A. INTRODUCTION The AFP Commissary and Exchange Service (AFPCES) was established pursuant to Staff Memorandum Number 5 dated December 5, 1972. On July 1, 1976, the AFPCES was formally organized as an AFP-Wide Support and Separate Unit of the AFP pursuant to General Order No. 920 dated July 13, 1976. Thereafter, the AFPCES, hereafter called as Commissary, was activated as a regular unit of the General Headquarters, AFP effective January 31, 1987 pursuant to General Order No. 138 dated February 26, 1987. It receives tax subsidy from the Department of Finance through the Bureau of Internal Revenue (BIR) in the form of Tax Credit Certificates (TCC) for the amount of value-added tax (VAT) placed on purchases of general merchandise and excise tax on alcohol/beer, petroleum and cigarettes. At present, AFPCES has eight Convenience Stores, six Drugstores and two Gasoline Station situated in Metro Manila, and 26 Provincial outlets or a total of 42 outlets nationwide.
B. OPERATIONAL HIGHLIGHTS AFPCES continuously improved its commitment of service to authorized customers. It has implemented various innovations in the field of customer service, maintenance and enhancement of facilities for a safe and pleasant shopping experience. It also enhanced its POS system for faster transactions and reliable source of data. Moreover, it intensified its security and internal control measures through a more frequent spot audit and cash counts and staff visit to store outlets. The significant accomplishments of AFPCES for CY 2016 are as follows: 1. Facility Enhancement In order to secure and preserve property and facility resources, various projects were undertaken. More so, to improve customer shopping experience and satisfaction, repair and renovation of existing facilities were undertaken to enhance store appearance and maintain the structures, as well as to provide a safe environment to customers while shopping in various outlets nationwide. Particular Termite Treatment Termite Treatment Termite Treatment
Store/Outlet Main C & X Main Annex/Central Whse Main Gas Station/Motorpool
Particular Repair of Glass Door Repair of Roof/Gutter Repair of Fence/Plant Box Hauling of Equipment Repair of Fire/Exit Door Installation of new water pipeline Repair of Fence Installation of water pipeline Manual Transfer Switch of GenSet Repair of Roll-up Door Renovation/Repair of Facility Installation of downspout Replacement of cracked tiles Repair/repainting of exterior walling Minor repair of store Landscaping Repainting of building Electrical rewiring Repair of roof, ceiling and window Replacement of barrel assembly Repair of water pipeline Re-tiling Re-tiling Repair of Gutter, Roofing and Ceiling Repair of Walling and Ceiling Repair of Walling Fabrication of window grills Repair of Canopy Installation of Roll-up Door
Store/Outlet VAB Drugstore AFPMC C & X MAB C & X CGS C & X MAB C & X NSL C & X MAB C & X CLL C & X Main C & X FB C & X Main Gas Station Main C & X FB C & X Main C & X CC C & X CC C & X CD C & X CMP C & X FDP C & X Main Annex Central Warehouse Headquarters building COA Office EP Barracks GM’s Quarters COA Office (records room) Headquarters building Headquarters building Headquarters building
2. Operational Innovation and Marketing Activities The conduct of “Libreng Patikim” fairs in various military camps and bases continuously provided the much needed information for the awareness of authorized customers in the existence of AFPCES in the area. It is also one way of giving back or sharing with them a year of their patronage to AFPCES. Coordination with suppliers was also constantly being provided through the conduct of various business review aimed in ensuring the availability of their products in AFPCES outlets nationwide. The co-branding scheme is still in place and AFPCES is continuously finding ways to make goods and merchandise more affordable to its authorized customers thereby giving them the much needed relief from the increasing cost of day-to-day living particularly in the purchase of basic commodities. Additionally, AFPCES personnel were provided with appropriate trainings and seminars to improve their skills and at the same time, equip them with additional ii
knowledge and skills that is relevant in their respective field of assignment and expertise. It is also one way for management to ensure that AFPCES personnel could adapt and be at par with the workforce in outside establishments. 3. Technology Advancement On its bid to further improve its operations and to best monitor its financial transactions, it continuously implemented its Point of Sales (POS) system in all outlets. Continuous enhancement of the system is being undertaken to make it more responsive and faster sales and reliable source of data. 4. Security and Control Aside from the installation of CCTV cameras, periodic background information to key personnel and background information of personnel before they are hired are conducted. To beef up security measures, intensive audit system is now being implemented to monitor store operations from the occurrence of cash and merchandise shortages. For the year, Management conducted 42 spot cash counts, 17 spot-detailed inventory audit, 13 turn-over audits and reinforced by a more frequent staff visits and spot cash audits to ensure store compliance to existing regulations and policies. For the year, 32 staff visits to store outlets were conducted. Moreover, appropriate legal action is also being pursued to accountable personnel/personnel involved in illegal activities or those who incurred merchandise shortages.
C. FINANCIAL HIGHLIGHTS A comparative schedule of assets, liabilities and government equity for the last two years is presented below: Group of Accounts Assets Liabilities Net Asset/Equity
819,795,968.15 314,853,351.74 504,942,616.41
772,683,151.12 240,316,045.95 532,367,105.17
Increase (Decrease) 47,112,817.03 74,537,305.79 (27,424,488.76)
RESULT OF OPERATIONS Group of Accounts Income Expense Excess of Income over Expenses
Increase (Decrease) 2,648,952,084.80 (315,189,528.96) 2,614,440,535.79 (273,844,481.56) 2015
2,333,762,555.84 2,340,596,054.23 (6,833,498.39)
For CY 2016, AFPCES was given Tax Subsidy in the amount of P335,088,513.69 to cover the taxes due on items purchased and sold to its intended beneficiaries, per FIRB Resolution No. 4-16 dated July 29, 2016, provided that such availment shall be in accordance with the terms and conditions of Section 16 (c) of the Republic Act (RA) No. 10717 or the 2016 General Appropriations Act (GAA), P259,312,336.00 of which was availed, as follows: SARO No. SARO-BMB-D-16-0032201 SARO-BMB-D-16-0036783 TOTAL
Quarter 1st and 2nd 3rd and 4th
Amount P105,382,140.00 153,930,196.00 P259,312,336.00
D. SCOPE OF AUDIT The audit covered the operations and financial transactions for CY 2016 of AFPCES and its outlets throughout the country. However, the results of audit do not include those pertaining to AFPCES outlets in Camp Capinpin, Sangley Point, Camp Riego de Dios, Fernando Air Base, Camp Elias Angeles, Camp Lapu-Lapu, Camp Evangelista, Camp Panacan, Camp Bautista, Camp Navarro, Edwin Andrews Air Base and Camp General Siongco because the Summary of Audit Observations and Recommendations (SAOR) were not received as of March 28, 2017. E. AUDITOR’S REPORT The auditor rendered a qualified opinion on the fairness of presentation of the financial statements of the AFPCES in view of the deficiencies noted as shown in the attached Matrix of Analysis on the Effect of the Misstatements on the FS marked as Annex A and enumerated in the next page together with the recommendations. 1. The reliability of the balances of Merchandise Inventory and Cost of Sales of P495,602,315.55 and P2,229,442,303.65, respectively, is doubtful due to (a) absence of three-way reconciliation of balances per general ledger (GL), subsidiary ledger (SL) and inventory count; (b) total difference of P21,521,617.51 between consolidated year-end inventory report and reported total amount of ending inventory of outlets; (c) expired inventories costing P15,293,950.81 was not written down from the books of account contrary to GAM Volume I and PPSAS 1 and 12. (Observation 3) We recommended that Management (a) reconcile the balances of the consolidated year-end inventory report and the reported amount of ending inventory of outlets; (b) revisit the contract and technical specification/ functionality of the POS system to ensure that the benefits expected from it were achieved; and (c) require the Chief Accountant to make the necessary adjusting entries and adhere strictly iv
to the aforementioned provisions of Chapter 8 of the GAM and PPSAS 1 and 12 to present fairly the accounts’ balances in the Financial Statements. 2. The accuracy and existence of Property, Plant and Equipment (PPE) accounts of P97,628,275.37 could not be established due to the (a) unreconciled difference between the accounting and property records of P23,458,130.58; (b) non-conduct of physical count; and (c) inclusion of motor vehicles registered under the name of private individuals, contrary to the provisions of Presidential Decree (PD) 1445, Government Accounting Manual (GAM) and Government Accounting and Auditing Manual (GAAM). (Observation 4) We recommended that Management (a) create an Inventory Committee to conduct the required physical count once a year and prepare and submit the RPCPPE to the Accounting Unit for reconciliation with the accounting records; (b) require the Chief Accountant to make the necessary adjusting entries to correct the balances of the affected accounts; (c) facilitate the transfer of ownership of motor vehicles and the corresponding registration under the name of AFPCES; and (d) adhere strictly to the provisions of Section 21 Chapter 10 of GAM on the issuance of Property Acknowledgement Receipt (PAR) upon issuance to end-user. 3. The accuracy and existence of Other Deposits account of P18,552,561.52 could not be ascertained due to the erroneous capture of financial transaction, presence of non-moving/dormant subsidiary ledgers (SL) balances, and absence of documents/records to support the amount recorded in the subsidiary ledgers, contrary to the provisions of Presidential Decree (PD) 1445 and Government Accounting Manual (GAM). (Observation No. 5) We recommended that Management exert more efforts to analyze and evaluate the composition of the Other Deposits account and gather the necessary documents for the long outstanding balances for possible adjustments in the books of accounts.
F. OTHER SIGNIFICANT OBSERVATIONS AND RECOMMENDATIONS 1. Proceeds from sale of merchandise utilized as operating funds of AFPCES were deposited and maintained with Philippine National Bank and Bank of the Philippines Islands, a private bank, without prior approval from the Department of Finance (DOF) contrary to DOF Department Circular NO. 001-2015 dated June 1, 2015 as amended by DOF Department Circular NO. 003-2015 dated August 24, 2015. (Observation No. 1) We recommended that Management (a) transfer the funds deposited with PNB and BPI to authorized government depository banks (AGDBs) or secure approval from the DOF to maintain deposits with PNB and BPI pursuant to DOF Department Circular NO. 001-2015 as amended by DOF Department Circular v
NO. 003-2015; and (b) request the bank to submit supporting documents to identify the debits/credit made in the bank statements for proper recording of adjustments in the books. 2. Long-outstanding/dormant and undocumented receivables as well as the enforcement of the liquidation/settlement of fund transfers for already completed project, affected the fair presentation of the reported Receivables accounts balances of P85,279,723.42 contrary to the provisions of Government Accounting Manual (GAM). (Observation 2) We recommended that Management (a) intensify its collections efforts and file collection cases against those with overdue and delinquent accounts; and conduct analysis and verifications of the receivables and determine those deemed uncollectible. If all possible avenues to collect have been exhausted and the same proved futile, request for write-off of the accounts following the guidelines set forth in COA-Circular No. 97-001 dated February 5, 1997 on the proper disposition/closure of dormant funds and/or accounts of National Government Agencies; and (b) make representation with the Philippine Army to liquidate/settle the outstanding amount and adhere strictly to the aforementioned provisions of COA Circular No. 94-013. 3. Unaccounted merchandise inventory estimated at P497,769.18 contributed to inventory losses incurred by the Central and General Staff College (CGSC) convenience store which is not in keeping with Section 102 of PD 1445. Likewise, replenishment/transfer of merchandise stocks by Main Annex Commissary and Exchange (C&X) were disproportionate to the monthly merchandise stocks being sold by the CGSC convenience store contrary to Section 5.4 of the AFPCES Store Operations Handbook 200-05. (Observation No. 6) We recommended that Management conduct a thorough investigation of the unaccounted stocks to establish accountability and pinpoint responsibility; and thereafter, hold the responsible personnel accountable. Henceforth, strictly adhere to Section 5.4 of the AFPCES Store Operations Handbook 200-05. 4. Inadequate procurement planning, monitoring of stocks and poor warehousing resulted in the expiration and contamination of medicines and medical supplies amounting to P15.11 million breaching the policy declaration of the government in Section 2 of the State Audit Code, which requires that all its resources shall be managed or utilized in accordance with the principles of economy, efficiency, and effectiveness in the operations of government. (Observation 7) We recommended that Management (a) donate the remaining unexpired medicines to AFPMC or to another government hospital in need to avoid waste of funds; (b) maintain appropriate inventory levels of stock to avoid overstocking of inventories; (c) coordinate and plan the proper timing of procurement taking into vi
consideration the need/demand, turnover ratio and expiration of drugs and medicines; (d) fix/repair the storeroom in the AFPMC to conform with the required temperature and environment to make it suitable to the nature of stocks being stored; (e) continued follow-up to Unilab, Inc for the replacement of the expired medicines; and (f) dispose of the expired/contaminated medicine/medical supplies. Other significant audit observations and recommendations were also noted and discussed in detail in Part II of this Report. Deficiencies observed in the course of the audit were communicated through Audit Observation Memorandum (AOM) and discussed in the exit conference conducted on March 10, 2017 with the concerned AFPCES officials and employees. Their comments were incorporated in this report, where appropriate.
G. IMPLEMENTATION OF PRIOR YEARS’ AUDIT RECOMMENDATIONS Out of the 49 audit recommendations embodied in CY 2015 Annual Audit Report, 23 were fully implemented, 22 were partially implemented and four were not implemented.