Checks and Balances: Audit and Accountability in

Philippine Public Finances

The Philippine Constitution emphasizes the importance of accountability in the government.
Article XI simply and bluntly begins: “Public office is a public trust,” before it adds that
officials and employees should serve the people with “responsibility, integrity, loyalty and
efficiency.”

In the government budget cycle, accountability is laid down by the need for government
agencies and departments submit to submit quarterly and monthly income statements;
statements of allotment, obligations and balances along with other financial reports and
documents for audit - a formal process whereby the authenticity, accuracy and reliability of
financial accounts or transactions are checked and approved.

There are several kinds of audit: One is Financial Auditing wherein financial transactions
and accounts are checked to ensure the submitting government agency has complied with
the rules and regulations, specifically the pre-agreed and government accounting system.
Another type is Performance Auditing whereby one is looking at the systems of the agency
to assess it has delivered on its institutional purpose and mandate by linking the budgets
with results or results-based budgets. An internal audit, as the name suggests, an internal
check on agency systems and processes. External Auditing involves an outside audit body
being brought in to look at the agency. Pre-auditing refers to auditing by agencies before
approval of transactions while post-auditing is auditing by an independent body after.

Government accountability agencies

 The Philippine government has agencies mandated to ensure accountability and
transparency on its overall operations. These agencies are: The Office of the Ombudsman,
Sandiganbayan, Presidential Anti-Graft Commission, the Civil Service Commission and
primarily, for the purpose of this paper, the Commission on Audit.

Office of the Ombudsman

The Office of the Ombudsman (Ombudsman) is mandated by the Constitution as
“protectors of the people who shall act promptly on complaints filed against officers or
employees of the government including members of the Cabinet, local government units
and government-owned and controlled corporations and enforce their administrative, civil
and criminal liability in every case where the evidence warrants in order to promote efficient
service by the government to the people.”

Significantly, Section 13 of Republic Act 6770 or the Ombudsman Act of 1989 states it shall
give priority to “high-profile complaints to high-ranking and supervisory officials involved with
grave offenses and large sums of money and/or properties.”
 
The Ombudsman does not only cover officials and employees of the government, but also
private individuals who have participated or “in conspiracy” with them in the filed complaints.

Sandiganbayan
The Sandiganbayan, or the government’s anti-graft court, is mandated by the 1973 and
1987 Constitutions. It covers criminal and civil cases against graft and corrupt practices and
other offenses committed by public officers and employees with Salary Grade 27 and
above, including those in local government units and government-owned or controlled
corporations, which are related to their official duties as determined by law.
 
Crimes and civil cases filed against public officers below Salary Grade 27 are covered by
the Regional Trial Court but Sandiganbayan is vested with Appellate Jurisdiction over its
final judgments, resolutions or orders. Private individuals can also be sued before this
special court if they are alleged to be in conspiracy with public officers. The Sandiganbayan
is also entrusted to have original exclusive jurisdiction over special laws such as RA 3019
(Anti-graft and Corrupt Practices Law), RA 1379 (Forfeiture of Illegally Acquired Wealth),
Revised Penal Code spec. Batasang Pambansa 871.
 
Presidential Anti-Graft Commission
The Presidential Anti-Graft Commission (PAGC) is mandated by Executive Order No. 12 to
assist the President in the campaign against graft and corruption. It investigates and
conducts hearings of administrative cases and complaints against Presidential appointees
in the Executive Branch with Salary Grades 26 and higher including members of the Armed
Forces of the Philippines and Philippine National Police of directed by the President,
government-owned and controlled corporations and public officers, employees and private
persons in conspiracy with alleged public officials.
 
PAGC’s jurisdiction includes the following laws: RA 3019, RA 1379, 6713, Revised Penal
Code, and E.O. 292.
 
Civil Service Commission
The Civil Service Commission (CSC) is the central personnel agency of the government
and is tasked in the recruitment, building, maintenance and retention of a highly-competent
and professional workforce. It is also one of the three independent commissions established
by the Constitution with adjudicative powers to render final disputes and personnel actions
on Civil Service. It covers all national government agencies, local government units and
government-owned and -controlled corporations.
 
 Commission on Audit
 
The Commission on Audit (COA) is the constitutional commission mandated to be the
supreme audit institution of the government. It has jurisdiction over national government
agencies, local government units, government-owned and controlled corporations and non-
government organizations receiving benefits and subsidies from the government.
 
The Constitution identified the following functions for the Commission:
 
1. Examine, audit and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property owned or held in trust by, or pertaining to, the
government;
2. 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;
3. Submit annual reports to the President and the Congress on the financial condition and
operation of the government;
4. Recommend measures to improve the efficiency and effectiveness of government
operations;
5. Keep the general accounts of government and preserve the vouchers and supporting
papers pertaining thereto;
6. Decide any case brought before it within 60 days;
7. Perform such other duties and functions as may be provided by law. COA, as the other
constitutional commissions are mandated, is headed by a Chairman and two
Commissioners appointed by the President and the Commission on Appointments of
Congress. It also enjoys fiscal autonomy which means its appropriations must be released
regularly and automatically. The Commission also deploys resident auditors in all national
government agencies, local government units and government-owned and controlled
corporations pursuant to its mandate to review each agency’s financial operations in a risk-
based audit approach.
 
COA reports
In order to perform its audit functions, COA produces different kinds of reports. A study by
the Philippine National Budget Monitoring Project 1 identified and explained each of these:
 
1. Regular Annual Audit Report of each NGA, LGU and GOCC
2. Consolidated Annual Financial Report for NGAs, LGUs and GOCCs
3. Special Audit Reports
4. Circulars and other Issuances
 
The Annual Audit Reports contain the results of the audit conducted on the financial
statements submitted by agencies, local government units and government-owned and
controlled corporations to COA auditors. The results are shown in the form of audit
opinionsindicating how the agencies faired with their financial statements at the end of each
fiscal year. The types of audit opinions are: Unqualified (U), Qualified (Q), Adverse (A) and
Disclaimer (D).
 
An Unqualified Opinion refers to the “clean opinion” or the agency reflected the results of
the financial statements fairly, which means its operations and the financial condition in a
period of time based on existing government accounting standards, and in compliance with
government laws, rules and regulations. A Qualified Opinion means that an agency
reflected fairly except for some specific transactions and/or accounts that have been found
to be problematic, either improper, questionable or needs further explanations. Adverse
opinion means that the financial statements did not fairly present its results of operations
and financial condition of the agency, and are not in compliance with prescribed laws and
applicable guidelines. Lastly, the Disclaimer opinion means that “there is no sufficient basis
to form any opinion” for an agency does not keep or submit its records of financial accounts
and transactions.
 
An audit report has the following parts: Audit Certificate, which shows the audit opinion,
theFinancial Statements, Major Findings and Observations which explains if there are
defects in the compliance of accounting and auditing rules and policies,
and Recommendations to the entities. In turn, COA checks if these measures were
conformed by the entity on the next year’s annual audit report.
 
The Consolidated Annual Financial Reports on the other hand show the financial
performance of the public sector in general. Each level has a volume of the consolidated
financial report, one each for NGAs, LGUs and GOCCs. These are based on the audit
reports of each entity. These reports contain the financial condition and highlights of
agencies, local government units and government corporations. These reports also reflect
the financial resources of the government, even the off-budget accounts or funds that are
not subject to annual appropriations. Interestingly, these reports are the only source where
one can be informed about funds that are not sourced out from appropriations.
 
Special Audit Reports are purposely for investigation, in response to a request by interested
parties or by a directive from Congress. The Commission has already undergone special
audit reports on the country’s outstanding debt and special purpose funds such as the
Agriculture and Fisheries Modernization Act and procurement of the Department of Public
Works and Highways.
 
GAFMIS
The Government Accountancy and Financial Management Information System (GAFMIS) is
a financial database which keeps the general accounts of the government. It is
spearheaded by the COA so as to implement its mandated function. Thru this, the
appropriations are verified and allotment releases to agencies are ensured not to exceed
the appropriations. From the Department of Budget Management (DBM), copies of Agency
Budget Matrices (ABM) and Special Allotment release Orders (SARO) are submitted to
GAFMIS and these make up the Registry of Appropriations and Allotments.
 
The GAFMIS is also essential because it assists government agencies with the Electronic
New Government Accounting System (e-NGAS). It is a computerized program of the New
Government Accounting System wherein budget transactions, allotments and obligations
are recorded and monitored electronically. It also helps in streamlining the New
Government Accounting System which provides the new accounting policies in the
government. Some of the basic features of the new system are the Accrual accounting and
One-fund concept.Accrual accounting recognizes the income when earned and expenses
when incurred as oppose to recognizing income when cash is earned and expenses when
paid.
 
Internal control and the internal control system
 
Internal control is defined as a process effected by an organization's structure, work and
authority flows, people and management information systems which are designed to help it
accomplish its goals. It is a means by which an organization's resources are directed,
monitored, and measured. It plays an important role in preventing and detecting fraud and
protecting the organization's resources. 2 Internal audit is an integral part of internal control.
It maintains efficiency and effectiveness in operations. It looks at the reliability of financial
transactions in reports by making sure that they are in accordance with rules and
regulations.
 
Several provisions in the Philippines have signified the internal control in the government
such as Section 123 of the amended Presidential Decree 1445, the Administrative Code
1987 and Government Accounting and Auditing Manual guided by worldwide standards thru
the International Organization for Standardization (ISO) and International Organization for
Supreme Audit Institutions (INTOSAI). The INTOSAI also formulated standards for the
internal control systems in the public sector. It has emphasized that internal control systems
shall be in line with the characteristics, values and context of the public organizations.
 
In line with these provisions, the Government has formulated the National Government
Internal Control System (NGICS) through the efforts of the DBM and resource and
reference panels from various government agencies. It serves as a guide to government
agencies in putting up internal control systems. It aims to strengthen accountability,
safeguard assets, promote efficiency, economy and effectiveness in the operations and
adhere with the policies of the organization.
 
Issues and limitations
 
The audit and accountability system in the Philippines have issues and limitations that affect
the status of checks and balances in the country’s financial resources.
 
A comparative assessment3 of government accountability agencies has identified the
following factors that affect the performance of their operations:
 
1. Personnel, budget and organization
 
As of September 2009, the Ombudsman has 1,007 employees, 30 percent of whom are
lawyers and 70 percent are investigators, technical and administration staff. The agency
experiences difficulty in hiring good lawyers due to uncompetitive salaries against the
private sector. Likewise, Sandiganbayan lacks human resources while CSC lacks sufficient
budget for salaries and programs. In PAGC, it is reported that employees have no security
of tenure. Akbayan Representative Risa Hontiveros-Baraquel also reported that the COA
had its budget cut by government in 2009 4 even though this is technically illegal since it has
fiscal autonomy from the administration under the Constitution.
 
Other organizational problems that were reported to exist were the unclear organizational
goals, lack of prioritization among concerns and values that are not service-oriented.
 
2. Questions over political neutrality
 
The Office of the Ombudsman has been continuously involved in controversy. Ombudsman
Merceditas Gutierrez has been accused of being unduly influenced by Malacanang Palace
–something she denies. PAGC is also seen as being very political – but then again it is a
presidential and not a constitutional body.
 
3. Cooperation among agencies and the public
 
The Sandiganbayan’s performance on cases was said to be affected by a lack of
cooperation with other accountability agencies such as the Ombudsman, PAGC, Court of
Appeals and Court of Tax Appeals. These agencies have imposed programs that
encourage the public to be vigilant about the unethical behavior of public officials yet they
have been receiving little feedback from them.
 
4. Backlog of cases
 
According to CENPEG’s study on the effectiveness of the judicial system in combating
corruption5, The Ombudsman and Sandiganbayan are both overloaded with a large number
of pending cases every year. The Ombudsman had a total of 78,700 old and new criminal
and administrative cases filed between 2001 and May 2006 while the Sandiganbayan had
7,324 cases out of which 1,700 were dismissed. The majority of the cases (3,909 or 53.4
percent) are still pending as of December 2008. Out of the total cases filed at
Sandiganbayan, staggering numbers of only 0.6 percent ended in convictions: There is also
an issue that complaints against “high-profile” officials are few, their cases do not move, and
that only so-called “small fish” were being prosecuted.
 
On COA’s mandate, the accounting and auditing system
In her public budgeting and accounting class 6, the late Professor Emilia Boncodin stressed
some issues on COA’s mandate and the accounting and auditing system of the
government. These are the following:
 
1. Auditing is not based on the budget
 
The audit system looks only at the agency’s compliance with the accounting standards and
laws in the financial reports instead of finding if the agencies have properly allocated their
appropriated budgets.
 
2. Reporting of GOCC’s entire budget
 
What is reported in the government budget documents regarding the GOCCs are the
budgetary support to government corporations or subsidies only. Yet, COA audits the
corporate operating expenses or the entire budget of government corporations.
 
3. Lax in penalizing because COA is limited to recommendatory functions only
 
Adverse/Disclaimer audit opinions and recommendations by COA to government agencies
do not have the corresponding penalties or sanctions if they are not acted upon and
followed. An example is DPWH’s audit report where it has been given an adverse opinion
for the past 16 years.
 
4. Pre-audit vs. Post-audit
 
Each type of audit has its own problems. Post-audit is disadvantageous because it involves
final evaluation of financial transactions –that is after the funds have already been
disbursed. Pre-audit however, ironically defeats the overall essential purpose of auditing
because financial transactions are assessed beforehand. In the past, COA had been
operating on post-audit basis since 1995 until 2009 when COA Circular 2009-002
reinstituted the selective pre-auditing due to the rising incidents of anomalous
disbursements. However, Circular 2009-003 in June 16, 2009 suspended some of the
provisions in the earlier circular to ensure uniformity and consistency in its implementation.
 
On COA reports
The Philippine National Budget Monitoring Project 7 has identified the following limitations
that affect the importance of COA reports in ensuring accountability:
 
1. Timeliness
 
COA’s deadline on the submission of reports is not parallel to the schedule of budget
preparation. Audit and financial reports must be submitted by end of September while
budget preparation time ends in July when the Congress’ session opens. The timings would
thus work best if reversed since the reports should serve as aids in reviewing the agencies’
budgets in time for budget legislation. Given the reality, the value of COA’s reports being
used as tools to determine the status of government entities in terms of financial
performance and compliance with rules are nullified.
 
2. Completeness
 
Audit reports of agencies are not completed on time due to inability of personnel and time
constraints. In effect, this puts problems in reviewing the budget and in making the annual
financial reports.
 
3. Availability
 
Although COA’s website is useful in terms of the reports posted, many reports from
agencies including those from LGUs and GOCCs are currently missing.
 
4. Contestability of findings
 
There are issues on COA’s findings on its reports. First is that the some of the past findings
have not been resolved yet or the so-called “hereditary balance sheets.” An example is the
disallowances that must be deducted by agencies to employees. However, these have not
been resolved even if some personnel have already left the service or died. Secondly, there
is the inconsistency of audit rules by resident auditors. In some agencies, the rules of past
auditors and new auditors differ like deductions that were not present in the past have
already been installed at the time the new auditor comes to office. The third issue is the
unreasonable application of rules and regulations in auditing. Some expenses are
disallowed even if it yields good results. The last issue is the inability of auditors to
understand the situation of agencies’ operations. The operations have complexities that
emergencies become inevitable and it is hard for them to look at the reasons for the issues
in operations.
 
 5. Feasibility of recommendations
 
The COA’s recommendations on reports are not always being followed by agencies and
these are already beyond the control of the institution.
 
6. Conflict of interest
 
COA auditors are still considered as “mere mortals” that may experience biases, influences
and errors in judgment. There are often claims that some auditors are complicit in bribery
and graft.
 
On internal control and the internal control system
The NGICS has identified the following limitations of internal control:
 
1. Human error, i.e., errors in judgment such as internal auditor’s biases/conflict of interest,
negligence, misunderstanding, fatigue, distraction, collusion, abuse, etc.
2. Shifts in government policies or programs
3. Resource constraints
4. Organizational changes; and
5. Management attitude
 
International accountability mechanisms
 
There have been evidence-based evaluations of public expenditure practices of
governments, including the Philippines, thru the international indexes of different programs
from international agencies:
 
Open Budget Index (OBI)
The Open budget Index is an advocacy of the International Budget Partnership’s (IBP)
Open Budget Initiative promoting public access to budget information and adopting
accountable budget systems.
 
The open budget index survey is being demonstrated in 85 countries around the world, one
of which is the Philippines, to determine if information is publicly available and to monitor
the practice of budget execution. The survey is formulated to measure the following aspects
of the budget system:
 
1. Dissemination of budget information
2. Executive’s annual budget proposal
3. Availability of other information
4. Budget process
 
Questions in the survey are further segmented into the following:
  
a. Executive’s budget proposal
b. Citizens’ budget
c. Pre-budget statement
d. In-year reports
e. Mid-end review
f. Year-end report
g. Audit report
 
In the report of the 2008 Open Budget Survey, findings show that 80 percent of the world’s
governments do not provide adequate budget information to citizens. Most countries have
weak formal oversight institutions. They have recommended some immediate measures to
the governments to improve budget transparency and accountability:
 
1. Disseminate budget information in forms and through methods and media that are
understandable and useful to the wider population. This should include disseminating
information through radio or other broadcast media, and in languages spoken by the
majority of the population.
2. Institutionalize mechanisms for public involvement in the budget process, including public
hearings during formulation and discussion of the Executive’s budget proposal, and at
regular intervals throughout the budget cycle.
3. Expand opportunities for media coverage of the budget process, for example, by opening
budget hearings to journalists or broadcasting these hearings on radio, television, and the
Internet.
4. Support relevant reforms to improve the independence and capacity of the legislature and
supreme audit institution to play their formal oversight role. Reforms should address the
political and financial independence of these institutions, as well as their analytical capacity,
access to the executive, and other legal powers required to fulfill their mandate.
5. Build effective public finance information systems that enhance the quality and timeliness of
available budget information, for example, through the use of clear, standardized
classification systems and appropriate Information Technology (IT).
 
Public Financial Management-Performance Measurement Framework
The PFM-Performance Measurement Framework is a project of the Public Expenditure and
Financial Accountability (PEFA) partnership composed of the World Bank, European
Commission, the Department for International Development of the United Kingdom, the
Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the
Royal Norwegian Ministry of Foreign Affairs, and the International Monetary Fund. It aims to
support integrated and harmonized approaches to assessment and reform in the field of
public expenditure, procurement and financial accountability.
 
The Framework was developed to assess and develop essential public financial
management systems. The following are the critical dimensions that serve as indicators in
the performance of an open and orderly public financial management system.
 
1. Credibility of the budget
2. Comprehensiveness and transparency
3. Budget cycle
a. Policy-based Budgeting
b. Predictability and Control in Budget Execution
c. Accounting, Recording and Reporting
d. External Scrutiny and Audit
4. Donor Practices
 
Report on the observance of standards and codes of fiscal transparency
The Fiscal ROSC is a project of the International Monetary Fund which takes a look at how
the countries observe the international standards and codes. It focuses on twelve areas,
one of which is fiscal transparency.
 
The Code of Good Practices on Fiscal Transparency is based on the following principles
 Roles and responsibilities in government should be clear.
 Information on government activities should be provided to the public.
 Budget preparation, execution, and reporting should be open.
 Fiscal information should attain widely accepted standards of data quality and be subject
to independent assurances of integrity. Philippine Public Transparency Reporting
Project