local government unit for the ensuing fiscal year on the basis of the estimates
of income and expenditures submitted by the local chief executive.

Step 2. Approve the Appropriation Ordinance

The Appropriation Ordinance enacted by the Sanggunian shall be presented to the LCE
for approval, in which case, he shall affix his signature on every page thereof.
Otherwise, he shall veto it and return the same with his objections to the Sanggunian,
which may proceed to reconsider the same.

Step 3. Submit the Appropriation Ordinance for Review

For component cities and municipalities, the Secretary to the Sanggunian

Panlungsod or Sangguniang Bayan, as the case may be, shall forward to the
Sangguniang Panlalawigan within three (3) days after approval, copies of the
approved Appropriation Ordinance for review in accordance with Sec. 327 of R.A.
No. 7160.

Changes in the Annual Budget

Supplemental Budget

General Rule
All budgetary proposals shall be included and considered in the budget preparation
process. After the LCE shall have submitted the executive budget to the Sanggunian,
no ordinance providing for a supplemental budget shall be enacted (Section 321, R.A.
No. 7160).

Exceptions

Changes in the annual budget may be done through supplemental budgets under the
following circumstances (Article 417, IRR of R.A. No. 7160 as amended by A.O. No.
47):

 When supported by funds actually available as certified by the local

treasurer
 If covered by new revenue sources
 In times of public calamity
24
Effectivity of Budgets

 The ordinance enacting the annual budget shall take effect at the beginning of the
ensuing calendar year (Section 320, R.A. No. 7160).
 An ordinance enacting a supplemental budget shall take effect upon its approval or
on the date fixed therein (Section 320, R.A. No. 7160)
 Posting requirements and effectivity of Appropriation Ordinance (Section 59, R.A.
No. 7160: Article 113, IRR of R.A. No. 7160).

 Unless otherwise stated in the ordinance or resolution approving the local

development plan and public investment program, the same shall take effect
after 10 days from the date a copy thereof is posted on the bulletin board at the
entrance of the provincial capitol or city or municipal hall, as the case may be,
and in at least two (2) other conspicuous places in the LGU.

III. BUDGET REVIEW PHASE

Budget Review is the third phase in the local budget process. Its primary purpose is
to determine whether the ordinance has complied with the budgetary requirements and
general limitations set forth in the Local Government Code of 1991 as well as
provisions of other applicable laws. It starts from the time the reviewing authority
receives the Appropriation Ordinance for review and ends with the issuance of the
review action.

Legal Basis

The Department of Budget and Management shall review ordinances authorizing the
annual or supplemental appropriations of provinces, highly-urbanized cities,
independent component cities, and municipalities within the Metropolitan Manila
Area in accordance with Section 326 of R.A. No. 7160.

The Sangguniang Panlalawigan shall review the ordinance authorizing annual or

supplemental appropriations of component cities and municipalities in the same
manner and within the same period prescribed for the review of other ordinances
(Section 327, R.A. No. 7160).

The Appropriation Ordinance of provinces, highly-urbanized cities, independent

component cities, component cities and municipalities shall be reviewed within 90
days from receipt of copies of such ordinances (Section 327, R.A. 7160).

25
 Budget Review Flow Chart

Sec. to the Reviewing Reviewing Local Chief

Sanggunian
Sanggunian Authority Authority Executive
Checks the
Submits the Approp.
Approp. Ordinance and
Ordinance Budgetary
Requirements
Prepares LBR
Form Nos. 1A
and 1B
Reviews the
Appropriation
Ordinance
1. Checks
compliance w/
budgetary
requirement
and general
limitations
2. Checks
compliance
with AIP
3. Checks for
items that are
prohibited by
law.
Issues the
Review Action
1. Prepares Advises the
LBR Form Sanggunian on
No. 2 the Budget Acts on the
2. Prepares Review Action Budget Review
Review Action Action

26
 Steps in the Budget Review Phase

Step 1. Check the Appropriation Ordinance with the Appended Budget Documents.
Step 2. Review the Appropriation Ordinance

Using the BESF, the reviewing officer shall validate the provisions of the Appropriation
Ordinance for compliance with the budgetary requirements and general limitations.

Budgetary Requirements and General Limitations on Local Budget Set in RA 7160

Legal Basis Details of Provisions

RA 7160, Section Each P/C/M shall appropriate in its Annual Budget no less than
287; DBM & DILG 20% of the IRA for Development Projects. The 20%
Joint Circ. No. 1, s Development Fund is a Special Account in the GF, and is
2005 dated 20 maintained with separate subsidiary ledgers for easier preparation
September 2005 of the financial statements.
RA 7160, Section 294 At least 80% of the proceeds from the development and
utilization of hydrothermal, geothermal and other sources of
energy in the P/C/M/B shall be applied solely to lower the cost of
electricity in the LGU where such source of energy is located.
RA 7160, Section 324. The aggregate amount appropriated shall not exceed the estimates
Budgetary requirements of income;

Full provision shall be made for all statutory and contractual

obligations of the LGU;

The appropriations for debt service shall not exceed twenty

percent (20%) of the regular income of the LGU concerned;

In the budget of provinces, cities, and municipalities (P/C/M), aid

to component barangays shall not be less than One thousand
pesos (P1,000.00) per barangay; and

Five percent (5%) of the estimated revenue from regular sources

shall be set aside as an annual lump sum appropriation for
calamities.
RA 7160, Section 325. The annual appropriations for Personal Services shall not exceed
General Limitations forty-five percent (45%) in the case of first to third class P/C/M,
and fifty- five percent (55%) in the case of fourth class or lower,
of the total annual income from regular sources realized in the
next preceding fiscal year.

The annual Discretionary Fund of the LCE shall not exceed two
percent (2%) of the actual receipts derived from basic real
property tax in the next preceding calendar year.
27
RA 10121 Phil. Disaster Not less than 5% of estimated revenue from regular sources shall
Risk Reduction & be set aside as Local Disaster Risk Reduction & Management
Management (PDRRM) Fund (LDRRMF), of which 30% shall be allocated as Quick
Act of 2010 Response Fund, and the remaining 70% as Special Trust Fund.

Step 3. Issue the Review Action

Review Actions

After the evaluation of the Appropriation Ordinance and its supporting documents, the
reviewing authority may take any of the following actions:

1. Declare the Appropriation Ordinance operative in its entirety.

- It shall continue to be in full force and effect.
2. Declare the Appropriation Ordinance operative in its entirety, subject to
conditions.
- Those items not subject to conditions shall continue to be in full force and
effect. The items of appropriation subject to conditions shall take effect only
upon compliance with the conditions imposed.

3. Declare the Appropriation Ordinance inoperative in its entirety.

-It loses force and effect.
-The LGU concerned shall operate under a reenacted budget effective
immediately until such time that the new ordinance authorizing the annual
appropriations is enacted and approved.
-The local treasurer shall not make further disbursements of funds from any of
the items of appropriation declared inoperative, disallowed, or reduced (Section
327, R.A. No. 7160).
-The budget shall be revised to comply with the provisions of law and
authorized through another Appropriation Ordinance which shall then be
submitted to the reviewing authority.
4. Declare the Appropriation Ordinance inoperative in part.
-The local treasurer shall not make further disbursements of funds from any of
the items of appropriation declared inoperative, disallowed, or reduced (Section
327, R.A. No. 7160).
-Only the items of appropriation that have not been declared inoperative, or
have not been disallowed, shall continue to be in full force and effect.

IV. BUDGET EXECUTION PHASE

Budget Execution is the fourth phase in the local budget process. It involves the
release of allotments and the certification of available appropriations and cash; the
recording of actual obligations and disbursement of funds for authorized PPAs to
produce goods and services that will benefit the general public. A critical aspect of
28
this phase is the collection of funds, such that disbursements do not exceed
appropriations. While seemingly a separate activity, the collection and/or receipt of
revenues are considered an integral part of budget execution.

Legal Basis

The financial affairs, transactions and operations of local government units shall be
governed by the following fundamental principles:

a. No money shall be paid out of the local treasury except in pursuance of an

appropriations ordinance or law;
b. Local government funds and monies shall be spent solely for public purposes;
c. Local revenue is generated only from sources expressly authorized by law or
ordinance, and collection thereof shall at all times be acknowledged properly;
d. All monies officially received by a local government officer in any capacity or on
any occasion shall be accounted for as local funds, unless otherwise provided by
law;
e. Trust funds in the local treasury shall not be paid out except in fulfillment of the
purpose for which the trust was created or the funds received;
f. Every officer of the local government unit whose duties permit or require the
possession or custody of local funds shall be properly bonded, and such officer
shall be accountable and responsible for said funds and for the safekeeping thereof
in conformity with the provisions of law;
g. Local governments shall formulate sound financial plans, and the local budgets
shall be based on functions, activities, and projects in terms of expected
results.(Section 305, R.A. No. 7160)

The ordinance enacting the annual budget shall take effect at the beginning of the
ensuing calendar year. An ordinance enacting a supplemental budget, however, shall
take effect upon its approval or on the date fixed therein. The responsibility for the
execution of the annual and supplemental budget shall be vested primarily in the Local
Chief Executive concerned (Section 320, R.A. No. 7160).

Key Players in the Budget Execution

1. Local Chief Executive – shall be responsible for the execution of the Annual
Budget or General Appropriations Ordinance and all subsequent supplemental
budgets (Sec. 320, R.A. NO. 7160).
2. Vice Governor/Vice Mayor – shall sign all warrants drawn on the
provincial/city/municipality; treasury for all expenditures appropriated for the
operations of the Sangguniang Panlalawigan/Panlungsod/Bayan (Sections 466,
456, and 445, R.A. 7160).
3. Local Budget Officer – shall be responsible for the preparation of release
documents (Local Budget Matrix, Allotment Release Order) and the
certification on the availability of appropriations for obligation requests; as well
29
 as the preparation and submission of quarterly and annual reports or statement
of allotments, obligations and balances. The LBO also coordinates with the
planning and development coordinator, treasurer, and accountant in the
execution of the budget (Section 475, R.A. No. 7160).
4. Local Treasurer – shall be responsible for the custody and proper management
of the funds of the LGU concerned. He takes charge of the collection of
revenues and disbursement of local government funds and such other funds the
custody of which may be entrusted to him by law or other competent authority
and the maintenance and updating of the tax information system of the LGU.
The Local Treasurer also certifies as to the availability of funds prior to any
disbursements (Section 470, R.A. 7160).
5. Local Accountant – shall be responsible for the maintenance of the validity,
reliability and propriety of all financial transactions of the LGU concerned; the
installation and maintenance of the preparation and submission of financial
statements to the local chief executive and to the Sanggunian concerned and
maintenance of registries to control the appropriations, allotments and
obligations for all authorized expenditures (Compiler’s Note: Under the present
system, it is the LBO who is in-charge of maintaining/updating the budget
registries). The local accountant also reviews supporting documents before
preparation of vouchers to determine completeness of requirements; and
controls the books of accounts (Section 474, R.A. No. 7160).
6. Local Planning and Development Coordinator – The LPDC shall be
responsible for the formulation of integrated economic, social, physical, and
other development plans and policies for consideration of the local development
council; the monitoring and evaluation of the implementation of the different
development programs, projects and activities in the LGU concerned, in
accordance with the approved development plan; the analysis of income and
expenditure patterns; and the formulation of fiscal plans and policies for
consideration of the local finance committee (Section 476, R.A. 7160).
7. Department Head – shall be responsible for the preparation of financial and
physical performance targets and obligation requests for authorized programs,
projects and activities for the department/office concerned; implementation of
programs, projects and activities to produce desired results/goods and services;
monitoring and evaluation of actual performance of PPAs to provide corrective
actions for negative deviations.

The Budget Execution Process

Record the approved budget in the Registries

(LBO)

Release the Allotment (LBM/ARO)

(LBO)

30
 Prepare the Cash Program and Financial/Physical
Performance Targets
(Dept. Head)

Obligate and Disburse Funds for the Implementation

of Programs/Project/Activities
(LBO)

Adjust Cash Programs, Financial and Physical

Performance Targets for Shortages and Overages
(LFC/Local Treasurer)

Provide Corrective Actions for Negative Deviations

(Dept. Head)

Budgetary Accounts in Budget Execution

The budgetary accounts maintained during the budget execution process are composed
of appropriations, allotments and obligations.

 Appropriation: an authorization made by ordinance, directing the payment

of goods and services from local government funds under specified conditions
or purposes.
 Allotment: the authorization issued by the Local Chief Executive (LCE) to a
Department/Office of the LGU which allows it to incur obligations for
specified amounts within its appropriations.
 Obligation: the specific amount within the allotment which is committed to be
paid by the LGU for any lawful expenditure made by an accountable officer
for and in behalf of the LGU concerned.

Steps in the Budget Execution Phase

Step 1. Record the approved appropriations per Appropriation Ordinance in

the appropriate registry

Registries to be maintained:
 Registry of Appropriations, Allotments and Obligations Captial
Outlays (RAAOCO)

31
  Registry of Appropriations, Allotments and Obligations
Maintenance and Other Operating Expenses (RAAOMOOE)
 Registry of Appropriations, Allotments and Obligations Personal
Services (RAAOPS)
 Registry of Appropriations, Allotments and Obligations Financial
Expenses (RAAOFE)

Guidelines to be observed in Step 1:

Budgetary reserves, which are stand-by appropriations ready for release in

case of calamites, as well as supplemental budgets, are similarly recorded
in the RAAO.

If the Sanggunian fails to enact the Ordinance at the beginning of the fiscal
year, only the annual appropriation for salaries and wages of existing
positions, statutory and contractual obligations, and essential operating
expenses authorized in the annual and supplemental budgets for the
preceding year shall be deemed renacted (Section 323, R.A. No. 7160).

Said re-enacted budget shall likewise be recorded in the registries. Once

the current budget is approved, the necessary adjustments shall be made.
The system of recording in the registries shall follow the Government
Accounting Manual prescribed by the Commission on Audit pursuant to
Philippine Public Sector Accounting Standards (PPSAS).

Step 2. Release of Allotment

1. The Local Budget Matrix (LBM) is issued to effect the comprehensive release
for a particular department/office. Release of reserve amounts or amount for
later release, including appropriated amounts under the needing clearance of the
LBM shall be effected through the use of Allotment Release Order (ARO).
2. Use the following control tools in the execution of the budget;
 Cash Program and Cash Flow Analysis; and
 Financial and Physical Performance Targets.
3. Prepare the LBM and the corresponding Cash Program for each
department/office. The LBM contains the released allotment or fund that will
finance the implementation of the PPAs and the Cash Program ensures that
there is available cash to be disbursed in the payment of actual obligations.
4. Issue the LBM to each department/office that will give the department head the
comprehensive authority to incur obligations that will not exceed the released
amount. Include the LBM reserve imposition, earmarking of funds for
clearance and withholding of funds for later release to provie safeguards for
shortfall in the collection of anticipated revenues.
5. Include the following budgetary items in the LBM:
 By source of appropriation whether Annual or Supplemental;
32
  By fund, whether the expenditure item is classified into any of the funds
established for LGUs (GF, SEF, TF).
 By program/project or by department/office (Exec. Services-Mayor’s
Office)
 By allotment class, according to the class of the expenditure item (PS,
MOOE and CO)
 By need for clearance, whether for further clearance or authority prior
to the release of funds
6. Specify the unreleased portion of the LBM, the Needing Clearance, which can
only be released upon receipt of and compliance with certain documentary
requirements.
7. Reflect the not needing clearance in the LBM.
8. Record and provide copies of LBM releases.
9. Release LBM for Supplemental Budgets. Enacted SBs shall follow the same
process in the release of allotments. But for augmentation of deficiencies in
allotment from one object of expenditure to another within the same class for
respective offices within executive branch and Sanggunian or realignment of
savings from one expense class to another, the ARO shall be the release
document to effect the changes. The former can be done by a new ordinance or
resolution of the Sanggunian and the latter requires the submission of a
Supplemental Budget for authorization by the Sanggunian.

Step 3. Prepare the Cash Program and Summary of Financial and Physical
Performance Targets.

1. Prepare the cash program.

2. Prepare the Summary of Financial and Physical Performance Targets.
3. Prepare the detailed financial and performance targets.
4. Revise and adjust the Project Procurement Management Plan (PPMP) and
corresponding Annual Procurement Plan (APP).

Step 4. Obligate and Disburse Funds

Pursuant to the modified accrual system, obligations shall be taken up in the

registry as they are incurred. Accordingly, expenditures and obligations
incurred during the fiscal year shall be taken up in the accounts of that year.

Accounts payable shall be settled in accordance with existing budgeting,

accounting and auditing rules and regulations.

Step 5. Adjust cash program for shortages and overages.

1. Determine amounts considered as over-collection of taxes then effect

upward adjustments in the cash disbursement program to match the increase
in the cash receipts forecast.
33
 2. Identify amounts considered as under-collection of taxes and revenues. It
becomes necessary to decrease the cash disbursement program for the
remaining months to prevent the incurrence of a cash overdraft.

Step 6. Provide corrective actions for negative deviations.

The Local Finance Committee shall:

1. Compare the actual performance in both the financial and physical
accomplishments vis-à-vis the targets for the quarter.
2. If the actual financial performance is greater than the estimated cost, it
means that there was overspending beyond the available resources. This
reflects inefficiency if the actual physical performance is below the target.
This needs corrective action.
3. If the actual financial performance is lower than the estimated cost; it means
that the estimated cost was overstated and performance is ineffective if the
physical targets were not met. This also needs corrective action.

V. BUDGET ACCOUNTABILITY PHASE

Budget accountability is the last phase of the budget process. It is essentially

accounting for the performance of the LGU in terms of income/revenue generation
and resource utilization for the implementation of its PPAs for the year.

It encompasses the recording and reporting of estimated and actual income and
expenditures as well as the monitoring and evaluation of the LGU’s performance
vis-à-vis prescribed standards/policies and planned targets. Basically, it is the
evaluation of the LGU’s performance in the execution of its budget.

Two interrelated aspects of budget accountability:

1. Accounting for the budget. This is a management control technique used to

assist in controlling expenditures and tracking revenues. This is a mechanism
provided under the Local Government Code by which the LCE, the Sanggunian
and their constituents will be apprised of the status of the implementation of the
PPAs funded in the budget. It covers the analysis of financial transactions,
recording of budgetary accounts in the registries, and the disbursements and
financial reporting. it encompasses the monitoring and evaluation of the
physical and financial performance of the LGU relative to the accomplishment
of its PPAs as funded in the budget.
2. Audit of accounts. This pertains to the examination of the legality and
propriety of the obligations and expenditures incurred in the process of
executing the budget. The results will complete the whole evaluation of the
budget performance of the LGU.

34
Legal Basis

Persons accountable for Local Government Funds. Any officer of the Local
Government Unit whose duty permits or requires the possession or custody of local
government funds shall be accountable and responsible for the safekeeping thereof
in conformity with the provisions of this Title. Other local officers, who, though
not accountable by the nature of their duties, may, likewise be held accountable and
responsible for local government funds through their participation in the use or
application thereof. (Section 340, R.A. No. 7160).

Fiscal responsibility shall be shared by all those exercising authority over the
financial affairs, transactions and operations of the local government unit. (Sec.
305, R.A. No. 7160).

Key Players in Budget Accountability

1. Local Chief Executive – shall be primarily responsible for the execution of the
annual and supplemental budgets and the accountability therefor. (Sec. 320,
R.A. No. 7160). Specifically, the LCE shall:
 Ensure that all taxes and other revenues of the LGU are collected, and that
local government funds are applied to the payment of expenses and
settlement of obligations, in accordance with law or ordinance (Sections
444 (b)(3)(iii); 455(b)(3)(iii); 465(b)(3)(iii) of R.A. No. 7160).
 Cause the periodic examination of books, records, and other documents
maintained by accountable officials, agents, or employees of the LGU to
ensure that income collections and disbursements are properly recorded
(Sections 444(b)(I)(xi); 455(b)(I)(xi); 465(b)(I)(xi) of R.A. No. 7160).
 Ensure that accountable officials are able to submit periodic reports in such
forms as may be required under this Manual and by applicable Rules
(Sections 444; 455; and 465 (b)(I)(x), R.A. No. 7160).
 Ensure that all executive officials and employees faithfully discharge their
duties and functions as provided by law and the Local Government Code
(Sections 444(b)(I)(x; 455(b)(I)(x; 465 (b)(I)(x), R.A. No. 7160).
 Submit to the Sanggunian on or before March 31 of each year an annual
report covering the immediately preceding calendar year which shall
contain among others the budgetary/financial performance ias well as
physical accomplishments of the LGU (Sec. 97, R.A. No. 7160 & Art. 189
Rule XXIV, IRR of R.A. No. 7160).

2. Local Treasurer – shall:

 Collect all taxes, fees, and charges (Section 170, R.A. No. 7160);
 Report regularly to the LCE on the tax collection efforts in the LGU
(Section 470(b), R.A. No. 7180);

35
  Advise the LCE, the Sanggunian, and other local and national government
officials regarding the disposition of local government funds, and on such
other matters relative to public finance (Section 470(d)(I), R.A. No. 7160);
 Take custody and exercise proper management of the funds of the LGU
(Section 470(d)(2), R.A. 7160);
 Take charge of the disbursement of all local government funds and such
other funds the custody of which may be entrusted to him by law or other
competent authority (Section 470(d)3) R.A. No. 7160;
 Submit periodic reports to the LCE through the LFC in such forms
prescribed under this Manual;
 Exercise such other powers and perform such other duties and functions as
may be prescribed by law or ordinance (Section 470(e), R.A. No. 7160).

3. Local Accountant – shall:

 Prepare and submit financial statements to the LCE and to the Sanggunian
(Section 474(b)(2), R.A. No. 7160);
 Apprise the Sanggunian and other local government officials concerned on
the financial condition and operations of the LGU (Section 474(b)(3), R.A.
No. 7160);
 Install and maintain an internal audit system in the LGU concerned;
 Record all financial transactions in the appropriate journals and keep all
supporting documents attached thereto as follows:
o statement of cash advances, liquidation, salaries, allowances,
reimbursement and remittances pertaining to the LGU;
o statement of journal entry vouchers and liquidation of the same and
other adjustments related thereto;
o maintain individual ledger for officials and employees of the LGU
pertaining to payroll and deductions;
 Record and post in the index cards details of purchased furniture, fixture
and equipment, including disposal thereof, if any;
 Maintain and update all general and subsidiary ledgers;
 Prepare and submit periodic reports to the LCE through the LFC in such
forms prescribed under this Manual.

4. Local Budget Officer – shall:

 Certify to the availability of appropriations and allotments to which

expenditures and obligations may be properly charged;
 Prepare and submit periodic reports to the LCE through the LFC and to the
DBM in such forms prescribed under this Manual.

36
 5. Planning and Development Coordinator – shall:

 Monitor and evaluate the implementation of the development programs and

projects and activities of the various departments in accordance with the
approved development plan (Section 476(b)(4), R.A. No. 7160);
 Analyze the income and expenditure patterns, and formulate and
recommend fiscal plans and policies for consideration of the LFC (Section
476(b)(6), R.A. NO. 7160);
 Prepare and submit periodic reports to the LCE through the LFC in such
forms prescribed under this Manual.

6. Heads of Departments/Offices – shall:

 Monitor the implementation of the PPAs of their respective

department/offices to ensure adherence to plans, targets and standards;
 Prepare and submit periodic reports to the LFC in such forms as may be
prescribed under this Manual.

7. Local Finance Committee- shall:

 Conduct a semi-annual review and general examination of cost and

accomplishments against performance standards in undertaking
development projects (Section 316(h), R.A. No. 7160).
 Post the semi-annual and general examination report in conspicuous and
accessible places in the LGU and furnish a copy of this report to the LCE
and the Sanggunian concerned (Section 316(h), R.A. No. 7160).

Accounting for the Budget

Step 1. Monitor income and expenditures

The Budgets of the LGU are accounted for on the first day of the fiscal year.
The estimated income and appropriation in amounts approved and reviewed are
recorded in the books where they shall be compared with the actual collections
and disbursements for the same period.

Expenditures are tracked and monitored vis-à-vis the outputs and

accomplishments.

37
Step 2. Evaluate Performance of Each Department/Office

The other component of accounting for the budget is the assessment of the
performance of the LGU primarily through a review of
outputs/accomplishments against performance standards and targets.

Pursuant to Sections 316 and 320 of R.A. No. 7160, the LFC and LCE are
tasked to conduct a semi-annual review and general examination of cost and
accomplishments against performance standards applied in the implementation
of development projects and delivery of basic services.

38
 CHAPTER III

COLLECTIONS, RECEIPTS,
AND DISBURSEMENT OF GOVERNMENT FUNDS

Chapter Overview

This Chapter covers six (6) major topics, namely: Collection and Receipts and its
Sources; Collection Procedures; Government Funds and its Classification; Fundamental
Principles on Disbursements; Disbursement Procedures, and Common Rules on the
Internal Control Over Receipts and Disbursements.

Learning Objectives

 Define collections, receipts, government funds, expenditures and disbursements.

 Explain the fundamental principles governing financial transactions and operations
of the LGUs.
 Determine the collection and disbursement procedures, and
 Determine internal control on collections and disbursements to the extent that these
are in accordance with prescribed rules and regulations.

COLLECTIONS AND RECEIPTS

Each local government unit shall exercise its power to create its own sources of
revenue and to levy taxes, fees and charges subject to the provisions herein, consistent with
the basic policy of local autonomy.

Local revenue is generated only from sources expressly authorized by law or

ordinance, and collection thereof shall at all times be acknowledged properly.

Collections are fees, charges, assessments and revenues collected by departments,

bureaus, offices or agencies in the exercise of their functions.

Receipts are cash inflows whether actual or constructive regardless of source or

purpose and whether pertaining to the agency or not. They are income realized from
operations and activities of the local government in the exercise of its corporate functions.
They also include trust receipts, fund deposits, inter-fund and inter-agency transfers and
equity contributions received by corporate agencies.

The sources of collections and receipts are the following:

1. Tax Revenue – are income derived from the regular system of taxation enforced
under the authority of law or ordinance and, as such, accrues more or less
regularly every year. This includes professional tax, community tax, real
39
 property tax – basic, special education tax, special levy on idle lands, real
property transfer tax, business tax, tax on sand/gravel/other quarry products, tax
on delivery trucks and vans, amusement tax, franchise tax, printing and
publication tax, fines and penalties, and other taxes.

2. Service and Business Income – includes permit fees, registration fees,

registration plates/tags/stickers fees, clearance and certification fees,
supervisions and regulation enforcement fees, inspection fees, verification and
authentication fees, processing fees, occupation fees, fishery rental fees, fees
for sealing and licensing of weights and measures, other service income.
Business income includes, school fees, affiliation fees, seminar/training fees,
rent income, communication network fees, transportation system fees, road
network fees, waterworks system fees, power supply system fees, seaport
system fees, parking fees, receipt from operation of hostels/dormitories and
other like facilities, receipt from market operations, receipt from slaughterhouse
operation, receipt from cemetery operations, income from printing and
publication, sales revenue, garbage fees, hospital fees, dividend income, interest
income, service concession revenue, lease revenue, fines and penalties –
business income, other business income.

3. Share from National Taxes – includes share from internal revenue allotment
(IRA), share from expanded value added tax, share from national wealth, share
from tobacco excise tax, and share from economic zones.

4. Transfer, Assistance and Subsidy – includes subsidy from national government,

subsidy from LGUs, subsidy from GOCC, subsidy from other funds, subsidy
from general fund, subsidy from other local economic enterprise, transfers from
general fund as project equity share, and transfer from general fund of unspent
DRRMF.

5. Shares, Grants and Donations – includes shares from PAGCOR, share from
PCSO, grants and donations in cash and in kind, and grants from concessionary
loans.

6. Miscellaneous Income

7. Other Receipts – includes refund of cash advances, receipts of

performance/bidder’s/bail bonds, collection made on behalf of another agency
or private parties, borrowings, as well as sale of property, plant and equipment.

PROCEDURES ON COLLECTIONS AND DEPOSITS

All monies official received by a local government officer in any capacity or on

any occasion shall be accounted for as local funds, unless otherwise provided by law. The
collection procedures are as follows:
40
 1. Receives cash/check from payor/creditor/ taxpayer;
2. Issues Official Receipt;
3. Records collections in Cash Receipts Record (CRR)/Cashbook;
4. Prepares deposit slip;
5. Deposits collection;
6. Records deposits in CRR/Cashbook;
7. Prepares Report of Collections & Deposits (RCD);
8. Forwards RCD to Accounting Unit with copies of ORs and validated deposit
slips;
9. Reviews submitted RCDs & supporting documents - to be done by the
Accounting Unit;
10. Prepares Journal Entry Voucher (JEV) and records in the Cash Receipts
Journal (CRJ) and or Cash Journal (CJ) - to be done by the Accounting Unit

Accountable Forms

These are serially pre-numbered forms and/or forms with fixed amount or official
documents for which the custodian thereof shall be accountable. These are held in trust by
the collecting officer/treasurer/property officer or other person duly authorized to possess
or have custody thereof. The kinds of accountable forms are:

1. Accountable forms without money value:

 Official Receipt (including eOR)
 Checks
 Marriage Licenses
 Other specifically designed forms

2. Accountable forms with money value

 Cash Tickets
 Registration of Large Cattle
 Registration of Slaughter Large Cattle
 Import Entry Documents

DISBURSEMENT OF GOVERNMENT FUNDS

Government Fund

Fund refers to a sum of money or other resources set aside for the purpose of
carrying out specific activities or attaining certain objectives in accordance with special
regulations, restrictions or limitations and constitutes an independent fiscal and accounting
entity. [Sec.3 (1), PD 1445; Sec. 2 (1) Title I (B), Book V, Administrative Code of 1987;
Section 306 (h), RA 7160]

41
 Government Funds include public moneys of every sort and other resources
pertaining to any agency of the government. It is known as public funds. (Sec. 3 (2), PD
1445; Sec.2 (2), Title I (B), Book V, Administrative Code of 1987)

The key players in the use of government funds are the agency head and
accountable officers.

There are three (3) classes of funds in the local government units, namely: General
Fund (GF); Special Education Fund (SEF) and Trust Funds. The last two (2) funds are
called Special Funds.

CLASSES OF FUNDS

General Fund

Every local government unit shall maintain a General Fund which shall be
used to account for such monies and resources as maybe received by and disbursed
from the local treasury. The General Fund shall consist of monies and resources of
the local government which are available for the payment of expenditures,
obligations or purposes not specifically declared by law as accruing and chargeable
to, or payable from any other fund (Section 308, RA 7160).

Local government units shall maintain special accounts in the General Fund
for public utilities and other economic enterprises, loans, interests, bond issues, and
other contributions for specific purposes, and other special accounts which may be
created by law or ordinance, such as the following:

a) 20% Development Fund

Section 287 of the Local Government Code provides that every LGU
shall appropriate in its annual budget no less than twenty percent (20%)
of its annual internal revenue allotment for development projects.
DILG-DBM Joint Memorandum Circular No. 2011-1 dated April 13,
2011 provides the guidelines on the appropriation and utilization of the
20% of the annual internal allotment for development projects.

Pursuant to DILG-DBM Joint Memorandum Circular No. 2011-1 dated

April 13, 2011, the 20% Development Fund may be utilized to finance
the priority development projects and programs, as embodied in the duly
approved Local Development Plan that directly support the Philippine
Development Plan, the Medium-Term Public Investment Program and
the Annual Investment Program. All projects to be funded shall
contribute to the attainment of desirable socio-economic development
and environmental management outcomes and shall partake the nature
of investment and capital expenditures.
42
 The following expense items that are not related to and/or not connected
with the implementation of development projects, programs and
activities shall not be paid out of the 20% development fund:

1. Administrative expenses such as cash gifts, bonuses, food

allowance, medical assistance, uniforms, supplies, meetings,
communication, water and light, petroleum products and the like;
2. Salaries, wages or overtime pay;
3. Travelling expenses, whether domestic or foreign;
4. Registration or participation fees in training, seminars, conferences
or conventions;
5. Construction, repair or refinishing of administrative offices;
6. Purchase of administrative office’ furniture, fixtures, equipment or
appliances; and
7. Purchase, maintenance or repair of motor vehicles or motor cycles.

Section 5 of the Joint Memorandum Circular states that “It is the

responsibility of every Provincial Governor, City and Municipal Mayor
and Punong Barangay to ensure that 20% of the IRA is optimally
utilized to help achieve desirable socio-economic development and
environmental outcomes. All concerned local chief executives are
hereby reminded that utilizing such fund, whether willfully or through
negligence, for any purpose beyond those expressly prescribed by law
or public policy shall be subject to the sanctions provided under the
Local Government Code and such other applicable laws.

b) Local Disaster Risk Reduction and Management Fund (LDRRMF)

Section 21 of RA 10121 or the Philippine Disaster Risk Reduction and

Management Act of 2010 provides that the LDRRMF amounting to not
less than five percent (5%) of the estimated revenue from regular
sources shall be set aside to support disaster preparedness programs
including training, purchase of disaster response and rescue equipment,
supplies and medicines, for post-disaster activities, and payment of
premiums on calamity insurance.

COA Circular No. 2012-002 dated September 12, 2012 prescribes the
accounting and reporting guidelines for the LDRRMF of Local
Government Units, NDRRMF given to LGUs and Receipts from Other
Sources. Relevant sections of the circular are as follows:

1. Section 3 – The LDRRMF shall be used to support disaster risk

management activities such as, but not limited to the following: (a)
Pre-disaster preparedness programs such as training of personnel,
and purchase of life-saving and rescue equipment, and supplies and
43
 medicines; (b) Post-disaster activities such as repair and
rehabilitation of public infrastructure and purchase of office/school
equipment damaged by calamities during the budget year; (c)
Payment of insurance premiums on property if indemnity includes
damages or loss due to fire, earthquake, storm or other casualties
and on the personnel accident insurance of Accredited Community
Disaster Volunteers, and (d) Relief and recovery programs in
communities or areas stricken by disasters, calamities, epidemics or
complex emergencies.

2. Section 4.3 – Thirty percent (30%) of the amount appropriated shall

be allocated to the Quick Response Fund (QRF) or stand-by fund
for relief and recovery projects and activities;

3. Section 4.4 – The unexpended LDRRMF shall accrue to a special

trust fund solely for the purpose of supporting disaster risk reduction
and management activities of LDRRM Council within the next 5
years;

4. Section 5.1.2 - The 30% Quick Respond Fund (QRF) shall be used
for relief and recovery program in order that situation and living
conditions of people in communities or areas stricken by disasters,
calamities, epidemics or complex emergencies, may be normalized
as quickly as possible;

The release and use of the QRF shall be supported by a resolution

of the local sanggunian declaring the LGU under the state of
calamity upon recommendation of NDRRMC (Item 6.3 of Joint
Memorandum Circular No. 2013-1 dated March 25, 2013).

While the 70% allocation may be utilized to procure early warning

systems, preparedness equipment and other equipage for flood,
earthquake, volcanic eruptions, landslide and other nature and man-
made calamities (DILG Memorandum Circular No. 2012-73 dated
April 17, 2012).

5. Section 5.1.13 - Any unutilized amount after five (5) years shall be
reverted back to the unappropriated surplus of the General Fund and
shall be made available for other social services after subsequent
enactment by the local sanggunian;

c) Gender and Development (GAD) Fund

Item 6.1 of Joint Circular No. 2012-01 of PCW/NEDA/DBM provides

that at least five percent (5%) of the total agency budget appropriation
44
 authorized under the annual GAA shall correspond to activities
supporting GAD plans and programs. The GAD budget shall be drawn
from the agency’s MOOE, Capital Outlay, and Personal Services.

Special Education Fund

It shall consist of the respective shares of provinces, cities and

municipalities, and barangays in the proceeds of the additional tax on real property
to be appropriated for purposes prescribed in Section 272 of RA 7160. The proceeds
shall be allocated for the operation and maintenance of public schools, construction
and repair of school buildings, facilities and equipment, educational research,
purchase of books and periodicals and sports development as determined and
approved by the local school board.

Section 99(a) of RA 7160 provides that, “ the provincial, city or municipal

school board shall determine, in accordance with the criteria set by the Education,
Culture and Sports, the annual supplementary budgetary needs for the operation
and maintenance of public schools within the province, city or municipality, as the
case may be, and the supplementary cost of meeting such needs, which shall be
reflected in the form of an annual school board budget corresponding to its share
in the proceeds of the special levy on real property constituting the Special
Education Fund and other sources of revenue as this Code and other laws or other
ordinances may provide.”

Moreover, Section 100© of the same Republic Act provides that “The
annual school board budget shall give priority to the following: (1) Construction,
repair and maintenance of school buildings and other facilities of public elementary
and secondary schools; (2) Establishment and maintenance of extension classes
when necessary; and (3) Sports activities at the division, district, municipal, and
barangay levels.

Corollary to the above mentioned regulations, DECS, DBM and DILG Joint
Circular No. 01 s 1998 dated April 14, 1998 prescribes the rules and regulations on
the Utilization of the SEF by the Local School Board for the operations and
maintenance of elementary and secondary public schools. Section 4 thereof,
emphasized the prioritization of expenses chargeable to SEF as follows:

a) Operation and Maintenance of public schools, including organization of

extension, non-formal, remedial and summer classes, as well as payments
of teachers granted by local government units chargeable against SEF as
of 31 December 1997, provided that any additional allowance that may be
granted to teachers by LGUs shall be charged to the general fund of LGUs,
subject to existing budgeting rules and regulations;

45
 b) Construction and repair of school buildings, facilities and equipment
including the acquisitions, titling and improvement of school sites;
c) Educational research;

d) Acquisition/Procurement of books, instructional materials, periodicals

and equipment including information technology resources and;

e) Expenses of school sports activities at the national, regional, division,

district, municipal, and barangay level as well as for other DECS related
activities including co-curricular activities.

Trust Fund

It shall consist of private and public monies which have officially come into
the possession of the local government or of a local government official as trustee,
agent or administrator, or which have been received as a guaranty for the fulfillment
of some obligation (Section 3(4) PD 1445). It shall only be used for the specific
purpose for which it was created or for which it came into the possession of the
LGU.

Example of trust funds are those received from NGAs and GOCCs as part
of the grass root participative budgeting or bottom up budgeting (BUB) such as the
KALAHI CIDDS, Maternal Neonatal Child Health and Nutrition (MNCHN)
Program, Salintubig, PAMANA, Supplemental Feeding, Social Pension and other
fund transfers for infrastructure projects and livelihood programs. However, these
funds do not find their way to the General Fund local budget appropriation since
they have been included in the national budget or the General Appropriations Act
in the case of NGAs and corporate budget, in the case of GOCCs.

Where the transfer of funds impose a condition, the implementing agency

recognizes a liability. Any unutilized fund transfers after the purpose had been
served, shall be remitted to BTR, if no condition to return any unused amount to
source agency/donor, or returned to the source agency/donor, if specified in the
memorandum of agreement.

Local Accountants and Treasurers shall maintain separate books and

depository accounts, respectively, for each fund in their custody or administration
under such rules and regulations as the COA may prescribe (Section 310 of RA
7160).

Local treasurers shall maintain depository accounts in the name of their

respective LGUs with banks, preferably government-owned, located in or nearest
to their respective areas of jurisdiction. Earnings of each depository account shall
accrue exclusively thereto (Section 311, RA 7160).

46
 Local treasurers and other accountable officers shall keep personal monies
separate and distinct from local public funds in their custody and shall not make
profit out of public money or otherwise apply the same to any use not authorized
by law or ordinance (Section 312, RA 7160).

FUNDAMENTAL PRINCIPLES ON DISBURSEMENTS

(Section 305, RA 7160)

The financial affairs, transactions, and operations of local government units shall
be governed by the following fundamental principles:

a) No money shall be paid out of the local treasury except in pursuance of an

appropriations ordinance or law;
b) Local government funds and monies shall be spent solely for public purposes;
c) Trust fund in the local treasury shall not be paid out except in fulfillment of the
purpose for which the trust was created or the funds received;
d) Every officer of the LGU whose duties permit or require the possession or custody
of local funds shall be properly bonded, and such officer shall be accountable and
responsible for said funds and for the safekeeping thereof in conformity with the
provisions of law.
e) Local governments shall formulate sound financial plans, and the local budgets
shall be based on functions, activities, and projects, in terms of expected results.
f) Local budget plans and goals shall, as far as practicable, be harmonized with
national development plans, goals and strategies in order to optimize the utilization
of resources and to avoid duplication in the use of fiscal and physical resources.
g) Fiscal responsibility shall be shared by all those exercising authority over the
financial affairs, transactions, and operations of the LGUs, and
h) The LGU shall endeavor to have a balanced budget in each fiscal year of operation.

Appropriations

Appropriations refer to an authorization made by law or other legislative

enactments, directing the payment of goods and services out of government funds under a
specified conditions or for specified purposes. They are classified as follows:

1. Annual Appropriation
2. Continuing Appropriation
3. Contingent Appropriation
4. Supplemental Appropriation

47
Allotment

Allotment is the authorization issued by the LCE to a department/office of the LGU,

which allows it to incur obligations, for a specified amounts, within the appropriation
ordinance.
Expenditures

Expenditures include all charges against the fund of the agency for current
operating expenditures, capital outlays and provisions for retirement of long-term
obligations. Classification of expenditures are as follows:
1. Personal Services (PS) – includes the pay proper, all authorized allowances,
bonus, cash gift, incentives and benefits, and other personal benefits paid to
officers and employees of the government. Personal services consist of salaries
and wages, other compensation, personnel benefit contributions, other
personnel benefits.
2. Maintenance and Other Operating Expenses (MOOE) – include travel
expenses; training and scholarship expenses; supplies and materials expenses;
utility expenses; communication expenses; awards/rewards and prizes; survey,
research, exploration and development expenses; demolition/relocation and
desilting/dredging expenses; generation, transmission and distribution
expenses; confidential, intelligence and extraordinary expenses; professional
services; general services; repairs and maintenance; financial
assistance/subsidy; transfers; other maintenance and operating expenses.
3. Financial Expenses (FE) – consist of management supervision/trusteeship fees;
interest expenses; guarantee fees; bank charges; commitment fees; and other
financial charges.
4. Capital Outlay (CO) – consists of expenditures for PPE.

Disbursements

Disbursements refer to the settlement of government obligations. Disbursement of

government funds shall be made through the use of the Disbursement Voucher. As a
general rule, disbursements should be made by check. Only transactions authorized under
existing regulations may be paid out of the cash advance granted to a duly authorized
disbursing officer.

The basic requirements applicable to all types of disbursements are:

a) Certificate of availability of funds issued by the Chief Accountant;

b) Existence of lawful and sufficient allotment duly obligated as certified by
authorized officials;
c) Legality of transactions and conformity with laws, rules or regulations;
d) Approval of expenditure by Head of Office or his authorized representative; &
e) Sufficient and relevant documents to establish validity of claim
48
 No money shall be disbursed unless the local budget officer certifies to the existence
of appropriation that has been legally made for the purpose, the local accountant has
obligated said appropriation, and the local treasurer certifies to the availability of funds for
the purpose. Vouchers and payrolls shall be certified to and approved by the head of the
department or office who has administrative control of the fund concerned, as to validity,
propriety, and legality of the claim involved. Except in cases of disbursements involving
regularly recurring administrative expenses such as payrolls for regular or permanent
employees, expenses for light, water, telephone, and telegraph services, remittances to
government creditor agencies such as the GSIS, SSS, LBP, National Printing Office,
Procurement Service of the DBM and others, approval of the disbursement voucher by the
LCE himself shall be required whenever funds are disbursed (Sec. 344, RA 7160).

PROCEDURES ON DISBURSEMENTS

The disbursement procedures are the following:

Persons Responsible Procedures

Head of Requesting Unit 1. Prepare the Obligation Request (ObR) and DV.
Head of Accounting Unit 2. Receives ObR and DV and record the same in the logbook.
3. Certify the obligation of allotment and completeness of supporting
documents (SDs) in the DV, and sign Box A of DV
Treasurer 4. Receives ObR and certified DV.
5. Verify claim, certify on the availability of fund and sign Box B of
DV.
6. Send DV to LCE for approval on the payment covered by the DV.
7. Receives approved DV with SDs and prepares check.
8. Sign the check
9. Send check to LCE for countersignature
10. Record check in the check register and release the original check
to the payee.
11. Prepare the Report of Checks Issued (RCI)

INTERNAL CONTROL ON RECEIPTS AND DISBURSEMENTS

Internal Control is the process designed and effected by those charged with
governance, management and other personnel to provide reasonable assurance about the
achievement of the entity’s objectives with regard to (a) reliability of financial reporting,
(b) effectiveness and efficiency of operations, and (c) compliance with applicable laws and
regulations. The common rules on the internal control on collections/receipts and
disbursements are:

1. Local revenue is generated only from sources expressly authorized by law or

ordinance, and collection thereof shall at all times be acknowledged properly;

49
 2. All monies official received by a local government officer in any capacity or
on any occasion shall be accounted for as local funds, unless otherwise
provided by law.
3. The disbursing officer (DO) should be familiar with the laws and regulations
affecting his work. He should not have access to or responsibility over the
accounting records related to disbursements;
4. He should maintain adequate records and should submit required reports
regularly and on time;
5. Officers authorized to sign checks should have no authority over the
accounting records or the custody of cash;
6. Checks should be countersigned; the signing and countersigning of checks
should not be made in advance;
7. Disbursing Officer should not process and approve DVs;
8. Disbursement procedures should be designed to ensure that payment is
received by the correct party;
9. Vouchers, payrolls and supporting papers should be stamped “PAID” upon
payment;
10. Safe and properly enclosed room should be provided to ensure safety of
accountabilities and records;
11. The Disbursing Officer, as well as his assistant, should be properly bonded;
12. The reconciliation of bank/treasury transactions should be done by person
other than those responsible for the issuance of the checks or the
signing/countersigning thereof;
13. The sequence of check numbers should be checked when reconciling
banking/treasury transactions;
14. Documents supporting the transactions shall be reviewed before any payment
is made;
15. Rotations should be made of employees in charge of the various phases of
payroll preparation; and
16. Cash examination should be conducted as required under existing rules

Administrative Order No. 70 issued on April 14, 2003 mandates the creation of
Internal Audit Service. Its pertinent provisions are as follows:

 All heads of government offices, agencies, government-owned and/or

controlled corporations, including government financial institutions, State
Universities and Colleges and local government units, shall organize an Internal
Audit Service (IAS) in their respective offices.
 The IAS shall be an integral part of the office and shall assist in the management
and effective discharge of the responsibilities of the office, without intruding
into the authority and mandate of the Commission on Audit granted under the
Constitution. It shall function in accordance with the policies established by
the provisions of RA 3456 as amended by RA No. 4177.
 The IAS shall be provided with sufficient support from the top management to
gain the cooperation/confidence of the auditee.
50
 The head/chief of IAS shall ensure that internal audit practices, methods and
procedures in the agency are improved and updated through continuing education. The
Association of Government Internal Auditors (AGIA) shall ensure that all audit works in
all government agencies are conducted in conformity with the standards of the internal
audit profession.

Management is responsible for the establishment and/or installation of an efficient

and effective Internal Control Structure. There is an implied assertion by management that
such internal control procedures are effective as to both their design and operation. An
evaluation shall be made of the systems of internal control and related administrative
practices to determine the extent they can be relied upon to ensure compliance with laws
and regulations and to provide for efficient, economical and effective operations [Section
55(3), PD 1445].

51
 Chapter IV

PROPERTY AND SUPPLY MANAGEMENT

Chapter Overview

This chapter introduces the procurement planning and basic policies and procedures
on the modes of procurement, warehousing, storage, issuance, utilization and disposal of
supplies and property in the government, including the manner of disposal.

Learning Objectives

 To understand the basic principles of transparency, accountability, effectiveness,

efficiency, and economy in government procurement;
 To explain the various laws, rules and regulations governing acquisition, utilization
and divestment of supplies and property in the government.

Basic Concept

The succeeding topics help the local chief executive devise ways of designing
controls to the processes involved in the acquisition, issuance, utilization and disposal of
government supplies and property.

Legal Basis

Sec. 2, P.D. 1445 provides the policy of the state on government resources. It is the
clear import of the policy that the main purpose of conserving and managing government
resources is to ensure that government operations will not be hampered. While the policy
puts the responsibility of seeing to it that the same is faithfully adhered to, in the chief or
head of the agency, it cannot be denied that other government officials play a major role in
the said mandate. Hence, the concept of responsibility and accountability for government
funds and property.

One such responsibility is the management of the supplies and property of the agency. The
chief or head of the agency undertakes this function through his/her staff. It is important
that they have a common understanding of the systems, procedures, operational policies
and the laws and rules that must be complied with to enable them to do their work
efficiently and effectively.

Distinction between Government Property and Personal Property:

Government Property – As stated in Section 63 of PD 1445 –

“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
52
 upon any occasion must be accounted for as government funds and government
property. Government property shall be taken up in the books of the agency
concerned at acquisition cost or an appraised value.”

Therefore, any financial assistance in the form of cash or in kind, received in the
name of the LGU, from various government sources or non-government organizations,
should be accounted as government property and the issuance and utilization of such should
be properly monitored.

Personal Property –

Goods, articles, and items of property acquired through personal funds and having
a more or less intimate relation to the person of the possessor.

CLASSES OF GOVERNMENT PROPERTY

1. Inventories are in the form of materials or supplies for production process, in the
form of materials or supplies to be consumed or distributed in the rendering of
services, held for sale or distribution in the ordinary course of operations, or in the
process of production for sale or distribution.

For monitoring, control and accountability, an Inventory Custodian Slip (ICS) shall
be prepared upon issuance of inventories or small tangible items covered by
approved Requisition and Issue Slip (RIS).

2. Property, Plant and Equipment (PPE) are tangible items; held for use in the
production or supply of goods or services, for rental to others, or for administrative
purposes; and expected to be used during more than one reporting period.
Infrastructure assets and heritage assets are accounted as PPE.

Infrastructure assets are tangible items which are part of a system or network,
specialized in nature and do not have alternative use, immovable, and may be
subject to constraints on disposal.

Heritage assets are tangible asset with historical, artistic, scientific, technological,
geophysical or environmental qualities that is held and maintained principally for
its contribution to knowledge and culture. It is accounted for as a distinct category
because their value is unlikely to be fully reflected in a financial value or price.
Their value may increase, rather than depreciate, even if the physical condition
deteriorates. Also, heritage assets may incur high costs to maintain them and their
life might be measured in hundreds of years. They are often described as
‘inalienable’, because the holder cannot sell or dispose of them without external
consent. These restrictions may be formed in law.

53
 3. Investment property is a property, land or building, or part of a building, or both,
held to earn rentals or for capital appreciation or both rather than for use in the
production or supply of goods or services or for administrative purposes or for sale
in the ordinary course of operations.

4. Intangible asset is an identifiable non-monetary asset without physical substance.

5. Biological asset is a living plant or animal.

PROCUREMENT PLANNING AND FORECASTING

All procurement should be meticulously and judiciously planned by the procuring

entity concerned. Planning is charting the course of action for a certain activity.
Forecasting is planning or calculating in advance. In procurement, the decision on when
and how much to order is done on the basis of estimated or future demand. All procurement
should be within the approved budget of the procuring entity. The Approved Budget for
the Contract (ABC) shall be used as the ceiling for the bid price of each procurement
activity.

No government procurement shall be undertaken unless it is in accordance with an

approved Annual Procurement Plan (APP). The Annual Procurement Plan outlines the
procurement requirement of the procuring entity for the entire year. It is consistent with
the approved yearly budget of the procuring entity, approved by the head of the procuring
entity or a second-ranking official designated by him.

The APP includes a Project Procurement Management Plan for each individual
project, which is updated every six (6) months or as deemed necessary. It includes
provision for foreseeable emergencies based on historical records. The implementation of
any project not included in the APP shall not be allowed.

Procurement

Procurement as defined under RA 9184 and its Revised IRR, refers to the acquisition
of Goods, Consulting Services, and the contracting for Infrastructure Projects by the
Procuring Entity. In case of projects involving mixed procurements, the nature of the
procurement, i.e., goods, infrastructure projects, or consulting services, shall be determined
based on the primary purpose of the contract. Procurement shall also include the lease of
goods and real estate. With respect to real property, its procurement shall be governed by
the provisions of RA 8974 and other applicable laws, rules and regulations.

54
Governing Principles on Government Procurement (Sec. 3, RIRR of RA 9184)

a) Transparency in the procurement process and in the implementation of procurement

contracts through wide dissemination of bid opportunities and participation of
pertinent non-government organization.

b) Competitiveness by extending equal opportunity to enable private contracting

parties who are eligible and qualified to participate in public bidding.
c) Streamlined procurement process that will uniformly apply to all government
procurement.
d) System of accountability where both the public officials directly or indirectly
involved in the procurement process as well as in the implementation of
procurement contracts and the private parties that deal with government are, when
warranted by circumstances, investigated and held liable for their actions relative
thereto.
e) Public monitoring of the procurement process and the implementation of awarded
contracts with the end in view of guaranteeing that these contracts are awarded
pursuant to the provisions of the Act and the Revised IRR, and that all these
contracts are performed strictly according to specifications.

Factors Considered in Procurement

 Right quality – best quality and/or suitability of an item for the purpose
 Right quantity – the most economical ordering quantity
 Right price – should bear a reasonable relation to cost; a result of economic
condition; and determined by competition
 Right time – purchase of needed supplies and materials should be made at the most
appropriate time.
 Right source – a vendor who is capable and willing to enter into an agreement of
sale after consideration of the pertinent factors of quality, quantity, price as well as
period of delivery; a bonafide supplier, duly licensed and registered with
appropriate bodies; not blacklisted by any government agency at the time of canvass
and in business for at least six (6) months.

General Policies on Procurement

1. Prohibition against Splitting of Requisitions, Purchase/Letter Orders & Payment.

Forms of Splitting:
• Requisition - non-consolidation of requisitions for one or more items needed at or
about the same time
• Purchase Orders (PO) - issuance of two (2) or more POs based on 2 or more
requisitions for the same items needed or about the same time by different
requisitioners.

55
 • Payment - making (two) 2 or more payments for one (1) or more items involving 1
PO. Exempted are requisitions acquired thru emergency purchase from reputable
firms.
2. Need of a certificate of availability of funds for the purchase;
3. Protection of locally-manufactured/produced articles over foreign-made products;
4. Prohibition against irregular, unnecessary, excessive, extravagant, and
unconscionable expenditures or uses of funds and property.
5. Requisitions of drugs and medicines prescribe the use of generic terminology or
generic names. (RA 6675 – Generic Act of 1988)
6. Specifications for procurement of goods shall be based on relevant characteristics
and/or performance requirements. Reference to brand names shall not be allowed.
(Art VI, Sec 18, RA 9184)
7. Performance and Warranty Securities can be dispense with under Sec 52-
Shopping, Negotiated Procurement-Sec. 53.2 (emergency cases) and Sec. 53.9
(small value procurement), Sec. 53.10

Specific Procedures in Procurement

1. Procurement Planning and the Preparation of the Annual Procurement Plan (APP)
and Annual Investment Plan (AIP);
2. Approval of Requisition
3. Preparation of Obligation Request and Status (ORS)
4. Preparation, Approval and Delivery of Purchase Order/Letter Order/Contract
5. Delivery, Inspection and Acceptance of the Items
6. Payment for the items delivered.

Procurement Organizations

• Head of Procuring Entity (HOPE)/Local Chief Executive (LCE)

• Bids and Award Committee (BAC)
• BAC Secretariat
• Technical Working Group (TWG)
• End-user
• Observers

MODES OF PROCUREMENT

Pursuant to Section 10, Article IV of RA 9184, all procurement shall be done

through Competitive Bidding, except as provided for in Article XVI which provides when
alternative modes may be allowed.

Alternative Methods of Procurement (Sections 48-54 of RA 9184)

56
 Subject to the prior approval of the Head of the Procuring Entity or his duly
authorized representative, and whenever justified by the conditions provided in this Act,
the Procuring Entity may, in order to promote economy and efficiency, resort to any of the
following alternative methods of procurement:

a. Limited Source Bidding, otherwise known as Selective Bidding – a method of

procurement that involves direct invitation to bid by the Procuring Entity from a set
of pre-selected suppliers or consultants with known experience and proven
capability relative to the requirements of a particular contract;

b. Direct Contracting, otherwise known as Single Source Procurement – a method of

procurement that does not require elaborate Bidding Documents because the
supplier is simply asked to submit a price quotation or a pro-forma invoice together
with the conditions of sale, which offer may be accepted immediately or after some
negotiations;

c. Repeat Order – a method of Procurement that involves a direct Procurement of

Goods from the previous winning bidder, whenever there is a need to replenish
Goods procured under a contract previously awarded through Competitive Bidding
(Sec. 51).
- Prices same or lower with original contract
- Original contract awarded thru competitive bidding
- Availed within six (6) months
- Shall not exceed 25% of the quantity of original contract

d. Shopping – a method of Procurement whereby the Procuring Entity simply requests

for the submission of price quotations for readily available off-the-shelf goods or
ordinary/regular equipment not available at the Procurement Service (PS) can be
procured directly from suppliers of known qualification.

e. Negotiated Procurement – a method of Procurement that may be procured under

the extraordinary circumstances provided for in Section 53 of the Act and other
instances that shall be specified in the IRR, whereby the procuring entity directly
negotiates a contract with technically, legally and financially capable supplier,
contractor or consultant.

OTHER MODES OF ACQUISITION

The following are the other modes of acquiring property, whether supplies,
materials, equipment, land, or buildings:

1. Transfer – any government property no longer needed by an agency may be

transferred without cost or at fair value to other government agencies upon
authority of the respective heads of agencies.
57
 2. Donation – acquired through contributions or donations from the private sector,
other government agencies, both local and foreign, and non-government
organizations. Attachment papers include “deed of donation” and “acceptance of
donation”

3. Confiscation, Attachment or Seizure and Foreclosure-All supplies/equipment

confiscated by any bureau or office for violation of laws or regulations and the title to
which has already been acquired by virtue of the decision of the courts or other
competent authorities, are government properties.

4. Production and Manufacture-All finished articles/property manufactured by an

office/agency will be reported by the property clerk to the chief accountant at the end of
the month. The report in two copies shall include the property number, kind and
description, quantity, cost of direct labor, cost of materials, and total cost.

Products are also obtained from the soils and animals, such as:

Natural fruits – the spontaneous products of the soil and the young and all other
products of animals.

Industrial fruits – those produced by land of any kind due to cultivation or labor.

5. Construction by Administration - may be recommended to the head of office/

agency/corporation concerned if after re-bidding, no bid still comes within the
limits of award of contracts, and other factors and acceptable reasons per Revised
Implementing Rules and Regulations of RA 9184.

DELIVERY, ACCEPTANCE, INSPECTION AND PAYMENT

Delivery of supplies, materials and equipment being requisitioned must be made by

the supplier in accordance with the specifications, terms and conditions provided in the
Contract/Purchase Order/Letter Order/Job Order. Failure to deliver within the prescribed
period shall render the contractor/supplier liable for penalty, usually in the form of
liquidated damages. However, in meritorious and justifiable cases, the contractor/supplier
may request for extension of time/period of delivery.

Supplies or property tested and found to be in accordance with the required

specifications shall be accepted and paid in full. Where a trend of shortage in quantity,
deficiency, or defectiveness is established, the inspector may recommend for rejection or
reduction in price. All items to be inspected shall be accepted first by the Property Officer,
as the case may be.

58
 Supplies and materials whose quality analysis shows a deficiency of less than 10%
may be accepted, provided they will serve the purpose, the defect is minor and the contract
price is reduced. Those whose quality analysis shows a deficiency of 10% or over must be
totally rejected and replacement thereof must be demanded.

All deliveries of supplies and properties shall be accepted and inspected. Inspection
means the examination (including testing) of supplies and services (including raw
materials, and component) to determine whether the supplies and services conform to
contract requirements, which include all applicable drawings, specifications and purchase
descriptions. It is the act of measuring, examining, testing or gauging the characteristics
and features of a product or services. Inspection may be conducted as follows:

a) Inspection by Item – individual item is checked for conformity to every

requirement.
b) Inspection by Sampling – sampling is a process of obtaining information about
a group of data having similar purpose or function, usually 10% of it.

Delivered supplies and properties which are found and verified to be in conformity
with specifications in the order are subject to payment in full. Purchase of supplies and
materials out of the appropriations for MOOE shall be directly charged to expenses while
purchase of PPE and construction of Infrastructure Assets or civil works shall be charged
against the appropriation for Capital Outlay and shall be capitalized. The common
documentary requirements for the payment of supplies and properties are:

a) Purchase Request
b) Bidding Documents/RFQs & Abstract
c) Purchase Order/Letter Order/ Contract
d) Original copy of the Dealer’s/Supplier’s Invoice or Official Receipt
e) Acceptance & Inspection Report (AIR)
f) Evidence of availability of funds, and/or copy of the Obligation Request Status
g) Result of test/analysis by proper government agency, if articles are subject to
test.

All of these acquisitions must be recorded in the books of accounts and the property
records maintained by the Accounting and Property Units.

CUSTODIANSHIP, WAREHOUSING AND STORAGE

Just as we would take good care of our personal and real properties with the
diligence of a good father of a family, we are likewise mandated to extend the same
diligence in the custodianship of government property.

59
Property Custodianship

- refers to the guardianship of government property by the person accountable. This

includes the receipt of supplies, materials and equipment, the safekeeping, issuance, repair
and maintenance. Likewise it includes the accountability, responsibility and liability of
accountable or responsible officers arising from loss, misuse, damage or deterioration of
government property due to fault or negligence in the safekeeping. It may be
physical/actual or constructive.

Warehousing

- refers to the receipt and arrangement of materials, equipment and other property
and to see to it that materials are maintained in such condition most suitable for use. This
includes recording of receipts and deliveries and reconciliation of entries of bin cards with
Stock/Property Cards and with physical count of stocks on hand.

Storage

- refers to the scientific and economical receipt, warehousing and issue of materials
for their best safekeeping and rapid availability. To be economical, savings in space, labor
and equipment have to be effected; damages, accidents and wasteful use should be
summarized. Best safekeeping means protecting the materials against theft, fire and
deterioration but easily accessible when needed.

Before materials should be stored, there must be a plan. There should be knowledge
of certain facts needed in planning: type of housing, size, quantity, doorways and entrances,
windows, floor loads and elevators, if any.

Inventory Taking

Inventory taking is an indispensable procedure for checking the integrity of

property custodianship. This serves as basis for preparing accounting reports. At the end
of each quarter, the Accounting and the Supply/Property Unit should reconcile their
property records.

The chief of agencies are required to take a physical count of all the equipment and
supplies of their respective offices at least once a year. Supplies and materials in stock,
including medicines, drugs and medical supplies either for commissary, sale, manufacture,
or relief purposes should be inventoried at least every six (6) months as of June 30 and
December 31 of each year. It is the Supply/Property Unit Chief who prepares the Inventory
Guidelines and sends them to the Agency Head for approval.

60
 ISSUANCE AND UTILIZATION

Issuance is the act of transferring the custodianship or a property from one person
to another.

Utilization is the process of promoting greater services and economy in the use of
supplies, materials and equipment of the government through efficient and honest
procurement, systematic and coordinated transfer of control and recording; proper care,
maintenance and repair and appropriate and timely disposal.

The following are the activities involved when issuing/utilizing government property:

1. Preparation of issuance documents – RIS, ICS, PAR,

2. Issuance and acknowledgment of the items – Equipment issued by the property

officer for official use of officials and employees shall be covered by PAR, which
shall be renewed every January of the third year of issue. PARs not renewed after
three (3) years shall not be considered in making physical count of the property.

3. Accounting for the issuance and acknowledgment of the items - The issuance of
supplies/materials/equipment shall be properly accounted for. The accounting for
the receipt, issuance of supplies and materials is performed by the accountant. The
accounting function includes the maintenance of the Supplies Ledger Cards,
Property, Plant and Equipment Ledger Cards, aside from the keeping of the general
and special books of accounts of the Agency.

4. Preparation of monthly reports - The property/supply officer or his representative

prepares the Report of Supplies and Materials Issued which serve as a monthly
abstract of supplies and materials issued supported by the RIS.

5. Reconciliation of property and accounting records - Before the property records can
be reconciled with the accounting records, the Property/Supply Office shall see to
it that the existing property records are reconciled with actual inventory count.

Due care shall be exercised in the use of equipment, otherwise, they will
deteriorate rapidly. They will accumulate dust, become dirty, and parts will rapidly tear
out unless properly oiled and covered when not in actual use.

“Due care” means the amount of care and attention which an official or
employee would reasonably give to his private property, considering all the attending
circumstances.

If the equipment is used by several persons, the chief of division shall designate
one of them to be responsible for its proper care and upkeep.
Insurance of Government Property
61
 The agency head has the responsibility to insure government property under the
Property Insurance Fund administered by the GSIS.

Agencies covered are Departments, Commissions, Boards, Bureaus, Office of

the National and Local Governments except Municipal Governments below 1st class,
Government Owned or Controlled Corporations and their subsidiaries/affiliates, and
acquired Assets Corporation.

Transfer of Property Accountability

When property is transferred from one accountable officer to another or from

an outgoing officer to his successor, the former officer shall secure clearance from
property accountability. An itemized Property Transfer Report is required for the
transfer.

LOSS OF GOVERNMENT PROPERTY

It is the power of the Commission on Audit to credit losses of property or act on

application for Relief from Accountability. Loss of property may be credited when the
loss:
 occurs while the property is in transit, or
 is caused by fire, theft or other casualty, or force majeure

Procedures/Requirements for Relief from Accountability

(COA Memorandum No. 92-751 dated February 24, 1992)

1. The basic notice of loss to be filed immediately after the discovery of the loss and
the request for relief from accountability which should be filed by the proper
accountable officer within the reglementary period of 30 days from the occurrence
of the loss, with the Auditor concerned or the Commission, as the case may be.
1.1 In case of delay in the filing of the aforesaid notice and request, satisfactory
explanation or the reason(s) for such delay should be submitted, after which
the reasons/explanation given should be verified or confirmed by the
Auditor concerned.
1.2 If the occurrence of the loss has also been reported to other police agencies,
like the N.B.I., C.I.S., etc., the progress/final investigation report thereon
should be submitted.
2. Copy of the Investigation, Inventory and Inspection Report of the proper COA
personnel on the facts and circumstances surrounding the loss;
3. Affidavit or Sworn Statement of the proper accountable officer on the facts and
circumstances surrounding the said loss, supported by the Affidavit of two (2)
disinterested persons who have personal knowledge of such fact of loss;
62
 4. Comment and/or recommendation of the Agency Head concerned on the request;
5. Comment and/or recommendation of the COA Director/OIC and/or Unit Head on
the propriety of the request, together with a full statement of material facts;
6. Exact or accurate amount of government cash or book value of the property, subject
of the request for relief;
7. Property Acknowledgement Receipts covering the properties subject of the request,
if any; and
8. A categorical determination by the Director/Auditor concerned on the absence of
fault or negligence on the part of the accountable officer in the handling,
safekeeping, etc. of the funds and properties under his custody as evidenced by a
recital of the precautionary/security measures adopted to protect or safeguard them
and the like.

Additionally, in case of the following incidents/occurrences, the following

requirements shall be submitted:

Fire

1. The progress and/or final report of the local Police/Fire Department or Station
on the incident;
2. List or inventory of burned or destroyed properties as well as those properties
retrieved After the fire, stating therein the acquisition cost/book value of each
item, duly verified by the Auditor concerned;
3. Authenticated picture(s) showing the site/office or government properties razed
by the fire;
4. Fire insurance policy, if any, covering subject property. If the property is
burned, information as to whether or not the Agency concerned has already
been paid the proceeds of the said insurance policy should be secured and, if
so, evidence to this effect should be submitted, or information if the property
has not been insured.

Theft or Robbery/Hold-up

1. Progress and/or Final Police Report on the theft or Robbery Case.

1.1 In cases of theft or robbery including with force upon things (destruction
of padlocks, doors, window jalousies, etc.) information as to whether or
not the premises of the government agency or office concerned are
manned by security guards. If so, the respective Sworn Statements or
Affidavits of the guards respecting the incident should be obtained and
submitted.
1.2 A certified copy of the contract of security/services entered into by and
between the government office and the security agency should be
submitted.

63
 1.3 If the Security Guard(s) is found to be negligent in the premises, a
recommendation to the Agency Head should be made that appropriate
action be instituted to enforce the civil liability of the security guard
and/or security agency concerned.
1.4 In cases of theft or robbery/hold-up of government cash/funds to be
deposited with or withdrawn from a depository bank, information as to
whether or not the proper accountable officer was escorted by a
policeman or security guard should also be submitted. If in the negative,
explanation to this effect should be submitted.
2. Detailed list of government properties lost or destroyed as well as those
properties retrieved after. The robbery incident disclosing the book value of
each item or exact amount of government money/cash involved, duly verified
by the proper Auditor.
3. Authenticated picture(s) taken relative to the robbery or theft incident.

Force Majeure (Earthquake, Typhoon, etc.)

1. Detailed list/inventory of lost or destroyed government properties or lost cash,

as well as those properties retrieved after the calamity, verified by the Auditor
concerned;
2. Certification of the proper official of the local PAGASA or other similar
government Agency on the actual occurrence of the calamity specifying therein
the approximate or exact time the incident happened and the areas or places
affected thereby; and

Death of Large Cattle and other Livestock

1. Certificate of Death of the large cattle issued by the proper official duly verified
by the Auditor concerned; and
2. Autopsy report of the proper Veterinarian, if any.

DISPOSAL/DIVESTMENT

The government properties which are unserviceable, no longer needed, obsolete,

forfeited/seized supplies, materials and equipment and valueless records should be
properly disposed in accordance with the existing rules and regulations. To save on cost,
there is a need for their disposal. Proper and regular disposal of such properties save cost
in maintaining such properties and the corresponding space could be used for more
valuable/important documents/records/properties.

Pursuant to EO No.888 and Section 1 of COA Circ. No. 89-296, the full and sole
authority and responsibility for the divestment or disposal of properties and other assets
owned by the National, Corporate and Local Government Units including its subsidiaries
64
shall be lodged in the heads of the departments, bureaus and offices or governing bodies
or managing heads of the concerned entities.

Common Modes of Disposal

1. Condemnation/Destruction of Property

-through pounding, burning, breaking, shredding, throwing or any other method by

which the property is disposed beyond economic recovery. Destruction shall be made in
the presence of the Disposal Committee.

2. Transfer of Property – Transfer without Cost

- upon initiative of the owning agency or submission of request to owning agency,

this may be done either with or without cost. Cost herein refers to payment based on the
fair value of the property.

3. Barter

- transfer of property to another government agency in exchange for another piece

of property. The value of the property transferred may or may not be equivalent to that
being received.

4. Sale of Unserviceable Property

- Sale thru Public Auction as a general rule, is the mode of disposal. This is done
thru sealed public auction or when circumstances warrant, by viva voce.
- Sale thru Negotiated Sale is resorted to as a consequence of failed auction.

Disposition of Property Held by Deceased, Incapacitated, Absconding, or Suspended

Accountable Officer

The agency head shall designate a custodian to take charge of the funds or property
until a successor shall have been appointed and qualified.

RECEIPT, ISSUANCE & REPORTING OF RELIEF GOODS FOR DISASTER

RISK REDUCTION MANAGEMENT

Purchases out of the General Fund and Cash Donations

1. The Accounting Unit shall prepare and maintain PPE Ledger Cards and Supplies
Ledger Cards for all PPE and relief goods, respectively, procured out of
appropriations. For check and balance, the Property and Supply Unit shall

65
 maintain Property Cards and Stock Cards. The formats prescribed in Appendices
57, 58, 69 and 70, Volume II, GAM shall be used.
2. Small items purchased for disaster response and rescue activities, which do not
qualify under the equipment classification, shall also be recorded under the
appropriate inventory account and the issuances to be charged to appropriate
expense account. Issuances shall be supported with RIS.
3. The monthly Report of Supplies and Materials Issued (RSMI) shall be prepared
by the Property and Supply Unit based on the RIS, using the formats in
Appendices 63 and 64, respectively, Volume II, GAM. The report shall be
submitted to the Accounting Unit for recording in the books of accounts
4. The First-In First-Out (FIFO) method shall be applied in charging to or
utilization of cash donations received from different donors for the same
purpose.

In-kind Donations from Local and Foreign Sources

1. Acknowledgement Receipt for In-Kind Donations for DRRM shall be issued by

the Head of the Agency or his/her authorized representative for the receipt of in-
kind donations.

2. Issuances of donated relief goods for distribution to intended beneficiaries/end-

users shall be supported with Issuance Form for In-Kind Donations – DRRM
3. Donated PPE transferred to other government agencies shall be approved by the
head of the transferring agency, covered by a Property Transfer Report and
dropped from the books of accounts. The recipient agency shall recognize in the
books of accounts the transferred PPE.
4. The Accounting Unit shall prepare and maintain PPE Ledger Cards for all
donated PPE. For check and balance, the Property and Supply Unit shall
maintain Property Cards. The formats prescribed in Appendices 57, 58, 69 and
70, Volume II, GAM shall be used.
5. In-Kind donations other than PPE shall not be recognized in the books of
accounts but shall be recorded in the Registry of Donated Relief Goods for
DRRM to be prepared and maintained by the Property and Supply Unit for each
kind of relief goods.
6. Donated relief goods shall be sorted, inventoried/counted and recorded upon
receipt and before repacking. The distribution shall be made immediately,
especially the perishable goods/items.
7. The inventories of donated items shall be considered in the determination of the
volume of relief goods to be purchased.

66
Reporting Guidelines

*In-Kind Donations

The Donee-Agency shall prepare monthly reports on the receipt and

distribution/utilization/issuance of in-kind donations. Separate reports shall be prepared for
relief goods and PPE based on the Registry of Donated Relief Goods for DRRM and
Property Cards, respectively. The reports shall be submitted to the OCD, copy furnished
the COA Auditor, on or before the 10th day of the ensuing month until all donations are
fully consumed/utilized.

*Posting of Reports on Websites

The required reports on the receipt and utilization of DRRMF sourced from GAA
and donations in cash and in-kind shall be posted in the official websites of the
implementing/donee-agency, OCD and NDRRMC.

67
 CHAPTER V

THE COMPLETE AUDIT PROCESS

Chapter Overview

This Chapter deals on the different audit processes which will guide the Local Chief
Executives in the proper disposition of government financial transactions to comply with
auditing rules and regulations and ensure efficient and effective operations in accordance
with the requirements of the oversight or control agencies of the government.

Learning Objective

 Obtain an understanding of the complete audit process.

 Understand the types of audit and identify each type; and
 Learn the different audit approaches and audit outputs.

Legal Basis

Sec. 2(2), Article IX-D of the 1987 Philippine Constitution provides:

“The Commission on Audit shall have exclusive authority, subject to the limitations
in this Article, to define the scope of its audit and examination, establish the
techniques and methods required therefor, and promulgate accounting and
auditing rules and regulations, including those for the prevention and disallowance
of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures,
or uses of government funds and properties.”

Sec. 25 - Statement of objectives, states:

“In keeping with its Constitutional mandate, the Commission adheres to the
following primary objectives:

1. To determine whether or not the fiscal responsibility that rests directly with
the head of the government agency has been properly and effectively
discharged;
2. To develop and implement a comprehensive audit program that shall
encompass an examination of financial transactions, accounts, and reports,
including evaluation of compliance with applicable laws and regulations;
3. To institute control measures through the promulgation of rules and
regulations governing the receipts, disbursements and uses of funds and
property, consistent with the total economic development effort of the
government;

68
 4. To promulgate auditing and accounting rules and regulations so as to
facilitate the keeping, and enhance the information value, of the accounts of
the government;
5. To adopt measures calculated to hasten the full professionalization of its
services;
6. To institute measures designed to preserve and ensure the independence of
its representatives; and
7. To endeavor to bring its operations closer to the people by the delegation of
authority through decentralization, consistent with the provisions of the new
Constitution and the laws.

This objective has thus clearly drawn the line between management and the
Commission in so far as handling and controlling of public finances of the government is
concerned. The basic responsibility to safeguard the resources of the government properly
and directly pertains to agency management.

Fiscal responsibility rests directly with the chief or head of the government
subdivision, agency or instrumentality. The role of COA is only to determine whether or
not such fiscal responsibility has been properly and effectively discharged.

SCOPE OF COA JURISDICTION

(Sec. 26, PD 1445)

The general jurisdiction conferred upon the Commission on Audit extends to and
comprehends all matters relating to the following:

 auditing procedures, systems and controls;

 keeping the general accounts of the government;
 preservation of vouchers pertaining to the general account for a period of ten years;
 examination and inspection of the books, records, and papers relating to said
accounts;
 audit and settlement of the accounts of all persons respecting funds or property
received of held by them in an accountable capacity; and
 examination, audit, and settlement of all debts and claims due from or owing to the
entities within its jurisdiction.

Entities within COA Jurisdiction

 National Government Agencies, its departments, bureaus, agencies and offices,

including Philippine embassies, consulates and other foreign based government
agencies;
 Local Government Units, their agencies and other instrumentalities;

69
  Government-Owned and Controlled Corporations and their subsidiaries;
 Constitutional Bodies, Commissions and Offices that have been granted fiscal
autonomy under the Constitution;
 Autonomous State Colleges and Universities; and
 Non-Government Organizations subject to the visitorial power of the Commission
Deviations from laws, regulations, and established policies and procedures, and
other deficiencies noted in the audit, together with any measures for corrective action, are
discussed with the agency officials responsible in order to obtain their view and assure a
fair and accurate reporting of the findings.

TYPES OF AUDIT

The COA audit is basically comprehensive and is categorized into the following:

1. Financial Audit
2. Compliance Audit
3. Value for Money Audit
4. Government Wide Sectoral Performance Audit
5. Fraud Audit
6. Special Audit

The purpose of comprehensive audit is to determine how well the agency under
audit discharged its financial responsibilities and conducted its operations and activities.
The other types of audit the Commission undertakes such as revenue audit, property audit,
levy audit, etc. fall under any or all of the above categories depending on the objectives.

Financial responsibilities are construed as including the expenditure of funds and

utilization of property, personnel and other resources in the furtherance of authorized
programs, projects and activities in an effective, efficient and economical manner.

Necessary to the determination of financial responsibility is the periodic reporting

of audit findings, stating the deficiencies observed and recommending appropriate
measures for improvements, where required.

A comprehensive audit is an analytical and critical examination of an agency and

its activities. Its scope extends to all operations and transactions and to all its
programs/projects/activities. Its objectives include the determination as to whether:

a) The agency is carrying out only those activities or programs authorized by the
legislature and are conducting them efficiently and in the manner authorize;
b) Expenditures are made only in the furtherance of authorized activities and in
accordance with the requirements of applicable laws and regulations including
auditing decisions;

70
 c) The agency collects and accounts properly for all revenues and receipts
arising from its activities;
d) The assets of the agency or those in custody are adequately safeguarded,
controlled and utilized in an efficient manner;
e) Reports by the agencies to the central control agencies disclose fully the nature
and scope of activities conducted and provides a proper basis for evaluating
the agency’s operations.

1. Financial Audit - an examination of financial statements or other financial data with

the objective of expressing an opinion on whether the financial statements fairly present
the financial condition and results of operation of an auditee in conformity with the
generally accepted accounting principles, or other comprehensive basis of accounting
prescribed by other authoritative bodies.

The complete set of Financial Statements typically include the following:

1. Statement of Financial Position

2. Statement of Financial Performance
3. Statement of Changes in Net Assets/Equity
4. Cash Flow Statement
5. Notes, comprising a summary of significant accounting policies and other
explanatory notes
6. Comparison of Budget and Actual Amounts

- Statement of Management Responsibility for Financial Statements – states

that management is responsible for all information and representation contained
in the Statement of Financial Position and the related Statement of Financial
Performance and Statement of Cash Flows and that the financial statements have
been prepared in conformity with generally accepted accounting principles.

- Statement of Financial Position - as a minimum, the face of the statement of

financial position shall include line items that present the following amounts:

a) Property, plant and equipment

b) Investment property
c) Intangible assets
d) Financial assets
e) Investments accounted for using the equity method
f) Inventories
g) Recoverables from non-exchange transactions
h) Receivables from exchange transactions
i) Cash and cash equivalents
j) Taxes and transfers payable
k) Payables under exchange transactions
l) Provisions
71
 m) Financial liabilities
n) Minority interest, presented within net assets/equity, and
o) Net assets/equity attributable to owners of the controlling entity

- Statement of Financial Performance - as a minimum, the face of the statement of

financial performance shall include line items that present the following amounts
for the period:
a) Revenue
b) Finance costs
c) Share of the surplus or deficit of associates and joint ventures accounted
for using the equity method
d) Pre-tax gain or loss recognized on the disposal of assets or settlement of
liabilities attributable to discontinuing operations, and
e) Surplus or deficit
The following items shall be disclosed on the face of the statement of financial
performance as allocations of surplus or deficit for the period:
a) Surplus or deficit attributable to minority interest, and
b) Surplus or deficit attributable to owners of the controlling entity.

- Cash Flow Statement - shall report the cash flows during the period classified by
operating, investing, and financing activities. An entity shall report cash flows from
operating activities using either the direct method or indirect method. An entity
shall report separately major classes of gross cash receipts and gross cash payments
arising from investing and financing activities, except to the extent that cash flows
are reported on a net basis.

2. Compliance Audit - an examination intended to evaluate an organization’s compliance

with applicable laws, rules, and regulations as well as policies and procedures in
handling of its finances and in its operations in general.

3. Performance Audit - an audit concerned primarily with the efficiency, economy, and
effectiveness of an entity’s or agency’s operations. It is also referred as Value-for-
Money (VFM) or Economy, Efficiency and Effectiveness (3E’s) Audit.

Economy refers to the terms and conditions under which the audited entities
acquire human and material resources. An economical operation requires that these
resources be obtained in appropriate quality and quantity at the lowest cost. An audit for
economy will determine whether the audited agency has been performing or functioning at
the least possible cost or under the terms most advantageous to the government.

Efficiency refers to the relationship between goods or services produced and

resources used to produce them. An efficient operation produces the maximum output for
any given set of resource inputs, or minimum inputs for any given quantity and quality of
service produced. An audit for efficiency will determine whether the audited agency is

72
managing or utilizing its resources (fund, personnel, property, space, etc.) in an efficient
manner.

Effectiveness concerns the extent to which a program achieves its goals or other
intended effects. An audit of effectiveness will determine whether the desired results or
benefits are being achieved and whether the objectives established by the authorizing body
are being met.

Performance Audit is the review of managerial efficiency, with the end in view of
eliminating waste and promoting efficient use of public funds and resources; and the
ascertainment of the agency’s effectiveness by determining whether desired results have
been achieved and programs have accomplished their purposes and objectives.

4. Government Wide Sectoral Performance Audit (GWSPA) - The simultaneous

examination of a management function or activity in a number of government agencies
which is expected to provide:

- audit criteria which are supported by best practices;

- opportunities to the audited agency for benchmarking with other
government agencies.

Sectoral Audit - audit of programs or activities that are delivered by more than one
government agency and is expected to provide:

- an overall picture of how various segments of a program are implemented

and possibly lead to the identification of areas where improvements can be
introduced;
- audit criteria or benchmark for future audits of government programs by
various government agencies.

5. Fraud/Forensic Audit - conducted when there is a suspicion or a report that fraud

exists. It indicates that there has been disclosure or detection of deceit, abuse, wastage
or illegal act that has resulted in loss or damage to public funds and properties.

Fraud involves acts of deceit, trickery, concealment, or breach of confidence

that are used to gain some unfair or dishonest advantage. It is an unlawful interaction
between two entities, where one party intentionally deceives the other through the
means of false representation in order to gain illicit and adjust advantage.

Motivation and opportunity are the elements that generally underlie the
commission of fraud and corruption. These could take the form of:

a) Economic Motivation - financial need or gain is the most common

motivation for fraud and corruption.

73
 b) Greed - persons with power and authority often commit fraud and
corruption because they are motivated by greed.
c) Prestige or Recognition - persons may feel they deserve more prestige or
more recognition. These persons are often motivated by jealousy, revenge,
anger, or pride.

d) Moral Superiority - persons may also be motivated by causes or values

and feel that they are morally superior to those of the victim, or the
government in this case.

Fraud is deemed to comprise anything calculated to deceive, including all acts,

omissions, and concealment involving a breach of legal or equitable duty, trust, or
confidence justly reposed, resulting in damage to another, or by which an undue and
unconscientious advantage is taken of another (People vs. Sabio, 86 SCRA 596).

6. Special Audit (such as: Levy Audit, Franchise Audit, Rate Audit, etc.) - an audit
that is not comprehensive or cyclical. Special audit may encompass financial,
compliance and comprehensive audit components.

Section 7 (5) a & c, Chapter 3, Subtitle B, Book V of Executive Order No. 292
(Revised Administrative Code of 1987) mandates COA through the Special Audit
Office to "conduct … variable scope audit of non-governmental firms … required to
pay levies or government shares …" and “audit financial operations of public utilities
and franchise grantees for rate determination and franchise tax purposes.”

Section 29 of PD 1445 vests on the COA visitorial authority over non-

government entities subsidized by the government, those required to pay levies or
government share, or those which have received counterpart funds from the
government or are partly funded by donations through the government.

AUDIT APPROACHES

1. Integrated Results and Risk-Based Audit (IRRBA) - is an integration of the different

types of audit being performed by the Commission on Audit. It is the establishment of
a common public sector audit approach and a consistent set of audit processes that
reduces redundant activities, eliminates duplication in the audit of an agency and drive
down resource costs.

IRRBA focuses primarily on the identification and assessment of the financial

statement misstatement risks and provides a framework to reduce the impact to the
financial statements of these identified risks to an acceptable level before rendering an
audit opinion on the financial statements in compliance with the attest function of the
Commission. It also provide indicators of risks as a basis of opportunity for

74
 improvement of auditee risk management and control processes in accordance with the
Commission’s operational advisory function.

2. Unified/Integrated Audit Strategy - is a vertical and/or horizontal audit of funds,

programs/projects/ activities of the government or follow-the-money trail audit.

The audit may be within the cluster, or sector, or across sectors of the Commission.

Vertical Audit - refers to audit of funds, programs/projects/activities implemented by

the head office of NGAs/GOCCs and their field offices/branches/operating units.

Horizontal Audit - refers to audit of funds pertaining to specific

programs/projects/activities co-implementd by various agencies or sectors of the
government.

Consistent with the Public Financial Management Roadmap, the Department of

Budget and Management (DBM), Commission on Audit (COA), Department of Finance
(DOF), and Bureau of the Treasury (BTr) jointly developed the Unified Accounts Code
Structure (UACS), a government-wide coding framework, to provide a harmonized
budgetary and accounting code classification that took effect on January 1, 2014. COA-
DBM-DOF issued Joint Circular 2013-1 dated 6 August 2013 to implement UACS and
Joint Circular 2014-1 dated 7 November 2014 on Enhancement of UACS. Agencies are
required to implement the UACS beginning January 1, 2014 for all financial transactions
(budget, accounting, treasury, cash, reporting, etc.)

What is UACS?

It is a government-wide harmonized budgetary, treasury and accounting code

classification framework to facilitate reporting of all financial transactions of agencies
including revenue reporting.

Why UACS?

• To direct the harmonization of budgetary, treasury and accounting classifications,

thus simplify and consolidate formats for financial reports.
• To enable reporting of actual revenues and actual expenditures in comparison to
what were projected to be collected and expended.
• To enable comparison of disbursements for programs, projects, activities with their
approved appropriations.

75
Major Final Output is now part of UACS MFO/PAP Element

76
3. Citizen’s Participatory Audit (CPA) - is the conduct of audit with the involvement of
civil society or private professional organizations as members of the Audit Team led
by the Commission on Audit.

Citizen’s Participatory Audit – is a Commission on Audit Strategy for Reform -

to uphold the people’s primordial right to a clean government and the prudent utilization
of public resources, founded on the premise that public accountability can prosper only
with a vigilant and involved citizenry, for the promotion of transparency and effectiveness.

CPA is a technique of conducting joint audits (with civil society organizations) to

make government more effective, transparent, and accountable. It is a mechanism for
strategic partnership and sharing of aspirations, goals and objectives between the COA and
civil society. It is an avenue for citizen involvement in the various areas of the COA’s
work as partners.

AUDIT TECHNIQUES

Audit Techniques - techniques used by auditors to determine deviations from actual

accounting and controls established by an auditee as well as uncovering problems in
established processes and controls. These can include the following:

Flowcharting - increases the auditors’ understanding of complex operations. The

flowcharting process includes: breaking down complex operations into their simplest parts;
providing overviews of how work is received, processed, and completed; and identifying
key control points for further review and testing.
Confirmation - written inquiry to verify accounting records and or other
information. Confirmation with independent parties is used widely for a variety of
transactions and balances because it can produce evidence regarding existence, ownership,
valuation and cut-off.
Tracing/retracing bookkeeping procedures - Auditor selects source documents
and proceeds forward through the control system to the final recording of the transaction.
Tracing supports completeness
Recomputation/reperformance - performing independent calculations or
recalculating the client’s calculations.
Scanning and observation of pertinent activities and conditions - eyes-open
approach of looking for anything unusual. It does not produce direct evidence, but can
raise questions and can be used to reduce sampling risk by scanning the items not selected.
Computers can be used to scan electronic data files.
Observation - looking at the application of policy or procedures by others.
Inquiry - involves the collection of written or oral evidence from the auditee and
independent third parties considering that evidence requires corroboration.
Comparison & correlation with related information - involves comparing
documents, reports or records against other pertinent documents, reports or records.

77
 Reconciliation - bringing together two or more data, information, records or
reports to an agreement.
Analysis - substantive test of financial information made through a study and
comparison of relationships among data.
Interview - the purpose of an audit interview is to gather facts. Auditors should
conduct audit interviews with sincerity, honesty, empathy, and candor.
Inspection/physical examination & count - the act of counting, measuring,
examining, testing, or gauging the characteristics & features of a product or services.
Vouching of authoritative documents - Information is selected from an account
or other summary of information and the auditor goes back through the control system to
find the source documentation.
Sampling - selection of a portion of the population. Auditors should ensure that
findings and conclusions are sound by choosing the type and size of the sample and
implementing the sampling procedures appropriate to the audit objectives.

AUDIT OUTPUTS

Audit Outputs - the following are the most common audit outputs relative to the
Audit Function and Legal and Adjudicatory Function of the Commission:

1. Audit Observation Memorandum (AOM) - a written notification to the agency head

and concerned officer/s informing of deficiencies noted in the audit of accounts,
operations or transactions and requiring comments thereto and/or submission of
documentary and other information requirements within a reasonable period. The
AOM is composed of the herein elements:
Criteria - the appropriate standard/s used. The standards may be derived from
laws, rules, regulations, and/or prescribed policies.
Condition - the situation prevailing in the agency at the time of the audit or the
actual practice which violated certain prescribed laws, rules, regulations, and/or
prescribed policies.
Cause - the action, inaction or inadequacy of action of management or its
officials/employees as measured against applicable criteria.
Effect - the difference between the standard used and the action taken.
Recommendation - the course of action offered to correct or remedy the
deficiencies observed.

Sample AOM (topic sentence) for Financial Audit

Failure to prepare the bank reconciliation statements due to absence of bank

statements, subsidiary records and other pertinent documents resulted in a material
unaccounted discrepancy of P101.957 million between book and bank balances,
thereby casting doubt on the accuracy and validity of the consolidated Cash in Bank
account totaling P377.591 million as of December 31, 2015.

78
Sample AOM (topic sentence) for Compliance Audit

Various payments to contractors amounting to P18,966,303.49 were not duly subjected

to withholding taxes contrary to the provisions of the National Internal Revenue Code
(NIRC) of 1997 as amended, resulting in the non-remittance of taxes to the Bureau of
Internal Revenue (BIR) amounting to P2,839,187.40.

Sample AOM (topic sentence) for Performance Audit

Relief goods consisting of various food items received as donations in the total amount
of P1.06 million have expired and went to waste due to delayed distribution that
deprived victims of calamities of much-needed supplies for sustenance.

Prepare Summary of Audit Results and Recommendations

Accumulated results of financial, compliance, and performance audits, issued and

communicated to management through Audit Observation Memorandum, are summarized
at the end of the audit.

Significant findings, issues and observations, including misstatements, are

summarized and discussed with concerned agency personnel. Conclusion for each
misstatement, finding, issue, and observation is documented. This serves as basis in
formulating audit opinion in the audit report.

Discuss results of other types of audit conducted

The agency may have been subjected not only to comprehensive audit but also to
other types of audit like Fraud Audit and GWSPA. In this case, the Audit Team, together
with the Supervising Auditor, shall discuss with the counterpart Audit Team the results or
status of the audit, if ongoing, for disclosure or inclusion in the Management Letter or
Annual Audit Report.

79
2. Management Letter (ML) - the final output of the yearly comprehensive audit of
bureaus, offices and operating units of national and corporate government agencies
whose financial transactions and operations are consolidated into the financial
reporting system of the Head Offices. It is similar in substance to the Annual Audit
Report except for the absence of audit opinion on the presentation of the financial
statements.

Management Letter is issued for the year-end financial audit of the regional
offices and operating units, with and without complete set of books of accounts. The
ML shall also be issued at the conclusion of an interim audit, if warranted.

3. Annual Audit Report (AAR) - is the year-end financial report for agencies with
complete set of books of accounts and listed in the General Appropriations Act. It is
the final output of the yearly comprehensive audit conducted. It is the medium used by
the Commission on Audit to communicate to the audited agencies and proper
authorities the results of the review and appraisal of how management had discharged
its fiscal responsibility.

The AAR discusses the observations noted by the Audit Team and includes the
recommendation of measures necessary to improve the economy, efficiency and
effectiveness of agency operations. The comments and observations in the AAR shall
be appropriately acted upon by the Heads of Offices and/or responsible officials.
Management explanation or reply to the observations shall also be presented as well as
the auditor’s rejoinder, as necessary or appropriate.

80
 The actions taken on the recommendations shall be communicated to the
Commission, through the Audit Team Leaders, within one month from date of receipt
of the AAR.

4. Cash Examination Report (CER) - narrative report on the results of examination

consisting of the introduction, findings and recommendations, and the annexes. The
findings with the corresponding recommendations are presented in the order of
significance. The report incorporates the management comments and auditor’s
rejoinder.

Cash examination is an audit technique whereby an authorized examiner of cash

and accounts inquire into the correctness and physical existence of the balance of the
cash in the custody of the accountable officer, the validity of his/her cash transactions,
the reliability of the cash records, and his/her conformance with prescribed procedures.

Cash is the most liquid asset of an agency. Because of its liquidity, it is so

attractive that it is the asset most susceptible to theft and misappropriation. To guard
against the loss of cash through theft or fraud, adequate cash management mechanisms
and controls must be in place.

5. Special Audit Report (SAR) - results of Special Audit or Other Types of Audit (e.g.,
Levy Audit, Rate Audit, Franchise Audit, etc.) conducted may have significant impact
on the financial statements. The conclusions of these audit shall be included as part of
Other Matters (Emphasis of Matter) in the Audit Certificate, aside from preparing and
submitting the Special Audit Report.

6. Fraud Audit Report (FAR) - after a thorough investigation, a written report has to be
done. Investigative report writing must be clear to convey a pertinent data of proof and
evidence.

Fraud Audit Report conveys all of the evidence and gives credence to the work
of the investigators. The written report is the final distillation of the evidence being
presented. The report is very likely to be tested in court and accordingly forces the
investigators to document their findings.

7. Audit Report on Barangays (ARBs) - is the cyclical financial report for Barangays
which is issued once in every three years. It is the final output of the cyclical
comprehensive audit of barangays. It is the medium used by the Commission on Audit
to communicate to barangay management and proper authorities the results of the
review and appraisal of how the barangay officials had discharged their fiscal
responsibility.

8. Notice of Suspension (NS) - a written notification by the auditor to the agency head
and the accountable officer concerned of the suspension found in audit.

81
 Suspension - a temporary disallowance; refers to transactions or accounts
which appear illegal/improper/irregular unless satisfactorily explained or justified by
the responsible officers or until the requirements on matters raised in the course of audit
are submitted or complied with.

The auditor shall issue a Notice of Suspension for transactions of doubtful

legality/propriety/regularity which may result in pecuniary loss of the government, and
which will be disallowed in audit if not satisfactorily explained or validly justified by
the parties concerned.

A Suspension is considered as settled upon satisfactory explanation,

justification, or submission of the requirements stated in the Notice of Suspension. A
suspension which is not settled within 90 days from receipt of the NS shall become a
disallowance or charge. The auditor shall issue the Notice of Disallowance or Notice
of Charge on the amount suspended if he is not satisfied with the explanation,
justification or documents submitted.

9. Notice of Disallowance (ND) - issued by the auditor to notify the agency head, the
accountable officers concerned and the other persons liable of the disallowed
transaction.

Disallowance is the disapproval in audit of a transaction, either in whole or in

part. The term applies to the audit of disbursements as distinguished from “charge”
which applies to the audit of revenues/receipts

The auditor shall issue the Notice of Disallowance for transactions which are
irregular/unnecessary/excessive and extravagant as defined in COA Circular No. 2012-
003 as well as other COA issuances, and those which are illegal and unconscionable.

The disallowance shall be settled within six (6) months from receipt of the ND
by the persons liable.

10. Notice of Charge (NC) - is issued by the auditor to notify the agency head, the
accountant and the persons liable for the charges noted in the audit of revenues, receipts
and assessments.

Charge is an inclusion or addition to an accountability pertaining to the

assessment, appraisal or collection of revenues, receipts and other income such as that
arising from under-appraisal, under-assessment or under-collection. As distinguished
from “disallowance” which refers to the audit of expenditures, the term “charge” is
generally used in connection with the audit of revenues/receipts.

The NC shall indicate the transaction and the amount charged, reasons for the
charge, laws/rules/regulations violated, and persons liable. The audit charge shall be
settled within six (6) months from the date of receipt of the NC.
82
11. Notice of Settlement of Suspensions, Disallowances and Charges (NSSDC) - is
issued whenever a suspension/disallowance or charge is settled.

Settlement - refers to the payment/restitution or other act of extinguishing an

obligation as provided by law in satisfaction of the liability under an ND/NC, or in
compliance with the requirements of an NS

An audit suspension or disallowance/charge shall be settled by the persons

responsible or liable therefor through compliance with the requirements, or
payment/restitution or by any of the modes of extinguishment of obligation provided
by law respectively. A Notice of Settlement of Suspension/ Disallowance/Charges
(NSSDC) shall be issued for such settlement.

12. Notice of Finality of Decision (NFD) - a written notification that a decision of the
COA has become final and executory.

The NFD shall be issued by the authorized COA official to the agency head to
notify that a decision of the Auditor, Director, ASB or CP has become final and
executory, there being no appeal or motion for reconsideration filed within the
reglementary period.

A decision of the Commission Proper, ASB, Director or Auditor upon any

matter within their respective jurisdiction, if not appealed as herein provided, shall
become final and executory. The Chief Accountant shall, on the basis of the NFD,
record in the books of accounts, the disallowance and/or charge as a receivable.

13. COA Order of Execution - a written instruction to withhold payment of salary and
other money due to persons liable, for settlement of their liability.

The COE shall be issued to enforce the settlement of an audit

disallowance/charge, whenever the persons liable therefor refuse or fail to settle them
after the decision has become final and executory.

The COE shall be addressed to the Agency Head, Attention: the

Treasurer/Cashier, and shall indicate the NFD, the particulars of the decision being
enforced and the persons liable.

14. Credit Notice - a written notification that the liquidation to a cash advance had been
allowed in audit.

83
84