EXECUTIVE SUMMARY

A. Introduction
The water supply system of San Carlos City was originally constructed in
1932 by the Provincial Government. It was managed by the former National Works
and Sewerage Authority (NAWASA now MWSS) and later the Municipal
Government.

In March 1977, Resolution No. 42 was passed by the

SangguniangPanglungsod of San Carlos City, establishing San Carlos City Water
District (SCCWD) as the body to manage, upgrade and develop the water system of
the City. The resolution was filed with the Local Water Utilities Administration
(LWUA) where it awarded the Conditional Certificate of Conformance (CCC) to
SCCWD on July 28, 1977.

On October 15, 2014, San Carlos City Water District entered into a JOINT
VENTURE AGREEMENT with the Prime Water Infrastructure Corporation for the
financing, development, rehabilitation, improvement, expansion and maintenance of
the water supply system of San Carlos City.

B. Financial Highlights

2016 2015 Inc./(Dec.)

Assets ₱92,970,942.77 ₱97,221,365.74 ₱(4,250,422.97)
Liabilities 26,814,621.28 27,742,768.92 (928,147.64)
Government Equity 66,156,321.49 69,478,596.82 (3,322,275.33)
Income 12,366,051.03 16,154.847.87 (3,788,796.84)
Expenses ₱19,278,948.52 ₱11,332,214.49 7,946,734.03

C. Scope of Audit and Methodology

A comprehensive audit was conducted on the accounts and operations of

the San Carlos City Water District, San Carlos City, Pangasinan, for the year ended
December 31, 2016. The audit consisted of review of operating procedures,
interview with concerned officials and employees, verification, reconciliation and
analysis of accounts and such other procedures deemed necessary.

D. Auditor’s Opinion on the Financial Statement

The auditor rendered a qualified opinion on the financial statement due to

the negative balances of four accounts under the District’s Liabilities in the
Financial Statements (₱597,709.26). Also, Depreciation Expense for CY 2015
amounting to ₱4,338,909.90 was booked in CY 2016 making it appear that this was
incurred in the current period instead of making an adjustment in the Retained

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 Earnings, thereby overstating the account by the same amount contrary to Generally
Accepted Accounting Principles which prescribed the practice of matching concept.

E. Significant Audit Observations and Recommendations

Presented below is the summary of the significant audit observations and

recommendations which were discussed with the agency officials concerned during
the exit conference and their corresponding comments when necessary, were
incorporated in Part II of the report:

a. Depreciation Expense for CY 2015 amounting to ₱4,338,909.90 was booked in

CY 2016 making it appear that this was incurred in the current period instead of
making an adjustment in the Retained Earnings, thereby overstating the account
by the same amount contrary to Generally Accepted Accounting Principles
which prescribed the practice of matching concept.

We recommended that Management adhere to existing accounting principles

and standards as those mentioned in the preceding paragraph for a more
accurate and reliable accounts of the affected accounts to meet the qualitative
characteristics of an FS as required under PFRS.

b. The District’s Statement of Condition showed four accounts under Liabilities

with negative balances amounting to ₱ (597,709.26) which made an impression
that there were either overpayments or errors in recordings. As it is, the
accuracy and reliability of the accounts as presented in the FS is doubtful
contrary to existing accounting principles as stated under the International
Financial Reporting Standards (IFRS).

We recommended that Management require the accounting personnel to

determine the cause of the abnormal balances of the subject accounts. Those in
charge should to the extent review prior and current years’ entries to determine
the erroneous recording made. Thereafter, prepare a journal entry vouchers for
all correcting accounting entries in accordance with existing accounting policies
and standards.

c. A net loss of ₱6,912,897.49 is suffered by the District due to its inability to

make arrangement in the Joint Venture (JV) agreement with the Prime Water
(PW) in the recognition of depreciation expense required under the Philippine
Financial Reporting Standards (PFRS). The financial loss of the District
happened after it entered into a JV on the development, improvement,
expansion, operation and maintenance of its water supply system.

We recommended that Management discuss diligently with Prime Water on

how these PPEs will be treated under the JVA otherwise the District
continuously suffers financial loss in operation.

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 We further recommended that the financial position of the District should be
presented and be discussed with the members of the Board of Directors for them
to go over the effects under the JV agreements if these conform with the
standards on Joint Venture to include among others the control over the
operation of the water supply system; whether the annual revenue share given is
sufficient to address the necessary and mandatory expenses of the District; the
accounting method used if indeed a JV exist following the guidelines of the
PFRS; and, other relevant issues the District encounters during its initial
operation.

d. Abnormal accounts amounting to P (597,709.26) exist in the books of accounts

of the District which materially affected the fairness in the presentation of the
financial statements thus raised doubts on the accuracy and reliability of the
reports at the end of the year.

We recommended that Management require the accounting personnel to

establish and perform verification of prior or current years’ entries to determine
the error of recording. Thereafter, prepare a journal entry vouchers for all
correcting accounting entries in accordance with existing accounting policies
and standards.

e. Employees share for GSIS compulsory premiums, arrearages and interests for
non-payment covering the period June 1978 to March 1992 were paid by the
District based on a MOA contrary to COA Circular No. 2012-003 dated October
29, 2012 on the prevention and disallowance of Irregular, Unnecessary,
Excessive, Extravagant and Unconscionable Expenses.

We have recommended to Management the following:

a) To immediately stop the payment of the remaining obligations to

the Government Service Insurance System for the reason that the
District is paying what is not supposed to be paid.

b) Require those concerned employee affected on the amortization

schedule to pay the District the premiums paid by them to the GSIS
otherwise these officers/employees who allowed the advance
payment from the funds of the district shall be held accountable of
the full amount.

c) File a letter request to the GSIS to return the total amount of

interests paid to them for the reason that the District should not be
held answerable of the Prior Years’ interests on unpaid premiums
considering that Local Water Districts were declared and known
as government-owned or controlled corporations only in 1992,
otherwise this will be disallowed holding the officials, General
Manager and the Board, liable.

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f. Payment of Representation Allowance and Transportation Allowance (RATA)
of Division Managers of a district under a Joint Venture Agreement was made
contrary to the guidelines under Section 59 of Republic Act (RA) No. 10717,
the General Appropriations Act of 2016 and DBM Budget Circular (BC) No.
548 dated May 15, 2013.

We recommended to Management the following:

a) Stop the grant of Representation and Transportation Allowances to the

Division Managers who are not performing the actual duties and
functions defined as Division Managers. The main activity of the
District under the present set-up is purely on monitoring activities that
lies directly with the head of the agency and nothing is actually related
to any functions as Division Manager following the guidelines under
the Revised Local Water District Manual on Categorization and Re-
categorization.

b) Review the staffing pattern of the district and employ the straight
listing under the Revised Local Water District guidelines.

g. The granting, utilization and liquidation of cash advances were made contrary to
the provisions under COA Circular No. 2012-001 dated June 14, 2012 and
Section 101 of P.D. 1445, resulting to the abuse in the use of government funds.

We recommended Management to strictly comply with the provisions under

COA Circular No. 2012-001 dated June 14, 2012 on the granting, utilization and
liquidation of the cash advances specifically on the granting of additional cash
advance which says that no additional cash advances shall be allowed to any
official or employee unless the previous cash advance given to him is first
liquidated and accounted for in the books. Liquidation shall mean the recording
of the liquidation documents in the books of accounts by the bookkeeper as a
credit to the cash advance account.

We further recommended stopping granting cash advances to employees not

properly bonded for the reason that in case of misuse, the head of the agency,
the accountant and the cashier shall likewise be held accountable.

h. The District granted rice allowance to its employees at a rate of ₱1,500.00 per
month without any law authorizing the grant of such allowance hence subject to
disallowance pursuant to COA Circular 2012-003 dated October 29, 2012
providing guidelines for the prevention and disallowance of Irregular,
Unnecessary, Excessive, Extravagant and Unconscionable Expenditures
(IUEEU).

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 We recommended Management to stop the grant of rice allowance as there is no
law that authorized said allowance. Only those employees who are incumbents
as of July 1, 1989 may be granted pursuant to DBM-CCC No. 10 and various
Supreme Court rulings and jurisprudence.

i. The Non-Revenue Water (NRW) as of CY 2016 was 36.36% which is beyond

the allowable rate of 20% prescribed under LWUA Resolution No. 444, series
of 2009. The non-reduction of the NRW to allowable rate is not in compliance
with the terms and condition of the JVA which stipulated therein the
achievement of NRW within the allowable rate.

We recommended that Management require strict compliance by Primewater

with the JVAs terms and conditions.

j. SCWD failed to include in the terms and conditions the proper accounting of
Property Plant and Equipment and the corresponding depreciation expenses
which resulted in the non-recognition of the same in the books for the CY 2015.
In effect this resulted in the incurrence of net loss amounting to ₱6,912,897.49
for CY 2016.

We recommended that Management discuss with Prime Water on how these

PPEs will be treated under the JVA. SCCWD should see to it that in any case
that there will be additions in the terms and conditions for the proper treatment
of the PPEs and the corresponding depreciation; this should be more
advantageous to the District to avoid losses.

F. Summary of Total Suspensions, Disallowances and Charges as of Year-End

Amount
a. Suspensions ₱ -0-
b. Disallowance ₱ 25,012,196.12
c. Charges ₱ -0-

G. Status of Implementation of Prior Year’s Audit Recommendations

Out of the 9 prior year’s audit recommendations, four were fully

implemented; five were partially implemented.