Republic of the Philippines

COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City, Philippines

CONFIDENTIAL

October 25, 2011

ATTY. RAINIER B. BUTALID

Chairman of the Board
Philippine National Construction Corporation
Km. 15, East Service Road
Bicutan, Parañaque City

Attention: ATTY. LUIS F. SISON

President and CEO

Management Letter on the Audit of the

Philippine National Construction Corporation (PNCC)
for the CY 2010

1. Pursuant to Section 2, Article IX-D of the Constitution of the Philippines and Section
43 of Presidential Decree No. 1445, otherwise known as the Government Auditing Code of
the Philippines, we are tasked to audit the accounts and operations of the Philippine
National Construction Corporation (PNCC) for the year ended December 31, 2010. The
audit was conducted in accordance with applicable legal and regulatory requirements, and
generally accepted auditing standards. Those standards require that we plan and perform
the audit to obtain a reasonable basis for our conclusions.

2. The audit aimed to ascertain the propriety of the financial transactions and the
compliance by the agency with the prescribed rules and regulations, to recommend agency
improvement opportunities and to determine the extent of implementation of prior year’s
audit recommendations.

3. The audit covered an examination of the cash accountabilities of the Members of the
PNCC Board, its officers and executives, including those of the Retirement Trust Fund
Board. It also covered a review and evaluation of existing procedures relative to cash
management and compliance with government accounting and auditing rules and
regulations.

4. We are pleased to bring to your attention our audit observations and

recommendations, which were communicated through Audit Observation Memoranda to the
President and CEO, Atty. Luis F. Sison, and other concerned officials of the PNCC. Their
responses were incorporated in this management letter, where appropriate.
5. As of report date, the Board has not authorized the issuance of the financial
statements because they want Management to implement several adjustments and
recommendations mentioned in the Audit Observation Memoranda issued by the Audit
Team. We were able to conduct the audit of the financial statements; however, we do not
express an opinion thereon in the absence of the authority to issue.

A. SUMMARY OF RECOMMENDATIONS

6. The following are our recommendations:

6.1 Unauthorized allowances and other benefits – P165.65 million (par. 7 to 37)

6.1.1 Require the immediate settlement/refund of the allowances, benefits

and incentives aggregating to P165.65 million received as Members
of the PNCC Board and PNCC Retirement Trust Fund for lack of legal
basis;

6.1.2 Stop the grant of retirement benefits on the basis of the 250% rate as
approved by the Board, it being grossly excessive, injudicious, and
unconscionable as defined under COA Circular No. 85-55A, dated
September 8, 1985.

6.1.3 Compute the terminal leave pay based on the actual leave credits
earned by the proposed retiree and not on the basis of estimates
provided by Management as quoted below:

“Vacation Leave (VL) and Sick Leave (SL) were assumed at

92.5 days for Managers and Executives and 47.5 days for
Rank & File and Supervisors”

6.2 Allowances and incentives granted to the PNCC officers, executives and
employees determined to be excessive, irregular and/or without legal basis –
P69.26 million (par. 38 to 68)

6.2.1 Strictly adhere to the provisions of AO No. 161, AO No. 263, DBM
Circular No. 2003-8, and all other laws, rules and regulations
authorizing the disbursement of government funds/expenditures;

6.2.2 Discontinue the grant of unauthorized allowances/benefits;

6.2.3 Require the immediate submission of the missing supporting

documents relative to Productivity Incentive Benefit and Seminar
Workshop Allowance; and

6.2.4 Require all the concerned officers and employees, as well as the
rank-and-file, to refund the amount of unauthorized
benefits/allowances received by them. Details shown in the
succeeding page.

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 Exit bonus P22,500,000
Incentive bonus 21,812,299
Performance bonus 12,075,219
Anniversary bonus 5,864,469
ISO bonus 5,080,000
Goodwill bonus 1,325,000
Clothing allowance – overpayment 605,500

P69,262,487

6.3 Payment to Chairman Emeritus without legal basis – P4.88 million (par. 69 to
76)

6.3.1 Require the persons responsible for the payment of financial package
to the Chairman Emeritus to refund the amount of P4.88 million for
lack of legal basis.

6.4 Unliquidated cash advances – P48.44 million (par. 77 to 80)

6.4.1 Issue a memorandum requiring all Accountable Officers to liquidate

their long outstanding cash advances totaling P48.44 million, and if
warranted, withhold any money due them until their cash advances
are liquidated;

6.4.2 Strictly adhere to the provisions stated under COA Circular No. 97-
002 dated February 10, 1997 in the grant and utilization of cash
advances; and

6.4.3 Require the officers concerned to return the amount personally

advanced by them, and for non-PNCC personnel, to refund the full
amount of cash advances granted to them.

6.5 Unauthorized car plan benefits – P27.93 million (par. 81 to 87)

6.5.1 Stop the further grant of car plan benefits to the Board of Directors;
and require immediate settlement/refund of the amount of
P19,440,826 representing the difference between the cost of the
vehicle purchased and the amount already settled/paid by the
concerned Directors, since they are not entitled to such benefits per
DBM Circular Letter 2002-2 dated January 2, 2002, and
Administrative Order No. 103; and

6.5.2 Require all the concerned Executives and Officers of PNCC, as well
as the concerned Consultant, to refund the amount of P8,486,442.37;
since, subject expenditures are considered irregular, unconscionable
and without legal basis.

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6.6 Cash advances granted against retrenchment pay – P202.23 million (par. 88
to 93)

6.6.1 Discontinue the grant of cash advances to officers and employees

deductible from their retrenchment pay; and

6.6.2 Require all persons concerned to refund the cash advances granted
to them aggregating P202.23 million.

6.7 Unauthorized benefits paid to consultants – P4.56 million (par. 94 to 100)

6.7.1 Require the concerned consultants and/or all persons liable to refund
the amount paid for the illegal benefits/incentives of consultants
amounting to P4,457,852.11;

6.7.2 Comply with the provisions of Section 4 of DBM Circular No. 433 in
the grant of remuneration to consultants to avoid the incurrence of
illegal and/or irregular expenditures;

6.7.3 Strictly adhere to the provisions of Section 10 of Article IV of RA 9184

in all its procurement activities;

6.7.4 Revisit all the individual consultancy/service contracts to determine

compliance with Section 6 of PD 807 and Section 211 of the GAAM;
and

6.7.5 Evaluate the need for their renewal in line with the existing laws and
regulations particularly, Section 33 of PD 1445 – Prevention of
irregular, unnecessary, excessive or extravagant expenditures or uses
of government funds or property.

6.8 Cash accountabilities for immediate settlement – P 3,715,856 (par. 101 to

104)

6.8.1 Exert effort to collect and/or send demand letter to the former EVP for
the immediate settlement of his accountabilities with PNCC of
P2,180,170 pertaining to his outstanding personal cash advances,
car plan equity, car insurance, and credit cards/phone bills; and
P1,535,686 representing his retirement and gratuity benefit, or a total
of P 3,715,856. (Failure to collect from the former EVP would mean
that the persons determined to be liable under the Notice of
Disallowance ( to be issued) shall be jointly & severally liable and the
Commission may go against any person liable without prejudice to the
latter’s claim against the rest of the persons liable pursuant to
Section 16.3 of the 2009 Rules and Regulations in the Settlement of
Accounts).

6.8.2 Exercise PNCC’s option to repossess the subject vehicle pursuant to

Section 5.3.6 of the Lease Purchase Agreement.

6.8.3 Institute legal action, if warranted.

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6.9 Unauthorized gratuity pay extended to Consultant – P 1.5 million (par. 105 to
107)

6.9.1 Require the persons liable and responsible to the transaction to

refund the P1.5 million paid for the gratuity pay extended to the
Consultant as required under Section 16.1 of the Rules and
Regulations on Settlement of Accounts (RRSA).

6.10 Overpayment of monthly remuneration as Assistant Treasurer – P 1.6 million

(par. 108 to 113)

6.10.1 Send a demand letter requiring the former Director to refund the
amount of P1.6 million representing overpayment of his monthly
remuneration as Assistant Treasurer to MNTC. Exert effort to collect,
and institute appropriate legal action(s) deemed necessary under the
circumstances.

6.11 Unpaid concession fees to the National Government inclusive of penalties -

P4.202 billion (par. 114 to 118)

6.11.1 Prioritize the payment to the National Government, through the Toll
Regulatory Board (TRB), all the unpaid concession fees and the
accumulated penalties totaling P4.202 billion, in accordance with the
Schedule of Fees as stipulated in the Toll Operation Agreement;

6.11.2 Make representation with the TRB and the Bureau of Treasury (BTr)
for the immediate reconciliation with PNCC books, and effect the
necessary adjustments, if warranted; and

6.11.3 Take note of the provisions embodied under Clause 10 of the TOA -
on Penalty Clause quoted below:

“If it is established after notice and hearing to be conducted by the

Board that the GRANTEE has violated any provision of this
Agreement and/or the provisions of its franchise or any order of
the Board, a penalty in the amount of FIVE THOUSAND PESOS
(P5,000) per day shall be imposed until such time the violation
ceases except where any other penalty is prescribed in this
Agreement or under PD 1113, in which case such penalty shall be
imposed.”
6.12 Unremitted revenue share of PNCC – P 44.5 million (par. 119 to 126); and
understatement/overstatement of PNCC’s liabilities/receivables by P87
million and P70 million, respectively. (par. 127 to 129)

6.12.1 Require Citra Metro Manila Tollways Corporation (CMMTC) to strictly

adhere to the provisions of the Memorandum of Agreement (MOA),
and remit immediately the amount of P44.5 million representing the
revenue share of PNCC as required, including interest;

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 6.12.2 Require the staff concerned to follow-up regularly the
remittances/collections due from any of the Corporation’s clients;
6.12.3 Provide persons concerned with supporting documents to enable
them to understand and properly record the transactions of the
Corporation;
6.12.4 Record a financial asset or a financial liability when the entity
becomes a party to the contractual provisions of the instrument; and
6.12.5 Submit justifications/documentation to support PNCC’s liability to Citra
Metro Manila Tollways Corporation amounting to P87 million and the
P70 million receivables from PNCC Skyway Corporation, as indicated
in the MOA.

6.13 Revenue foregone P6.9 million (par. 130 to 142)

6.13.1 Make representation with the TRB and CMMTC to resolve the matter
regarding the P5,410,730 recorded in the books of PNCC as Other
Receivables – CMMTC but unrecorded in the books of CMMTC, as
well as the P1,535,667 representing excess remittance of toll fees in
2007 allegedly for offsetting against the payables of PNCC to
CMMTC. Effect the necessary adjustments, if warranted.

6.14 Non-compliance with the terms and conditions of the escrow agreement (par.
143 to 157)

6.14.1 Require the concerned parties to strictly comply with the terms and
conditions of the escrow agreement; and

6.14.2 Coordinate closely with South Luzon Tollway Corporation and Manila
Toll Expressway Systems, Inc. to be able to validate the accuracy of
the gross toll revenue distributed and received by the corporation.

6.15 Unrecognized reporting difference - P 45.59 billion (par. 158 to 171)

6.15.1 Recognize in the books the reporting difference of P45.59 billion as of

December 31, 2010 either under Advances from BTr account/
Payable to PMO or Equity adjustments-under Rehabilitation Plan-
Loans Transferred to NG.

6.15.2 Apply with the Securities and Exchange Commission for the increase
in the Corporation’s capitalization to accommodate the pending
conversion of liabilities to equity.

6.16 Unauthorized payment of retainers fees – P 8.5 million (par. 172 to 177)

6.16.1 Strictly adhere to the provisions of COA Circular 95-011 dated

December 4, 1995 and Office of the President Memorandum (OP)
Circular No. 9 dated August 27, 1998;

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 6.16.2 Explain/justify why the payment of retainers fees amounting to
P8,518,465 to private lawyers without the written conformity and
acquiescence of the Solicitor General or the Government Corporate
Counsel (OGCC), as the case may be, and the written concurrence of
the Commission on Audit (COA), should not be disallowed in audit for
being contrary to the provisions of COA Circular No. 95-011 and OP
Memorandum Circular No. 9; and

6.16.3 Require the officials and employees determined to be liable to refund

the total amount paid to the law firms. COA Circular No. 86-255
requires that “xxx henceforth, the payment out of public funds of
retainer fees to private law practitioners who are so hired or employed
without the prior written conformity and acquiescence of the Solicitor
General or the Government Corporate Counsel, as the case may be,
as well as the written concurrence of the Commission on Audit shall
be disallowed in audit and the same shall be a personal liability of the
officials concerned.”

6.17 Payment of honoraria to OGCC lawyers and non-core personnel without

legal basis (par. 178 to 186)

6.17.1 Provide the audit team with the required Office Order assigning the
concerned OGCC personnel to PNCC or submit the Certification
given by the Department of Justice, if any, authorizing said personnel
to receive compensation: honoraria to OGCC lawyers and P3,000
each to non-core personnel.

6.17.2 Otherwise, refund all the honoraria paid to them for the same has no
legal basis under the provision of the provisions of Section 6 of EO
878 and Section 56, Chapter 7 of Book V and Section 59, Chapter 7
of Book VI of the 1987 Revised Administrative Code.

6.18 Donation made to PNCC Foundation Inc. without legal basis (par. 187 to
192)

6.18.1 Strictly adhere to the provisions of Section 1.a.8 of Administrative

Order (AO) No. 103 dated August 31, 2004 and Sections 2 and 4.2 of
PD 1445, and, issued by the President of the Philippines;

6.18.2 Require the officers of the Foundation to return all the money
donated/paid by PNCC, inasmuch as the said donation and
assignment of PNCC revenues are not allowed under AO No. 103,
and therefore, has no legal basis; and

6.18.3 In cases of failure to collect from the Foundation, require the officials
and employees determined to be liable to refund the total amount paid
to the Foundation, amounting to P4.063 million.

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6.19 Disallowed premiums paid for Directors and Officers Liability Insurance – P24
million (par. 193 to 197)

6.19.1 Require all persons responsible in approving the expenditure,

certifying the availability of funds, legality, and completeness of
supporting documents attached thereat, be made jointly and severally
liable to refund the amount of P 24,000,000.00 representing
disallowed premiums paid for Directors and Officers Liability
Insurance.

6.20 Overpayment of per diem and unauthorized travel- (par. 198 to 203)

6.20.1 Strictly comply with the guidelines on Travel Expenses and Per Diem
as provided for under Executive Order Nos. 298, 259, 248, 248-A and
Administrative Order No. 103; and

6.20.2 Require the immediate settlement/refund of the overpayment noted

amounting to P266,563.35 relative to the per diem claimed by
Officers, as well as the total amount of P995,574 incurred for
unauthorized travel.

6.21 Delayed payment of capital gain tax (par. 204 to 211)

6.21.1 Determine the person/s liable for the delay in the payment of the
capital gains tax as well as the documentary stamp tax;

6.21.2 Require the responsible personnel to submit explanation/justification

for failure to implement the payment of the necessary taxes on time
when it is clearly stated in the Deed of Absolute Sale (DAS) that all
taxes and any special assessments imposed on the property from the
date of the contract shall be paid by the Company and considering the
fact that under Section 249 of the NIRC there shall be assessed and
collected on any unpaid amount of tax, interest at the rate of twenty
percent (20%) per annum, or such higher rate as may be prescribed
by rules and regulations, from the date prescribed for payment until
the amount is fully paid;

6.21.3 Implement administrative sanction, if warranted, to persons/s

identified to be liable for the non-payment of the required taxes. As
decided in the case of Commissioner of Internal Revenue vs. Procter
& Gamble Philippine Manufacturing Corp., et al., G.R. No. L- 66838,
dated April 15, 1988, the Supreme Court ruled that “the errors of
certain administrative officers should never be allowed to jeopardize
the government’s financial position”;

6.21.4 Ascertain at all times prudent stewardship of public funds entrusted to

all accountable officers;

6.21.5 Strictly comply with the time for filing and payment of taxes in
accordance with the National Internal Revenue Code to avoid

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 incurrence of unnecessary expenses in the form of interest and
penalties due to late payment;

6.21.6 Ensure that the title to the land purchased be transferred in the name
of the Corporation to establish ownership thereof; and

6.21.7 In all cases where payments will be made by the Corporation, ensure
that the corresponding Official Receipts are issued in its name.

6.22 Discrepancies on both receivable and payable accounts amounting to

P123.05 million and P181.226 million, respectively (par. 212 to 214)

6.22.1 Exert effort to identify the causes of the discrepancies noted on both
the receivable and payable accounts;

6.22.2 If possible, coordinate with the concerned debtors/creditors for the

immediate reconciliation with their respective accounts; and

6.22.3 Prepare the necessary adjustments in the books, if warranted.

6.23 Deficiencies in the handling of cash transactions (par. 215 to 225)

6.23.1 Coordinate with the Bangko Sentral Ng Pilipinas to determine whether

the foreign currencies still on hand are still of legal tender. If on the
affirmative, request the bank to convert the said foreign currencies
into peso. Recognize foreign gain/loss on conversion, when
necessary;

6.23.2 Ascertain whether there is really a case filed against the erring
employee. If none, turnover the P107,920 kept by the Cashier in the
vault for quite a long time to the Collecting Officer for deposit to the
authorized depository bank;

6.23.3 Comply with the procedural and documentary requirements of Section

179 (g) and 181 (b) of GAAM Volume I, Section 69 (1) of PD 1445,
Section 57 of Manual on NGAS to strengthen the internal control on
cash transactions and avoid incurrence of future losses;

6.23.4 Deposit intact with the authorized depository bank idle funds to avoid
the incurrence of forgone interest income; and

6.23.5 Segregate the accounting and record keeping functions from those
handling of cash transactions.

6.24 Deficiencies in the handling/recording of Cash in Bank accounts (par. 226 to

230)

6.24.1 Prepare the necessary adjustments to record stale checks amounting

to P 51,834.71 still presented as outstanding checks since subject
checks could no longer be negotiated with the banks;

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 6.24.2 Explain the nature of the Dollar Time Deposit amounting to
P77,790.11 recorded in the books, but not existing in the bank.
Locate the depositor’s copy of the Certificate of Dollar Time Deposit
(CTD) and require explanations from the concerned banks why said
CTD was not confirmed as among the deposits of PNCC. Request
from the concerned bank information as to whether there was pre-
termination made and/or subject CTD had matured already and its
proceeds already paid to PNCC. In case proceeds of said CTD was
already paid by the bank and received by a PNCC accountable officer,
require the concerned accountable officer to immediately refund
and/or settle the unrecorded proceeds of said CTD;

6.24.3 Conduct detailed analysis of the Cash in Bank accounts and

determine the reasons why there were unrecorded Time Deposits as
confirmed by the Bank with a balance of P488,309.90. Locate copies
of the Certificate of Time Deposits in the name of PNCC; and prepare
the necessary adjusting entry to record the subject confirmed
placements made with the PNB for the account of PNCC;

6.24.4 Exert effort to locate the necessary documents that will establish the
validity of the alleged Cash in Bank transferred from ICON. If no
action has been done to establish the existence of such bank account
because the books of accounts, financial statements/schedules and
other documents needed to validate its existence are no longer
available, the President of PNCC may request for write-off or
adjustment of the account in consonance with COA Circular No. 97-
001 dated February 5, 1997. The request for write-off should be
supported by the following:

 List of available records and extent of validation made on the

account; and

 Certification and reasons why the books of accounts/records,

financial statements/schedules and supporting
vouchers/documents cannot be located.

6.24.5 Coordinate with the concerned banks and confirm whether the subject
Cash in Banks were already garnished and/or applied to the
Corporation’s loan accounts. If found to be in the affirmative, prepare
the necessary adjustments to book the garnishment and/or application
to PNCC loan accounts of the subject Cash in Bank accounts. For
still missing documents, exert effort to locate the same to support its
existence as recorded; and

6.24.6 Furnish the Audit Team with copies of all the Journal Entry Vouchers
(JEVs) covering the adjustments made.

6.25 Cash in Bank account of PNCC included Cash in Bank under the name of
Traffic Controls Product Corporation (TCPC) and CDCP Consumer Coop.,
Inc. FSD (CCCIF) (par. 231 to 237)

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 6.25.1 Coordinate with respective banks for the transfer of subject accounts
to its name especially that of the CCCIF, considering the fact that it is
already non-operational/non-existing.

6.26 PNCC maintains depository accounts with private banks - not in accordance
with Department of Finance Order No. 011-99 dated February 24, 1999, as
amended (par. 238 to 241)

6.26.1 Transfer to and maintain the Corporation’s deposits and cash

balances in any of the authorized government depository banks as
required under DOF Order No. 011 – 99 dated February 24, 1999, as
amended.

6.27 Dacion en pago and the subsequent foreclosure of the EDSA and Calamba
properties amounting to P490 million and P621 million, respectively –
deemed disadvantageous on the part of PNCC (par. 242 to 272)

6.27.1 Require previous PNCC Board and executives to explain/justify why

they should not be considered remiss in their duties and
responsibilities and be held personally liable for the improper disposal
of the 10,000 sq. m. EDSA properties and the foreclosure of the
remaining 13,218 sq. m. thereof, as well as the 11 has. Calamba
property.

6.28 Deficiencies in the Corporation’s Land Appraisal Increase accounts (par. 273
to 279)

6.28.1 Request for re-appraisal of the remaining parcels of lot with an area of
1,116,363 square meters in accordance with the existing policy of the
Corporation. Once appraisal had been made, record all property in
the PNCC books at appraised values pursuant to PAS No. 16;

6.28.2 Exert effort to settle the various issues regarding the missing Transfer
Certificates of Titles;

6.28.3 Expedite the transfer of ownership of the parcels of land which are not
yet registered in the name of the Corporation and subsequently record
the same in the books at appraised values; and

6.28.4 Obtain the original copies of the photocopied Transfer Certificate of

Titles to ascertain the ownership of the property.

6.29 Non-recognition of the impairment of assets. (par. 280 to 286)

6.29.1 Assess for impairment in value, all of the Corporation’s investments in

inactive and non-operating subsidiaries at each balance sheet date;

6.29.2 Effect the necessary adjustment/s to remove the costs of investments

from the Investments in Stocks account and reclassify them as
Accounts Receivables – Subsidiaries and Affiliates, if there is a
chance to recover these investments. If these are already

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 irrecoverable, write-off these investments from the books, subject to
approval of appropriate authority and pertinent rules and regulations;
and

6.29.3 Work for the dissolution/liquidation of the inactive and non-operating

subsidiaries.

6.30 Unreconciled Inventory account (par. 287 to 291)

6.30.1 Require the Controllership Department to make a thorough

reconciliation of the Inventory account;

6.30.2 Require the Custodian to immediately furnish the Controllership

Department with copies of the RIS as basis in recording issuances in
the general ledger; and

6.30.3 Reassess the existing condition of all non- moving inventory items
noted, if warranted, and provide the allowance for impairment.

6.31 Assets for write-off worth P9.615 billion without supporting documents (par.
292 to 297)

6.31.1 If the existence, validity and accuracy of the Assets for Write-off
valued at P9.615 billion could not be established, because the books
of accounts, financial statements/schedules and other documents
needed to validate the accounts are no longer available, request for
write-off or adjustments of these accounts in consonance with COA
Circular No. 97-001 dated February 5, 1997. The request should be
supported by the following:

 List of available records and extent of validation made on the

accounts, and

 Certification and reasons why the books of accounts/records,

financial statements/schedules and supporting
vouchers/documents cannot be located.

6.32 Treasury stock valued at P14.72 million not supported by stock certificates
(par. 298 to 304)

6.32.1 In coordination with the current stock and transfer agent, determine
the actual number of shares and value of treasury stock; and prepare
the necessary adjustment, if warranted.

6.33 Non-disclosures in the Notes to Financial Statements of the Arbitral

Tribunal’s Final Award under CIAC Case No. 38-2008 requiring PNCC to pay
the liquidated damages amounting to P2.4 million, plus interest, as well as
PNCC’s Petition for Review under Rule 43 of the Rules of Court assailing the
Final Award dated January 22, 2010 of the CIAC - (par. 305 to 312)

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 6.33.1 Pending the decision of the Court of Appeals relative to the Appeal
made by PNCC to the Court of Appeal and, inasmuch as
Management has already recognized the possible liability that may be
incurred relative to the above-mentioned case, disclose in the Notes
to Financial Statements containing the following information:
 a brief description of the nature of the obligation and the expected
timing of the resulting outflows of economic benefits;
 an indication of the uncertainties about the amount or timing of
those outflows. Where necessary, to provide adequate
information, an entity shall disclose the major assumptions made
concerning future events that may affect the amount required to
settle said obligation;
 amount of any expected reimbursement, stating the amount of any
asset that has been recognized for that expected reimbursement.

6.34 Absence of the approved Annual Procurement Plan (APP) in violation of

Section 7 of RA 9184, otherwise known as the Government Procurement
Reform Act, as amended (par. 313 to 317)

6.34.1 Comply with the requirements of Section 7 of RA 9184 to enable

PNCC to conduct its procurement activities in the most economical,
efficient and effective manner

B. DETAILED OBSERVATIONS AND RECOMMENDATIONS

Unauthorized allowances and other benefits in the aggregate amount of P165.65

million received as members of the PNCC Retirement Trust Fund and as members of
the PNCC Board.

7. In April 2005, Resolution No. BD-032-2005 was issued by the PNCC Board of
Directors granting “separation pay to the remaining PNCC employees in the event of
retrenchment or separation of officers and employees on account of early separation
program or retrenchment program offered by management, to be computed at the rate of
250% based on the latest monthly salary/remuneration for every year of continuous and
uninterrupted service, which shall apply equally therein to union and non-union, rank-and-
file, and supervisory employees, managers and executives”. (underscore ours)

8. The BD-032-2005 does not cover the Members of the Board. As such, Resolution
No. BD-031-2007 dated April 25, 2007 was issued by the PNCC Board “authorizing the
creation of PNCC Retirement/Resignation/Gratuity Benefit Program for Directors and Senior
Officials and that it covers only Directors who are presently sitting in the current Board of
PNCC including those sitting therein within one (1) year before approval of this resolution,
plus Senior Management Officers with the rank of Senior Vice Presidents down to those
with rank of Vice-Presidents and include Corporate and Assistant Corporate Secretary
including Corporate Secretariat Staff.” (underscore ours)

9. Further, PNCC Management proposed that the terminal leave credits of the
retrenched officers and employees be based on estimates provided by Management.

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Vacation Leave (VL) and Sick Leave (SL) were assumed at 92.5 days for Managers and
Executives and 47.5 days for Rank and File and Supervisors.

10. We believe that the 250% rate offered and the assumed terminal leave credit days
proposed by Management are without legal basis and are grossly excessive and injudicious
as defined under COA Circular No. 85-55A dated September 8, 1985. From CYs 2003 to
2006, the Corporation has already been incurring losses. As such, the PNCC Board should
have considered the status of the Corporation’s business operations in determining the
retrenchment pay that would be granted.

11. We have noted that the gratuity benefit granted under BD-031-2007 (mentioned in
paragraph 8) is in addition to the retirement benefit granted under BD-032-2005 (mentioned
in paragraph 7) to Executive Directors such as President & CEO, EVP, and including Senior
Vice-President and Corporate and Assistant Corporate Secretaries and its Corporate
Secretariat Staff. Its payment is to be sourced out from the following:

a. pool of savings from operations,

b. NLEX revenue shares,
c. retirement share under the SLEX Joint Venture Agreement, and
d. dividends from other subsidiaries and affiliates

12. We found the grant of the gratuity benefit under BD-031-2007 as grossly excessive,
extravagant, injudicious and unconscionable. (underscore ours)

13. In relation to BD-031-2007, the PNCC Board issued BD-043-2007, dated August
30, 2007, creating a Board of Trustees of the PNCC Retirement Trust Fund to manage the
Retirement Fund operating under a Board of Administrators. The Board of Directors of the
PNCC Retirement Trust Fund shall have the following powers and duties:

a. power and authority to approve full and partial payments and releases of
advance payments of retirement gratuity.

b. Once elected, the Board shall from among themselves appoint their authorized
signatories for the purpose of effecting payments and shall submit their
authorized signatories to their trustee bank for the purpose;

14. Per Secretary’s Certificate dated September 6, 2007, the Board of Trustees of the
PNCC Retirement Trust Fund elected its Chairman, Vice Chairman, President, Treasurer,
and Secretary. The same Board approved the opening of a checking account with
Philippine Postal Savings Bank Inc. (PPSBI), Mabalacat Branch – Pampanga. Any two (2)
officers/trustees of the Board of Trustees are recognized as the authorized signatories to
their trustee bank for the purpose. We have noted, however, that as early as 2006, Board
Resolution No. BD-064-2006 dated October 3, 2006 was issued by the PNCC Board
authorizing Management to open a depository account with the PPSBI in the name of or for
the account of the PNCC Retirement Trust Fund; and that the President and CEO is
authorized to sign any and all documents relative to or required for the opening of the
aforesaid depository account.

15. We tried to establish the existence of the depository account authorized to be

opened under BD-064-2006. We requested for photo copy of the signature specimen card
used in the opening of the account allegedly in PPSBI located at Postal Bank Center,

14
Liwasang Bonifacio, Manila. However, no such depository account exists. The Chief
Finance Officer (CFO) informed that the check intended for deposit to PPSBI, Liwasang
Bonifacio, Manila, was deposited instead at PPSBI - Mabalacat Branch for the account of
the PNCC Retirement Trust Fund. This was confirmed by the letter dated September 10,
2007, signed by the Chairman and President relative to the opening of a checking account
at PPSBI, Mabalacat, Pampanga.

16. Upon request and relative to the opening of the checking account, the Branch
Manager of PPSBI, Mabalacat Branch furnished the audit Team with three signature
specimen cards signed by the: Chairman and President; Vice Chairman and Secretary;
and Vice Chairman and Treasurer of the PNCC Retirement Trust Fund.

17. Our examination of the original copies of the “PAID” checks duly acknowledged as
received by the concerned members of the PNCC Retirement Trust Fund, its Executives,
Officers, including the Corporate Secretary’s staff revealed that there were three (3)
Checking Accounts opened at PPSBI Mabalacat Branch as follows:

 Checking Account No. 01900-102800-1 – Account Name not indicated

 Checking Account No. 01900-102900-1 – Account Name not indicated
 Checking Account No. 019-002536-021- Account Name- PNCC Retirement Trust
Fund

18. We also requested for information from PNCC Management as to the series of
checks issued for the above-mentioned checking accounts. In its letter to the President and
CEO dated March 25, 2011, PPSBI Mabalacat Branch informed that the following were the
initial account numbers assigned to the PNCC Retirement Trust Fund upon its opening on
December 12, 2006:

 Account No. 01900-102900-1 with checkbook series 00811 – 00840

 Account No. 01900-102800-1 with checkbook series 00841 - 00870

It also informed that when the Bank system was upgraded, the above account numbers
were changed to ATA (automatic transfer account) as follows:

 Account No. 0019-002536-021, the current account with checkbook series

003701-003900
 Account No. 0019-002536-271, the savings account.

19. Our review of the clearing of checks issued against the three (3) checking accounts
mentioned in paragraph 17 disclosed that only Checking Account No. 0019-002536-021,
with issued checkbook series 003701 – 003900 was changed to ATA (automatic transfer
account). All fund transfers made from Savings Account No. 0019-002536-271 were
credited to Checking Account No. 0019-002536-021 to fund all checks issued against the
said account. We noted however, that all checks issued from the three (3) checking
accounts, which include Checking Account Nos. 01900-102900-1 and 01900-102800-1
were all cleared under Account No. 0019-002536-021, the only checking account converted
to Automatic Transfer Account (ATA).

20. We traced the amount allegedly deposited to PPSBI Mabalacat Branch, and found
out that Check No. 80318 amounting to P5 Million, drawn from PNB Buendia under

15
Checking Account No. 265-831880-5, was used as initial deposit to Savings Account No.
190020-11501-0 opened on December 11, 2006. Additional deposit of P20 Million was
made on January 31, 2007 through Check No. 80554 drawn under PNB Checking Account
No. 265-832492-9, maintained at PNB Buendia. This additional deposit was transferred on
February 7, 2007 to another Savings Account, SA No. 0019-002536-141 also maintained at
the same Branch which was later on converted to Time Deposit No. PSP190021004263.
On the other hand, the P5 Million initial deposit, together with its earned interest of
P1,972.60, was also transferred to SA No. 0019-002536-141 on February 7, 2007 and
subsequently deposited as Time Deposit under TD PSP 010108.

21. The P20 Million invested as Time Deposit and rolled-over upon its maturity was
transferred on September 11, 2007 to Checking Account No. 0019-002536-021 inclusive of
the interest earned amounting to P474,775.64. This amount was later on used to fund the
various checks issued representing payments allegedly for the retirement gratuity of the
members of the Board of the PNCC Retirement Trust Fund. Transfers of funds from one
bank account to another that were used to fund various checks issued from accounts
maintained at PPSBI Mabalacat Branch in payment of retirement gratuity and other benefits
received by the Members of the Board of the PNCC Retirement Trust Fund were specifically
identified as shown in the attached SCHEDULE 1.

22. Other Board Resolutions issued by the PNCC Board paved the way for the
incurrence of expenditures considered to be bereft of legal basis, and were considered
grossly excessive, extravagant, injudicious and unconscionable.

23. BD No. BD-031-2008 dated November 5, 2008 was issued by the PNCC Board
amending BD No. 043-2007 to include the additional powers and duties of the Board of the
PNCC Retirement Trust Fund as follows:

 the Board of Trustees shall have the authority/power to re-align and distribute
savings and other income from its budget to its intended and respective
beneficiaries in accordance with a reasonable and equitable sharing formula that
should consider a minimum equal sharing of a base amount and the balance on
length of service;

 the Board of Trustees is empowered and authorized to implement the payment

of regular gratuity approved under Resolution No. BD-028-2005 dated March 29,
2005, as amended, and hereby authorizes the funding and transfer of such
funds to the retirement trust on the accrued amount of regular gratuity based on
the amount thereto approved; and in case different amount of gratuity is further
approved or augmented, any such amount shall be further transferred to the
retirement trust fund for effective implementation.

24. As a result of the issuance of the above-mentioned resolution, funds from PNB
Buendia Account No. 265-832492-9, where the toll collections representing income of
PNCC were deposited, were transferred to various savings and checking accounts
maintained at PPSBI Mabalacat Branch for the account of the PNCC Retirement Trust
Fund. Total amount of disbursements drawn from PPSBI Mabalacat Branch amounting to
P102,992,275.21 represent payments for retirement gratuity; monthly allowances from
September 2007 to June 2010; and bonuses of the members of the PNCC Retirement
Trust Fund, its executives, officers and corporate secretary’s staff. All checks issued were in
payment of the benefits and allowances drawn against the three (3) checking accounts

16
maintained at the PPSBI Mabalacat Branch, which checks were all cleared in Checking
Account No. 0019-002536-021 maintained with the same bank. Details of these check
disbursements are shown in the attached SCHEDULE 2, with summary as shown below:

Retirement/Gratuity Pay approved under BD- 031-2007 P 101,500,475.21

Monthly Allowance – September 2007 to June 2010 1,069,300.00
Bonus – CY 2008 130,000.00
Mid-Year Bonus CY 2009 130,000.00
Bonus – CY 2009 162,500.00
TOTAL P102,992,275.21

All checks drawn from the checking accounts maintained at PPSBI Mabalacat Branch were
traced to have been encashed and/or deposited to the personal account of each of the
concerned Payee. Details shown in SCHEDULE 2.

25. On August 27, 2009, Resolution No. BD-019-2009 dated was issued granting the
cash gratuity to two (2) Ex-Directors, one in his capacity as former President and Chairman
of the Board of PNCC and its subsidiaries; and the other, as former President of PNCC and
PNCC Skyway Corporation and its subsidiaries amounting to P1,500,000 and P1,000,000,
respectively. The issuance of the resolution made possible payments even to those
directors no longer connected with PNCC. The total amount of P2,500,000 forms part of the
P101,500,475.21 benefits received by the members of the PNCC Retirement Trust Fund.

26. These observations were not noted in the previous audit for failure of the previous
PNCC Management to furnish the Audit Team with the necessary disbursement vouchers
and other supporting documents because they alleged that the transactions of the PNCC
Retirement Trust Fund are not subject to the audit of COA. During the 2010 audit, it was
noted that all of the disbursements drawn from PPSBI Mabalacat Branch were not recorded
in the PNCC books of accounts. Even the accounts maintained at the said bank were not
declared to the previous Audit Team. As such, the Audit Team was not able to establish the
accuracy of the Cash in Bank accounts. It was only during the audit of the 2010
transactions that the non-recording of the disbursements were discovered. As such, it was
recommended and Management agreed and recorded the same in the books of accounts.

27. However, the present Audit Team could not also establish the accuracy of the
balances of the remaining Cash in Bank accounts as of December 31, 2010 maintained at
PPSBI Mabalacat Branch due to the following:

 Management failed to submit copies of the bank statements for the following
checking accounts:

Account No. 01900-102900-1 with checkbook series 00811 – 00840

Account No. 01900-102800-1 with checkbook series 00841 - 00870

 Not all the series of checkbooks issued against the above accounts were
accounted for. Check Nos. 819, 831, and 850 were not presented by
Management. Allegedly they were cancelled checks and/or checks issued but
not related to the Mabalacat accounts.

 Unused checks , if any, were not presented to the Audit Team; neither had the
Bank confirmed and/or denied utilization of the same.

17
  No Bank Statements/Bank Reconciliation Statements were submitted for the
above-listed checking accounts.

Management continue to assert that PNCC is an Acquired Asset Corporation and

not a Government Owned and Controlled Corporation, and hence, not subject to
COA audit.

28. We maintain our position that PNCC is now subject to COA audit. The Office of the
Government Corporate Counsel (OGCC), in its Opinion No. 207, series of 1996 dated July
31, 1996 opined that “PNCC falls within the ambit of COA’s functional authority and
regulatory responsibility. PNCC may enjoy operational flexibility provided its transactions
are not irregular, unnecessary, and unconscionable expenditures or uses of government
funds and properties. It may adopt its own accounting and auditing rules and regulations as
long as they are consistent with the appropriate and applicable guidelines of COA.” On the
other hand, in Magno vs. Commission on Audit (G.R. No. 149941, August 28, 2007), Cabili
vs. Civil Service Commission (G.R. No. 156503, June 22, 2006), De Jesus vs. Civil Service
Commission (G.R. No. 156559, September 30, 2005), Molen, Jr. vs. Commission on Audit
(G.R. No. 150222, March 18, 2005, and Bases Conversion and Development Authority vs.
Commission on Audit (G.R. No. 178160, February 6, 2009), the Supreme Court held that
the specification of compensation and limitation of the amount of compensation in a statute
indicate that Board members are entitled only to per diem authorized by law and no other.

29. Aside from the benefits received by the members of the Board of the PNCC
Retirement Trust Fund, the same directors were also members of the PNCC Board who
have collected additional allowances and other benefits in the aggregate amount of
P62,654,322.02 which were not allowed under Department of Budget and Management
(DBM) Circular Letter No. 2002-2 dated January 2, 2002, as quoted below:

“The above-listed benefits are personnel benefits granted in addition to

salaries. As fringe benefits, these shall be paid only when the basic salary is
also paid.

Members of the Board of Directors of agencies are not salaried officials of the
government.

As non-salaried officials they are not entitled to PERA, ADCOM, YEB and
retirement benefits unless expressly provided by law.”

30. List of benefits and other allowances received by the regular members of the PNCC
Board in addition to those they received as directors of the PNCC Retirement Trust Fund,
that were not allowable under DBM Circular Letter No. 2002-2, are as follows:

Received in
2010
Incentive/performance bonus (distribution of 10% share in
2008 and 2009 net earnings) P29,411,764.75
Monthly allowance 25,453,753.37
Mid-Year Bonus 4,200,000.00
Christmas bonus 1,604,626.95
Anniversary Bonus 1,604,626.95

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 Rice subsidy 249,550.00
Productivity enhancement incentive – CY 2009 130,000.00

Total P62,654,322.02

31. The above-mentioned allowances are in addition to the P35,623,662.17 received by

the Board in 2009 as reported in the 2009 Annual Audit Report wherein Notice of
Disallowance was issued. While it is true that under Section 36 of the Corporation Code,
every corporation has the power and capacity to establish pension, retirement and other
plans for the benefit of its directors, trustees, and officers and employees; and it is without
doubt that the PNCC Board of Trustees also possesses the usual corporate powers for their
effective governance, the same is not at all absolute. As enunciated in G.R. No. 158562
Ramon R. Yap vs. COA, “it was insufficient for the petitioner to assert that the disputed
allowances and benefits were approved by the board of directors of the MGC. Such board
action should in itself be authorized by law or regulation or have valid legal basis.
Otherwise, it becomes an illegal corporate act that is void and cannot be validated”. Unlike
private corporations, government corporations are circumscribed by laws which limit their
governing boards’ power in the adoption of rules and regulation as well as the authorization
of expenditures. Every expenditure must have legal basis and should not be contrary to law,
rules and regulations.

32. Records show that Management had already paid the separated officers and
employees of PNCC and Tollways Management Division on the basis of the 250% rate. As
of December 31, 2010, the outstanding cash advances chargeable against the
retrenchment pay of the 101 PNCC Central Office officers and employees and the 22
employees of the Toll Management Division amounted to P179,043,950.03 and
P23,265,000.00, respectively. Allowing the grant of cash advance deductible against the
retrenchment pay of both the ex-service and those still in service is not in accordance with
COA Circular No. 97-002 dated February 10, 1997, and has no legal basis; hence,
immediate settlement of the whole amount, which as of December 31, 2010 stood at
P202,308,950.03, should be made.

33. In view of the foregoing, we recommended that Management:

 Require the immediate settlement/refund of the whole amount of all allowances,

benefits and incentives received by the Members of the PNCC Board and those
of the PNCC Retirement Trust Fund for lack of legal basis;

 Stop the grant of retirement benefits on the basis of the 250% rate as approved
by the Board, it being grossly excessive, injudicious, and unconscionable as
defined under COA Circular No. 85-55A, dated September 8, 1985.

 Compute the terminal leave pay based on the actual Vacation Leave and
Sick Leave credits earned by the retiree and not on the basis of estimates
provided by Management of 92.5 days for Managers and Executives
and 47.5 days for Rank & File and Supervisors.

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34. Quoted below are management comments.

Grant of the retirement and gratuity benefit:

34.1 In General – the bases of the grant of retirement and gratuity benefit are the
following:

PNCC By-Laws

34.2 Article V of the Corporate By-Laws, Section 5.01 – Number of Directors,

states that, “The Corporate power of the Corporation shall be vested in and
exercised, its business conducted and its property controlled by the Board of
Directors composed of eleven (11) directors. xxxx

34.3 Article V of the Corporate By-Laws, Section 5.13 – Powers, likewise provides
that, “Unless otherwise provided in the Corporation Law and in this By-Laws,
the corporate powers shall be exercised, all business conducted, and all
property shall be controlled and held by the Board. (As amended per Res.
Stockholders 6 – 72/73 dated August 21, 1973).

Powers under the Corporation Code

34.4 Section 23 of the Corporation Code categorically states that the corporate
power of all corporations shall be exercised, all business conducted and all
property of such corporation controlled and held by the board of directors.
Thus, the questions of policy or of management are left solely to the honest
decision of the board as the business manager of the corporation. Its acts or
contracts are presumed to be valid and regular and as long as it acts in good
faith and in the exercise of honest judgment in the interest of the corporation,
its actions are not reviewable by the courts.

Specific Legal Basis

34.5 The grant of the Retirement and Gratuity benefit to incumbent members of
the Board and executives/officers and Corporate Secretariat staff as of April
2007 under the covering resolutions of the Board is not without legal basis as
to the old Board’s perspective. Resolutions BD-031-2007, BD-043-2007, and
BD-031-2008 are founded on the corporate powers for the creation/grant of
the retirement/resignation/gratuity benefit program.

34.6 Thus, the old Board in the grant of the benefit asserted its power as a private
corporation governed by its Articles of Incorporation and By-Laws and the
Corporation Code.

34.7 It is emphasized that while majority ownership of PNCC is held by the

government through the Privatization Management Office (PMO) and the
Government Service Insurance System (GSIS) by way of debt-to-equity
conversion under LOI 1295 and further via the Deed of Confirmation and the
Supplemental Deed of Confirmation, PNCC still retained its private character
as a government acquired asset corporation.

20
34.8 With due respect, a sharp distinction should be made between strictly
government corporations or agencies and acquired assets or essentially
private corporation like PNCC. In the case of PNCC vs. Pabion, 320 SCRA
188, the Supreme Court categorically declared that PNCC is “essentially a
private corporation notwithstanding the government’s interests” therein
through the debt-to-equity conversions imposed by LOI 1295. Being a private
corporation, PNCC is subject to SEC regulation and jurisdiction.

34.9 In a letter dated June 01, 2011, the new PNCC Board required each member
of the then Board to explain in writing why the benefits they received should
not be disallowed and why no formal demand should be addressed to them
to refund the same.

34.10 The then Chairman of the PNCC Board, in his letter of June 13, 2011, wished
to take exception to the COA position and stated that the compensation
referred to was made in accordance with the Corporation Code. He added
that during their tenure, PNCC was restored to profitability and substantial
long standing debt in the billion of pesos were either totally paid off or
resolved in favor of PNCC. He further added that the long standing liabilities
to the BIR amounting to P125 million were fully paid.

34.11 The immediately preceding PNCC Board presented, in their letter reply dated
June 15, 2011, their explanations, quoted as follows.

34.12 “With all due respect, the payment of cash gratuity to all PNCC corporate and
managerial executives, along with the rank-and-file employees, is legally
authorized. Section 5.13 of the PNCC By-Laws, in relation to Section 36 (10)
of the Corporate Code provides that the PNCC Board has the power, among
others, to establish pension, retirement bonus or other types of incentives or
compensation plans for the benefit of the corporation’s employees, officers,
directors, and trustees.

34.13 The By-Laws are in effect written into the charter and in this sense, they
become part of the fundamental law of the corporation and the corporation,
its directors, officers, and members are bound by and must comply with them
(SEC Opinion, April 28, 1997, citing 8 Fletcher Sections 4166 and 4197).”

34.14 “It is a fact that PNCC has been in a retrenchment mode after the operations
and maintenance of the relevant expressway had been ceded to various
private operators under the different Joint Ventures, with PNCC remaining as
equity partner with share in the revenues. The grant of cash gratuity, as in
any other retrenching entity, was in line with PNCC’s
Retrenchment/Retirement Guidelines applied to all officers and employees in
recognition of their contribution to PNCC’s welfare and viability.”

34.15 “The authority of the Board emanates from Section 5.13 of the PNCC By-
Laws and Section 23 of the Corporation Code which state that the corporate
power of all corporations shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors.
Thus, the questions of policy or of management are left solely to the honest

21
 decision of the board as the business manager of the corporation. Its acts or
contracts are presumed to be valid and regular and, as long as it acts in good
faith and in the exercise of honest judgment in the interest of the corporation,
its actions are not reviewable by the courts (Sales vs. SEC, 169 SCRA 109;
Philippine Stock Exchange, Inc. vs. CA, 281 SCRA 232).”

34.16 “Moreover, the rules and regulations or standards applied in the audit of
regular agencies and corporation do not and should not apply to PNCC.

34.17 It bears stressing that PNCC’s corporate ownership status had been in limbo
for a long time. PNCC is primarily a construction company which diversified
into other businesses. Organized under the Corporation Code in the 1960’s,
PNCC is a publicly-listed corporation with broad public ownership. With the
issuance of LOI 1295, in 1983, PNCC’s government loans were required to
be converted into equity. However, the issue on whether there was indeed
actual conversion of said government debt into PNCC shares became the
subject of a protracted case culminating in the decision rendered in the case
of Cuenca vs. Atas, et.al. (G.R. No. 146214) sometime in 2008. Note that the
government agencies alleged to be stockholders of PNCC had to execute a
subsequent Deed of Ratification and Confirmation during the pendency of the
aforesaid Cuenca case to make up for the lack of proof evidencing actual or
consummated conversion of the debt to equity. Even then, the High Tribunal
in the same case has maintained that PNCC is a private corporation echoing
the earlier decision of the PNCC vs. Pabion case.”

34.18 “By definition, PNCC can be classified as an acquired asset corporation

because it is under private ownership but its voting or outstanding shares
were conveyed to the government in satisfaction of debts and by enunciated
policy, is required to be disposed of to private ownership within a specified
period of time (Section 2 of A.O. 59). By express provision of law, an
acquired asset corporation shall not be considered as a government owned
or controlled corporation (Section 2 (1) of A.O. 59; Section 2 P.D. No. 2029).”

34.19 As clearly and categorically ruled by the Supreme Court in the case of
Cuenca vs. Atas, supra:

“x x x it has been settled in PNCC vs. Pabion that PNCC is an acquired asset
corporation and not a government-owned and/or controlled corporation
(GOCC). In said case, we held that PNCC did not lose its status as a private
corporation upon acquisition by the government thru the GFI’s of the majority
of its shares of stock. Our determination that PNCC is an acquired asset
corporation removed it from the category of a GOCC xxxx.”

34.20 Despite certain obiter dicta pronouncements in other cases involving PNCC,
the declaration in the Pabion and Cuenca cases that PNCC is not a GOCC
has not been directly overturned.”

34.21 “In view of PNCC’s peculiar status, all PNCC directors before were not
appropriately appointed by the President of the Philippines, but were directly
elected by the stockholders or, in case of vacancy, by the remaining Board.
Also, PNCC officers and employees are not embraced by the Civil Service

22
 but belong to the private sector. Thus, their labor and welfare rights are
governed by the corporation’s Articles and By-Laws, the Corporation Code,
the Labor Code, the Social Security System Law (SSS), and the pertinent
Collective Bargaining Agreements (CBA’s) – PNCC’s workforce having been
unionized. Further, PNCC’s income and budget come from its private
corporate earnings and not from the General Appropriations Act nor from the
Bureau of Treasury.”

34.22 “Again, with due respect, the COA should have duly considered all the
foregoing relevant facts and circumstances that are accurately reflective of
PNCC’s true corporate status in the audit of PNCC’s finances and operations.
Accordingly, the pertinent laws, rules, regulations and circulars cited or
invoked by COA in the audit of the subject cash gratuity, would definitely not
apply to PNCC, as they are applicable only to regular government agencies
and government corporations.

34.23 In fact, the enactment of R.A. No. 10149 or the GOCC Governance Act of
2011, is an indication or acknowledgment that, previously, there was no clear
cut law, rule or regulation regarding the legal limits of the Board’s authority in
approving compensation and benefits other than those provided in the
corporation’s charter and other laws of general application.”

34.24 “If Section 5 of A.O. 59 directs all government agencies such as the DBM,
NEDA, etc. to accord operational flexibility and differential treatment to
GOCCs engaged in proprietary functions, with more reason and with greater
force should this directive apply to PNCC which is merely an acquired asset
corporation and essentially a private corporation.”

34.25 “It is axiomatic in law that obligations are demandable only if there is a law or
contract requiring their performance by persons clearly covered thereby
(Article 152-1158, Civil Code).”

34.26 Lastly, the immediately preceding PNCC Board humbly submitted that the
grant of gratuity benefits to those who rendered invaluable services to PNCC
in accordance with PNCC’s Retrenchment/Retirement Guidelines was legally
authorized, justifiable, and reasonable under the particular circumstances

34.27 The previous President and CEO, in a separate letter reply of June 21, 2011,
confirmed acceptance of the benefits in good faith on the belief that the
gratuity was a form of additional benefit in recognition of his service during his
tenure and correctly assumed that the benefits granted are approved by the
Board of Directors. He likewise added that it has been two (2) years from the
time he received the gratuity and had spent the same for his daily living
expenses like any normal person would do.

Specifics – on the amounts received by the Executives/Officers/Corporate

Secretariat Staff:

34.28 The above recipients of the retirement and gratuity benefit likewise uphold the
positions of the then PNCC Board in the grant of the same. Each of the
recipient claimed that the additional benefit was received in good faith, the

23
 payment being covered by the pertinent Board Resolutions duly passed and
approved by the Board of Directors and the Board of Trustees, as well, who
accordingly have the power and authority to approve full and partial payments
and releases of advance payments of the retirement gratuity to eligible
beneficiaries or entitled members of the Board and Senior Management. As
such, the benefit was accepted with gratitude.

34.29 The recipients, upon knowing that the benefit received in good faith will either
be deducted from their respective separation/retrenchment pay or refunded,
jointly/collectively cite provisions of the Government Accounting and Auditing
Manual, the Labor Code of the Philippines, and some of the most recent
jurisprudence on similarly situated cases, which prohibit the deduction from
salaries/separation/retrenchment pay or the refund of what has already been
received:

On deduction from separation/retrenchment pay:

34.30 Article 116 of the Labor Code of the Philippines -Withholding of wages and
kickbacks prohibited. It shall be unlawful for any person, directly or indirectly,
to withhold any amount from the wages of a worker or induce him to give up
any part of his wages by force, stealth, intimidation, threat or by any other
means whatsoever without the workers consent.

34.31 Section 265 of the Government Accounting and Auditing Manual (GAAM) -
Retention of salary for the satisfaction of indebtedness to the government
provides that “When any person is indebted to the Government of the
Philippines or to any government-owned or controlled corporation or to any
self governing board, commission or agency of the government, the COA
may direct the proper officer to withhold the payment of any money due him
or his estate, the same to be applied in satisfaction of such indebtedness.
However, the retention of the retirement gratuity of a person to satisfy his
indebtedness to the government may be resorted to only if the person admits
his indebtedness and consents to the retention or when a competent court so
directs.”

34.32 Said provision explicitly limits the power of COA to retain the retirement
benefits of a government employee for the purpose of satisfying his
indebtedness only to instances where (1) the employee admits his
indebtedness and consents to such retention; or (2) a competent court so
directs.

34.33 Thus, the benefit, if deducted from the separation/retrenchment pay of the
recipient without his admission and consent, cannot quality as a ‘debt for
compensation or set off to be operative under Article 1279 of the Civil Code.
The amount is a mere claim that would not make one creditor of the other. As
explained by the Court in E.G.V. Realty Devt. Corp. v. Court of Appeals:

34.34 “Compensation or offset takes place by operation of law when two (2)
persons, in their own right, are creditor and debtor of each other. For
compensation to take place, a distinction must be made between a debt and
a mere claim. A debt is a claim which has been formally passed upon by the

24
 highest authority to which it can in law be submitted and has been declared to
be debt. A claim, on the other hand, is a debt in embryo. It is a mere
evidence of a debt and must pass thru the process prescribed by law before it
develops into what is properly called a debt.”

34.35 It is a settled rule in Philippine jurisprudence that retirement benefits of

government employees may not be withheld, deducted or applied to his
indebtedness to the government. The Supreme Court in Tantuico vs.
Domingo, et al. G.R, No. 96422, February 1994, declared that:

34.36 “Regardless of petitioner’s monetary liability to the government that may be

discovered from the audit concerning his fiscal responsibility and
accountability as former COA Chairman, respondent Chairman cannot
withhold the benefits due petitioners under the retirement laws.”

34.37 Also, the High Court held that it is a well settled rule that retirement pay
accruing to a public officer may not be withheld and applied to his
indebtedness to the government. As pronounced in Bengzon vs. Drilon, 208
SCRA 133:

34.38 “A number of retirement laws have been enacted, the purpose of which is to
entice component men and women to enter the government service and to
permit them to retire therefrom with relative security, not only those who have
retained their vigor but, more so, those who have been incapacitated by
illness or accident.

34.39 Retirement laws are construed liberally in favor of the retiree because their
intension is to provide for sustenance and hopefully even comfort, when he
no longer has stamina to continue earning his livelihood.”

34.40 In Bangko Sentral ng Pilipinas vs. COA and Recarredo S. Valenzuela G.R.
No. 168964 dated January 23, 2006, the Court denied the petition and
affirmed the December 29, 2003 Judgment of the COA in Decision No. 2003-
163 which allowed the release of respondent Recarredo S. Valenzuela’s
retirement benefits and its July 21, 2005 Resolution denying petitioner
Bangko Sentral ng Pilipinas’ motion for reconsideration.

On refund:

34.41 It is the honest belief of each of the recipients of the grant of the gratuity
benefit that they are entitled to additional benefits duly approved by the
Board, at that, because they are salaried officials/employees of the
corporation. Having accepted the benefits in good faith, they should not be
required to refund the same based on the following:

34.42 Blaquera v. Alcala (G.R. No. 109406 September 11, 1998);

 The Court’s pronouncement in Blaquera v. Alcala supports petitioners’

position on the refund of the benefits they received. In Blaquera,
officials and employees of several government departments and
agencies were paid incentive benefits which the COA disallowed on

25
 the ground that A.O. No. 29 dated January 19, 1993 prohibited
payment of these benefits. While the Court sustained the COA on the
disallowance, it nevertheless declared that:

 “Considering, however, that all the parties here acted in good faith, we
cannot countenance the refund of subject incentive benefits for the
year 1992, which amounts the petitioners have already received.
Indeed, no indicia of bad faith can be detected under the attendant
facts and circumstances. The officials and chiefs of offices concerned
disbursed such incentive benefits in the honest belief that the
amounts given were due to the recipients and the latter accepted the
same with gratitude, confident that they richly deserve such benefits.”

34.43 Bases Conversion and Development Authority vs. Commission on Audit (G.R.
No. 178160. February 26, 2009);

 The Court having noted that the Board members and the full-time
consultants received the year-end benefit in good faith, the COA
Decision No. 2007-020 confirming the disallowance of the year-end
benefit granted to the BCDA Board members and full-time consultants
and held the presumption in good faith did not apply to them is
PARTIALLY GRANTED. The said COA decision is AFFIRMED with
the MODIFICATION that the Board members and full-time consultants
of the Bases Conversion and Development Authority are not required
to refund the year-end benefits they have already received.

34.44 Rodolfo S. de Jesus, Edelwina DG. Parungao, Hermilo S. Balucan, Avelino

C. Castillo, Danilo B. de Leon (Interim Board of Directors, Catbalogan Water
District) and Alice Marie C. Osorio (Board Secretary) vs. Commission on
Audit (G.R. No. 149154. June 10, 2003);

The ruling in Blaquera applies to the instant case, thus:

 “WHEREFORE, the Decision of the Commission on Audit dated 12

September 2000 as well as its Resolution dated 5 July 2001 are
AFFIRMED with MODIFICATION. Petitioners need not refund the
Representation and Transportation Allowance, Rice Allowance,
Productivity Incentive Bonus, Anniversary Bonus, Year-end Bonus and
cash gifts, received per Resolution No. 313, series of 1995, of the
Local Water Utilities Administration, between May to December 1997
and April to June 1998.”

34.45 Executive Director Gabriel S. Casal, Acting Director Cecilio Salcedo and
Luzviminda B. Herrera, in her personal capacity and in representation of the
rank-and-file employees of the National Museum as President of the National
Museum Rank-and-File Employees Association (NMRFEA) vs. The
Commission on Audit (G.R. No. 149633 November 30, 2006);

 Generally stated, as to the employees who received the incentive

award without participating in the approval thereof, it cannot be said

26
 that they were in bad faith or grossly negligent in so doing. The
imprimatur given by the approving officers on such award certainly
tended to give it color of legality from the perspective of these
employees. Being in good faith, they cannot, following Blaquera, be
compelled to refund the benefits already granted to them.
(underscoring supplied)

The dispositive portion of the ruling reads as follows:

 “WHEREFORE, the petition is PARTIALLY GRANTED. The Decision

dated June22, 1999 of the respondent COA and its Resolution dated
August 3, 2001 are declared invalid only insofar as they hold liable all
National Museum employees who merely received the incentive
award for CY 1993.

 Accordingly, the Temporary Restraining Order directed to COA which

was issued by this Court on October 2, 2001 is hereby PERMANENT
as to the employees who were held liable to reimburse, merely for
receiving the incentive award. The same, however, is LIFTED as to
the following: x x x.”

34.46 The foregoing provisions, laws, and jurisprudence clearly express a history of
the mandate on the exemption from withholding of claims and/or
indebtedness from separation/retirement benefits and/or from refunding
amounts already received.

34.47 It bears repeating the many other rulings promulgated by the Supreme Court
whereby COA disallowances were all sustained, affirmed, or upheld but
refunds were not required from recipient-beneficiaries, to wit: (1) G.R. No.
157542, October 10, 2008; (2) G.R. No. 159299, July 07, 2004; (3) G.R. No.
157001, October 19, 2004; (4) G.R. No. 159200, February 16, 2006; (5) G.R.
No.159355, August 09, 2010; (6) G.R. No. 169637, June 08, 2007; (7) G.R.
No. 152688, November 19, 2003; (8) G.R. No. 142347, August 25, 205; and
(9) G.R. No. 156641, February 05, 2004.

Grant of the retirement benefits on the basis of the 250%:

34.48 The aforesaid grant of the retirement benefit/separation pay to the remaining
employees was in grateful appreciation of their continuous and loyal service
to the company, in the event of retrenchment or separation of officers and
employees on account of the early separation program or retrenchment
program offered by management. Same is covered by duly approved board
resolutions No. BD-032-2005 dated March 29, 2005 and No.BD-084-2005
dated June 28, 2008.

34.49 At this point in time, the recommendation to stop the grant is not doable. The
employees’ welfare and labor rights are not only governed by the
corporation’s Articles and By-Laws, the Corporation Code, the Labor Code,
the Social Security System Law, but also the pertinent Collective Bargaining
Agreements, the company’s workforce being unionized.

27
 Terminal Leave Pay is computed on the basis of estimates instead of the actual
leave credits earned by the proposed retiree:

34.50 The aforesaid recommendation was brought to the attention of the HRAD-
Personnel Services Department, the office responsible for the computation of
the estimated retrenchment pay, which include among others the subject
terminal leave pay. Accordingly, the manner of computation will be changed
to reflect the actual leave credits earned.

35. We maintain our position that the grant of allowances, benefits and incentives
received by the Members of the PNCC Board and those of the PNCC Retirement Trust Fund
has no legal basis.

36. In G.R. No. 131715 PNCC vs. Ernesto Pabion and Louella Ramiro, the Supreme
Court stated that “Contrary to respondent’s assertion that PNCC is not a GOCC, we hold
that it may be deemed so under EO 292. However, for purposes of AO 59, particularly in the
application of Section 16 thereof, PNCC is an acquired asset corporation.”

37. As enunciated in G.R. No. 158562 Ramon R. Yap vs. COA, “it was insufficient for the
petitioner to assert that the disputed allowances and benefits were approved by the board of
directors of the MGC. Such board action should in itself be authorized by law or regulation
or have valid legal basis. Otherwise, it becomes an illegal corporate act that is void and
cannot be validated.”

Various allowances and incentives granted by Management and received by officers,

executives and employees during the year 2010 were either excessive, irregular
and/or without legal basis.

38. Review of documents relative to various disbursements of PNCC revealed that the
following allowances/ benefits were given to officers and employees during the year 2010:
Nature of Allowance and Benefits Amount per employee Total Amount
Exit Bonus P100,000.00/person P 22,500,000.00
Incentive Bonus out of the 10% Share in Annual More or less one (1) month salary 21,812,298.67
Profits for CYs 2008 and 2009 for rank-and-file
Performance Bonus- out of the 10% share in More or less one (1) month salary 12,075,219.15
Annual Profits for CYs 2008 and 2009 for officers and executives
Mid Year Bonus one month basic salary 11,936,776.50
Productivity Incentive Benefit P2,000/year of service 10,178,000.00
Christmas Bonus/ 13th month pay one month basic salary 7,194,570.51
Anniversary Bonus one month basic salary 5,864,468.67
ISO Bonus P10,000 for regular
P5,000 for non-regular 5,080,000.00
Rice Subsidy P5,250/quarter 4,097,488.35
Goodwill Bonus P5,000 1,325,000.00
Clothing Allowance P9,500 - officers and executives
P8,000 - rank and file
P6,500 - for TMD 1,209,500.00
Cash Gift P5,000/year 1,116,666.67
Seminar Workshop Allowance P1,200/year 426,000.00
TOTAL P104,815,988.52

Exit Bonus- P22,500,000

39. Verification of the amount paid to those retrenched employees of the Tollway
Management Division (TMD) affected by the hand-over of the South Luzon Tollway (SLT)

28
operations to Manila Toll Expressway System, Inc. (MATES) on May 2, 2010 showed that
P100,000 exit bonus was also given to each separated employee. Further review of records
disclosed that P10,000 were also paid to each non-regular fixed-term/project employee and
contractual service employee in the South Luzon Tollway as an exit bonus upon separation.
The grant of the said exit bonus was authorized under Board Resolution No. BD-022-2010
dated April 27, 2010.

40. The grant of Exit Bonus does not have legal basis, and as such, they are not allowed
in audit. Notices of Disallowance shall be issued and the persons liable thereto shall be
required to settle the same.

41. Management alleged that subject allowances/benefits have been granted based on
several board resolutions. However, we believe that the powers of the governing PNCC
Board are limited because they are not the owners of the corporation but mere
representatives of the government. That is, unlike private corporations, government
corporations are circumscribed by laws which limit their governing boards’ power in the
adoption of rules and regulation as well as the authorization of expenditures. Every
expenditure must have legal basis and should not be contrary to law, rules and regulations.

Incentive bonus (Distributed out of the 10% share in Annual Profits) - P21,812,299

42. Further review of the disbursements of PNCC also disclosed that Management paid
the aggregate amount of P21,812,298.67 to rank-and-file during the calendar year 2010
representing Incentive Bonus, the funding of which allegedly sourced out from the 10%
share in the annual earnings of the Corporation. The Incentive Bonus granted covers the
years 2008 and 2009, details are shown below:

Incentive bonus for CY 2008 equivalent to more or less one (1) month salary P 10,373,991.08

Incentive bonus for CY 2009 equivalent to more or less one (1) month salary 11,438,307.59

TOTAL P 21,812,298.67

Performance Bonus (Distributed out of the 10% share in Annual Profits)

-P12,075,219

43. Performance Bonus was paid to officers and executives amounting to

P12,075,219.15 as follows:
P 5,579,468.00
Performance bonus- officers and executives for CY 2008
Performance bonus- officers and executives for CY 2009 6,495,751.15
TOTAL P 12,075,219.15

44. This is in addition to the Productivity Incentive Benefit granted to the same officers
and employees as discussed in paragraph 42. This is contrary to Section 7 of
Administrative Order (AO) No. 161. Pertinent portion is quoted below:

“Heads of departments, agencies, governing boards, commissions, offices,

including government-owned and/or controlled corporations and government
financial institutions, and local government units, are hereby prohibited from
establishing and authorizing a separate productivity and performance

29
 incentive award or any form of the same or similar nature.”

45. The payment of incentive bonus and performance bonus as discussed above was
already the subject of an Audit Observation Memorandum (AOM) due to lack of authority
from the Office of the President and reflected in the 2009 Annual Audit Report of PNCC.
However, Management justified the grant of said benefit based on Section 10.1 of the
Articles of Incorporation of the PNCC which provides that ten percent (10%) of the annual
profits or net earnings of the Company after deducting expenses of administration of the
company but before taxes and bonus shall be distributed among the members of the Board,
the executive officers, other officers and employees, as may be determined by the Board
upon recommendation of the President.

Productivity Incentive Benefit - P10,178,000.00

46. Administrative Order (AO) No. 161 dated December 6, 1994 prescribes a standard
incentive pay system based on productivity and performance, for all officials and employees
of the government x x x including those of government-owned and or controlled
corporations x x x. This AO authorizes government-owned and/or controlled corporations to
appropriate annually an amount to cover these benefits.

47. Section No. 3 and 4 thereof specifically provide that:

“Sec. 3. Basis and Amount of Award. — The incentive pay shall be based on
individual personnel productivity and performance as evaluated and determined by
the heads of the respective offices/agencies in accordance with the policies and
standards set by the Civil Service Commission. The amount of incentive that will be
paid deserving officials/employees pursuant to this Order may vary for each
official/employee within an agency depending on individual performance appraisal,
subject to Section 4 below.

Sec. 4 The total cost of the incentive pay that will be utilized for the purpose by any
government agency including government-owned and/or controlled corporations, x x
x in any one year shall in no case exceed an aggregate total for an agency
computed at an average of P2,000.00 per occupied/filled-up position x x x as of end
of CY 1994.”

48. Audit of the Personal Services account revealed that on February 10, 2010,
Management paid the total amount of P10,178,000 representing Productivity Incentive
Benefit (PIB) granted to PNCC officers and employees covering the years 1995 to 2010,
contrary to the provision of Section 3 of the AO No. 161. It was noted that the required
individual personnel productivity and performance appraisal have not been evaluated and
determined by the head of the office which should have been used as basis for the
payment. All the officers and employees were paid P2,000 each, regardless of their
individual productivity and performance. Moreover, for CY 2009 and 2010, PIB was paid
even without the required budget/appropriation for the same. Management failed to prepare
their Corporate Operating Budget. Hence, at the time of payment, no budget had been set
aside for the purpose.

49. In view of the foregoing, said disbursement is considered irregular pending

submission of the individual personnel productivity and performance appraisal report that
should have been used as basis in the grant of the said productivity incentive award. As
such, we are constrained to issue a Notice of Suspension requiring submission of the basis

30
used by Management in granting and approving the payment of the said Productivity
Incentive award.

Anniversary Bonus - P5,864,469

50. Administrative Order (AO) No. 263, dated March 28, 1996, authorizes the grant of
anniversary bonus to officials and employees of government entities. The AO provides that
anniversary bonus shall be granted only during milestone years, which refers to the 15th
anniversary and every fifth year thereafter. The payment of the anniversary bonus shall be
in an amount not exceeding P3,000 for each employee provided that the employee has
rendered at least one (1) year service in the same agency as of the date of the milestone
year. No other bonus or allowance or whatever name it may be called of similar nature
which relate to or in connection with an entity’s anniversary shall be granted.

51. Review of records revealed that Resolution No. BD-40-2010, dated November 15,
2010, was approved authorizing the grant of Anniversary Bonus for the CY 2010 to all PNCC
entitled employees on board as of November 22, 2010. On November 25, 2010 PNCC paid
Anniversary Bonus to all officers and employees equivalent to one month salary, totalling
P5,864,468.67. As of November 22, 2010, PNCC is on its 44th year. For this reason, the
grant of the one month anniversary bonus is in violation of the provisions of AO No. 263,
hence, disallowable in audit.

ISO Bonus - P5,080,000

52. Distribution of the P5,080,000 ISO bonus was authorized by Board Resolution No.
BD-023-2010. Said bonus was granted allegedly in appreciation of the effort exerted and in
the full cooperation of employees in the achievement of the International Organization for
Standardization (ISO) Certification for PNCC Tollway Operations. The grant of the said
bonus was extended to several employees of PNCC Subsidiaries, Dasmariñas Industrial &
Steel Corporation (DISC), and Traffic Control Products Corporation (TCPC) based in PNCC.

Goodwill Bonus - P1,325,000

53. Validation of disbursements during the year 2010 also disclosed payment of
Goodwill Bonus pertaining to the calendar year 2009 amounting to P5,000 per employee or
a total of P1,325,000. Bases for the grant of the said bonus were the Collective Bargaining
Agreements between PNCC and the different Unions of employees within the Company.
Analysis of the (CBA) furnished to us by the Human Resources Administration Division
(HRAD) showed the following authorized amount of goodwill bonus:
Amount per
CBA between
employee
PNCC and PNCC Tollways Supervisors Association (PTSA) P 5,000
PNCC and PNCC Central Office Supervisors Association (PCOSA) 2,000
PNCC and PNCC Central Office Rank and File Union (PCORFU) 4,000

54. Although the grant of the Goodwill Bonus is among those agreed upon under the
PNCC CBA, the same should be in accordance with Sections 2, 3, and 9 of Resolution No.
02, series of 2003 of Public Sector Labor-Management Council, and Section 1 of
Administrative Order No. 135 dated December 27, 2005, which are quoted in the next page:

31
 Section 2

“The CNA must include, among others, provisions on improvement of income

and productivity, streamlining of systems and procedures, and cost cutting
measures, that shall be undertaken by both the management and the union so
that the operations of the GOCC/GFI can be undertaken at a lesser cost”.

Section 3

“The CNA Incentive may be granted if all the foregoing conditions are met by
the GOCC/GFI:

a. Actual operating income at least meets the targeted operating income in

the Corporate Operating Budget (COB) approved by the Department of
Budget and Management (DBM)/Office of the President for the year.

b. Actual operating expenses are less than the DBM-approved level of

operating expenses in the COB as to generate sufficient source of funds
for the payment of CNA incentive, and

c. For income generating GOCCs/GFIs, dividends amounting to at least 50%

of their annual earnings have been remitted to the National Treasury in
accordance with the provisions of Republic Act No. 7656 dated November
9, 1993.

Section 9

“The payment of CNA incentive shall be in accordance with the Provisions of

this Resolution and subject to accounting and auditing rules and regulations.
Should the payment of CNA Incentive be disallowed by the Commission On
Audit for violation of the herein provisions, pertinent COA rules and
procedures shall apply”.

Section 1- Administrative Order (AO) No. 135 – Grant of Incentive

“The grant of the Collective Negotiation Agreement (CNA) incentive to national

government agencies (NGAS), government-owned and/or controlled
corporations (GOCCs), and government financial institutions (GFIs), if
provided in their respective CNAs and supplements thereto executed between
the management and employees’ organization accredited by the Civil Service
Commission (CSC), is hereby authorized.”

55. Validation made as to PNCC’s compliance with the provisions of Resolution No. 2,
series of 2003 of Public Sector - Labor – Management Comment earlier stated disclosed
that Management failed to comply as follows:

a. Non-compliance with the provision of Section 2;

b. Since there is no operating budget submitted by Management, compliance
with the requirements under Section 3.b could not be established.

32
 c. Non-compliance with Section 3.c since PNCC is not required to remit 50% of
its annual income to the Bureau of Treasury. Moreover, PNCC failed to
declare and pay the dividends due to its preferred stockholders.

56. In view of the foregoing, inasmuch as several provisions of the subject Resolution
were not complied with, the payment of the Goodwill Bonus amounting to P1,325,000 is
being disallowed in audit in accordance with Section 9 of the same Resolution. Notice of
Disallowance shall be issued requiring all the persons liable to immediately refund/settle the
amount due them.

Clothing Allowance – P605,500 overpayment

57. DBM Budget Circular No. 2003-8 dated December 8, 2003 prescribes the rules and
regulations on the grant of uniform/clothing allowance (U/CA) to all government personnel.
Paragraph 3.1 thereof states that the U/CA shall be as prescribed in the pertinent general
provision of the annual General Appropriations Act (GAA). Republic Act No. 9970 or the
GAA for Fiscal Year 2010 provides that the U/CA per annum should not be more than
P4,000.

58. Moreover, per Section 1, Article XIV of the Collective Bargaining Agreement (CBA)
between PNCC and PNCC Central Office Supervisors Association (PCOSA) dated January
2004, the Company shall provide covered employees with clothing allowance in the amount
of Two Thousand Five Hundred (P2,500.00) per year.

59. Examination of documents disclosed that for the year 2010, the PNCC granted
clothing allowance of P9,500, P8,000 and P6,500 for officers and executives, rank and file,
and for TMD employees, respectively. Total amount paid exceeded the allowable amount by
P605,500, as shown below:

Amount per Total Amount Total Amount Excess

Clothing Allowance
Employee Distributed per RA 9970 Payments
Officers & Executives P 9,500.00 P 465,500.00 P 196,000.00 P 269,500.00
Rank & File 8,500.00 432,000.00 216,000.00 216,000.00
TMD employees 6,500.00 312,000.00 192,000.00 120,000.00

TOTAL P 1,209,500.00 P 604,000.00 P 605,500.00

60. The above-computation is already based on the P4,000 allowable rates per DBM
Circular No. 2003-8, instead of P2,500 as agreed upon in the CBA; hence, the amount
disallowed is P605,500 representing the excess payment made.

Seminar Workshop Allowance - P 426,000

61. Department of Trade and Industry (DTI) memorandum dated December 3, 2009,
provides that, “In the interest of the public service, the above-mentioned are hereby
authorized to conduct a Seminar Workshop before the year ends for the purpose of
assessing and evaluating their respective performance for the year 2009. Expenses in
connection herewith, not to exceed one thousand two hundred pesos (Php1,200) per
employee, is likewise authorized chargeable against the appropriation of each respective
agency.”

33
62. Verification showed that PNCC instead of conducting a seminar workshop,
distributed the amount of P1,200 each to all regular and co-terminus employees. It is clearly
stated in the DTI memorandum that a seminar workshop allowance shall be conducted
wherein expenses relative thereto should not exceed P1,200 per employee. Granting
without accepting that the grant of P1,200 per employee is valid, each employee should
have submitted the corresponding Certificates of Attendance to support their attendance to a
particular seminar.

63. We recommended that Certificates of Attendance to the said workshop of each of the
recipient of the Seminar Workshop Allowance be submitted to the Audit Team; otherwise, we
shall be constrained to issue a Notice of Suspension (NS). The fact that PNCC is an
acquired asset of the National Government since 1983, it is now governed by certain
government rules and regulations. Even the Office of the Government Corporate Counsel
(OGCC) opined that PNCC is already covered by certain rules and regulations of the
Commission on Audit. Opinion No. 207 of the Office of the OGCC, series of 1996 dated July
31, 1996 is quoted below:

a. PNCC falls within the ambit of COA’s functional authority and regulatory
responsibility;

b. PNCC may enjoy operational flexibility provided its transactions are not
irregular, unnecessary, and unconscionable expenditures or uses of government
funds and properties. It may adopt its own accounting and auditing rules and
regulations as long as they are consistent with the appropriate and applicable
guidelines of COA.

64. It is worthy to note that as of date, PNCC’s liabilities with the National Government
amounted to P4.21 billion for the unremitted concession fees and P2.29 billion for the
advances made by the Bureau of Treasury, aside from the fact that some of its properties
were foreclosed due to failure to pay its obligations. Good governance dictates that
Management should have first settled its obligations before rewarding themselves of the
huge allowances and benefits.

65. We recommended that Management:

a. Strictly adhere to the provisions of AO No. 161, AO No. 263, DBM Circular No.
2003-8, and all other laws, rules and regulations authorizing the disbursement of
government funds/expenditures;

b. Discontinue the grant of unauthorized allowances/benefits;

c. Require the immediate submission of the missing supporting documents relative

to the payment of Productivity Incentive Benefit and Seminar Workshop
Allowance.

d. Require all the concerned officers and employees as well as the rank-and-file to
refund the amount of unauthorized benefits/allowances received by them.

66. Management commented that the alleged either excessive, irregular, and/or without
legal basis grant of allowances and incentives by Management and received by officers,

34
executives, and employees was referred to their Corporate Legal for opinion. It further
commented as follows:

66.1 Worthwhile to note that all the grant of allowances and bonuses, including the
mandated benefits, were covered by pertinent resolution duly passed and
approved by the Board of Directors, who accordingly have the power, among
others, to establish pension, retirement bonus or types of incentives or
compensation plans for employees, officers, and directors of the corporation.
Thus, with due respect, the pertinent circulars, rules, and regulations cited or
invoked by COA regarding grant of benefits to PNCC officers, employees, and
directors, obviously would not apply to PNCC, as they are applicable only to
regular government agencies and government corporations.

66.2 As regard the requirement to refund the amount of the alleged unauthorized
benefits/allowances received by the concerned officers, executives, as well as
the rank-and-file, Management will appreciate if the COA team can shed light
on the applicability of COA Decision No. 2007-020 confirming the disallowance
of the year-end benefit granted to the BCDA Board members and full-time
consultants and held that the presumption of good faith did not apply to them.
The petition, however, is PARTIALLY GRANTED. The said COA decision is
AFFIRMED with the MODIFICATION that the Board members and full-time
consultants of the Bases Conversion and Development Authority are not
required to refund the year-end benefits they have already received.

67. We wish to state that in G.R. No. 131715 PNCC vs. Ernesto Pabion and Louella
Ramiro, the Supreme Court stated that “Contrary to respondent’s assertion that PNCC is not
a GOCC, we hold that it may be deemed so under EO 292. However, for purposes of AO
59, particularly in the application of Section 16 thereof, PNCC is an acquired asset
corporation.” Also, we wish to state that unlike private corporations, government
corporations are circumscribed by laws which limit their governing boards’ power in the
adoption of rules and regulation as well as the authorization of expenditures. Every
expenditure must have legal basis and should not be contrary to law, rules and regulations.
Further, the pertinent rules and regulations cited or invoked by the Audit Team do not
specifically exempt government acquired corporation from the coverage; thus, PNCC is
deemed covered by them.

68. As enunciated in the case G.R No. 158562 Ramon R. Yap vs. COA, “any
disbursement of public funds, which includes payment of salaries and benefits to
government employees and officials, must (a) be authorized by law, and (b) serve a public
purpose. x x x To our mind, in view of the public purpose requirement, the disbursement of
public funds, salaries and benefits of government officers and employees should be granted
to compensate them for valuable public services rendered, and the salaries or benefits paid
to such officers or employees must be commensurate with services rendered. In the same
vein, additional allowances and benefits must be shown to be necessary or relevant to the
fulfillment of the official duties and functions of the government officers and employees. We
cannot accept petitioner’s theory that the compensation and benefits of public officers are
intended purely for the personal benefit of such officers, or that the mere payment of salaries
and benefits to a public officer satisfies the public purpose requirement. That theory would
lead to the anomalous conclusion that government officers and employees may be paid
enormous sums without limit or without any justification necessary other than such sums are
being paid to someone employed by the government. Public funds are the property of the

35
people and must be used prudently at all times with a view to prevent dissipation and
waste.”

Payments to the elected Chairman Emeritus amounting to P4.9 million had no legal
basis.

69. The PNCC Articles of Incorporation and By-Laws do not provide for a position of
Chairman Emeritus. However, the PNCC Board created said position in compliance to the
desire/nomination letter dated March 1, 2010 of the then President of the Philippines as
endorsed by the then Secretary of the Department of Trade and Industry on March 22, 2010
to the PNCC President and Chief Executive Officer (CEO).

70. Following the creation of the said position, the Board elected the Chairman Emeritus
of the PNCC Board under Resolution No. BD-013-2010. The total approved monthly gross
financial package for the said position amounted to P566,391.65 effective April 13, 2010, broken down as follows:
Amount

Chairman Emeritus P 494,117.65

Driver 9,964.00
Secretary 12,310.00
Consultants (2) (P25,000 each) 50,000.00

Total P 566,391.65

71. For CY 2010, PNCC had paid a total of P4,880,370.95 to the elected Chairman
Emeritus without legal basis and, hence, disallowable in audit.

72. Chairman Emeritus is defined as retired from his position but retains his professional
title. As an honorary title, an emeritus position involves few, if any, responsibilities, but the
individual retains a relationship with the institution. Though a chairman emeritus no longer
holds the formal powers of his previous office, he may participate in official or ceremonial
events. To achieve and maintain an emeritus title, professionals normally retire and remain
in good standing with their institutions. In addition, a chairman emeritus may maintain
professional relationships developed during his tenure. The term is used when a person of
importance in a given profession retires and/or hands over the position, so that his former
rank can still be used in his title. We have noted that the person nominated and elected as
Chairman Emeritus did not become a member of the PNCC Board to deserve such
recognition.

73. Per inquiry from the Office of the Corporate Secretary, the position Chairman
Emeritus is already dissolved on January 11, 2011 when the new set of Board of Directors
were elected.

74. We recommended that Management require the persons responsible for the
payment of financial package to the Chairman Emeritus to refund the amount of P4.88
million for lack of legal basis.

75. Management justified that the creation of the position and the payments made to the
Chairman Emeritus are covered by the following:

36
 a. Desire letter, dated March 01, 2010, from Malacanang signed by the former
President;

b. Appointment/nomination letter, dated March 08, 2010, signed by the former

Executive Secretary;

c. DTI letter, dated March 22, 2010, signed by the former Secretary on the
endorsement of the March 08, 2010 letter of the Executive Secretary; and

d. PNCC Joint Finance and Compensation Committee Resolution No. JFC-001-

2010 dated April 27, 2010; and

e. The computation/breakdown of the budget effective April 13, 2010.

76. We maintain our position that the payment of the allowances to the Chairman
Emeritus had no legal basis. The person nominated and elected as Chairman Emeritus
does not qualify for such position, hence, does not deserve any payment. Moreover, there
is no record to show that the President of the Philippines had authorized the incurrence of
Gross Financial Package which stood at P6,328,204.25 as of December 31, 2010.

Cash advances totalling P 48.44 million remained unliquidated even if the purposes
for which they were granted have already been served contrary to pertinent
provisions of COA Circular No. 97-002 dated February 10, 1997, resulting in the
understatement of the expense accounts and corresponding overstatement of the
asset/receivable account.

77. COA Circular No. 97-002 dated February 10, 1997, on the grant and utilization of
cash advances, provides that:

“a. No cash advance shall be given unless for a legally specific purpose.

b. No additional cash advance shall be allowed to any official or employee unless

the previous cash advance given to him is first settled or a proper accounting
thereof is made.

c. A cash advance shall be reported as soon as the purpose for which it was given
has been served.

d. Only permanent appointed officials and employees shall be granted cash

advances.

e. Only duly appointed or designated disbursing officers may perform disbursing

functions.”

78. In the 2009 COA Annual Audit Report on PNCC, we recommended that management
issue a memorandum requiring all accountable officers to liquidate their long outstanding
cash advances, and if warranted, withhold any money due them until their cash advances
are liquidated, in consonance with the provisions of COA Circular No. 97-002. In our review
of the 2010 transactions, we noted that there are still cash advances granted to PNCC and
non-PNCC personnel as early as 2006 that have not yet been fully liquidated, as follows:

37
 Name Amount Purpose

1. President and CEO P 1,200,000.00 No purpose indicated

2. Asst. Manager, Technical
Support Staff 5,200,000.00 Legal discretionary fund
3. SVP, Head- Support Franchise Extension & TMD
Services Group 39,520,000.00 Operations
4. Assistant Manager 2,300,698.49 Media Relations
5. Assistant Corporate
Secretary 138,054.12 No purpose indicated
6. Consultant 83,102.00 Trip to Malaysia – per diem
P 48,441,854.61

79. We have noted that, in the audit of the 2009 accounts, the previous Audit Team had
already issued a Demand Letter to each of the concerned Accountable Officer; however, as
of date, subject cash advances were not yet fully liquidated.

80. In view thereof, we reiterated our previous years’ recommendation for Management
to:

 Issue a memorandum requiring all Accountable Officers to liquidate their long

outstanding cash advances, and if warranted, withhold any money due them until
their cash advances are liquidated.

 Strictly adhere to the provisions stated under COA Circular No. 97-002 dated
February 10, 1997 in the grant and utilization of cash advances; and

 Require the officers concerned to return the amount personally advanced by

them and the non-PNCC personnel to refund the full amount of cash advances
granted to them.

Car Plan benefits granted to Members of the Board of Directors of PNCC, its
Executives and Officers in the total amount of P 27,927,268.37 is contrary to the
provisions under Section 2 of DBM Circular Letter 2002-2 dated January 2, 2002,
Sections 3.b and 3.c of the Administrative Order No. 103 dated August 31, 2004, as
well as those of COA Circular No. 85-55A dated September 8, 1985.

81. In 2005, the Amended PNCC Car Plan Policy was approved. Among the provisions
in the Policy are as follows:

 To provide qualified officers of PNCC with economic means of coping with the
prestige and stature attendant to their respective positions; and

 To provide them with means of transportation to enable them to meet the

demands of their work with more facility and efficiency.

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 The Car Plan is part of the package of fringe benefits for eligible officers of
PNCC. It is a lease purchase undertaking where option to purchase may be
exercised by the officers at any time during the lease period.

There shall be 2 Parts in the implementation of this Car Plan, described as

follows:

 The first part, referred to as Part 1, involves the conversion of existing company
service vehicles assigned to qualified officers into vehicles eligible for purchase
under the Car Plan. The vehicles shall be leased to officers to whom the service
vehicles are assigned, with maximum lease term determined based on the age
of the vehicle shown in the next page:
Age of Vehicle Lease Term
Over 5 years One (1) year
4 years One (1) year
3 years Two (2) years
2 years Three (3) years

 The second part, referred to as Part 2, involves acquisition of brand new motor
vehicles to be leased to qualified officers over a minimum period of three (3)
years and up to a maximum period of five (5) years. Subject to availability of
funds and to the limitations on re-availment as provided under Section II.T of the
said Policy. Part 2 shall take into effect one (1) year after the initial
implementation of Part 1.
PNCC’s Subsidy/Officer Share – Adjusted net book value or acquisition cost of
the vehicle, whichever is applicable, shall be shared by PNCC and the Officer
availing of the plan based on 65%-35% ratio, 65% being subsidized by PNCC
and 35% as the officer’s share.
Rentals – The officer’s share of the vehicle cost shall be treated as rentals and
shall be paid through equal monthly payroll deductions over the selected lease
term.
Failure to Pay Rental Dues – In case of non-payment by the officer of the rental
on due date, he shall pay to PNCC penalty to be computed on actual number of
days in default at the rate of 2% per 30-day month on the unpaid amount without
prejudice to PNCC’s right to terminate the Lease Purchase Agreement.
Re-availment – Subject to availability of funds, and provided the officer has paid
his outstanding obligations with respect to the previous availments, he may re-
avail of the Car Plan in any of the following events:

 The vehicle availed under Part 1 of the Plan, upon reaching the age of 5
years old, but not earlier than 1 year from date of availment.

 The vehicles availed under Part 2 of the Plan, upon reaching 5 years old,
regardless of the lease term period selected by the officer, from 3 years to 5
years, in previous availment, and

 In case of total loss of the leased vehicle at any time during the lease term.

39
82. Despite financial difficulties and liquidity problems being encountered by the
Corporation, the previous Members of the PNCC Board issued Resolution Nos. BD-035-
2008, dated November 5, 2008; BD- 026-2009 dated October 6, 2009; BD-008-2010 and
BD-008-A-2010,both dated February 26, 2010, and details shown below.
a. Resolution No. BD-035-2008, dated November 5, 2008

 Approved the re-availment of car plan by the qualified/eligible officers three

years after the date of previous availment (originally five (5) years);

 Approved the increase in the amount of the eligible officer’s maximum

entitlement based on the rank/position at the time of availment

 Provided that the chosen motor vehicle of the qualified/eligible officers shall
be leased to them for a period of 3 years and shall be depreciated over a
period of 3 years also, in lieu of the vehicle’s economic life of 5 years.

b. Resolution No. BD- 026-2009, dated October 6, 2009

 Increased the amount of car plan entitlement of directors, officers and

executives as follows:
E N T I T L E M E N T
Amended
Policy Board Resolution
Position 2005 BD-35-2008 BD-026-2009

Chairman 1,400,000.00 2,000,000.00 2,500,000.00

President
Director 1,200,000.00 1,500,000.00 1,800,000.00

Executive Vice-President
Senior Vice-President 1,150,000.00 1,300,000.00 1,500,000.00

Vice-President 950,000.00 1,100,000.00 1,300,000.00

Corporate Secretary 950,000.00 1,100,000.00 1,500,000.00

Senior Asst. Vice-President

Asst. Vice-President 800,000.00 1,000,000.00 1,100,000.00

Senior Manager duly

designated as Division Head 700,000.00 700,000.00 800,000.00

c. Resolution No. BD-008-A-2010 dated February 26, 2010 – (Modification to the

Amended Car Plan of 2005 and Resolution BD-035-2008)

 Provided that in lieu of the Lease Purchase Agreement, a Deed of Sale shall
be executed in favour of the Director or Officer availing of the car plan under
the said plan policy.

40
  Provided that the consideration for the Deed of Sale for the vehicle shall be
subject to a reduction in the net book value of the same or an adjusted net
book value based on the years of service to PNCC of the director or officer,
as presented in the formulas and schedule shown below:
Original Purchase Price P XX
Less: Accumulated Depreciation (XX)
Accumulated lease payments made by directors/officers (XX)

Equals Net Book Value of Vehicle P XX

Times: (100% less Applicable Reduction in Net Book Value) XX
Equals: Adjusted net Book Value of Vehicle P XX

Schedule of Applicable Reduction in Net Book Value (NBV) is shown below:

Applicable Reduction in
Years of Service to PNCC Net Book Value
Five (5) years and above 80%
Between 5 to 4 years 60%
Below 4 years 40%

83. We find the amendments to the Amended Car Plan Policy to be irregular,
unnecessary, unconscionable and without legal basis for being violative of the provisions
provided for under Section 2 of DBM Circular Letter 2002-2, Administrative Order No. 103
dated August 31, 2004, as well as those of COA Circular No. 85-55A., to wit:

 Section 2 of DBM Circular Letter No. 2002-2 dated January 2, 2002 provides
that: “to clarify and address issues/requests concerning the grant of personnel
benefits of Members and Ex-Officio Members of the Board of Directors, the
following compensation policies are hereby reiterated:

a. Personnel Economic Relief Allowance (PERA), Additional Compensation

(ADCOM), Year End Benefits (YEB) and retirement benefits are personnel
benefits granted in addition to salaries. As fringe benefits, these shall be
paid only when the basic salary is also paid.

b. Members of the Board of Directors of agencies are not salaried officials of the
government. As non-salaried officials, they are not entitled to PERA,
ADCOM, YEB and retirement benefits unless expressly provided by law.

 Section 3.b of Administrative Order No. 103 states that “Suspend the grant of new
or additional benefits to full-time officials and employees and officials, except for
(i) Collective Negotiation Agreement (CNA)) Incentives which are agreed to be
given in strict compliance with the provisions of the Public Sector Labor-
Management Council Resolutions No. 04, s. 2002 and No. 2, s. 2003, and (ii)
those expressly provided by presidential issuande.”

 Section 3.c of Administrative Order No. 103 states that “For other non full-time
officials and employees, including members of the governing boards, committees,
and commissions: (i) suspend the grant of new or additional benefits, such a s but
not limited to per diems, honoraria, housing and miscellaneous allowances, or car

41
 plans ; and (ii) in case of those receiving per diems, honoraria and other fringe
benefits in excess of Twenty Thousand Pesos (P20,000) per month, reduce the
combined total of said per diems, honoraria and benefits to a maximum of Twenty
Thousand Pesos (P20,000) per month.”

 COA Circular No. 85-55A, date September 8, 1985 – pertains to Amended Rules
and Regulations on the Prevention of Irregular, Unnecessary, Excessive or
Extravagant Expenditures or Uses of Funds and Property.

84. Analysis of the three Resolutions ( BD-035-2008, dated November 5, 2008; BD-
026-2009 dated October 6, 2009; and BD-008-A-2010, dated February 26, 2010) all issued
by the previous PNCC Board as discussed above, disclosed that the expenses incurred by
the PNCC representing the 65% share in the cost of the vehicle it subsidized (the 35%
represents as the Directors/Executives/Officers’ share) plus the extension of gratuity
deductions in the transfer prices of said vehicles ranging from 40% to 80% of its net book
value are all considered irregular, unconscionable, and illegal due to the following:

a. The President and CEO was the one authorized and empowered to approve or
deny any application for acquisition/transfer of assigned vehicles to qualified
officers/directors by way of deed of sale; and that almost all the Directors,
Executives (including the President and CEO who approved the availment) and
Officers of the PNCC, including Consultants had availed of the above-mentioned
Car Plan Benefit.

b. It is unconscionable for the Members of the Board to propose and implement the
said policy, knowing that the ultimate beneficiaries, first and foremost, are
themselves. Such policy is self-serving. In the first place, Members of the Board,
as well as the Consultants, are not entitled to any allowances and other fringe
benefits except the per diems/consultancy fees for which they are entitled, since
they are not salaried officials of the government as discussed under COA
Decision No. 2006-030 dated April 11, 2006; Section 2 of DBM Circular Letter No.
2002-2 dated January 2, 2002; and G.R. 178160 BCDA vs. COA dated February
26, 2009. Hence, said car plan benefits granted to the PNCC Board of Directors
and Consultants are also considered illegal.

c. The grant of the said car plan benefits is a concrete example of irregular
expenditures since the benefits were granted contrary to the provisions under
Section 2 of DBM Circular Letter 2002-2 dated January 2, 2002, Sections 3.b and
3.c of the Administrative Order No. 103 dated August 31, 2004, as well as those
of COA Circular No. 85-55A dated September 8, 1985.

d. The grant of said car plan benefits may be considered an anomalous transaction
because it failed to follow the appropriate rules of procedure; and as such, also
considered as an irregular expenditure. The Board approved several resolutions
enabling themselves to avail of car plan benefits which is contrary to DBM
Circular Letter No. 2002-2. Further, other resolutions were passed shortening the
estimated life of the availed car plan, from 5 to 3 years, to allow qualified/eligible
Directors and Officers to re-avail of a new plan; and, preterminated the lease–
purchase agreements and in lieu thereof, executed a Deed of Sale, resulting to a
much-reduced cost of vehicle to be settled by the Director or Officer, which is very
disadvantageous to PNCC.

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 e. Prior to CY 2008, car plan benefits had been extended to the directors,
executives and officers of the Corporation; however, despite the very tight
financial condition being suffered by PNCC, the previous Board still issued
several Resolutions amending the previous Resolutions issued, in effect,
increasing the benefits contained in the Amended Car Plan Policy.

f. For CYs 2008 and 2009, PNCC incurred accumulated deficit of P1.9 billion and
P1.5 billion, respectively, still Management continue increasing the benefits that
the Directors, Executives and Officers had been enjoying with respect to the car
plan benefits. Total cost of vehicles subject of the said car plan benefits
amounted to P 21,678,963, of which 89.7%, or P 19,440,826 is still outstanding.

85. Inasmuch as the Members of the Board are not entitled to any other benefits except
per diems for every attendance during each Board Meeting, then the unpaid portion of the
car plan availed by each of the concerned Directors aggregating to P 19,440,826 need to be
collected/refunded. In short, the Directors are not entitled to the 65% subsidy, more so, to
the extension of gratuity deductions in the transfer prices of said vehicles ranging from 40%
to 80% of its net book value.

86. On the other hand, for the Executives and Officers of PNCC who have availed of the
said Amended Car Plan, the total amount of P 8,486,442.37 is being disallowed in audit as
follows:

Particulars Amount

Unnecessary, irregular, unconscionable

expenses/loss incurred by PNCC as a result of the
implementation of BD-035-2008; whereby, the
original lease term of 5 years was reduced to 3
years with the corresponding change in the life of the P 408,185.19
vehicle from 5 years to 3 years.

Unnecessary, excessive and unconscionable

expenses/loss incurred by PNCC as a result of the
implementation of BD-008-A-2010 whereby the
extension of gratuity deductions in the transfer
prices of said vehicles ranging from 40% to 80% of
its net book value extended to officers and
executives who availed of the car plan based on the 8,078,257.18
number of years of service to PNCC.

Total P 8,486,442.37

87. We recommended that Management:

a. Stop further grant of car plan benefits to the Board of Directors; and require
immediate settlement/refund of the amount of P 19,440,826 representing the
difference between the cost of the vehicle purchased and the amount already
settled/paid by the concerned Directors, since they are not entitled to such

43
 benefits per DBM Circular Letter 2002-2 dated January 2, 2002, and
Administrative Order No. 103; and

b. Require all the concerned Executives and Officers of PNCC, as well as the
concerned Consultant, to refund the amount of P 8,486,442.37; since,
subject expenditures are considered irregular, unconscionable and without
legal basis.

Cash Advances aggregating P202.23 million granted to officers and employees of the
Corporation to be deducted from their retrenchment benefits had no legal basis.

88. On March 29, 2005, the Board of Directors approved Board Resolution No. BD-032-
2005 granting separation pay to the remaining PNCC employees, in grateful appreciation of
their continuous and loyal service to the company, in the event of retrenchment or
separation of officers and employees on account of early separation program or
retrenchment program offered by management to be computed at the rate of 250% based
on the latest monthly salary/remuneration for every year of continuous and uninterrupted
service. This shall apply equally therein to union and non-union, rank and file and
supervisory employees, managers and executives. Provided, further, that for purposes of
computation, a fraction over six months shall be considered as one whole year. We find the
250% rate to be excessive, exorbitant and unconscionable.

89. In relation to the Board-approved separation pay, we have noted that officers and
employees were granted interest free cash advances deductible from their retrenchment
benefits equal to 30% of their entitlement. However, such 30% ceiling is not covered by a
written policy. Moreover, we noted that some officials were able to obtain amounts over and
above the 30% ceiling. Further, those who had availed of the cash advances were not
issued written Notice of Separation as required under the said Resolution.

90. As of December 31, 2010, a total cash advance of P202,308,950.03 was granted to
PNCC officers and employees, of which P23,265,000.00 were granted to 22 officers and
employees of the Toll Ways Management Division (TMD) and P179,043,950.03 to 101
officers and employees of the Central Office. In 2010 alone, Central Office and TMD
additional cash advances amounted to P37,963,000 and P6,785,000, respectively.

91. The grant of cash advances to PNCC officers and employees to be offset against
their future retrenchment benefits was bereft of legal basis. Nowhere in the above cited
Board Resolution that such benefit maybe given to officers and employees who were not
issued Notice of Separation and are still in the active service.

92. We reiterated our previous years’ audit recommendations that Management:

a. Discontinue the grant of cash advances to officers and employees deductible

from retrenchment pay; and

b. Require all persons concerned to refund the cash advances granted to them.

93. Management commented that the grant of cash advances versus separation pay is
already discontinued effective October 16, 2010, except for some who are already issued
Notice of Separation. “The requirement for all the concerned employees to refund the cash

44
advances granted to them is no longer doable. The amount of monies advanced were either
used: (1) to put up a small business, as fall back, if already separated; (2) to construct a new
house; (3) to renovate/repair the old house or that damaged by typhoons Ondoy and
Pepeng; or (4) for medication; and the like. As of March 31, 2011, cash advances against
separation pay totaled P194.075 million versus the P202.23 million as of December 31,
2010. The remaining amount will eventually be wiped out of the books considering the
aggressive manpower unloading being undertaken by Management in relation to the
company’s on-going retrenchment program.”

Additional benefits paid to Consultants amounting to P 4.5 million are contrary to the
provisions of Section 4 of DBM National Budget Circular No. 433 dated March 1, 1994.

94. Section 4 of DBM National Budget Circular No. 433 provides:

“ Remuneration of Consultants:

4.1 Consultants shall be paid remuneration of not more than 120% of the
minimum basic salary of their equivalent position in the agency based on the
position allocation list approved by the Department of Budget & Management
(DBM). However, in case of those working on a part-time basis, the
remuneration shall not exceed 50% of that received by full-time consultant of
equivalent responsibility.
4.2 Consultants remuneration shall be inclusive of all benefits accruing for the
services rendered. Thus, they shall not be entitled to any other benefits
otherwise accruing to regular personnel of the government.”

95. Analysis of the Professional Fees account showed that payments made to twenty-
one (21) consultants hired during the year 2010 amounted to P 13,657,395.34, 32.6% of
which, or P4,457,852.11 pertains to other benefits for which they are not entitled for being
not in accordance with Section 4 of DBM National Budget Circular No. 433 as discussed
above, to wit:

Other Benefits Paid to Consultants Amount

Car Plan Benefits P2,524,760.36

Mid-Year Bonus 568,341.67
Reimbursement of Expenses 512,985.36
13th Month Pay 401,764.72
Anniversary Bonus 400,000.00

Total P4,407,852.11

96. As discussed above, consultants are not entitled to other benefits except for the
consultancy fees as stated in the Consultancy Contract; hence, they are not entitled to
receive the above-listed benefits. In addition, it was noted that the amount of P512,985.36
pertains to reimbursements made by the consultants for meals and gasoline/fuel allowance
which are also not allowable. With regard to the disallowed portion of the car plan benefit
amounting to P2,524,760.36, this pertains only to the 65% subsidy granted by PNCC as well
as the benefits being granted as a result of the reduction in net book value and change in
the lease term from five (5) years to three (3) years only. In summary, since the consultants

45
are not entitled to receive other benefits, then the outstanding balance of the leased vehicle
aggregating to P 2,524,760.36 should have been shouldered by the concerned consultants.

97. On the other hand, review of the consultancy contracts disclosed the following
deficiencies:
a. Procurement of Consulting Services is not in accordance with Section 10 of
the Implementing Rules and Regulations (IRR) of RA 9184, which provides that
as a general rule, the Procuring Entities shall adopt public bidding as the general
mode of procurement and shall see to it that the procurement program allows
sufficient lead time for such public bidding. Alternative method shall be resorted
to only in the highly exceptional cases provided for in this Rule.
b. The method of procurement of consulting services was not indicated in the
Approved Procurement Plan (APP) since in CY 2010 Management failed to
prepare and submit their APP.

c. Negotiated procurement of consulting services was resorted to even without

two (2) failed biddings as required under RA 9184.
d. Consultants were hired beyond one (1) year and sixteen (16) consultants
who were hired on a continuous basis, even as early as May 2005, in violation of
Section 6 of PD 807 which provides that “Contractual personnel or those whose
employment in the government is in accordance with a special contract to
undertake a specific work or job, requiring special or technical skills not available
in the employing agency, to be accomplished within a specific period, which in no
case shall exceed one year, and performs or accomplishes the specific work or
job, under his own responsibility with a minimum of direction and supervision
from the hiring agency.”
e. Payments of consultancy fees were not supported with the required
accomplishment reports.

f. Six (6) Consultants were hired for non-technical and/or whose duties and
functions are clerical or administrative in nature in violation of Section 211 of
GAAM which provides that “In no case shall contractual appointments or
contracts of personnel services be issued to non-technical personnel or those
whose duties and functions are clerical or administrative in nature or those who
will hold positions in the labor or trade and craft groups. If such services are
needed in support of the job or project, the regular staff or personnel may be
augmented by hiring casual or emergency staff.”

98. We reiterated our prior year’s recommendations that Management:

a. Require the concerned consultants and/or all persons liable to refund the amount
paid for the illegal benefits/incentives of consultants amounting to P
4,457,852.11.

b. Comply with the provisions of Section 4 of DBM Circular No. 433 in the grant of
remuneration to consultants to avoid the incurrence of illegal and/or irregular
expenditures;

46
 c. Strictly adhere to the provisions of Section 10 of Article IV of RA 9184 in all its
procurement activities.

d. Revisit all the individual consultancy/service contracts to determine compliance

with Section 6 of PD 807 and Section 211 of the GAAM.

e. Evaluate the need for their renewal of the contracts in line with the existing laws
and regulations particularly, Section 33 of PD 1445 – Prevention of irregular,
unnecessary, excessive or extravagant expenditures or uses of government
funds or property.

99. Management commented that upon instruction of the PNCC President to coordinate
the matter/observation to PNCC Corporate Legal, a memo dated May 16, 2011, was sent to
the said office for legal opinion. The COA team will be provided with the requested opinion
as soon as the same is provided by Corporate Legal.

100. Even before the issuance of the subject observation, the new PNCC Management
has already undertaken the following steps:

a. Non-renewal of some of the consultancy agreements;

b. Pre-termination of some of the consultancy agreements;
c. Renewal of at least three (3) consultancy agreements, on a month to month
basis, as deemed necessary.

Cash accountabilities amounting to P 3.72 million of a former Executive Vice

President remained unsettled/unliquidated as of December 31, 2010.

101. A former EVP was separated from service effective March 31, 2007. His final
accountability was established on May 31, 2008 only, or one year and two months after his
separation from service. His accountabilities include personal cash advance, car plan equity,
including arrearages, property, vehicle insurance, credit card bills, and phone bills
aggregating to P1,707,795. His equity in the car plan was not fully settled with an unpaid
balance of P142,000.

102. From June 2008 to September 2010, the total arrearages in monthly amortization of
his pre-terminated car plan, including registration and vehicle insurance, amounted to
P472,377. Thus, his total accountabilities as of December 31, 2010 pertaining to personal
cash advances, car plan equity, vehicle insurance, and credit card/phone bills amounted to
P2,180,172.

103. Further, it was noted that the former EVP had also received the amount of
P1,535,686.44 covered by Check No. 00822 dated June 23, 2008 representing payment for
retirement and gratuity benefit. Management alleged that said benefit was granted on the
basis of Board Resolution No. BD-031-2007 adopted by PNCC Board on April 25, 2007. We
are also disallowing this payment for lack of legal basis.

47
104. We recommend that Management:

a. Exert effort to collect and/or send demand letter to the former EVP for the
immediate settlement of his accountabilities with PNCC consisting of the
P2,180,170 pertaining to his outstanding personal cash advances, car plan
equity, car insurance, and credit cards/phone bills; and P 1,535,686 representing
his retirement and gratuity benefit. As of December 31, 2010, total cash
accountabilities stood at P 3,715,856. Failure to collect from the former EVP
would mean that the liability of the persons determined to be liable under the
Notice of Disallowance ( to be issued) shall be solidary and the Commission may
go against any person liable without prejudice to the latter’s claim against the rest
of the persons liable pursuant to Section 16.3 of the 2009 Rules and Regulations
in the Settlement of Accounts.

b. Exercise PNCC’s option to repossess the subject vehicle pursuant to Section

5.3.6 of the Lease Purchase Agreement.

c. Institute legal action, if warranted.

Payment of gratuity to a Consultant amounting to P1.5 million had no legal basis.

105. After his designation as Corporate Secretary has ended, PNCC hired the then
Corporate Secretary as Adviser and Legal Consultant to the PNCC Board.

106. PNCC granted him a cash gratuity pay amounting to P1,500,000.00 per Board
Resolution No. BD-032-2008. The Board approved the gratuity pay in consideration for his
fifteen (15) years of service as Corporate Secretary and Legal Consultant to the Board. Fifty
percent (50%) of the amount or P750,000.00 was paid on January 13, 2009 and the
remaining balance of P750,000.00 was paid on May 12, 2010, after his resignation effective
April 16, 2010. The payment of gratuity had no legal basis, hence, disallowed in audit.

107. We recommended that Management require the persons liable and responsible to
the transaction to refund the amount paid for the gratuity pay extended to the Consultant as
required for under Section 16.1 of the Rules and Regulations on Settlement of Accounts
(RRSA).

The monthly remuneration paid to a former Director who acted as the Assistant
Treasurer of MNTC covering the period July 2005 to October 2010 was overpaid by
P25,000 per month or an aggregate amount of P1.6 million as of December 31, 2010.

108. Pursuant to the Amended and Restated Shareholder’s Agreement dated September
30, 2004 executed by and among the First Philippine Infrastructure Development
Corporation (FPIDC), PNCC, Egis Projects, S.A., and Leighton Asia (Southern) Limited
(representing the Joint Ventures), with the conformity of Manila North Tollways Corporation
(MNTC), the PNCC Board of Directors nominated one of them, to occupy the position of
Assistant Treasurer in the MNTC. The Board approved the provision and implementation of
a reasonable budget and annual capital budget for PNCC’s office and such amount to be
taken and/or deducted from PNCC’s 6 per cent share of MNTC’s gross revenues. The
Board further granted the Chairman and the Chief Executive Officer the authority to

48
determine the reasonable remuneration for the nominee/occupant of Asst. Treasurer and
compensation for support office personnel to the same office, as part of the operating
budget. Copy of the Operating Budget submitted to the Audit Team showed that the monthly
remuneration for the Assistant Treasurer of MNTC approved by the Board is P75,000.

109. Analysis of the Other Receivable - MNTC account disclosed that the total amount of
P6,400,000 was deducted from the collection of 6% share on MNTC revenue representing
remuneration of P100,000 per month paid directly to the former Director covering the period
July 2005 up to October 2010. Since the monthly remuneration for the Assistant Treasurer
per Corporate Operating Budget (COB) approved by the Board is only P75,000, there is a
monthly overpayment of P25,000 or a total overpayment amounting to P1,600,000 as of
December 31, 2010.

110. The above-mentioned overpayment has been noted in the previous years’ audit and
was included in the 2009 Annual Audit Report (AAR) on PNCC. Management informed that
the matter was referred to the Finance Committee during its meeting held on January 29,
2010. Management, however, continued paying excessive remuneration up to October
2010.

111. We recommended that Management send a demand letter requiring the former
Director to refund the excess amount of P1,600,000. Management, however, commented
that the grant of monthly remuneration of P100,000.00 to the former Director is covered by
the following:

 PNCC letter to MNTC dated August 15, 2005 requesting, among others, the
immediate implementation of the payment/release of amounts to the former
Director as Assistant Treasurer of MNTC starting the month of August 2005;

 Resolution No. BD-019-2005, “confirming the nomination of the former Director to

occupy the position of Assistant Treasurer in the Manila North Tollway
Corporation (MNTC), pursuant to the MNTC Amended and Restated
Shareholders Agreement”.

 Resolution No. BD-059-2005, approving and confirming the amendment to

Resolution No.-019-2005, to further include the following:

 “Granting authority to the Chairman and Chief Executive Officer (CEO) to provide
and implement a reasonable annual operating budget and annual capital budget
for above mentioned office and such amount to be taken and/or deducted from
PNCC’s 6% revenue share of MNTC’s gross revenues; and

 Granting authority to the Chairman and CEO to determine and provide a

reasonable remuneration for the nominee/occupant of the above position and
compensation for support office personnel to the same office.”

112. The former Director claimed that the approved budget of P200,000.00 was reduced
to P100,000.00, which amount he received from the July 2005 to October 2010 (per PNCC
record).

49
113. Verification of any subsequent payments after October 2010, however, is being made
from MNTC, considering that its remittance to PNCC of the revenue share for the covering
period from January 2010 to November 2010 is still held in trust with the Regional Trial
Court and PNCC is still unaware of the deductions made from such revenue. Upon receipt
of the confirmation, demand letter will be sent to the latter.

Concession fees due to the National Government in accordance with the Toll
Operation Agreement (TOA) amounting to P1.046 billion together with the penalty
charges thereon of P2.882 billion or a total of P3.928 billion as of December 31, 2010,
differ from the total amount of P4.202 billion per TRB’s records, which amount remain
unpaid to date.

114. As stipulated under Clause 2.1.1 of the TOA entered into by and between the
Republic of the Philippines, represented by the Toll Regulatory Board, and PNCC (then
CDCP), PNCC shall pay or reimburse the government through the TRB for a period of 30
years a concession fee of approximately P912 million on the dates provided in the Schedule
of Fees. Further, Clause 2.1.3 of the TOA provides that if PNCC fails to pay any amount of
the concession fee when it falls due and the amount remains unpaid for a period of 30 days,
a penalty of two per cent per month of the amount due shall be charged until the amount of
concession fee is fully paid. A supplemental TOA was executed in December 1978
amending the 30 days time frame to 365 days.

115. Records of PNCC showed Concession Fee Payable-Current and Accrued Penalties
Payable thereon of P1,046,249,500 and P2,882,044,000, respectively, or a total of
P3,928,293,500 as of December 31, 2010.

116. However, confirmation with TRB dated March 1, 2011 disclosed a variance of
P273,556,600 as follows:

Particulars Per PNCC Per TRB Variance

Concession fee
Principal P1,046,249,500 P1,060,283,300 (P14,033,800)
Interest & Penalties 2,882,044,000 3,141,566,800 (259,522,800)
P3,928,293,500 P4,201,850,100 (P273,556,60)

117. We reiterated our prior year’s recommendation that Management:

a. Prioritize the remittance to the National Government through TRB all the unpaid
concession fees and the accumulated penalties thereon in accordance with the
Schedule of Fees as stipulated in the TOA; and

b. Immediately reconcile the variance of the balances between PNCC books and
TRB/BTr books, and effect the necessary adjustments, if warranted.

118. Management commented that (a) under the strategic plan designed by Management
and presented to the Department of Finance-Privatization Committee, the account with TRB
will be addressed via conversion into equity or long-term notes payable over twenty five (25)
years.; (b) even if there is no resolution yet on the issue, payments were already made as
follows: Of the P220 million payments made to BTR in 2008 (P200M) and in 2009 (P20M),

50
P170 million was applied against concession fee payable while the other P50 million was
applied as payment for outstanding NG advances. In 2010, PNCC has remitted P200
million to BTr/DOF, of which P100 million is applicable against outstanding concession fees;
and (c) the noted difference in concession fee resulted from the two (2) unresolved issues,
namely:

 ROW offsetting of P22.54M;

The cost of the ROW acquisitions is already effected in PNCC books but not yet
considered by TRB.

 Application of PNCC Skyway Corporation’s payments on the transferred

concession fees from 1999 to 2006 in the amount of P11.15M.

Several deficiencies/inconsistencies were noted in the Memorandum of Agreement

(MOA) between and among Citra Metro Manila Tollways Corporation (CMMTC), PNCC
and PNCC Skyway Corp. (PSC) dated December 21, 2007 covering the South Metro
Manila Skyway (SMMS):

a. Non-remittance by (CMMTC) to PNCC of the revenue share amounting to

P44,549,808.24 as provided for in the MOA; thus depriving PNCC of its
income.

119. The design and the construction of the South Metro Manila Skyway (SMMS) and the
financing thereof, was the primary and exclusive privilege, responsibility and obligation of
the CMMTC, while the PNCC through its subsidiary, the PSC, operated and maintained the
project roads.

120. Section 5 of the MOA provides that effective 10:00 PM on December 31, 2007, the
date and time that the responsibility for the Operation and Maintenance (O&M) of the SMMS
is actually turned over from PSC to the NewCo, and while such O&M responsibilities are
being performed by the NewCo, PNCC will be entitled to receive from CMMTC 2.5% -
equivalent of the Total Toll Revenues.

121. Analysis of the Other Income – CMMTC account disclosed that CMMTC failed to
remit the full amount of the Corporation’s revenue share of the toll revenues as stated in the
MOA, thereby depriving the Corporation of the funds which could have earned interest had it
been used in a more profitable project or high-yielding investment.

122. Records show that from January 2008 to December 2010, the CMMTC remitted only
five (5) times to PNCC as follows:
2.5% revenue share remitted in
Cash by CMMTC to PNCC (net of
Date OR No. Particulars 2% w/holding tax)

4/28/2008 683309 Revenue share on toll revenue for the

months of Jan – March 2008 P 8,837,755.04
5/27/2008 683349 Revenue share on toll revenue for the
months of April 2008 3,009,508.74
11/28/2008 688655 Revenue share of total toll revenue from Jan
to Sept 2008 14,140,560.19
8/25/2009 694003 Revenue share balance of 2008/Jan-June
2009 25,911,604.37
11/20/2009 701600 Revenue share for the 3rd quarter of 2009 7,942,964.27
P59,842,392.61

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123. CMMTC was supposed to remit cash to PNCC, its share in the Total Toll Revenues,
net of deductions for claims due to CMMTC from PNCC, including any interest thereon,
pursuant to Section 4 of the MOA which provides that the claims due to CMMTC from
PNCC, until fully paid, shall be offset against sixty-five percent (65%) of the 2.5% equivalent
of the Total Revenues, no later than three (3) banking days after the completion of the
account reconciliation computed as follows:

2008 2009 2010 Total

Toll revenue 4,208,473,589.56 4,098,005,950.80 4,347,120,563.23 12,653,600,103.59

PNCC share (%) 2.5% 2.5% 2.5%

2.5% revenue share 105,211,839.74 102,450,148.77 108,678,014.08 316,340,002.59

% of PNCC share paid to debt

through offset 65% 65% 65%

65% or revenue share to be offset

as payment of debt
68,387,695.83 66,592,596.70 70,640,709.15 205,621,001.68

35% of revenue share CASH TO

PNCC 36,824,143.91 35,857,552.07 38,037,304.93 110,719,000.91

Less: 2% withholding tax 2,104,236.79 2,049,002.98 2,173,560.28 6,236,800.05

Cash to be remitted to PNCC 34,719,907.11 33,808,549.09 35,863,744.65 104,392,200.85

Actual remittance received net of

2% 25,987,823.97 33,854,568.64 - 59,842,392.61

UNREMITTED REVENUE SHARE

FROM CMMTC TO PNCC 8,732,083.14 (46,019.55) 35,863,744.65 44,549,808.24

124. As shown in the preceding table, the amount of P110,719,000.91 representing the
35% of the 2.5% revenue share should have been remitted in cash by CMMTC to PNCC.
However, actual remittance received was only P59,842,392.61 or a difference of
P44,549,808.24.

125. Despite the delayed or non-receipt at all of its share for the year 2010, PNCC failed
to call the attention of CMMTC relative to the remittance of the said revenue as agreed upon
in the MOA. No document is available to explain/justify CMMTC’s failure to remit the full
amount.
126. We noted that the staff in the Controllership Division in-charge for a particular
account are not provided with the complete documentation, like contracts or agreements,
which could help them understand the nature of a particular transaction and facilitate the
recording of the same in the books. In the case of the above-mentioned MOA which was
executed on December 21, 2007, copy thereof was only furnished to Controllership
personnel in March 2011.

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 b. Non-recording of liabilities and receivables contained in the MOA understated
PNCC liabilities and overstated its receivables by P87 million and P70 million,
respectively, thus, cast doubt on the reliability and accuracy of the affected
accounts.
127. Review of the various provisions of the aforementioned MOA and verification of the
Corporation’s records reveal that as of December 31, 2010, the PNCC has not recorded yet
in its books the P87 million liability of the Corporation to CMMTC for the latter’s initial
advance to the PSC which would be reimbursed by the Corporation, as well as the P70
million set-off against the amounts due to PNCC from PSC which took effect on December
31, 2007. This resulted to the understatement of the PNCC liabilities by P87 million and
overstatement of its receivables by P70 million.
128. The Controllership Division personnel, who are in-charge in the recording of
transactions in the books, stated that there are no documents to support the inclusion of the
above-mentioned liabilities and receivables in the said MOA. Hence, they are not
recognized in the PNCC books, thus, cast doubt on the reliability and accuracy of both
liabilities and receivable accounts.

129. We recommended that Management:

a. Require CMMTC to strictly adhere to the provisions of the MOA and remit
immediately the full amount representing the revenue share of PNCC as required,
including interest.
b. Require the staff concerned to follow-up regularly the remittances/collections due
from any of the Corporation’s clients.
c. Provide persons concerned with supporting documents to simplify things and to
enable them to understand and properly record the transactions of the Corporation.
d. Record a financial asset or a financial liability when the entity becomes a party to
the contractual provisions of the instrument; and
e. Submit justifications/documentation for the inclusion of the P87 million and P70
million in the MOA, to establish the existence and legality of such claims.

Revenue foregone amounting to P6.9 million is disadvantageous on the part of

PNCC, thus, casting doubt on the accuracy of the Other Receivables-CMMTC
account.

130. Review of the Analysis Report of the Revenue account prepared by the Toll
Management Division (TMD) as of December 31, 2010 showed “Revenue foregone”
amounting to P6,946,396.99 as one of the reconciling items between PNCC and CMMTC
books, details shown in the next page.

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 a. Revenue foregone for the period September 2000
to December 2001 P5,410,730.00

b. Allegedly, this was due to the excess remittance of

toll fees collected by PNCC Skyway Corp. (PSC) to
CMMTC in CY 2007 which they agreed to be offset
against the payables of PNCC to CMMTC 1,535,667.06

c. CMMTC Revenue (0.07)

Total P6,946,396.99

131. Examination of available documents revealed that item 130.a above resulted from
certain discrepancies from the South Luzon Tollways Division (SLTD) toll collection
operation for the period September 2000 to December 2001. The amount covers the
unreimbursed portion due to South Luzon Tollways (SLT) from CMMTC.

132. It was noted that the collection of toll fees for the SLT, most commonly known as the
South Luzon Expressway, has been done by two entities. The elevated toll road and at-
grade portion of the SLT from Nichols to Alabang also known as the South Metro Manila
Skyway (SMMS) which has been designed and constructed by the CMMTC, was operated
and maintained by the PNCC through its subsidiary, the PSC, until December 31, 2007.
The toll collection for the Alabang to Calamba stretch was done by the SLTD of the PNCC
until May 1, 2010.

132. Several exchange of communications in 2001 and 2002 showed that PNCC tried and
requested from CMMTC for the reimbursement of item 130.a which was based on the
applicable rates approved by TRB relative to the sharing and/or realization of revenue
arising from toll collection operation, as shown below:

Class 1:

Nichols – Calamba TRB Approved Rate P29.50

Nichols – Alabang PSC/CMMTC TRB Approved Rate P22.50
Alabang – Calamba PNCC TRB Approved Rate 7.50 30.00
Difference (short) (P 0.50)

Average traffic count per month 225,872

Class 2:

Nichols – Calamba TRB Approved Rate P60.50

Nichols – Alabang PSC/CMMTC TRB Approved Rate P45.00
Alabang – Calamba PNCC TRB Approved Rate 15.00 60.00
Difference (short) P 0.50

Average traffic count per month 64,872

133. PNCC claimed that based on the above scheme, SLT shares in revenue reduced for
Class 1 toll transactions as a result of the difference where the variance of P0.50 is left
alone to be borne by SLT. Comparatively, since the pattern recognizes first the option of

54
satisfying PSC-CMMTC share, the difference which incidentally comprises the majority of
the transactions, the unadjusted portion is passed on and directly credited to SLT to
represent its shares. Moreover, PNCC alleged that the Corporation enjoys the fractional
share in the total revenue realized in the operation equivalent to 25% or P7.50 share on
gross revenue of Nichols – Alabang toll. Thus, in a letter dated March 15, 2002 addressed
to the EVP, Chief Technical Officer of the CMMTC, PNCC informed that they would effect full
deduction of the “revenue foregone” from the SLT daily remittance to CMMTC to preclude
further losses in terms of interests/cost of money from its unrealized revenue.

134. In its letter dated April 4, 2002, CMMTC replied that the alleged amount of foregone
revenue results from the fact that the toll rates for the Skyway Project, as stated in the
matrix of toll rates approved by the TRB, are definite, exact or accurate, thereby resulting to
certain discrepancies of either an overage or shortage/deficiency for the SLT revenues.
Further, CMMTC informed PNCC that the remittance by the latter of the net revenues due to
the Skyway System should not be subject to any deductions or off-setting. And that if such
amount is indeed due from the Skyway System, the said amount is very minimal compared
to the amount due from PNCC for net toll revenue due to the Skyway System. Moreover,
losses in terms of interest/cost of money resulting from CMMTC’s receivable from PNCC
were allegedly of a much greater magnitude.

135. It was noted that the matter was referred to TRB by CMMTC for their resolution but
as of report date, there is no update as to what transpired. Inquiry revealed that the
personnel in-charge of this Revenue account was constantly following-up with their superior
regarding the matter but to no avail.

136. PNCC, PSC and CMMTC conducted a preliminary reconciliation of their inter-
company accounts and determined the outstanding balances of their inter-company claims
which are considered in harmony, and taken in conjunction, with the provisions in a
Memorandum of Agreement (MOA) executed on December 21, 2007. Section 3. b. thereof
provides that “Without CMMTC admitting any liability whatsoever arising from the
replacement of PSC pursuant to Section 14.02(03) of the ASTOA either to PNCC, PSC or
its officers and employees, the settlement payment of P320 million will be provided to PSC,
x x x x x.”

137. The foregoing provision is deemed disadvantageous on the part of the PNCC
because the reconciliation conducted prior to the execution of the said MOA was allegedly
done in a hurry, thus, the agreement was finalized and executed although some issues
remained unsettled/unresolved. Among those issues is the “revenue foregone” which is
never acknowledged by CMMTC since 2000 up to the present.

138. Due to the aforementioned provision, it was gathered that the “revenue foregone”
would no longer be pursued. Said action is not justifiable since this would result to a big
loss on the part of the PNCC.

139. The total amount of P5,410,730.00 was originally debited to Other Accounts Payable
and credited to Deferred Credits. Subsequently, in 2011, it has been reclassified as Other
Receivables – CMMTC. However, according to a TMD staff, said amount was not
acknowledged by CMMTC as their payable to PNCC, hence, casting doubt on the accuracy
of the Other Receivables – CMMTC account.

55
140. As regard the “revenue foregone” amounting to P1,535,667.06, it was only through
inquiry that we got the information that the same was allegedly due to the excess remittance
of the toll fees collected by PSC to CMMTC in CY 2007, in which, they (PSC and CMMTC)
agreed among themselves without consulting PNCC, to offset the said amount against the
payables of PNCC to CMMTC. The Controllership staff came to know about such
arrangement through verbal communication from CMMTC. No documents are available to
support such claim.

141. In its letter dated April 4, 2002, CMMTC informed PNCC that the remittance by the
latter of the net revenues due to the Skyway System should not be subject to any
deductions or off-setting. In the same manner, the remittance by CMMTC to PNCC should
not be subject to any deductions or off-setting, more so in this particular transaction. The
amount being offset pertains to transactions between CMMTC and PSC, a third party,
without the prior knowledge or consent by PNCC. Although PSC was a wholly-owned
subsidiary of the PNCC, it is a separate and distinct entity from the latter. Hence, the
offsetting made was invalid.

142. We recommended that Management make representation with the TRB and CMMTC
to resolve the matter regarding the P5,410,730 recorded in the books of PNCC as Other
Receivables – CMMTC but unrecorded in the books of CMMTC; and to effect the necessary
adjustments, if warranted.

Non - compliance to the terms and conditions of the escrow agreement relative to the
operation of the South Luzon Expressway deprives the PNCC of its revenue share
that should have been credited to its LBP account; hence, the accuracy of the Other
Income - SLTC account could not be established.

143. On February 1, 2006, The Republic of the Philippines through the Toll Regulatory
Board (TRB), PNCC, South Luzon Tollway Corporation (SLTC) and Manila Toll Expressway
Systems, Inc. (MATES) entered into a Supplemental Toll Operation Agreement (STOA),
under which SLTC was granted the concession rights to finance, design and construct that
part of the South Luzon Expressway (SLEX), from the end of the South Metro Manila
Skyway at Alabang, Muntinlupa City, including the Alabang viaduct, to Lucena City. MATES
was granted the concession rights to operate and maintain the SLEX upon SLTC’s reaching
substantial completion thereof.

144. Under Section 8.01 of the STOA, the Gross Toll Revenue from the operation of the
SLEX is the property of the SLTC. MATES shall collect and retain custody of and remit the
Gross Toll Revenue collected to the Escrow Bank. The Escrow Bank shall be responsible
for the distribution of the Gross Toll Revenue in accordance with the terms and conditions of
the Escrow Agreement, provided that, the expenses to meet the Operation and Maintenance
of the Project Toll Roads shall always be the first priority.

145. To implement the above-mentioned provision of the STOA, SLTC, MATES and
PNCC agreed to appoint Maybank Philippines, Inc. – Trust Department as the Escrow
Agent. The four (4) parties entered into an Escrow Agreement on May 5, 2010.

146. Section 2 of the escrow agreement provides that the Gross Toll Revenue, as defined
in the STOA shall be deposited by MATES to a designated account to be opened with
Maybank Philippines, Inc. (MPI) – Cash Management Service Department (CMS) pursuant

56
to the Pick-up Deposit Service Agreement signed between MPI, SLTC and MATES dated
April 21, 2010. MPI-CMS shall, on a daily basis, remit the collection to a Designated
Revenue Peso account which is controlled by Maybank Investment Bank Berhad (MIB), as
the Security Trustee. MIB, on the fifth (5 th) calendar day of each month, shall remit the
necessary allocation, based on the submitted budget by SLTC, to the Escrow Agent which
shall be deposited to an Escrow Fund, a non-interest bearing account to be opened by the
SLTC, MATES and PNCC and maintained by the Escrow Agent with its cash department.

147. The Escrow Fund shall be held by the Escrow Agent for the benefit of MATES,
PNCC and SLTC and shall be credited to the respective bank accounts of each client on the
seventh (7th) calendar day of each month beginning on June 2010 and every month
thereafter. For PNCC, one and seventy five percent (1.75%) of the collection for the first
three (3) years and three percent (3%) after the third year thereafter shall be credited to a
particular account at Land Bank of the Philippines to cover its revenue share. The amount
to be credited to MATES’ account covers the monthly operating and maintenance expenses
of the SLEX. The remainder of the Escrow Fund, after the allocation to MATES and PNCC
will be credited to the account of SLTC.

148. Section 4.c of the escrow agreement also states that the Escrow Agent should
prepare and submit a monthly report not later than the 10 th calendar day of each month on
the contributions to and withdrawals from the escrow fund to each of the clients.

149. Analysis of the accounts Other Income – SLTC and the related Other Accounts
Receivable – SLTC disclosed that for the calendar year 2010, PNCC accrued its 1.75%
share from SLTC amounting to P11,381,621.54. However, only a total of P4,549,541.76 or
40% of the recorded income was actually received/credited to the LBP account of PNCC on
June 25, July 30 and September 23, 2010. This is not in consonance with the terms of the
escrow agreement which provides that the revenue share shall be credited on the 7 th
calendar day of each month beginning on June 2010. Hence, PNCC is deprived of its
income which could have earned interest had it been remitted to its account on time.

150. Notwithstanding the delayed receipt of its share, it appears that PNCC failed to call
the attention of SLTC, MATES, and/or the Escrow Agent relative to remittance of the said
revenue as agreed upon pursuant to Section 2 of the Escrow Agreement as mentioned in
the preceding page.

151. The Audit Team was not able to establish the accuracy and reliability of the recorded
Other Income – SLTC account since documents to support the same were not submitted by
Management. It appears that the Escrow Agent failed to prepare and submit the monthly
report required under Section 4.c of the Escrow Agreement. Moreover, there is no record to
show that Management send communications to Escrow Agent requiring/demanding
submission of the same.

152. In the preparation of the accounting entries, we were informed that the Controllership
Division Staff-in-Charge of the account simply checked the correctness of the computation
based on the amount credited to the specified LBP account. Inquiry with the concerned
personnel also revealed that no validation was made to ascertain the accuracy of the gross
toll revenue collected by Mates and remitted to the Escrow Bank and credited to the Land
Bank opened by PNCC for the purpose. Thus, casting doubt on the accuracy of the Other
Income - SLTC account.

57
153. We recommended that Management:

a. Require the concerned parties to strictly comply with the terms and conditions of
the escrow agreement; and

b. Coordinate closely with SLTC and MATES to be able to validate the accuracy of
the gross toll revenue distributed and received by the corporation.

154. Management commented that PNCC’s 1.75% or P11,287,513 revenue share from
SLTC’s gross revenue covering the period May 2010 to December 2010 was remitted on
different dates, the latest on February 17, 2011. Inquiry from SLTC on the late remittances
revealed that there was delay in the approval of the Security Trustee, Maybank Investment
Bank Berhad, due to insuffiency of fund during the initial stage of the operation.

155. Management, on March 18, 2011, had written SLTC, MATES, and Maybank
Philippines, Inc. on the non-compliance to the requirements of Sections 3 and 4 of the
Escrow Agreement.

156. Having been aware of the difficulty in meeting the “7 -calendar day time frame” within
which the Escrow Agent will deposit the Escrow Fund to the respective accounts of each
Clients, the SLTC Board, during its meeting on May 05, 2011, had approved to change the
remittance period from 7th calendar day of each month to 15 th calendar day of each month.
In reality, it is only on the 7th day of the month that the report is generated.

157. The PNCC Corporate/Internal Audit, being the responsible office, is requested to
regularly monitor/validate the revenue collected by MATES to ensure the accuracy of the
amount being remitted to PNCC.

Liabilities assumed by Privatization and Management Office (PMO) and Advances

made by Bureau of Treasury (BTr) for the accounts of PNCC amounting to P 45.59
billion were not recognized in the books.

158. Presidential Letter of Instruction No. 1295 dated February 23, 1983 directed all
concerned Government Financial Institutions (GFIs) to convert into equity or common
shares of stock in CDCP (now PNCC) the following obligations:

a. all of the direct obligations of CDCP and those of its wholly-owned

subsidiaries, including interests, fees and advances in any currency
outstanding as of December 31, 1982;

b. the direct obligations of CDCP to the concerned GFIs maturing in 1983; and

c. obligations maturing in 1983 which are guaranteed by the concerned GFIs.

159. LOI 1295 was partially implemented as confirmed through a Deed of Confirmation
dated April 14, 2000 among the GFIs (except for GSIS and LBP) and validated through a
Supplement to Deed of Confirmation dated June 7, 2000. The National Government (NG),
through the PMO, presently holds shares of PNCC at P10 par value and the remaining
obligations to GFIs were recorded under Equity Adjustment-Under Rehabilitation Plan-
Loans Transferred to NG, as follows:

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 Obligations assumed by NG per PNCC books

Obligations recorded
under “equity
adjustments under
Obligations already rehabilitation plan-
converted to equity loans transferred to
GFI (capital stock) NG” Total
PNB P 255,000,000 P 2,865,445,000 P 3,120,445,000
NDC - 1,356,693,000 1,356,693,000
TIDCORP/PEFLGC 375,845,770 1,204,311,000 1,580,156,770
DBP 269,874,470 9,633,000 279,507,470
GSIS 474,903,830 - 474,903,830
LBP 6,578,360 - 6,578,360
Central Bank - 75,654,000 75,654,000
Bureau of Treasury - 39,991,000 39,991,000
P 1,382,202,430 P 5,551,727,000 P 6,933,929,430

160. Confirmation with the liabilities assumed by PMO and advances made by BTr, as of
December 31, 2010 disclosed differences between the recorded obligations in PNCC books
vis-à-vis the amounts confirmed by PMO/BTr, as shown below:

Difference in balances between PNCC and BTr books on assumed liabilities

As confirmed by
Account/GFI Per PNCC PMO/BTr Difference
PNB P 3,120,445,000 P 43,813,903,264 P 40,693,458,264
NDC 1,356,693,000 2,093,467,965 736,774,965
TIDCORP/PEFGC 1,580,156,770 2,494,016,154 913,859,384
DBP 279,507,470 2,801,683,085 2,522,175,615
GSIS 474,903,830 - (474,903,830)
LBP 6,578,360 - (6,578,360)
Central Bank 75,654,000 - (75,654,000)
Marina - 441,887,411 441,887,411
BTr Advances 39,991,000 2,393,960,908 2,353,969,908

P 6,933,929,430 P 54,038,918,787 P 47,107,989,357

Less: Conveyance - (1,515,680,000) (1,515,680,000)

P 6,933,929,430 P 52,523,238,787 P 45,589,309,357

161. We further noted that the total authorized capital stock of PNCC as of December 31,
2010 amounted to P2.70 billion. With the P2.27 billion already issued and subscribed, the

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remaining unissued capital stock would not be enough to cover the conversion of the
remaining total obligations to equity, as follows:

Excess of convertible liabilities over the unissued capital stock

As recorded PMO/BTr
Transfer price P 6,933,929,430 P 52,523,238,787
Less: Liabilities already converted to equity 1,382,202,430 1,382,202,430
Net convertible liabilities 5,551,727,000 51,141,036,357
Less: Unissued capital stock 451,589,780 451,589,780
Excess of net convertible liabilities P 5,100,137,220 P 50,689,446,577

162. Likewise, as stated in Note 15.2 of the Notes to 2010 financial statements, the
Corporation’s indebtedness was not converted into equity due to the then Central Bank of
the Philippines’ rule on Single Borrowers Limit, i.e. allowing only a certain percentage of
debts that can be converted into equity. We believe, however, that the rule is not applicable
to PNCC in view of LOI 1295 and its related issuances.

163. We reiterated our previous year’s recommendation that Management recognize in

the books the reporting difference of P45.59 billion as of December 31, 2010 either under
Advances from BTr account/ Payable to PMO or equity adjustments-under rehabilitation
plan-loans transferred to NG. We also recommended that Management obtain authority from
the Securities and Exchange Commission to increase its capitalization to accommodate the
pending conversion of liabilities to equity.

164. Management commented that as discussed under Note 15.2 of the 2010 Notes to
Financial Statements, the loans are among the accounts transferred by PNCC to the
National Government, through the Asset Privatization Trust, now Privatization Management
Office pursuant to PNCC’s Rehabilitation Plan of 1987 and are no longer recorded as
liabilities in PNCC books. As such, PNCC is precluded from servicing the account.

165. Based on LOI 1295, which was a special law promulgated to rehabilitate PNCC, the
debts which were not converted to equity, because of the limitation in general provisions (i.e.
then Central Bank of the Philippines’ rule on Single Borrowers Limit (SBL), allowing only a
certain percentage of debts that can be converted into equity) should effectively be equity
and therefore, should no longer incur interest charges. Otherwise, the spirit and purpose of
LOI 1295 will be defeated.

166. The PMO and the BTr, however, still consider the unconverted debts as liabilities,
confirming the amounts of P50.129 billion and P2.294 billion, respectively as of December
31, 2010, both inclusive of accumulated interest charges on the obligation.

167. The Corporate Finance Group has looked into the COA Team’s recommendation on
the recognition of the reporting difference in the books. As a result of which, recording of the
difference under equity adjustment is a better option as it will not result to capital deficiency.

168. Recognition in the books of any reporting differences will be made and authority from
the SEC for the increase in the company’s capitalization will be sought, however, once

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resolution of the issue is reached considering that there are on-going talks/discussion
between PNCC and the PMO.

169. Management also pointed out that the company’s unissued capital stock amounted
to P433,915,830 (43,391,583 shares) vis-a-vis the COA team’s P451,589,780 (45,158,978
shares).

170. The difference in the unissued capital stock equivalent to 1,767,395 shares between
Management and COA’s records represents the treasury stocks as disclosed and presented
in the Notes to Financial Statements and discussed in Comment No. 14. Treasury shares
are essentially the same as unissued capital since they have been reacquired by the
corporation and such shares may be disposed again for a reasonable price to be fixed by
the Board of Directors.

171. We maintain our position that Management recognize in the books of PNCC the
reporting difference of P45.59 billion as of December 31, 2010 the liabilities assumed by
PMO and the advances made by BTR for the accounts of PNCC. If PNCC opted to record
the difference under the equity adjustment, authority to increase the capitalization should be
secured from SEC in accordance with Section 38 of the Corporation Code.

The hiring of private law firms/lawyers, who were paid the total amount of P8.5 million
during the CY 2010 without the written conformity and acquiescence of the Solicitor
General or the Government Corporate Counsel (OGCC), and the written concurrence
of the Commission on Audit (COA), is contrary to the provisions of COA Circular No.
95-011 dated December 4, 1995, and Office of the President (OP) Memorandum
Circular No. 9 dated August 27, 1998.
172. For CY 2010, PNCC had paid professional fees in the total amount of P8,518,465.65
to various law firms. Examination of vouchers together with their supporting documents,
showed that the Corporate Controllership personnel just used the Statement of Accounts
received as basis for the disbursements. Most of the lawyers rendered their services even
without the corresponding contracts that would serve as legal basis for the payments made.
They were hired by PNCC without the prior written conformity and acquiescence of the
OGCC and the written concurrence of the COA in violation of the provisions of COA Cir. No.
95-011 and OP Memorandum Circular No. 9 which prohibited the hiring of private lawyers.
The said circulars require that “In the event that such legal services cannot be avoided or is
justified under extraordinary or exceptional circumstances, the written conformity and
acquiescence of the Solicitor General or the Government Corporate Counsel (OGCC), as
the case may be, and the written concurrence of the Commission on Audit (COA) shall first
be secured before the hiring or employment of a private lawyer or law firm.”

173. The same audit observation has been noted in the COA 2009 Annual Audit Report on
PNCC and yet, Management continued to engage the services of the private counsels
without complying with the requirements of the aforementioned COA and OP issuances.

174. It was also noted that out-of-pocket expenses were paid to the law firms with the
disbursement vouchers relative thereto not supported by necessary documents like official
receipts, attendees to meetings, etc.
175. We recommended that Management:

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 a. Strictly adhere to the provisions of COA Circular 95-011 dated December 4, 1995
and Office of the President Memorandum (OP) Circular No. 9 dated August 27,
1998;

b. Explain/justify why the payment of P8,518,465.65 should not be disallowed in

audit for being contrary to the provisions of COA Circular No. 95-011 and OP
Memorandum Circular No. 9;

c. Require the officials and employees determined to be liable to refund the total
amount paid to the law firms. COA Circular No. 86-255 requires that “XXX
henceforth, the payment out of public funds of retainer fees to private law
practitioners who are so hired or employed without the prior written conformity
and acquiescence of the Solicitor General or the Government Corporate
Counsel, as the case may be, as well as the written concurrence of the
Commission on Audit shall be disallowed in audit and the same shall be a
personal liability of the officials concerned.”

176. Management commented that the Chief Financial Officer, in a memo dated April 18,
2011, had again sought PNCC Corporate Legal’s opinion and/or reason for the alleged non-
compliance with the requirements of the COA and OP issuances. The Corporate Legal,
being the office which worked directly with the private law firms/lawyers, is the proper
authority to determine the benefits derived from the engagement of the services and
consequently, to explain/justify the non-disallowance of the payments already made.

177. A Notice of Disallowance No. 11-007-(2010) dated September 1, 2011 was issued for
payments made amounting to P8,586,454.86.

Honoraria amounting to P675,252 were granted to the Office of the Government

Corporate Counsel (OGCC) lawyers and OGCC non-core personnel without legal
basis.

178. Examination of check vouchers and supporting documents disclosed that PNCC
management paid honoraria & per diem to OGCC lawyers amounting to P675,252. Instead
of the required Office Orders assigning the concerned OGCC lawyers to PNCC, only
certifications stating that “the receipt of honorarium does not exceed the allowable amount
under COA Circular 76-25A” were attached to the vouchers. Said certifications which were
certified by the respective recipients of the honoraria, are self-serving and, as such, are not
acceptable substitute to the required Office Order.

179. As provided for under EO Nos. 292 and 878, the OGCC is the principal law office of
government-owned and controlled corporations (GOCCs) mandated to render legal services
to them. OGCC lawyers rendering legal assistance to GOCCs derive their authority to
receive additional compensation under Section 6 of Executive Order 878, which reads:

“Section 6. When the exigency of the service so requires, any member of the
legal staff of the OGCC may be assigned or designated in a concurrent
capacity to act as corporate officer of the Government – Owned or Controlled
Corporations (GOCC) being service by the OGCC, provided the OGCC
approves the assignment or designation. Whenever any member of the legal
staff of OGCC is assigned/designated to perform additional or special task in

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 any of the client corporations, he is allowed to receive such additional
compensation and privileges as may be granted by the government
corporations concerned.”

180. COA Decision No. 94-040 dated February 1, 1994 categorically laid down the basic
conditions for the grant of additional compensation in the form of honorarium to OGCC
lawyers assigned at client corporations, as follows:

“For the proper grant of allowances, there should be three (3) concurring
conditions sine qua non under the above-quoted provision of law, namely:

1. When the exigency of the service so requires;

2. That OGCC approves the assignment or designation, and
3. That OGCC lawyers are assigned/designated to perform additional or
special task in any of the client corporations.”

181. The grant of said allowances is also subject to Section 56, Chapter 7, of Book V of
the 1987 Revised Administrative Code which states: “No elective or appointive public officer
or employee shall receive additional or double compensation unless specifically authorized
by law nor to accept without the consent of the President, any present, emolument, office or
title of any kind from foreign state”. Further, it is explicitly stated in Section 59, Chapter 7
Book VI of the same Code that “Officials or employees who are duly appointed by
competent authority to any position in another government agency in a concurrent capacity
may, in the discretion of the President, be allowed to receive additional compensation in the
form of allowances or honorarium at such rates he shall fix subject to such conditions as he
may prescribe. Such additional compensation shall be paid from the appropriations of the
office or agency benefiting from the concurrent service.”

182. The validity of the payment of honoraria to the OGCC lawyers cannot be ascertained
for lack of concrete proof/evidence showing that they have strictly complied/satisfied all the
three (3) concurring conditions set forth in COA Decision No. 96-040 for them to be legally
entitled to additional compensation.

183. In addition to the payment of honoraria to OGCC lawyers without legal basis, PNCC
management also paid unauthorized honoraria of P3,000 each to OGCC non-core
personnel.

184. The unauthorized payment of honoraria to OGCC lawyers and non-core personnel
assigned to the PNCC had been the subject of COA Audit Observations and included in
COA’s Annual Audit Report on PNCC for prior years. However, this was not given due
attention despite repeated recommendations to strictly adhere to the requirements of EO
878 and the 1987 Revised Administrative Code on the grant of additional
compensation/allowances to OGCC lawyers.

185. We recommended that the Management provide the Audit Team with the Office
Order assigning the OGCC personnel to PNCC or Certification given by the Department of
Justice authorizing them to receive such compensation - for the payment of honoraria to
OGCC lawyers and payment of P3,000 each to OGCC non-core personnel. Otherwise,
refund should be required for the honoraria paid to them for the same has no legal basis.
186. Management commented that PNCC had requested from the concerned OGCC
lawyers the required Office Order from the Department of Justice, in lieu of the usual

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appointment letter issued by the OGCC. The OGCC lawyers were likewise informed,
through the PNCC Head-Corporate Legal, that the COA team did not consider
Management’s justification that the grant of the allowances/honoraria to them has met the
three (3) concurring conditions, provided under COA Decision No. 94-040. Management
further informed that in view of the issuance of Notice of Disallowance (ND) No. 11-009-08
dated March 21, 2011, the processing of payments of allowances/honoraria (starting March
2011) to the OGCC lawyers is held until the issue on hand is resolved and that the OGCC
lawyers are preparing their position paper/appeal memorandum with regard to the
disallowance. As to the payment of P3,000 each to OGCC non-core personnel,
management informed that the same did not materialize and that the grant of the PNCC
Christmas Bonus for CY 2010 to OGCC lawyers including the secretaries was reversed, as
evidenced by JV No. 12-14-07-10 dated December 31, 2010.

Donation made by PNCC in the amount of P1.0 Million for the capitalization of the
PNCC Foundation, as well as the P3.063 Million payment made to the same
Foundation, is contrary to the provisions of Sections 2 and 4.2 of Presidential Decree
(PD) No. 1445 and Section 1.a.8 of the Administrative Order (AO) No. 103 dated
August 31, 2004, issued by the President of the Philippines.
187. The Corporation paid P1 million for the capitalization of the PNCC Foundation, Inc. on
April 24, 2007, contrary to Section 1.a.8 of AO 103 which provides for the suspension of
donations, contributions, grants and gifts, except if said activities are undertaken pursuant to
the mandate of the donor-agency. Further, on May 14, 2010, the Corporation disbursed in
favour of PNCC Foundation, Inc. the amount of P3,063,271.32 out of the PNCC
revenues/collections from the services rendered on the billboard advertisements and tollbooth
signages along the South Luzon Expressway (SLEX). Said revenues should have been
credited to the account of PNCC; however, on the basis of Board Resolution No. BD-20-2007
approved by the PNCC Board, the assignment of PNCC revenues and income from the sale of
services (signages and billboards) was made possible. Such disbursement is in not in
accordance with the provision of Section 2 of PD 1445 which states 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. Section 4.2
further provides that government funds or property shall be spent or used solely for public
purposes.

188. Previous PNCC Management commented that the recording of the P1.0 million
donation and the assignment of PNCC’s revenues in the amount of P3,382,540.61 is in
accordance with Resolution Nos. BD-024-2008 and BD-020-207, respectively.

189. While it is true that under Section 36 of the Corporation Code, every corporation has
the power and capacity to make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes; and it is without doubt that
the PNCC Board of Trustees also possesses the usual corporate powers for their effective
governance, the same is not absolute. Unlike private corporations, government corporations
are circumscribed by laws which limit their governing boards’ power in the adoption of rules
and regulation as well as the authorization of expenditures. Every expenditure must have legal
basis and should not be contrary to law, rules and regulations.

190. From the Articles of Incorporation of the PNCC Foundation, Inc. we noted the following:

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 a. The P1.0 Million donations made by PNCC appeared as capital
contribution of the Foundation’s incorporators and directors.

b. The previous members of the PNCC Board are among the incorporators
and directors of the Foundation.
c. Attached to the Articles of Incorporation is a Certification issued by the
Manager of BPI relative to a P1 million deposit with the said bank under the
name of the former President and CEO as Treasurer-in-Trust for PNCC
Foundation, Inc., who is also a member of the PNCC Board.
d. The Foundation was incorporated on November 8, 2007.

191. To prevent the further dissipation of PNCC’s scarce resources, we recommended that
Management:

a. Strictly adhere to the provisions of Section 1.a.8 of the Administrative Order (AO)
No. 103 dated August 31, 2004 and Sections 2 and 4.2 of PD 1445;
b. Require the Officers of the Foundation to return all the money donated/paid by
PNCC, inasmuch as the said donation and assignment of PNCC revenues are
not allowed under AO No. 103, and therefore, has no legal basis; hence, being
disallowed in audit.
c. Require the officials and employees determined to be liable to refund the total
amount paid to the PNCC Foundation, Inc. Failure to collect from the
Foundation, the same shall be a personal liability of the concerned approving
officials.

192. Management commented that PNCC has undertaken the following actions to
address the above concerns:

a. On April 14, 2011, Management has written the Chairman of the Foundation
(copy furnished the Board of Trustees) informing the former of the election of the
new members of the PNCC Board and on the need to convene the Board of
Trustees for the purpose of: (1) changing the authorized bank signatories; (2)
providing the new PNCC Board the opportunity to install a new set of Board
Members and Officers, and (3) allowing the new Board to act on the findings of
the Commission on Audit (COA) on the funding of the Foundation.

b. On March 28, 2011, PNCC Management has written the Bank of the Philippine
Islands (BPI), the depository bank of the Foundation, requesting to put on hold
the deposit account pending the changes in the composition and/or signatories of
the Foundation. In a letter dated April 25, 2011, BPI informed PNCC that the
request cannot be executed unless the required documentary evidences have
been submitted.

c. On April 25, 2011, PNCC Management sent a letter to the PNCC Foundation,
Inc., Treasurer-in-Trust seeking opinion/comment on the COA finding on the
donation and disbursement by PNCC to the Foundation for P1.0 million and
P3.063 million, respectively, specifically on the recommendation to return the
same to PNCC.

d. On May 02, 2011, PNCC Management again wrote BPI reiterating its request to

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 put on hold the deposit account of the Foundation while awaiting changes in the
latter’s Board composition and/or signatories.

The Corporation paid P 4.8 million annual premium for the Directors and Officers
Liability Insurance (DOLI) or a total of P 24 million from December 1, 2005 to
December 1, 2010, which is not in accordance with Section 4.2 of Presidential Decree
(PD) No. 1445.

193. For CY 2010, PNCC paid insurance premium to the Government Service Insurance
System (GSIS) amounting to P 4,800,000.00 representing the annual premium for the DOLI for
the period covering December 1, 2009 to December 1, 2010. The establishment of the DOLI
was authorized by the PNCC Board per Resolution No. 112-2005 dated October 28, 2005 to
ensure and free all the Directors and Executives from all claims made against them during the
policy period for any wrongful act related to their position, offices and on arising from the
performance of their duties and responsibilities, filed and demanded against them individually
or collectively, defendants or respondents before courts and other forms. The liability
insurance is under Policy No. MS-DOL-GSISHO-0000113.

192. The matter had been the subject of the previous audit team’s Audit Observation
Memorandum (AOM) No. 09-025 dated August 3, 2010. As stated therein, the expenditure for
the insurance liability does not fall within the definition of public purpose as provided for under
Section 4.2 of PD 1445. In the case of COA vs. Yap, G.R. No. 158562, dated April 23, 2010,
public purpose is defined as an activity that will serve as benefit to the community as a body
and which at the same time is directly related function of government. Public funds are the
property of the people and must be used prudently at all times with a view to prevent
dissipation and waste. The existence of Board Resolution No. 112-2005 dated October 28,
2005 does not make the payment of the said insurance liability authorized.

193. We reiterated our recommendation that Management require all persons responsible in
approving the said expenditure, certifying the availability of funds, legality, and completeness
of supporting documents attached thereat, be made jointly and severally liable to refund the
amount of P 24 million representing disallowed premiums paid for DOLI.

194. PNCC, in its letter of March 08, 2011, sought OGCC’s legal opinion on the acquisition
of the liability insurance. The latter, in its Opinion No. 085, Series of 2011, has concluded that
that PNCC’s use of its funds for the DOLI of its directors and officers is legally justified since
the DOLI will cover official acts of the PNCC Board of Directors in the performance of PNCC’s
primary mandate and role to provide and maintain toll roads which is a public purpose. With
respect to the funds derived by PNCC from its private transactions, it is believed that with more
reason, the same can be used for the payment of the DOLI premiums. The OGCC, likewise,
cited the more recent case that the Supreme Court counseled that the term “public purpose” is
not defined, since it is an elastic concept that can be hammered to fit modern standards. It
should be given a broad interpretation; therefore, it does not only pertain to those purposes
that are traditionally viewed as essentially government functions, such as building roads and
delivery of basic services, but also includes those purposes designed to promote social justice.
Thus, public money may now be used for the relocation of illegal settlers, low-cost housing
and urban or agrarian reform. In short, public use is now equated with public interest, and that
is not unconstitutional merely because it incidentally benefits a limited number of person
(Ramon R. Yap vs. Commission on Audit, 23 April 2010, 619 SCRA 154).

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195. We maintain our position that the acquisition of the DOLI has no legal basis as there
is no specific law which authorizes the same. Under the same jurisprudence mentioned
above, Ramon R. Yap vs. COA G.R. No. 158562, the Supreme Court enunciated that “ x x x
it is necessary that the release of public funds must not contravene the law on disbursement
of public funds. Section 4 of Presidential Decree No. 1445 lays out the basic guidelines that
government entities must follow in disbursing public funds, as follows:

“Section 4. Fundamental principles. – Financial transactions and operations

of any government agency shall be governed by the fundamental principles
set forth hereunder, to wit:

1. No money shall be paid out of any public treasury or depository except in

pursuance of an appropriation law or other specific statutory authority.

2. Government funds or property shall be spent or used solely for public

purposes.”

196. Moreover, the Supreme Court clearly explained: “To our mind, in view of the public
purpose requirement, the disbursement of public funds, salaries and benefits of government
officers and employees should be granted to compensate them for valuable public services
rendered, and the salaries or benefits paid to such officers or employees must be
commensurate with services rendered. In the same vein, additional allowances and
benefits must be shown to be necessary or relevant to the fulfillment of the official duties
and functions of the government officers and employees. We cannot accept petitioner’s
theory that the compensation and benefits of public officers are intended purely for the
personal benefit of such officers, or that the mere payment of salaries and benefits to a
public officer satisfies the public purpose requirement. That theory would lead to the
anomalous conclusion that government officers and employees may be paid enormous
sums without limit or without any justification necessary other than such sums are being
paid to someone employed by the government. Public funds are the property of the people
and must be used prudently at all times with a view to prevent dissipation and waste.”

197. Directors and Officers are obliged to perform certain duties and responsibilities to the
corporation and to its stockholders, and failure to do so may cause loss to the corporation
for which it may claim damages against them. To ensure and free them from claims against
them, they should observe diligence and act in good faith with due care, and prudence in the
performance of their duties and refrain from acquiring personal or pecuniary interest in
conflict with their duty.

Overpayments of per diems claimed by the PNCC Corporate Secretary and two (2)
OGCC lawyers and employees for several foreign and local travels in 2010 in the
amount of P225,643 and P40,920, respectively, and travelling expenses incurred for

67
the unauthorized foreign travel to Paris, France and Moscow, Russia by the PNCC
Chairman and the Head, Support Services Group on November 11-23, 2009,
amounting to P995,574 have not yet refunded.

198. The Corporation has its own Policies and Guidelines on Travel Expenses and Per
Diem, approved by the PNCC President on January 5, 1998. The rates provided thereon far
exceeded those provided for under EO 298 which provides that “Government personnel
who travel abroad shall be entitled to the Daily Subsistence Allowance (DSA) as provided
under the United National Development Program (UNDP) Index, which can be secured from
the Department of Foreign Affairs. The DSA shall be apportioned as follows unless
otherwise stated in the UNDP Index: (a) fifty percent (50%) for hotel/lodging; (b) thirty
percent (30%) for meals; and (c) twenty percent (20%) for incidental expenses. When the
country of destination is not listed in the said Index, the DSA for the nearest country shall be
adopted."

199. The PNCC Corporate Secretary together with two (2) OGCC lawyers traveled to
Malaysia on March, June and August 2010. They applied for cash advance and
subsequently liquidated their travelling expenses using the Corporation’s Policies and
Guidelines on Travel Expenses. Comparison of computations using the PNCC guidelines as
against the DSA Circular Report of the International Civil Service Commission for the
corresponding period shows that the travelling expenses claimed by these people exceeded
by US$4,898 or P225, 643.35.

200. It was also noted that two officers of PNCC travelled locally and claimed per diem
which is P24,800.00 over and above what is allowed under Section 4 of EO 298. The travel
expenses of government personnel regardless of rank and destination shall be in the
amount of Eight Hundred Pesos (P800.00) per day which shall be apportioned as follows: a)
fifty percent (50%) for hotel/lodging, b) thirty percent (30%) for meals and c) twenty percent
(20%) for incidental expenses.

201. Further, it was noted that the PNCC Chairman and the Head, Support Services
Group traveled to Paris, France and Moscow, Russia without authority from the Office of the
President as required under EO 459 and EO 248. This has been a subject of an Audit
Observation Memorandum and included in the 2009 Annual Audit Report on PNCC with the
recommendation that travelling expenses relative thereto of P995,574 be refunded by the
persons concerned.

202. As of report date, no refund has been made for the reason that Management
believes that Section 1 of EO No. 459 is not applicable to PNCC, it being a government
acquired asset corporation. We wish to inform that the OGCC in its Opinion No. 207 opined
that:

a. PNCC falls within the ambit of COA’s functional authority and regulatory
responsibility;

b. PNCC may enjoy operational flexibility provided its transactions are not
irregular, unnecessary, and unconscionable expenditures or uses of
government funds and properties. It may adopt its own accounting and
auditing rules and regulations as long as they are consistent with the
appropriate and applicable guidelines of COA.

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203. We recommended that Management:

a. Strictly comply with the guidelines on Travel Expenses and Per Diem as provided
for under Executive Order Nos. 298, 259, 248, 248-A and Administrative Order
No. 103.

b. Require the immediate settlement/refund of the overpayment noted amounting to

P266,563.35 relative to the per diem claimed by Officers, as well as the total
amount of P995,574 incurred for unauthorized travel.

Non-payment of the required capital gains tax and documentary stamp tax on time, as
required under Sections 51(C) and 200(B) of the National Internal Revenue Code
(NIRC), resulted in the incurrence of unnecessary interest payments amounting to
P5.3 million.

204. On October 9, 1980, PNCC entered into a contract to sell with a private individual for
a parcel of land which was formerly used as site of North Luzon Tollways (NLT) office, at an
agreed price of P455,800. However, the sale was consummated only on May 24, 2000,
after almost twenty years, through a Deed of Absolute Sale (DAS) wherein the vendor
agreed to surrender to PNCC the Owner’s Duplicate Copy of the Transfer of the Certificate
of Title (TCT) No. 260678 upon the execution of the DAS. It was also specified in the said
agreement that the parties agreed that all taxes and any special assessments which are or
will be imposed by the government or governmental authority on the property, from the date
of the contract, including but not limited to the transfer tax shall be paid by the Company as
if the property has already been purchased, including interest.

205. On September 29, 2010, the Corporation paid capital gains tax amounting to
P6,321,946 for the land acquired and selling price in the amount of P455,800, broken down
as follows:

Fair Market Value of Land 34,185,000

Multiply by tax rate 6%

Capital gains tax 2,051,100

Interest 4,270,846

Payment 6,321,946

206. On the same date, the Corporation paid the corresponding documentary stamp tax
amounting to P1,585,899.12, to wit:

Fair Market Value of Land 34,185,000.00

Multiply by tax rate 1.5%

Documentary stamp tax 512,775.00

Interest 1,073,124.12
Payment 1,585,899.12

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207. Had the capital gains tax and documentary stamp tax been paid on or before June
24, 2000 and not ten (10) years after, PNCC could have avoided the payment of interest
amounting to P4,270,846.00 and P1,073,124.12, respectively.

208. It was noted that payments were made through the issuance of Philippine National
Bank (PNB) Managers Check Nos. 200679 and 200690, both dated September 28, 2010.
However, the photocopy of Official receipt (OR) issued by BIR for the capital gains tax
payment attached to the voucher is under the name of this private individual, TIN # 298-602-
340 (with handwritten “PNCC 000-058-330 and an initial) , while the OR for the payment of
documentary stamp tax is in the name of PNCC. Problem may arise when it comes to the
payment of Corporate Income Tax (CIT), since one of the requisites for deductibility of taxes
from gross income is that it must be imposed directly upon the taxpayer. Otherwise, the
capital gains tax paid during the year will be treated as non-deductible expense in the
computation of taxable income.

209. Further, we were informed by the Manager of Realty Management Division (RMD),
that the original copies of the ORs were submitted to BIR for the processing of the TCT in
the name of PNCC. As of report date, original copy of the said OR is not yet in the custody
of RMD.

210. Moreover, inspection of TCTs conducted by the Team on March 18, 2011 disclosed
that only a photocopy of the above-mentioned TCT under the name of the private individual
was in the possession of the Cashier/custodian. Hence, it appears that the TCT pertaining
to the lot sold to PNCC is not yet transferred in its name.

211. We recommended that Management:

a. Determine the person/s liable for the delay in the payment of the capital gains tax
as well as the documentary stamp tax.

b. Require the responsible personnel to submit explanation/justification for failure to

implement the payment of the necessary taxes on time when it is clearly stated in
the DAS that all taxes and any special assessments imposed on the property
from the date of the contract shall be paid by the Company and considering the
fact that under Section 249 of the NIRC there shall be assessed and collected on
any unpaid amount of tax, interest at the rate of twenty percent (20%) per
annum, or such higher rate as may be prescribed by rules and regulations, from
the date prescribed for payment until the amount is fully paid.

c. Implement administrative sanction, if warranted to persons/s identified to be

liable for the non-payment of the required taxes. As decided in the case of
Commissioner of Internal Revenue vs. Procter & Gamble Philippine
Manufacturing Corp., et al., G.R. No. L- 66838, dated April 15, 1988, the
Supreme Court ruled that “the errors of certain administrative officers should
never be allowed to jeopardize the government’s financial position.”

d. Ascertain at all times prudent stewardship of public funds entrusted to all

accountable officers.

e. Strictly comply with the time for filing and payment of taxes in accordance with
the National Internal Revenue Code to avoid incurrence of unnecessary
expenses in the form of interest and penalties due to late payment.

70
 f. Ascertain that the title to the land purchased from a private individual be
transferred in the name of the Corporation to establish ownership thereof.

g. In all cases where payments will be made by the Corporation, ascertain that the
corresponding Official Receipts are issued in its name.

Discrepancies of P123.05 million and P181.226 million were noted between the
balance per books and balance per confirmations with both debtors and creditors of
the Corporation, thereby casting doubts on the accuracy and reliability of the balance
of both the Receivable and Payable accounts amounting to P531.05 million and
P206.21, respectively, as of December 31, 2010.

Receivables
212. Except for the receivables from Citra Metro Manila Tollways, which is understated by
P189,786,631.10, all the other receivable accounts were overstated aggregating to
P312,836,853.04 resulting in the net overstatement of P123,050,221.94, as follows:
Balance Balance
Company Per Books Per Confirmation Difference
Manila North Tollway
Corp. P 344,374,005.14 P 32,366,834.07 (P312,007,171.07)
Citra Metro Manila
Tollways 108, 485,316.88 298,271,947.98 189,786,631.10
South Luzon Tollways
Corp 7,909,737.26 7,804,276.61 (105,460.65)
Tierra Factors
Corporation 15,358,682.32 14,926,858.00 (431,824.32)
Traffic Control Products
Corp. 54,927,851.90 54,635,454.90 (292,397.00)
Total P 531,055,593.50 P 408,005,371.56 (P123,050,221.94)

Payables

Balance Balance
Company Per Books Per Confirmation Difference
Citra Metro Manila
Tollways P202,371,716.69 P22,282,516.89 P180,089,199.80
Best Security Agency
Inc. 1,124,915.36 1,155,824.94 (30,909.58)
Traffic Control Products
Corp. 1,224,724.38 1,150,613.18 74,111.20
Top Star Security
1,492,446.02 398,590.02 1,093,856.00
Services
Total P 206,213,802.45 P24,987,545.03 P181,226,257.42

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213. As far as the Payables account is concerned, the amount payable to Best Security
Agency, Inc. is understated by P30,909.58; while the rest had an overstatement aggregating
to P 181,257,167, resulting in a net overstatement of P181,226,257.42.

214. We recommended that:

a. Management exert more effort to identify the causes of the discrepancies

noted on both the receivables and payables account;

b. If possible, coordinate with the concerned debtors/creditors for the immediate

reconciliation with their respective accounts; and

c. Prepare the necessary adjustments in the books, if warranted.

Accuracy and reliability of the Cash account was doubtful due to several lapses
noted.

a. Revolving Fund (11207) – P31, 673.15

215. No cashbook was maintained by each accountable officer as prescribed under

Section 181 (b) of GAAM Volume I; and the unutilized Revolving Fund – Executive
Exchange remained in the custody of the Cashier for quite so long, instead of being
deposited in the authorized depository bank in accordance with Section 179 (g) of GAAM
Volume I.

216. The revolving fund - executive exchange was established to fund the Support
Service Group of PNCC in assisting the lawyers of the Office of the Solicitors General
(OSG) and the Toll Regulatory Board (TRB) during their hearings for TR3’s Right-of-Way in
Calamba, Laguna and Tanauan, Batangas. According to the cashier, the custodianship of
the fund was eventually transferred to her, however, instead of depositing the same to the
authorized depository bank, it remained in her possession even though the purpose for
which it was set up has been served already.

217. Further, inquiry from the cashier regarding the Revolving Fund – Other Foreign
Currency and inspection of attached documents to the bills and coins, revealed that the fund
was established for the international construction operations of the Corporation that ceased
to operate several years ago. The treasury department failed to deposit or convert the same
to local currency. Thus, as of date, we could not establish whether subject foreign
currencies in the possession of the Cashier are still of legal tender and/or acceptable for
exchange to Philippine peso. At present, it appears that most of the subject foreign
currencies are already demonetized or, no longer legal tender.

218. Per information gathered from Management, since mid-year of 1980, said foreign
currencies were already recorded in the books valued at P 21,673.15.

219. Continuous failure of management to act on Revolving Fund - Other Foreign

Currency composed of various foreign bills and coins after the termination of the
Corporation’s International Construction Operations, may result in the demonetization/loss of
its value. Hence, the accuracy and reliability of the Other Foreign Currencies forming part of
the revolving fund valued in the books at P21,673.15 could not be established.

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 b. Petty Cash Fund (11304) – P485,000

220. No cashbook was maintained by four (4) accountable officer having custody of petty
cash fund, as prescribed under Section 181 (b) of GAAM Volume I, resulting in the lack of
proper accountability and monitoring in the movement of their respective funds.

221. Petty cash voucher was not used by the petty cash custodian in the GSD division,
instead he used a log book signed by the requesting employee. Said procedure is not in
accordance with sound internal control system relative to the documentation of the flow and
control on the cash disbursements from the petty cash fund.

222. Unused petty Cash Fund–ECOLA intended to fund SL/VL and ECOLA adjustment
claims of North Luzon Tollways’ retrenched employees amounting to P15,000 remained in
the possession of the custodian for quite a long period of time, instead of depositing the
same to the authorized depository bank.

223. Petty cash custodian in Daang-Hari SLEX Link Road Project performs both the
recording of the transactions of the operating unit, as well as the custodianship of the petty
cash fund amounting to P150,000. Sound internal control system requires that the
accounting and recording functions be separated with those handling of cash
accountabilities.

c. Cash on Hand (11601) – P107,920

224. Cash maintained in the cashier’s vault amounting to P107,920 is allegedly restricted
for use. The Team was informed that the cash will be used as evidence in a case filed
against an employee who hid it in a septic tank way back in 1999. Officials from both the
PNCC Corporate Treasury and Controllership Department advised the Audit Team to inquire
from the PNCC Corporate Legal for further information relative to the status of the case
against the employee, if any. The Corporate Legal informed the Audit Team that they have
no knowledge of the said case. Moreover, Management failed to identify the accountable
employee concerned; thus, cast doubt on the justification for the continuous safekeeping of
the subject idle cash instead of depositing the same with the bank.

225. We recommend that Management:

a. Coordinate with the Bangko Sentral Ng Pilipinas to determine whether those

foreign currencies still on hand are still of legal tender. If on the affirmative,
request the bank to convert the said foreign currencies into peso. Recognize
foreign gain/loss on conversion, when necessary.

b. Ascertain whether there is really a case filed against the erring employee. If
none, turn-over the P107,920 kept by the Cashier in the vault for quite a long
time to the Collecting Officer for deposit to the authorized depository bank.

c. Comply with the procedural and documentary requirements of Section 179 (g)
and 181 (b) of GAAM Volume I, Section 69 (1) of PD 1445, Section 57 of Manual
on NGAS to strengthen the internal control on cash transaction and avoid future
losses;

73
 d. Deposit intact with the authorized depository bank idle funds to avoid the
incurrence of forgone interest income.

e. Segregate the accounting and record keeping functions from those handling of
cash transaction.

Results of bank confirmation showing a net discrepancy of P173,733.57 between the

amount recorded in the books against those recorded by the respective banks cast
doubt on the reliability of the Cash in Bank per book amounting to P377.27 million.

226. Confirmation letters were sent to various banks where accounts of PNCC are being
maintained. As of December 31, 2010, total Cash in Bank per book amounted to
P377,278,656.96; while total amount appearing in the banks is P377,104,923.39 or a
difference of P173,733.57, due to the following Cash in Bank balances:

Bank Per Books Per Bank Difference

Placement Funds- PNB 77,790.11 - (77,790.11)

-do- PNB - 243,680.69 243,680.69
-do- PNB - 244,629.21 244,629.21
BOC 0002 1,348,019.00 1,358,624.00 10,605.00
LBP 0003 2,388,546.99 2,408,526.70 19,979.71
PNB 0520 44,024,559.79 44,045,809.79 21,250.00
Transferred from ICONS 636,088.07 - (636,088.07)

P48,475,003.96 P48,301,270.39 P173,733.57

227. Analysis of the results of confirmation letters sent to concerned banks disclosed the
following:
a. There was a dollar deposit under Placement Funds - PNB amounting to
P77,790.11 recorded in the books of PNCC under CTD No. 794096 amounting to
$1,772.59 as rolled-over, but not confirmed by the Bank. Once validated to be
non-existing in PNB, the same shall be construed as “shortage” on the part of the
concerned PNCC accountable officer;
On the other hand, per bank confirmation, there were Time Deposit Placements
confirmed by the Philippine National Bank for the account of PNCC but not
recorded in the books resulting in the understatement in the recording of the
Cash in Bank in the amount of P 488,309.90 (P 243,680.69+ P244,629.21).
b. We noted that there were stale checks totalling P51,834.71, still presented as
outstanding checks in the Bank Reconciliation Statements.
Further validation made disclosed that the difference noted in the table above
relative to BOC 0002, LBP 0003, and PNB 0520 amounting to P10,605,
P19,979.71, and P21,250, respectively, pertain to the above-mentioned stale
checks not yet reversed/adjusted in the books.

c. Further, included among the Cash in Bank account is the amount of P636,088.07
allegedly Cash in Bank maintained in other countries. However, there is no
record to show as such. Per information gathered from the Head of the

74
 Controllership, said account had been existing in the book since 1980s but there
were no documents available to support the existence of any foreign bank
wherein the said account is maintained.
d. On the other hand, we noted that Cash in Banks amounting to P 287,308.67,
allegedly maintained in the different banks, were reclassified to Other Assets
account since they were considered dormant.

Name of Bank Amount

Philippine National Bank - PNB 0518 P 2,589.97

Philippine National Bank - PNB 0522 10,327.88
Philippine National Bank - PNB 0523 9,597.13
Philippine National Bank – PNB 0550 22,234.96
Philippine National Bank – PNB 0524 117,693.36
Bank of Philippine Island – BPI 0013 101,909.37
Land Bank of the Philippines– LBP 0005 22,956.00

Total P 287,308.67

228. Verification made on the above alleged dormant Cash in Bank showed the following:

 All the Cash in Bank maintained in different PNB branches were transferred to
PNB Head Office for application to PNCC loan accounts.

 Accounts maintained with BPI was garnished in connection with the Asiavest
case.

 No supporting documents for LBP account.

229. In view of the foregoing, the validity and existence of the Cash in Bank, classified as
dormant accounts and lodged under the Other Accounts, could not be established resulting
in the overstatement of the Other Assets account by P287,308.67.

230. We recommended that Management:

a. Prepare the necessary adjustments to record stale checks amounting to

P51,834.71 still presented as outstanding checks since subject checks could no
longer be negotiated in the Banks.

b. Explain the nature of the Dollar Time Deposit amounting to P 77,790.11,

recorded in the books, but not existing in the Bank. Locate the depositor’s copy
of the Certificate of Dollar Time Deposit (CTD) and require explanations from the
concerned Banks why said CTD was not confirmed as among the deposits of
PNCC. Request from the concerned bank information as to whether there was
pre-termination made and/or subject CTD had matured already and its proceeds
already paid to PNCC. In case proceeds of said CTD was already paid by the
Bank and received by PNCC accountable officer, then, require the concerned
accountable officer for the immediate refund and/or settlement of the unrecorded
proceeds of said CTD.

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 c. Conduct detailed analysis of the Cash in Bank accounts and determine the
reasons why there were unrecorded Time Deposits as confirmed by the Bank
with a balance of P488,309.90. Locate copies of the Certificate of Time Deposits
in the name of PNCC; and prepare the necessary adjusting entry to record the
subject confirmed placements made with the PNB for the account of PNCC;

d. Exert effort to locate the necessary documents that will establish the validity of
the alleged Cash in Bank transferred from ICON. If no action has been done to
establish the existence of such bank account because the books of accounts,
financial statements/schedules and other documents needed to validate its
existence are no longer available, PNCC may request for write-off or adjustment
of the account in consonance with COA Circular No. 97-001 dated February 5,
1997. However, the request for write-off should be supported by the following:

 List of available records and extent of validation made on the account; and

 Certification and reasons why the books of accounts/records, financial

statements/schedules and supporting vouchers/documents cannot be
located.

e. Coordinate with the concerned banks and confirm whether the subject Cash in
Banks were already garnished and/or applied to its loan accounts. If found to be
in the affirmative, prepare the necessary adjustments to book the garnishment
and/or application to PNCC loan accounts of the subject Cash in Bank accounts.
For missing documents, exert effort to locate the same to support its existence.

f. Furnish the Audit Team with copies of all the Journal Entry Vouchers (JEVs)
covering the adjustments made.

Included in the Cash in Bank account of PNCC are bank balances under the name of
Traffic Controls Product Corporation (TCPC) and CDCP Consumer Coop., Inc. FSD
(CCCIF) amounting to P140.76 million which cast doubt on the reliability and
existence of the account.

231. Review of the Cash in Bank account revealed that it includes the balances of bank
accounts under the name of TCPC and CCCIF in the amount of P140.64 million and P.12
million, respectively, or a total of P140.76 million. This observation had been noted in the
previous years’ audit reports; however, as of date, previous recommendation for
Management to transfer to its name subject bank accounts was not yet implemented.

232. Management informed the Audit Team that they maintained their previous stand that
said bank accounts and money market placements were recorded in the name of TCPC to
avoid garnishment levied on PNCC accounts/property under Radstock case and Asiavest
Case and by the Corporation’s other creditors that might have filed cases against PNCC.
Management further explained that the ownership of the said cash still belongs to PNCC
considering that the check signatories are all PNCC officers, the same are recorded in the
corporation’s books, all pertinent documents are kept and maintained at PNCC, and that
TCPC is fully aware of the arrangement. TCPC is a wholly owned subsidiary and as such,
all its resources are owned by PNCC. However, verification of the General Information
Sheet filed by TCPC on April 30, 2010 with the Securities and Exchange Commission

76
revealed that TCPC is thirty percent (30%) owned by Titan Equipment making it a majority
owned and not a wholly owned subsidiary of PNCC.

233. Management’s claim that TCPC is fully aware of the arrangement; and that it owned
the resources of TCPC, being a wholly owned subsidiary; is misplaced in view of the
business entity concept under Philippine Financial Accounting Standards (PFRS) that each
reporting entity has distinct and individual financial statements, aside from the added
information that 30% of its resources is owned by Titan Equipment.

234. While in substance, the cash is purportedly controlled by PNCC, the arrangement
made by PNCC and TCPC, by its form, does not conform to the requirements of PFRS as to
the ownership and control of the assets.

235. Moreover, with regard to the bank account maintained under the name of CDCP
Consumers Cooperative Inc. FSD, we were informed that said Cooperative had ceased its
operation since 2007 and that the account appears to be non-moving.

236. The deposits, which are not in the name of PNCC, cast doubt on the reliability and
existence of the cash in bank account. Further, such practice impairs the fair presentation
and purpose of financial statements which is to provide information about the financial
position, financial performance and cash flows of an entity that is useful to a wide range of
users in making economic decisions. Using other entity’s name to avoid garnishment is
already a misrepresentation.

237. We reiterated our previous years’ recommendation for Management to coordinate

with respective banks for the transfer of subject accounts to its name, especially that of the
CCCIP FSD, considering the fact that it is already non-operational/non-existing.

The Corporation deposit their funds and maintain depository accounts with the Bank
of the Philippine Islands (BPI) and Bank of Commerce (BOC), both private banks.
This practice is not in consonance with the provisions of the Department of Finance
(DOF) Order No. 011 – 99 dated February 24, 1999, as amended.

238. In the audit of the 2010 transactions of PNCC, it was noted that as of December 31,
2010, the Corporation maintains depository accounts with the following private banks:

BPI P 7,362,158.46
BOC 1,339,400.64
P 8,701,559.10

239. This practice is not in consonance with the provisions of the Department of Finance
(DOF) Order No. 011 – 99 dated February 24, 1999, as amended, which provides that
“attached agencies of the DOF and GOCCs shall deposit their funds and maintain
depository accounts preferably with any of the Government Financial Institutions (GFls)
namely: the Land Bank of the Philippines (LBP) and the Development Bank of the
Philippines (DBP) nearest to their location. x x x No government funds shall be deposited
to any other private banking institutions with the further exception of rural and cooperative
banks authorized by the BSP to act as depository of government funds pursuant to Section
5(2) of BSP Circular 110.”

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240. In view thereof, we recommend that Management transfer and maintain its deposits
and cash balances to any of the authorized government depository banks as required under
DOF Order No. 011 – 99 dated February 24, 1999, as amended.

241. Management commented that it is now working on the transfer of its cash balances
with private banks to the Development Bank of the Philippines (DBP), which is an authorized
government depository bank. In fact, there had been series of talks between the PNCC
Management and the DBP representatives regarding the opening of bank account with the
latter and the pertinent requirements.

Dacion en pago and the subsequent foreclosure of the EDSA and Calamba properties
amounting to P490 million and P621 million, respectively, deemed disadvantageous to
PNCC and not in accordance with law, rules and regulation on disposal. The sale or
disposal values thereof were not maximized due to the failure of PNCC management
to bid out the said properties.

242. As early as March 23, 1992, PNCC availed of a short-term loan (payable within 360
days from date of relevant drawdown) from the Philippine National Bank (PNB) amounting to
P275 million to be used by PNCC to pay off the following:

 its loan obligations originally with PDCP and later assumed by the National
Treasury; and

 retirement benefits of its employees to be retrenched as a result of the

streamlining of the borrower’s operations and to finance the corporation’s
working capital requirements.

The said loan was secured by a Real Estate Mortage (REM) dated April 1, 1992, on
two parcels of land covered by TCT Nos. 41720 & 41719 including buildings and
other improvements erected thereon and various machineries and equipment located
at EDSA cor Reliance St. Mandaluyong.

243. Review of available documents submitted to the Audit Team disclosed that since
then, PNCC availed of various credit facilities and entered into various restructuring
agreements resulting in the increase in outstanding obligations and incurrence of bloated
interest, penalties and other charges which strained the company’s financial lifeline in
meeting the monthly amortization of its loan which as of August 1998 stood at P880 million.

244. At its regular meeting held on November 24, 1998, the board passed Resolution No.
BD-121-1998 authorizing the PNCC President and CEO to negotiate with PNB for the
payment in kind or dacion en pago, using the PNCC property situated at the Financial
Center Area, of PNCC’s P880 million loan with the PNB; and further, to authorize him to
obtain P50 million credit line and further authorizing him to use the proceeds thereof
according to his business judgment in meeting project requirements and administrative
costs. Such act, as emphasized, is highly onerous and disadvantageous on the part of
PNCC.

245. Apparently the proposed dacion did not suffice and was not accepted by PNB
because during its regular meeting on December 15, 1998, the board passed another
Resolution No. BD-128-1998 authorizing the President and CEO to implement and/or

78
comply with the requirements contained in the approval of PNB as regards the restructuring
of PNCC’s P880 million loan and the grant of an additional P50 million revolving credit line,
more particularly the following:

 To mortgage the property in barangay Mapagong, Calamba, Laguna, covered by

TCT No. 431055 in an area of 126,415 sq.m.

 To assign by way of collateral two hectares of PNCC’s 129,548 sq.m. property at

Lot 6 of the Financial Center Area

 To assign eligible current Accounts Receivable (A/R) with the commitment to

replace assigned A/R which turned past due with new eligible current accounts,
and to submit on a quarterly basis a schedule of aging of receivables duly
certified by the Treasurer;

 To establish a sinking fund account in the form of regular peso savings deposit
where collections of PNCC shall be directly deposited and from which loan
amortizations shall be automatically debited.

246. On December 17, 1998, a Restructuring and Credit Line Agreement was entered into
by and between PNCC and PNB. PNCC’s total outstanding obligations on the principal of
the omnibus line and loan amounting to P823,134,450.78 as of September 7, 1998 and
accrued interest thereon as of December 19, 1998 was restructured into a five year term.
PNB extend also to the PNCC a one year revolving credit line amounting to P 50 million. In
addition to the existing REM covering a land area of 23,218 sq.m. located at EDSA cor
Reliance St. Mandaluyong, the Restructured Loan was also secured by a Supplemental
REM covering a parcel of land located at Calamba, Laguna, with an area of 110,162 sq.m.,
more or less, together with all the improvements thereon covered by TCT No. T-431055.

247. We noted that during the board meeting on May 13, 1999, the board passed
Resolution No. BD-043-1999 authorizing Management to pursue the proposed alternative
programs relative to PNCC financial profile, among others, to restructure the PNB loan and
effect partial payment via dacion en pago with option to buy-back under terms and
conditions that may be mutually agreed upon.

248. On August 19, 1999, during the Regular Meeting of the Board of Directors, the
Corporate Treasurer, informed the Board of PNB’s approval of the loan restructuring with
partial dacion and grant of an additional P350 million on August 13, 1999, the highlights of
which are the restructuring of existing exposure which as of July 19, 1999 amounted to P1.3
billion inclusive of penalties, with figures expected to increase depending on how soon the
loan will be implemented; that the additional P350 million will be used as follows:

 P120 million for separation program,

 P80 million to pay off balance of equity participation in CMMTC, and
 P150 million for tollways equipment re-tooling;
 that the restructured and additional loans shall be co-terminus for a term of five
years.

249. PNB accepted PNCC’s offer to partially pay-off existing exposure by way of dacion
of 10,000 sq.m. of EDSA property at dacion value of 70% of appraised value, with right to

79
repurchase at dacion value plus 15% interest per annum. PNB granted waiver of 90% of
the penalties and agreed to release the loan pending the complete documentation of dacion
en pago. Hence, on the same date, Board Resolution No. BD-080-1999 was passed
authorizing the President and CEO to implement and/or comply with the terms and
conditions imposed by the PNB in its August 13, 1999 approval of PNCC’s restructuring of
its P1.3 billion loan,

 grant of an additional P350 million loan,

 dacion of a portion of EDSA property with repurchase option, and
 waiver of penalties, subject to the resolution of the conditions on the submission
of post-dated checks and the prior consent of PNB before any privatization is
concluded, with further authority to the President and CEO to sign documents in
relation to the foregoing.

250. A Second Restructuring Agreement between PNCC and PNB was executed on
November 29, 1999, amounting to P1,258,200,000, representing the outstanding loan of
PNCC as of July 19, 1999 broken down as follows:

Principal P938,300,000
Accrued interest 92,400,000
Penalty 227,500,000

PNB extended a 5-year term loan in the principal amount not exceeding
P350,000,000.

251. From the aforementioned information, we observed that the then PNCC board had
the practice of offering to PNB the settlement of its outstanding obligations through dacion
en pago without a prior cost-benefit analysis or study to support the board’s decision to do
so which is detrimental to the interest of the corporation.

252. Dacion en pago agreement, signed by the then PNCC President and CEO in behalf
of the corporation, was also entered into on November 29, 1999, in partial payment of the
obligations of PNCC. PNB agreed among others, to accept PNCC’s offer to partially settle
the obligations by transferring in the name of the bank ownership of the portion equal to
10,000 sq. m. of the mortgaged parcel of land located at EDSA corner Reliance St.,
Mandaluyong City, including the buildings, equipment, machinery and other improvements
thereon. The dacion amount was P490,000,000.

253. Review of the dacion transaction showed the following:

 The said transaction was accordingly recorded in the books on December 13,
1999, a journal entry was prepared to take-up in the PNCC books the partial
payment of the PNB loan by way of dacion en pago.

 The acquisition cost of the dacioned property recorded and consequently

derecognized from the books was P1,085.36 per sq.m. or a total of
P10,853,648.03.

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  There are no available documents which can be used to validate the dacion
amount except for the minutes of the board dated August 19, 1999 above-
mentioned.

 Inquiry with the CFO disclosed that the appraised value of the land at that time
was P70,000 per sq.m. Allegedly, said amount was dictated by the then
President who was a former Vice President of the PNB, to the in-house
appraisers of the bank. No documents were available to support such allegation.

254. On January 26, 2001, PNCC again entered into another Restructuring Agreement
amounting to P50 million which represented the outstanding principal availment on a one-
year revolving credit line as of August 9, 2000. The said amount was restructured into a
long-term loan effective July 17, 2000 to mature on September 17, 2004 and secured by the
same Real Estate Mortgages (REM) aforementioned covering the parcels of land located in
Mandaluyong and Calamba.

255. On July 20, 2005, the then Chairman & CEO wrote a letter to PNB, in compliance
with the pertinent covenant under the Loan agreement, requesting its consent for PNCC’s
participation in a Joint Venture to pursue the SLEX projects.

256. Management was aware that in order to obtain its consent, PNCC needs to settle its
account with PNB or put the same in current status. Thus, to signify their determination, he
proposed to apply the appraised value of the mortgaged properties as of April 2005 against
the outstanding loan, as follows:

EDSA Property consisting of 1.3 ha @ P60,000/sq.m. P 780.0 million

Calamba property consisting of 11 has @ P2,750/sqm 313.7 million
Total P1,093.7 million

257. An update on the PNCC Proposal to settle the PNB Loan was discussed during the
January 26, 2006 regular meeting of the board:

 The settlement by way of dacion en pago is still being pursued using the
collaterals for the purpose.

 Two appraisal companies have been engaged by PNB for the valuation of the
PNCC EDSA 1.32 ha. Property as of December 27, 2005, as follows:

a. Sallmann’s Phils. – P580 million (value of land was P40,000/ sq.m.)

b. Philippine Appraisal – P496.41 million (land valued at P35,000/ sq.m.)

 The latest available zonal valuation as of January 26, 2006 within the EDSA
Property vicinity for properties classified as commercial-residential is
P50,000/sq.m.

258. In his letter to PNB dated August 22, 2006, the Chairman mentioned the proposed
sale of the properties subject of the REM, to wit:

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 Edsa Property consisting of 1.3 has. @ P45,000/sq.m.
together with buildings and improvements P585 million

Silangan, Calamba property consisting of 11.0 has. @

P1,500/sq.m. with building and improvements 165 million

Total estimated market value/sales proceeds P750 million

259. PNCC hired the services of Asian Appraisal who came up with total appraised values
of P894.378 million as of November 14, 2006, which is P144.378 million more than the
preceding proposed offer, to wit:

EDSA property
Land 13,218 sq.m.
@ P47,000/sq.m. P621,246,000
Improvements 60,990,000 P682.236 million

Silangan, Calamba property

Site I Land 79,572 sq.m.
@ P1,500/sq.m. P119,508,000
Site II Land 30,490 sq.m.
@ 2,000/ sq.m. 60,980,000
Improvements 31,654,000 212.142 million

Total appraised value P894.378 million

260. In June 2007, PNB exercised its mortgage rights and foreclosed the mortgaged
properties as follows:

Place Transfer Certificate of Title Date Bid Price

Mandaluyong TCT No. 15995 June 14, 2007 P496,776,000

City

Calamba, TCT Nos. 535566 and June 5, 2007 124,230,70

Laguna 535568 0

P621,006,700

261. A public auction was conducted on the specified dates by the Sheriff in the
respective areas where the properties were located. We noted that PNB was the lone
bidder in both auctions.

262. As of July 31, 2007, the total outstanding obligations of PNCC on the credit
facilities and the standby LCs, after foreclosure, amounted to P2,464,159,000, more
or less, inclusive of the accrued interest and penalties thereon, broken down as
follows:
Amount

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 Principal P 312,845,000
Advances for dacion transfer costs 10,917,000
Foreclosure/litigation expenses 40,387,000
Interest on the principal loan 658,131,000
Interest on the dacion 397,907,000
Interest on the advances for dacion transfer costs 4,453,000
Penalty charges 938,911,000
Standby LC extension and other charges 100,608,000
P2,464,159,000

263. On November 21, 2007, at request of PNCC, compromise agreement was executed
wherein PNB agreed to a compromise settlement and restructuring of PNCC obligation as
follows:

a. Cash payment of P100 million to be paid by PNCC to PNB on September 15,

2007.

b. Restructuring of a portion of the obligation amounting to P500 million into an

eight-year term loan effective from October 15, 2007.

c. Upon compliance by PNCC with the conditions precedent provided in Section 4

of the agreement, PNB shall waive that portion of the obligation amounting to
P1,912,247,000.

264. On June 16, 2010, Board Resolution No. BD-0250-2010 was passed whereby the
PNCC board approved the recommendation of management for the repayment of the PNB
Loan covered by the Compromise Agreement, with principal balance as of June 15, 2010
amounting to P274,999,999.90 provided that Management exert more efforts toward further
reduction of the full amount of principal and interest.

265. On July 5, 2010, PNCC effected its full repayment of the loan in the total amount of
P282,323,287.57 representing the outstanding principal and interest computed as of the
said date.

266. The Board of Directors who were responsible for issuing policies relative to the
business affairs of the corporation, were fully aware of the financial constraint of the
corporation to pay off its outstanding obligation. However, we observed that instead of
bidding out the subject properties to fully maximize its sale or disposal value for the benefit
of the corporation, they offered to settle the company’s obligations in kind at dacion value of
70% of appraised value even without prior study or cost - benefit analysis. The sale or
disposal of the said properties should have been based on their assessed value and/or fair
market value at the time of dacion and not just on a percentage thereof. Such act showed
lack of prudence on the part of the board to the detriment of the corporation. Failure to bid
out the disposal of the dacioned EDSA properties violated law and regulations including the
PNCC guidelines on the disposal of properties which prescribes competitive bidding on the
disposal of properties.

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267. Based on the appraised values mentioned above which were taken from the
documents submitted to the audit team, it appears that the value of the EDSA property
declined from 1999 up to 2006, to wit:

Appraised Value
Source document per sq. m.

Minutes of the Regular Meeting of the Board dated August 19,

1999 P 70,000
Letter of Chairman & CEO Arthur Aguilar to PNB dated July
20, 2005 60,000
Sallmann’s Phils. (engaged by PNB) appraisal as of
December 27, 2005 40,000
Philippine Appraisal (engaged by PNB) - appraisal as of
December 27, 2005 35,000
Asian Appraisal (engaged by PNCC) – appraisal as of
November 14, 2006 47,000

268. We also noted that during the board meeting held on January 26, 2006, the latest
available zonal valuation then within the EDSA Property vicinity for properties classified as
commercial-residential was P50,000/sq.m.

269. Above data cast doubt on the actual valuation of the land considering that the
subject property is a prime lot where the trend of land development is mixed commercial and
industrial in character and usage. Such doubt could have been eliminated had the said
property was subjected to public bidding.

270. Based on the documents submitted and the limited information gathered, despite the
various agreements increasing and restructuring the outstanding obligations of the
corporation, the PNCC Board and Management did not exert their best effort to prevent the
foreclosure of the mortgaged properties.

271. Due to failure of PNCC Management to observe the guidelines in the disposal of the
subject property, compounded by the inability of Management to submit all the supporting
documents relevant to the dacioned properties, the Aidot Team was not able to establish the
following:

 reliability and accuracy in the recording of the disposed property

 whether the proceeds of the long-term loan secured from PNB were utilized
in the most economical, efficient and effective manner supposed to be to the
benefits of PNCC.

272. We recommended that Management require previous PNCC Board and executives
to explain/justify why they should not be considered remiss in their duties and
responsibilities and be held personally liable for the improper disposal of the 10,000 sq. m.
EDSA properties and the foreclosure of the remaining 13,218 sq. m. thereof, as well as the
11 has. Calamba property.

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The accuracy of the Land account balance of P906.7 million as of December 31, 2010
could not be ascertained due to deficiencies in the Corporation’s Land and Appraisal
Increase accounts.

273. Verification of the Schedule of Land, List of Real Estate Properties and other
documents, as well as inspection of the Transfer Certificates of Titles (TCTs) as of
December 31, 2010, disclosed the following deficiencies:

 Except for parcels of land with a total area of 1,116,363 sq. meters costing
P2,568,692, all have been appraised as of December 31, 2010. However, since
no updated appraisal has been made on the lots, the fairness of presentation of
the accounts Land and the related Land Appraisal Increase could not be
established.

Inspection of the Transfer Certificates of Titles (TCTs) and/or Tax Declaration of

parcels of land recorded in the books of the Corporation, disclosed the following:

 TCT # T-98739 for the property in Dasmariñas, Cavite with a total area of 75,000
was missing.

 The missing Tax Declaration Certificate No. 6807 of the property in Bocaue,
Bulacan, with an area of 847 sq. m. as reported in the 2009 Annual Audit Report,
was secured from the Bocaue Assessor’s Office; however, the Tax Declaration
Certificate showed that said property is registered under the name of Victorio N.
Roxas instead of PNCC.

 Parcels of land with a total area of 276,745 sq. m. already titled/registered in the
name of PNCC but not recorded in the books.

 Parcels of land with a total area of 7,768 sq. m. are included in the list of properties
owned by the Corporation but are not recorded in its books. Inspection of titles
showed that the original TCTs of the said properties are in the possession of
PNCC but they are titled/registered under the name of the private individuals,
instead of PNCC .

 Also included in the list of Land provided by Realty Management Division are
parcels of land located in Dau-Mabalacat Expressway, Mabalacat-Bamban NLT
Extension in Bamban, Tarlac., Mexico-San Fernando Pampanga, and Balintawak
toll Plaza but are not recorded in the books. These properties are registered under
the names of several owners. Inquiry from RMD personnel disclosed that these are
Right of Way lots and part of the NLEX.

 During the inspection of TCTs, we observed that some certificates were only
photocopies, casting doubt on the ownership and status of the property. The
personnel from the RMD mentioned that these were the only available documents
on file when he assumed into office. The responsibility to secure the original TCTs
is the responsibility of the Corporate Legal Division (CLD). However, since then to
date, there was neither a request from RMD nor any actions taken by CLD to
locate the original copies of the above-mentioned TCTs.

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274. In the 2009 Annual Audit Report, we recommended that Management (1) record all
property in the PNCC books at appraised values pursuant to the requirements of PAS No.
16 which provides that “if an item of property, plant and equipment is revalued, the entire
class of property, plant and equipment to which that asset belongs shall be revalued;” (2)
expedite the transfer of ownership of the parcels of land which are not yet registered in the
name of PNCC and subsequently record the same at their appraised values; and (3) exert
efforts to settle the various issues regarding the missing Transfer Certificates of Title (TCT).
As of date, said recommendations were not yet implemented.

275. Management commented that the parcels of lot with an area of 1,116,363 sq.m. are
among those included in the September-October 2010 appraisal, resulting in an appraisal
increase of P146 million recorded in December 2010.

276. The company’s RMD is continuously working on the required documentation for the
transfer of the title in PNCC’s name.

277. The noted missing Tax Declaration (TD No. 6807) for the Bocaue, Bulacan property
was already secured from the Bocaue Assessor’s Office. Prior to transfer of title in the
name of PNCC, however, a joint survey has to be conducted together with the owner of the
adjacent property.

278. The Manager of the PNCC Realty Management Division informed the Audit Team
that the parcels of land with a total area of 1,116,363 sq. meters were not really appraised
since it would entail high cost/expenses. Although the schedule of properties submitted was
labeled “List of Real Estate Properties Appraised as of September – October 2010,” there
were notations under the Remarks column specifying as to when the latest appraisal of a
particular property was conducted.

279. We reiterated our previous years’ audit recommendations that Management:

a. Request for re-appraisal of the remaining parcels of lot with an area of 1,116,363
square meters in accordance with the existing policy of the Corporation. Once
appraisal had been made, record all property in the PNCC books at appraised
values pursuant to PAS No. 16;

b. Exert effort to settle the various issues regarding the missing Transfer
Certificates of Titles;

c. Expedite the transfer of ownership of the parcels of land which are not yet
registered in the name of the Corporation and subsequently record the same in
the books at appraised values; and

d. Obtain the original copies of the photocopied Transfer Certificate of Titles to

ascertain the ownership of the property.

86
The accuracy and reliability of the Investment in Stocks, valued at P177.05 million as
of December 31, 2010, could not be established for failure of Management to
recognize impairment of the assets.

280. Analysis of the Investment in Stocks account disclosed that of the total Investments
in Stocks amounting to P178,774,180, P177,055,760 or 99% pertains to investments in
PNCC subsidiaries/affiliates that are no longer operating and/or no longer operating but still
incurring expenses; and operating but continuously incurring losses, details follow:

Name of Company Amount

1. Companies no longer operating:

a. Land Management Corporation P 11,000
b. Managerial Resources Corporation 1,525,921
c. Manila Land Corporation 10,000.000
d. San Ramon Ranch, Inc. 1,100,000
e. San Roque Ranch, Inc. 550,000
Sub – total P 13, 186,921

2. Companies no longer operating but still incurring

expenses:
a. CDCP Farms P 15,120,200
b. Tierra Factors Corporation 51,635,109
Sub-total P 66,755,309

3. Companies still operating but continuously incurring

losses
a. Dasmariñas Industrial & Steelworks Corporation P 96,413,530
b. Traffic Control Products Corporation 700,000
Sub-total P 97,113,530

Grand Total P177,055,760

281. Prior years’ audit reports already disclosed that the Securities and Exchange
Commission (SEC) affirmed that the Certificates of Incorporation of the following affiliates,
where PNCC invested a total of P13.19 million were considered revoked for failure to
submit the pertinent documents during the last five years.

Name of Company Balance

282.
Land Management Corporation P 11,000
Managerial Resources Corporation 1,525,921
Manila Land Corp. 10,000,000
San Ramon Ranch, Inc. 1,100,000
San Roque Ranch, Inc. 550,000

Sub-total P 13,186,921
Moreover, records show that all of the above companies have ceased operations in
the late 1980’s. Thus, PNCC may not be able to recover said investments aside from the

87
fact that no more income will be derived from said subsidiaries/affiliates. PNCC’s control
over these companies and their operations had ceased to exist and to continue carrying
them in the books as part of the Investment in Stocks account will automatically result in the
overstatement of the asset account.

283. On the other hand, we noted that the expenses continuously being incurred by some
of the subsidiaries no longer operating pertain to allowances including anniversary,
performance bonus and 13th month pay of Officers and members of the Board of Directors.

284. We requested copy of the 2010 unaudited financial statements of some of these
subsidiaries/affiliates and we noted that they continuously incurred losses/deficits when
compared with the previous years financial statements. Thus, it is evident that impairment
loss occurred; that is, the carrying amount of the asset already exceeded its recoverable
amount.

285. In view of PNCC management’s failure to assess the recoverable amount of the
above-listed investments in stocks which as of as of December 31, 2010 comprises 99% of
the total investment in stocks, despite indications of impairment losses, the validity of the
investment in stocks accounts balance of P177.05 million is doubtful.

286. We reiterated our previous years’ audit recommendation that Management:

a. Assess for impairment in value all its investments in inactive and non-
operating subsidiaries at each balance sheet date;

b. Effect the necessary adjustment/s to remove the costs of investments from

the Investments in Stocks account and reclassify them as Accounts Receivables
– Subsidiaries and Affiliates, if there is a chance to recover these investments;

c. If these are already irrecoverable, write-off these investments from the books,
subject to approval of appropriate authority and pertinent rules and regulations;
and

d. Workout for the dissolution/liquidation of the inactive and non-operating

subsidiaries.

Accuracy and reliability of the Inventory account amounting to P 25.36 million could
not be ascertained due to unreconciled balances between the General Ledger (GL)
and Inventory Listing.

287. Deficiencies were noted between the amount recorded in the GL and those
appearing in the Inventory Listings of Inventories as of December 31, 2010. Details are
shown in the next page:

Account Balance per Variance

Code Inventory Listing

88
 Account Description Balance per GL over (under)
14028 Construction Materials P 2,088,080.62 P 1,624,859.89 P 463,220.73
14044 Repair Parts and Supplies 13,952,306.94 13,659,215.09 293,091.85
14060 Common Supplies 4,989,025.95 3,578,080.13 1,410,945.82
14087 Fuel and Oil 348,853.76 864,708.58 (515,854.82)
14109 Tires and Batteries 682,943.19 428,433.31 254,509.88
14303 Office Supplies 1,860,628.24 1,329,601.23 531,027.01
14320 Medical and Dental 608,157.89 77,550.25 530,607.64
14362 Other Inventories 834,293.89 556,501.98 277,791.91
TOTAL P 25,364,290.48 P 22,118,950.46 P 3,245,340.02

288. Fuel and Oil Inventory is understated by P515,854.82; while all the remaining items
of Inventories are all overstated in the aggregate amount of P 2,729,485.20 resulting in a net
difference of P3,245,340.02. The noted variance could be attributed to some adjustments
that are not reflected in the general ledger using a journal voucher, but rather directly posted
by the custodian to individual stock card. Inquiry with concerned personnel revealed that
some differences arise from the delayed submission of Requisition and Issue Slip (RIS) from
Materials Management Division (MMD) for the inventory issuances used in the rehabilitation
of the offices in Bicutan. It was noted that the RIS is the source document in the preparation
of the journal entry to record the issuance of inventory from stock.

289. Ocular inspection conducted at Bicutan warehouse disclosed that most inventory
items were considered non-moving or idle for several years. These items pertained mostly to
Repair Parts and Supplies.

290. We reiterated our previous recommendation that Management:

a. Require the Controllership Department to make a thorough reconciliation of the

Inventory account.

b. Require the Custodian to immediately furnish the Controllership Department with

copy of the RIS which will be the basis in recording such issuances in the general
ledger.

c. Reassess the existing condition of all non- moving inventory items noted, if
warranted, make a reclassification of these items to Other Asset account.

291. Management commented that MMD and Toll Management Division - Accounting are
now undergoing reconciliation of inventory accounts. The noted non-moving/idle inventory
items (Repair Parts and Supplies) are already declared for disposal, considering that the
equipment, which exclusively used the particular RPS, had long been disposed of.

The accuracy, reliability and fairness of presentation in the financial statements of the
balance of the Assets for Write-off with an aggregate amount of P9.615 billion as of

89
December 31, 2010 could not be ascertained due to unavailability of supporting
documents.

292. Verifications of documents submitted by Management showed that total Assets for
Write-off as appearing in the general ledger amounting to P9,615,422,000, do not tally with
the amount appearing on the Schedule amounting to P9,408,398,000, resulting in a
variance of P207,024,000. Details are shown below:

Per General
Accounts Ledger Per Schedule Variance
(in thousand pesos)

Receivables and Advances P 4,139,136 P 4,023,839 P 115,297

Property, Plant and Equipment 2,872,888 2,883,786 (10,898)
Deferred Charges 1,755,663 1,747,445 8,212
Inventories 511,342 417,747 93,595
Investment in Stocks 179,798 179,798 -
Pre-operating Expenses 137,323 137,323 -
Accounts Receivable- Long Term 12,000 12,000 -
Investment in Joint Venture 4,563 4,563 -
Miscellaneous Deposits 1,897 1,897 -
Guarantee Deposits 812 - 812

TOTAL P 9,615,422 P 9,408,398 P 207,024

293. Information gathered from management disclosed that the supporting documents for
these accounts are no longer available due to the fire that gutted the PNCC Complex in
June 1991. Copy of the Investigation Report submitted to the Team showed that the total
amount of damage incurred by the company was estimated at P55,420,310, including the
building, office furniture, fixtures, equipment and supplies. As such, management allegation
that the supporting documents pertinent to the Assets for Write off were among those that
were gutted by fire. Hence, submission of the said documents is no longer possible at this
point in time. Further, we noted that the said accounts had been outstanding since 1987, or
more than twenty (20) years.

294. In view of the foregoing, we recommended that the PNCC request for write off of the
assets valued at P9.615 billion in accordance with COA Circular No. 97-001 dated February
5, 1997. The request should be supported by the following documents:

a. List of available records and extent of validation made on the accounts, and

b. Certification and reasons why the books of accounts/records, financial

statements/schedules and supporting vouchers/documents cannot be located.

c. Other efforts exerted to reconstruct the documents and locate the subject assets
for write off.

295. Management commented that accounting standards provide that receivables and
other assets should be valued at their face amounts minus, if appropriate, allowances set up

90
for doubtful accounts and for any anticipated adjustments which in the normal course of
events will reduce the original amount to estimated realizable values.

296. The Assets for Write-off account consists of assets, collectibility and realizability of
which are uncertain and doubtful of existence. As such, a 100% allowance for losses was
provided as early as 1986. The account Asset for Write off/Allowance for Losses is
synonymous to providing allowance for doubtful accounts. The use of the equity adjustment
account was authored by the then COA team.

297. We informed Management that providing allowance for doubtful account only means
that the said assets are being presented in its realizable value which are still part of the
Assets. If COA will approve the write-off, the said assets and the accountability thereof will
be dropped from the books of accounts. Management will just prepare adjusting entry
debiting the Equity Adjustment Account and crediting the subject asset account.

The reliability of the treasury stock valued at P14.72 Million as of December 31, 2010
could not be ascertained due to unavailability of the stock certificates.

298. Treasury shares are shares of stock which have been issued and fully paid for, but
subsequently reaquired by the issuing corporation by purchase, redemption, donation or
through some other lawful means. Such shares may again be disposed of for a reasonable
price fixed by the Board of Directors.

299. As disclosed and presented in the Notes to Financial Statements, Treasury stock
account is composed of 295,227 shares valued at P2,952,270 of special common, formerly
held by PNCC Employees Savings and Loan Association, 1,400,00 shares of preferred “A”,
valued at P14,000,000 and 72,168 shares, valued at P721,680, formerly held by one
stockholder.

300. Previous year’s audit report showed that confirmation from the stock and transfer
agent disclosed no existence of the 1,400,000 shares of preferred “A”, valued at
P14,000,000 and 72,168 shares, valued at P721,680, formerly held by one stockholder.

301. The audit of the 2010 accounts, we made several representations with the PNCC
Corporate Secretary to determine the actions taken by management in addressing the non-
existence of the said treasury shares of stock. We requested copies of the communications
made to the transfer agent and/or to the Securities and Exchange Commission relative to
the issue on hand. As of report date, the audit team had not received any reply from the
Corporate Secretary. Thus, the reliability of the treasury stock account could not be
ascertained due to unavailability of the stock certificates.

302. We reiterate our previous year’s recommendation that Management in coordination

with the current stock and transfer agent, determine the actual number of shares and value
of treasury stock and prepare the necessary adjustment, if warranted.

303. Management commented that the Professional Stock Transfer, Inc. (PTSI) informed
PNCC, in a written reply to the Corporate Secretariat’s request for update/report on the
treasury stock account of the Company, of the following:

a. The Preferred A stock (1,400,000 shares) was turned-over by the former Stock
Transfer Agent to PTSI as treasury stock already and does not have record of

91
 any stock certificate issuance; and

b. The 72,168 Special Common shares, under the name of Alfredo Asuncion, is not
recorded in PTSI books as treasury stock and likewise not aware of any
transaction involving the buy back of said shares.

304. We maintain our position that Management determine the actual number of shares
and value of treasury stock. We recommended further that Management consider seeking
assistance from the Securities and Exchange Commission that has information about
PNCC’s account. Otherwise, effect the necessary adjustment in the books.

Non-disclosure in the financial statements that PNCC has been a respondent in a

case filed by a Construction Company with the Construction Industry Arbitration
Commission (CIAC) whereby the Arbitral Tribunal rendered its Final Award in the
CIAC Case No. 38-2008 in favour of the Complainant requiring the respondent PNCC
to pay the liquidated damages amounting to P2,424,471.08, plus interest.
305. On November 15, 1996, PNCC entered into a Memorandum of Agreement with the
Bases Conversion Development Authority (BCDA), Clark Development Corporation (CDC)
and Clark International Airport Corporation (CIACOR) for the construction of the North Luzon
Expressway Mabalacat-Clark Spur Road Project wherein BCDA agreed to fund the project
while PNCC agreed to provide the detailed engineering and construction of the project.
306. On January 22, 1998, a Construction Company and PNCC entered into an
Agreement for the supply of labor, materials, supervision, equipment, tools and supplies
necessary and incidental to the construction of roadway identified as Section 2: Expressway
inside Clark Field including North Railway Crossing and Perimeter Road Crossing of the
NLE Mabalacat-Clark Spur Road Project in Clark Field, Pampanga, for a subcontract price
of P96,708,867.19. However, on October 1998, PNCC ordered the suspension of the
project. Eventually, BCDA ordered the final suspension of the Project.
307. PNCC and the Construction Company had a final reconciliation, and as a result, the
Construction Company submitted its final billing to PNCC. The Construction Company was
paid for its claims, except for the sum of P2,424,471.04 for liquidated damages and the
amount of P1,898,240.84 representing actual compensatory damages or its overhead
expenses incurred during the period the project was suspended.

308. On December 22, 2008, the Complainant filed a Request for Arbitration/Complaint
with the Construction Industry Arbitration Commission (the “Commission” or “CIAC”) against
PNCC (the Respondent). The issues to be determined by the Arbitral Tribunal are as
follows:
a. Is Claimant entitled to its claim for the amount of P2,424,471.04 representing
liquidated damages that was deducted to its final billing?
b. Is Claimant entitled to its claim for the amount of P1,890,240.84 representing the
actual compensatory damages or overhead cost it allegedly incurred during the
period the project was suspended?
c. Are the parties entitled to their respective claims for attorney’s fees. If so, how
much?

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 d. Is Claimant entitled to its claim for interest?
e. Which of the parties are liable for arbitration costs?
309. On January 22, 2010, CIAC rendered its Final Award in favor of the Claimant and
against the Respondent PNCC requiring the payment in the amount of P2,424,471.08 for
the liquidated damages that was deducted from the final billing.
310. In addition, PNCC shall pay interest at the rate of six percent (6%) per annum on the
amount of P2,424,471.08 computed from December 22, 2008 until the Final Award become
final.
311. Records show that on January 25, 2010, PNCC received the Final Award of the
CIAC dated January 22, 2010. Immediately upon receipt thereof, PNCC filed a Petition for
Review under Rule 43 of the Rules of Court assailing the Final Award dated January 22,
2010 of the CIAC. Said Appeal was docketed under CA-G.R. No. 112677-CIAC Case No.
38-2008 which was received by the Court of Appeals on February 9, 2010.

312. While waiting for the decision of the Court of Appeals relative to the Appeal made by
PNCC to the Court of Appeal, and inasmuch as Management has already recognized the
possible liability that may be incurred relative to the above-mentioned case, we
recommended that disclosures in the Notes to Financial Statements be made to contain the
following information:
a. a brief description of the nature of the obligation and the expected timing of the
resulting outflows of economic benefits;
b. an indication of the uncertainties about the amount or timing of those outflows.
Where necessary, to provide adequate information, an entity shall disclose the
major assumptions made concerning future events that may affect the amount
required to settle said obligation;
c. the amount of any expected reimbursement, stating the amount of any asset that
has been recognized for that expected reimbursement.

Absence of the approved Annual Procurement Plan (APP) as required under Section
7 of Republic Act (RA) No. 9184 otherwise known as the Government Procurement
Reform Act, as amended.

313. Records show that for CY 2010, the PNCC purchased, among others, property and
equipment amounting to P19,605,714. Information gathered disclosed that some of the
furniture and fixtures purchased and distributed to various personnel were allegedly
unnecessary.

314. The Audit Team requested for a copy of the approved APP to determine whether the
above-mentioned items procured were among those listed in the APP, and to establish the
validity of the procurement activities. However, management failed to submit the required
APP. Instead, copy of the Materials Management Annual Plans (MMAP) for CY 2010 to
2011 was submitted which does not serve our purpose since the MMAP presents only
Management’s plans as far as purchasing, warehousing, sub-contracting, inventory control
and asset disposal is concerned. The requested APP is supposed to contain the following
information:

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 a. Name of the procurement program/project;
b. Project management office or end-user unit;
c. General description of the procurement;
d. Procurement method to be adopted;
e. Time schedule for each procurement activity;
f. Source of fund; and
g. Approved Budget for the Contract (ABC).

315. Section 7.1. of RA 9184 otherwise known as the Government Procurement Reform
Act, as amended, requires that “All procurement should be within the approved budget of
the procuring entity and should be meticulously and judiciously planned by the procuring
entity concerned. No government procurement shall be undertaken unless it is in
accordance with an approved Annual Procurement Plan (APP).XXX”

316. In view thereof, and to enable PNCC to conduct its procurement activities in the most
economical, efficient and effective manner, we recommended that Management comply with
the requirements of Section 7 of RA 9184.

317. Management commented that the matter was referred to the PNCC Head, Materials
Management Division (MMD). Accordingly, for the year 2010, the corporate thrust was
centered on the turn-over of the SLEX operations to the new operator. Likewise,
compounding the situation was the transfer of offices from Mandaluyong to CITRA Bldg. and
Bicutan. The company’s exposure to infrastructure was only the Daang Hari SLEX Linkroad
Project, which is covered by a Project Execution Plan (PEP), essentially compliant to the
requisites set forth by RA9184. For 2011, the APP will be done as required, likewise taking
into consideration the company’s own policy on procurement.

C. STATUS OF IMPLEMENTATION OF PRIOR YEAR’S AUDIT

RECOMMENDATIONS

318. Out of forty-four (44) previous year’s recommendations, eleven (11) were
implemented, twenty-two (22) were partially implemented and eleven (11) were not
implemented.
D. ACKNOWLEDGMENT

319. We wish to express our appreciation to Atty. Luis F. Sison, President and CEO of the
PNCC and to the Management and staff of the PNCC for the cooperation and assistance
extended to us during the audit.

320. We request that appropriate actions be taken on the observations and

recommendations and that we be informed of the actions taken thereon by the PNCC within
sixty (60) days from receipt hereof.

Very truly yours,

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COMMISSION ON AUDIT

By:

AURORA LIVETA-FUNA
Supervising Auditor

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