EXECUTIVE SUMMARY A. Introduction

ii Scope and Objectives of Audit 5. The audit was conducted to determine the (a) level of assurance that may be placed on Management’s assertions on t...

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EXECUTIVE SUMMARY A. Introduction PNOC Alternative Fuels Corporation (PAFC) 1. PAFC was formerly known as PNOC Petrochemical Development Corporation (PPDC). The PPDC was incorporated on May 13, 1993, and registered with the Securities and Exchange Commission (SEC) under SEC Registration No. AS09303633, to develop the first integrated petrochemical industry in the Philippines. 2. On July 13, 2006, the Amended Articles of Incorporation of the PPDC was approved by the SEC reflecting its new name as PNOC Alternative Fuels Corporation. Its mandate is to explore, develop and accelerate the utilization and commercialization of existing and emerging alternative sources of energy and technologies and carry on the business of alternative fuels and other related activities thereto, to enhance the energy security and promote sustainable energy development; to develop projects for implementation of alternative fuel sources which shall include but not limited to bio-fuels, bio-diesel, bio-mass, bio-gas and such other energy systems that support environmental sustainability and energy consumption efficiency; to purchase, acquire, own, hold, lease, develop, sell, construct, maintain and operate production plants, refineries, factories, equipment, pipelines, transportation facilities, patent rights, technical and engineering know-how, appliances, industrial sites, storage, warehouses, offsite and industrial utilities which are used or incidental to production, manufacturing, processing, converting, fabricating, storage, trading, marketing, distributing, beneficiating, disposing, buying, selling, bartering, transporting, importing, exporting, or making of alternative fuels; and to advance energy research development of alternative energy sources through technical, financial and institutional arrangements, as well as venture into financing and operating of energy projects, utilizing alternative fuels through innovating schemes, such as but not limited to joint ventures and other sharing arrangements. 3. The Company has retained its secondary purpose, its mandate to manage, operate, and develop some 530 hectares of land in Bataan as a petrochemical industrial estate, known as Petrochem Park pursuant to its Articles of Incorporation. The Company was also mandated to cause the establishment of petrochemical and related industries thereat either by itself or in joint venture with private investors. Dissolution of PAFC 4. In a Memorandum dated September 8, 2014 from the Executive Secretary, President Benigno Simeon C. Aquino III had approved the recommendation of the Governance Commission for Government Owned and Controlled Corporations (GCG) to abolish PAFC, including the creation of a Technical Working Group for the pursuance of dissolution. The Company is in the process of complying with the liquidation requirements in coordination with the GCG and other government agencies.

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Scope and Objectives of Audit 5. The audit was conducted to determine the (a) level of assurance that may be placed on Management’s assertions on the financial statements; (b) the propriety of transactions as well as compliance with existing rules and regulations and Management’s policies; and (c) the extent of the implementation of prior years’ audit recommendations. 6. The audit covered the examination on a test basis of the accounts and financial transactions and operations of PAFC for the period January 1 to December 31, 2015 in accordance with Philippine Standards on Auditing. The audit also involved performing procedures to ascertain the propriety of financial transactions and compliance of the Company to prescribed laws, rules and regulations. B. Financial Highlights (In Million Pesos) The financial position and results of operations of PAFC are summarized as follows: Financial Position (As restated) 2014 4,022.555 815.839 3,206.716

Increase (Decrease) 12.119 (19.394) 31.513

2015 116.835 50.630 66.205

2014 96.653 50.021 46.632

Increase (Decrease) 20.182 0.609 19.573

28.140 38.065 (13.318) 24.747 5.406 0.000 19.341

37.403 9.229 11.506 20.735 0.932 0.000 19.803

(9.263) 28.836 (24.824) 4.012 4.474 0.000 (0.462)

2015 4,034.674 796.445 3,238.229

Assets Liabilities Equity

Results of Operation

Revenues Cost of Sales Gross Profit General, Administrative and Other Operating Expenses Profit from Operations Other Income (Charges) Profit Before Tax Income Tax Expense Other Comprehensive Income Total Comprehensive Income

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C. Auditor’s Opinion The Auditor rendered an unqualified opinion on the fairness of the presentation of the financial statements of the PAFC as at December 31, 2015 as stated in the Independent Auditor’s Report in Part I. D. Significant Audit Observations and Recommendations Although the Auditor rendered an unqualified opinion, there is a significant audit observation that needs immediate action. This, together with the audit recommendation, is presented below. Details are in Part II. No forceful action has been taken for the past six years by the PAFC against two partner-growers, namely: Petrogreen Oil Commodities Holdings, Inc. and Royal Green Energy Development, Inc. for the latter’s failure to account for the working funds they received in 2008 for the development of Jatropha Biodiesel Project totaling P64.500 million. Recommendation: Request the OGCC to immediately complete the evaluation of the case and to take the necessary legal action. E. Summary of Total Suspensions, Disallowances and Charges as of Year-end The Notices of Disallowance (ND) issued in CY 2011 pertain to payment of P17.587 million retirement benefits that lacked legal basis. In CY 2015, another ND was issued disallowing excess benefits received by the Members of the Board of Directors, Corporate Secretary and Corporate Treasurer contrary to Section 3 (c) of Administrative Order No. 103 s. 2004 Details and status of these NDs are presented in Items 4 and 5 of Part II of the Report. There are no outstanding audit suspensions and charges as of December 31, 2015. F. Statement of Prior Years’ Audit Recommendations Out of the seven audit recommendations embodied in the previous years’ Annual Audit Reports, two were fully implemented, two were partially implemented and three were not implemented. Details are presented in Part III of the Report.

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