State of Compliance and Implementation of National Internal Audit Mandates by

Local Government Units in the Philippines

Rufo R. MENDOZA, PhD, CPA

Abstract

Internal auditing is gaining more and more recognition as an important tool for improving
organizational performance. In many countries, both public and private sectors advance
internal audit as a profession, process and body of knowledge. The Philippines is one
such country having put in place the policy framework mainstreaming internal audit in
government operations. However, at the local level, confusion has emerged among the
local government units as a result of conflicting policy pronouncements by the national
government. This paper presents a fairly substantial description of the current state of
internal audit practice and compliance to relevant policies among Philippine local
government units. Specifically, it establishes a preliminary profile of the internal audit
units within the local government units in terms of organizational placement, staff
composition, linkages and key activities.

The findings indicate that the local government units possess good potential for meeting
local and international standards for internal auditing. But this would require addressing
a range of issues they are currently faced with from compliance to rules and regulations
to the need for capacity building for professional internal audit advancement.

INTRODUCTION

Internal auditing is earning more and more recognition as an essential tool for improving
organizational performance. Traditionally treated as a simple administrative task that is
part of financial management, countries have come to realize that there is more to
internal audit than simple review of documents, counting of assets, checking of account
balances and reporting. Its importance has become globally recognized that international
initiatives for the development of the internal audit process and practices, the body of
knowledge and the profession developed. The International Organization of Supreme
Audit Institutions (IOSAI), for instance, has been active in issuing auditing standards to
help improve governance in both the developed and the developing countries. The
Institute of Internal Auditors (IIA) has been actively advocating for internal audit as a
systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and in general the governance processes. IIA has made
numerous contributions towards further development of internal auditing. IIA for instance
developed (i) the Statement of Responsibilities of Internal Auditing issued in 1993
defining the scope of internal auditing as the “examination and evaluation of the
adequacy and effectiveness of the organization‟s system of internal control and the
quality of performance in carrying out assigned responsibilities”;

*Rufo R. Mendoza, PhD is currently President of the Association of Government Internal Auditors (AGIA) and Lecturer at
the Ateneo School of Government. This article is based on the AGIA-commissioned research, The Current State of
Internal Auditing in Philippine Local Governments, prepared by the same author.

Electronic copy available at: http://ssrn.com/abstract=2392900

 and (ii) the Professional Practices Framework issued in 1999 which contains (a) a
mandatory guide consisting of Code of Ethics and International Standards for the
Professional Practice of Internal Auditing (ISPPIA); (b) practice advisories; and (c)
development and practice aids developed or endorsed by the IIA. The development of
internal auditing as profession came as a result of the first Certified Internal Auditor
examination in 1974.

In the OECD countries, the performance of internal auditing has been recognized as
having contributed to the improvement of financial reporting and overall management
among government organizations. Unbiased audit reports countercheck poor
organizational performance serving as an effective mechanism for continual
improvement.

There is also great interest among the private sector in incorporating internal auditing in
their operations. Their attention is shifting to corporate governance of which internal
auditing plays an integral part from corporate management following debacles of
corporate giants like Enron, WorldCom and American Tyco.

Initiatives for Internal Auditing in the Philippines

The Philippines is not lacking in initiatives pertaining to internal auditing. In fact, the
government has formulated and put in place important policies mainstreaming internal
audit in government operations. As early as 1962, the Philippines already had a law for
internal auditing, the Republic Act (RA) 3456 or the Internal Auditing Act of 19621. This
serves a general reference for succeeding policies and other legal instruments that
pertain to government internal audit.

In the recent past, the government made two important policy pronouncements which
greatly affect the practice of internal auditing in the Philippine government today. These
are (i) Administrative Order (AO) No. 70, issued by the President on April 14, 2003; and
(ii) Budget Circular No. 2004-4, issued by the Department of Budget and Management
(DBM) on March 22, 2004.

AO No. 70 orders all government offices; agencies; government owned and/or controlled
corporations; state universities and colleges; and local government units (LGUs) to
organize an Internal Audit Service (IAS) in their respective offices. It also prescribes the
conduct of audit in conformity with the ISPPIA and the strict observance of the Code of
Ethics promulgated by the Association of Government Internal Auditors (AGIA)2. Budget
Circular No. 2004-4, on the other hand, provides guidelines on the organization and
staffing of internal auditing units (IAUs) in all government offices and agencies.

The Office of the President issued Memorandum Circular No. 893 reiterating strict
compliance of all government agencies to AO No. 70 and Budget Circular No. 2004-4.
However, full compliance to these policies particularly at the local level seems a
formidable challenge for LGUs since these are inconsistent with the Local Government
Code (LGC) of 1991 which states that the accountant in a LGU “shall take charge of
both the accounting and internal audit services of the LGU concerned.”
1
Amended in 1965 by virtue of RA 4177
2
AGIA is the premier organization that promotes the advancement of internal auditing in the Philippines.
3
Issued on 18 August 2005.
2

Electronic copy available at: http://ssrn.com/abstract=2392900

 THE AGIA STUDY

In 2005, AGIA launched a major research study to determine the state of practice with
respect to internal auditing rules and policies among LGUs. A major goal was to provide
informed recommendations towards better understanding of the policy environment for
government internal auditing, and eventually towards better local governance. The
objectives of AGIA study were (i) to establish the profile of the IAS units in local
governments; and (ii) assess the internal audit activities of the IAS units in terms of:

 quality of audit staff

 authoritative support
 relationship with management
 audit process and report
 value added of the IAS units

The study, which ran for six months from May to October 2005, involved a survey of all
provinces and municipalities / cities in the country totaling to 191. However, only 24
cities and 15 provinces or a total of 39 LGUs responded to the mailed survey
questionnaires. The sample size, therefore, represented only 20.42 percent of the total
target population. Majority (64.11%) of the respondents had accountant positions:
City/Provincial Accountant, 53.85 percent; Assistant City/Provincial Accountant, 5.13
percent; and Accountant IV, 5.13 percent.

A questionnaire was developed and distributed which determined the respondents‟

general profile and their state of practice with respect to national internal auditing rules.
Specifically, the survey determined their (i) organizational profile pertaining to internal
auditing; and (ii) the scope and quality of their internal auditing activities. The
organizational profile of LGUs was determined by asking questions pertaining to the
existence and placement of IAS unit within the organization, its staff composition, its
linkage with AGIA and its professional development activities or its perceived capacity
building needs.

The scope and quality of internal auditing activities of the LGUs, on the other hand, was
measured by asking the respondents to score certain aspects pertaining to the quality of
their respective organizations‟ internal audit activities using a five-point scale4.
Specifically, the respondents were asked to score quality aspects such as (i) the quality
of internal audit staff; (ii) the level of authoritative support given to the IAS units; (iii) the
degree of relationship between IAS unit and the management; (iv) the quality of the audit
process; and the (v) the quality of the IAS units in terms of their value added services.
The scores were then aggregated and averaged to generate the overall profile of the
respondent LGUs in terms of the scope and quality of internal auditing activities. The
following quality scale was then used: 1.00-1.80 = poor; 1.81-2.60 = fair; 2.61-3.40 =
good; 3.41-4.2 = very good; and 4.21-5.0 = excellent.

Key informant interviews were also conducted to augment the amount of information for
making a more informed analysis and recommendations towards further internal audit
development among LGUs. Descriptive statistics and frequencies were calculated for
each of the items in the questionnaire. The responses of the two groups of respondents

4
Scale of 1 to 5 with 5 representing the highest score.
3
 from the city and provincial governments were tested at one percent (.01) significance
level to find out if there is significant difference on their ratings.

KEY FINDINGS

Existence of IAS units. The study found that all respondents have existing IAS units in
place. This is in conformance to the LGC. The local government officials were also found
to be already aware of the new and expanded functions of IAS. Yet, they focus on
ensuring compliance to documentary requirements for disbursements.

Organizational placement of IAS within LGUs. As shown in Table 1, the IAS unit in
most LGUs is under the office of the local accountant consistent with the provisions of
the LGC. But the proponent views that the organizational placement prescribed in the
LGC is flawed since an internal auditor, working under the supervision of the local
accountant, cannot audit the local accountant limiting the functions of the internal
auditor. In other LGUs, the internal audit service is separate from the accounting unit
and no standard nomenclature exists across LGUs. They are either referred to as
Internal Audit Service Office, Internal Audit Office, Internal Control Division, or Internal
Control Unit.

Table 1. Organizational Placement of IAS in LGUs

CITY PROVINCE TOTAL
CRITERIA n=22 n=15 n=37
F % F % F %
Is the IAS unit in the LGU separate from
the Accounting Department?

Yes 3 13.64 5 33.33 8 21.62

No 19 86.36 10 66.67 29 78.38
Total 22 100 15 100 37 100

In 56.76 percent of the LGUs surveyed, „Internal Audit‟ is the dominant name of the IAS,
consistent with the LGC. The internal control nomenclature used by 27.02 percent of the
respondents was developed when most local governments transferred the audit of
disbursements to the office of the local chief executive and expanded the functions for
control measures. The use of „pre-audit‟ name was derived from the transfer of pre-audit
functions from the Commission on Audit (COA) to the LGUs. On the other hand, the
term management and audit service office was adopted from the position title of most
employees performing audit functions provided in the government‟s manual of position
and qualification standards.

IAS Staff. There are basically two general position categories that make up the IAS
staff in LGUs: 45.95 percent of IAS heads belong to the Management and Audit Analyst
category and 32.43 percent belong to the Accountant position. Meanwhile, 21.62
percent of the respondents said that IAS heads occupy positions other than internal
auditing and are only assigned temporarily to do the internal audit function. Such
positions include fiscal examiner, executive assistant, local treasury operations officer,
and assistant local treasurer among others.

4
 The reporting hierarchy is not uniform across the LGU respondents. A little more than
half (51.35%) of the respondents said that the IAS head reports to the local chief
executive as the immediate superior. In about a third (35.41%) of the respondent LGUs,
the IAS head reports to the local accountant while in 13.51 %, the IAS head reports to
the local administrator.

In terms of employment tenure, 83.33 percent are regular and the rest are casual or
contractual. As shown in Table 2, accountants dominate the profession. However, only
8.82 % of the total employees reported by the respondents are Certified Public
Accountants (CPAs). Other employees are graduates of management courses,
engineering, economics, law and other courses.

Table 2. Field of Specialization of IAS Employees

CITY PROVINCE TOTAL
CRITERIA n=22 n=15 n=37
Mean % Mean % Mean %
Fields of Specialization of IAS Employees

Accounting (CPA) 17 8.33 10 9.80 27 8.82

Accounting 142 69.61 50 49.02 192 62.75
Engineering 7 3.43 8 7.84 15 4.90
Law 4 1.96 4 3.92 8 2.61
Economics 5 2.45 5 4.90 10 3.27
Management 27 13.24 21 20.60 48 15.69
Others 2 0.98 4 3.92 6 1.96

Total 204 100 102 100 306 100

Table 3 shows the educational profile of IAS heads. Majority of them (85.71%) are
specialized in accounting. But apparently, there is low interest among the IAS heads to
pursue graduate studies. Rather, it is fair to observe that the majority meet only the
minimum qualifications standards required by the Civil Service Commission (CSC).

Table 3. Educational Attainment of IAS Employees

CITY PROVINCE TOTAL
CRITERIA n=21 n=14 n=35
F % F % F %
Highest Educational Attainment of IAS
Head

College degree 12 57.14 8 57.14 20 57.14

Masteral units 3 14.29 4 28.57 7 20.00
Masteral degree 5 23.81 2 14.29 7 20.00
Doctoral degree 1 4.76 - - 1 2.86
Total 21 100 14 100 35 100

Linkages with the Association of Government Internal Auditors. Only a quarter

(25.71%) of the IAS heads and 11.44 % of the IAS employees are members of AGIA.
This implies that: (i) LGUs have minimal utilization of AGIA services for capacity
5
 development. This also reflects the breadth of opportunity that AGIA can tap to increase
its membership and expand the coverage of service delivery; and (ii) LGUs are short of
compliance to AO No. 278 tasking all heads and staff of IAS units to cooperate and
actively participate in the activities of AGIA.

Professional Development Activities / Training Needs. Table 4 shows the frequency

of staff attendance to professional development activities. The table reveals a poor staff
development initiative on the part of the LGUs.

Table 4. Frequency of Staff Attendance to Professional Development Activities.

CITY PROVINCE TOTAL
CRITERIA n=21 n=14 n=35
F % F % F %
Frequency of staff attendance to
professional development activities

Quarterly 1 4.76 1 7.14 2 5.71

Semi-annually - - 2 14.29 2 5.71
Annually 6 28.57 5 35.71 11 31.43
Longer than one year 14 66.67 6 42.86 20 57.15

Total 21 100 14 100 35 100

The respondents ranked the following topics for capacity development in the order of
importance or priority: (1) International standards for the professional practice of internal
auditing; (2) Risk-based audit approach; (3) Information technology audit; (4) Report
writing skills; and (5) Fraud audit.

Quality of Audit Staff. Table 5 shows that the IAS staff conducting internal audit have
the necessary educational qualifications; technical proficiency; and personal
characteristics such as objectivity, professionalism and the will for continual
improvement. Nevertheless, further capacity enhancement is still needed.

Table 5. Mean scores on the assessment of the quality of audit staff.

QUALITY OF STAFF CITY PROV TOTAL VALUE
n=22 n=14 n=36
1 Educational background of the IAS staff 3.64 3.43 3.56 VG
2 Technical proficiency of the IAS staff in the 3.27 3.14 3.22 G
conduct of audit
3 The degree of objectivity of the internal auditors 3.41 3.43 3.42 VG
in performing their work.
4 The extent of professional care exerted by the 3.45 3.43 3.44 VG
auditors in the conduct of the audit.
5 The effort to enhance the knowledge, skills, 3.23 3.21 3.22 G
and other competencies of the internal auditors
through continuing professional development.

Overall mean score 3.40 3.33 3.37 G

Standard deviation .769 .880 .820

6
Legend: Poor (1.00–1.80) Fair (1.81–2.60) Good (2.61–3.40) Very Good (3.41–4.20) Excellent (4.21–5.0)

Authoritative Support to IAS units. The extent of support given by top management to
IAS unit determines how the latter will be able to perform its role. Table 6 shows the
mean scores on the authoritative support provided by the management to IAS units.

Table 6. Mean scores on the assessment of the authoritative support provided to IAS
units.
CITY PROV TOTAL VALUE
AUTHORITATIVE SUPPORT n=22 n=14 n=36

1 The extent of defining the purpose, authority, 3.14 3.00 3.08 G

and responsibility of the internal audit activity in
the form of a charter, administrative orders,
memoranda or similar authoritative documents.
2 Provision of funds for IAS activities 2.73 2.86 2.78 G
3 Provision of equipments, supplies, and other 2.95 3.21 3.06 G
physical facilities to respond to IAS
requirement
4 Deployment/complement of the necessary 3.00 3.00 3.00 G
manpower/human resource
5 Access of IAS to documents and other 3.09 3.71 3.33 G
information

Overall mean score 2.98 3.16 3.05 G

Standard deviation .778 .862 .814

Legend: Poor (1.00-1.80) Fair (1.81-2.60) Good (2.61-3.40) Very Good (3.41-4.20) Excellent (4.21-5.0)

The relatively low scores on four factors are quite noticeable: (a) extent of defining the
purpose, authority, and responsibility of the internal audit activity; (b) provision of funds
for IAS activities; (c) provision of equipment, supplies and other physical facilities; and
(d) deployment of the necessary manpower. It seems that all four factors are affected by
the lack of funds allotted to IAS units.

Relationship with Management. The recognition of internal auditor as a valued

member of the management team is evident in the results shown in Table 7.

Table 7. Mean scores on the assessment of the relationship of IAS units with
management.
CITY PROV TOTAL VALUE
RELATIONSHIP WITH MANAGEMENT n=22 n=14 n=36

1 Internal auditing as a valued member of the

management team. 3.50 3.86 3.64 VG

2 Organizational placement of the internal audit

functions to ensure unhampered activity and
achieve their internal auditing objectives. 3.41 3.29 3.36 G

7
 CITY PROV TOTAL VALUE
RELATIONSHIP WITH MANAGEMENT n=22 n=14 n=36
3 The manner by which impairments to
independence and objectivity is addressed. 3.32 3.14 3.25 G

4 The extent by which the IAS communicates the

results of audit to top management or similar
governing bodies. 3.27 3.07 3.19 G

5 The extent of the top management utilization of

audit findings and recommendations 3.14 3.21 3.17 G

Overall mean score 3.33 3.31 3.32 G

Standard deviation .768 .877 .810

Legend: Poor (1.00-1.80) Fair (1.81-2.60) Good (2.61-3.40) Very Good (3.41-4.20) Excellent (4.21-5.0)

Internal auditors work well with top management and with other members of the
organization. But definitely, the functional relationship between the IAS unit and the
management will need to be improved.

Internal audit independence was rated “good” among the LGUs surveyed. Interviews
with some respondents, however, reveal that in Philippine local governments, culture
plays a lot in the selection of people to occupy certain positions thereby affecting the
objectivity and independence of internal audit work.

Audit process and reporting. All the variables in the audit process and report category
are rated “good” by the respondents (Table 8). Nevertheless, the LGUs should
continuously improve in terms of prescribed audit processes and reporting procedures.

Table 8. Mean scores on the assessment of the audit process and report.
AUDIT PROCESS AND REPORT CITY PROV TOTAL VALUE
n=22 n=14 N=36

1 Duration of the audit 3.23 3.07 3.17 G

2 Timeliness of the audit reports 3.23 3.07 3.17 G

3 Clarity of audit reports 3.14 3.14 3.14 G

4 Accuracy of audit findings 3.32 3.21 3.28 G

5 Internal audit follow–up on corrective actions 3.27 3.07 3.19 G

Overall mean score 3.24 3.11 3.19 G

Standard deviation .716 .772 .738

8
Legend: Poor (1.00–1.80) Fair (1.81–2.60) Good (2.61–3.40) Very Good (3.41–4.20) Excellent (4.21–5.0)

In terms of audit reporting, the writing tasks are usually left to more senior IAS staff while
the rank and file employees review transactions and gather data.

Value added of IAS units. Table 9 shows the mean scores on the assessment of the
value added of IAS units. It shows that in terms of value added, IAS units are generally
“good” with a mean score of 3.33.

Table 9. Mean scores on the assessment of the value added of IAS units.
VALUE ADDED CITY PROV TOTAL VALUE
n=22 N=14 N=36
1 Usefulness of the audit in improving business 3.41 3.29 3.36 G
processes.
2 Assistance to management in risk assessment. 3.27 3.29 3.28 G
3 Partnership with management on control 3.27 3.43 3.33 G
issues.
4 Degree of impact on organizational 3.36 3.21 3.31 G
governance.
5 Promotes a customer orientation by providing 3.36 3.43 3.39 G
quality work.

Overall mean score 3.34 3.33 3.33 G

Standard deviation .733 .775 .747
Legend: Poor (1.00–1.80) Fair (1.81–2.60) Good (2.61–3.40) Very Good (3.41–4.20) Excellent (4.21–5.0)

The table also shows that the respondents perceive internal auditing as an important tool
in improving organizational processes and systems by identifying process defects and
system weaknesses.

Interviews with key informants in selected LGUs reveal that local internal auditors have
yet to explore risk assessment, and partnership with management on internal control
issues as important areas for further improvement.

Table 10 shows the summary of LGU scores pertaining to internal audit quality.
Generally, the there is positive perception on the state of internal auditing in local
government both in terms of human resource component and audit performance.
However, it is quite evident that there are many aspects where capacities need further
development, like those pertaining to the five quality indicators used in the study.

Table 10. Mean scores on the assessment of the internal audit activity.

INTERNAL AUDIT QUALITY CITY PROV TOTAL VALUE

Quality of audit staff 3.41 3.29 3.36 G
Authoritative support 3.27 3.29 3.28 G
Relationship with management 3.27 3.43 3.33 G
Audit process and report 3.36 3.21 3.31 G
Value added of IAS unit 3.36 3.43 3.39 G
Overall mean score 3.34 3.33 3.33 G
Legend: Poor (1.00-1.80) Fair (1.81-2.60) Good (2.61-3.40) Very Good (3.41-4.20) Excellent (4.21–5.0)

9
Test of Hypothesis

The responses of the two groups of respondents from the city and provincial
governments were tested at one percent (.01) significance level to find out if there is
significant difference on their ratings.

Results show that the significance probability of each of the five variables is greater than
1% which means that the difference in the responses of the two groups of respondents
is not significant. In other words, their responses exhibit homogeneity or similarity in all
indicators. This implies that respondents from both the cities and provinces have quite
similar perceptions about the internal audit activities in the local government.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

Generalizations based on the data at hand is limited considering the sampling method
and the sample size. But considering the dearth of information as regards to the internal
auditing practice of LGUs in the Philippines, the authors believes that the findings of this
study can help in advancing internal audit among Philippine LGUs towards good local
governance.

There is adequate awareness among the surveyed LGU officials on the various rules
and regulations pertaining to the establishment of IAS unit in LGUs. However, full
compliance to such rules and regulations remains a formidable challenge to the LGUs.
In fact, the Budget Circular No. 2004-4 and other government policies have been non-
complied with by the LGUs in several aspects. The problem stems from failures in the
macro policy environment. Specifically, the current scenario wherein the LGC of 1991
specifically Article IV, Section 474 and major government policy pronouncements such
as the AO No. 70 and Budget Circular No. 2004-4 contradict each other leaves the
LGUs quite baffled. Hence, LGUs differs as regards to the placement of IAS units in their
organizational structure. There were IAS units incorporated in the accounting
department while there were others established as separate divisions under different
offices like the office of the local chief executive or that of the local executive secretary.
With this, the LGUs are then confused on the operational scope of their respective IAS
units.

There is an adequate mix of personnel within the IAS units of surveyed LGUs
considering the educational and technical qualifications of the IAS employees. With this,
the LGUs possess good potential for effectively implementing nationally accepted
internal audit functions. One significant stride towards realizing such potential is the
awareness among the survey respondents of the capacity development needs of their
respective personnel. However, many of the respondent LGUs could not send their IAS
personnel to capacity development programs more frequent than once a year. In fact, in
most cases, personnel are sent to capacity development programs only about once
every two years. The lack of funds is said to be the main reason. However, lack of funds
may just be a portion of the problem. The lack of interest or support from the LGU
officials seems to be the more daunting problem. The study shows that the support
provided by management to the IAS unit in LGUs is very minimal, deviant to the

10
provisions of AO No. 278. Without support from the LGU officials, initiatives to improve
the internal audit performance may end up at the lowest of priorities causing
transparency of local fiscal administration to suffer.

In implementing technical and professional development activities, the LGUs can tap
professional bodies like the AGIA as a valuable ally as embedded in AO No. 70.
Independent professional bodies can deliver training programs and other technical
services for technical skills improvement and professional advancement in a wide range
of concerns in internal auditing, including system development and organizational design
learning from collective experiences. This is especially important considering that the
IAS staffs of the surveyed LGUs are in real need of skill enhancement especially in the
unexplored areas of internal auditing. Currently, the participation of IAS heads and staff
in the activities of AGIA is very minimal contrary to the provisions of AO No. 278. Thus,
LGUs could not capitalize on the full potentials of their linkage with AGIA. From another
perspective, this poses a great challenge for AGIA to intensify its campaign for improving
internal auditing practice in the government and reach more LGUs for capacity
development.

Despite the inadequacies among the surveyed IAS units, there is genuine appreciation
on the value added by IAS units towards good local governance especially in areas of
risk management, control, and governance in general.

Recommendations

The observed difficulty of the LGUs to fully perform internal audit functions poses a
challenge to both the LGUs and the national government to exert greater effort in
pushing for a more developed and standardized audit system at the local level. Meeting
this challenge requires a more holistic approach.

In terms of the policy environment for internal auditing in the LGUs, the Philippines is not
lacking in initiatives. However, problems arise from the inconsistencies of the current
national policy framework for internal auditing. Hence, any reform in the existing internal
auditing system at the local level should start from the macro policy environment. This
should involve a review of existing national government pronouncements and issuances
pertaining to internal auditing, ensuring that policies are not contradicting each other.
The amendment of the LGC, particularly Article IV, Section 474 to separate internal audit
from accounting functions can be the start. The creation of an IAS unit as a mandatory
department in LGUs should also be stipulated in the proposed revision of the LGC.

Once the policy inconsistencies are resolved, attention can be focused to strict
implementation of such policies. For instance, the IIA has issued an internationally
recognized definition of the scope of internal auditing. But IAS units in LGUs currently
focus only on the review of documentary requirements for disbursement which is more of
a pre-audit activity rather than internal audit. As a way to resolve this issue, the authors
recommend the strict enforcement by government of Budget Circular No. 2004-4,
through the DBM. A transparent government will always require an effectively-
functioning internal audit in the first place.

To support the implementation of a national standard for internal auditing, there has to
be an effective system for monitoring and evaluating (M&E) the compliance and

11
performance of LGUs in terms of the mandates. At the national level, monitoring
compliance by the Office of the President to its recently issued Memorandum Circular
No. 89, dated August 18, 2005 and benchmarking of LGUs that have established IAS
units separate from the accounting department is considered a priority. AGIA in this
context recommends establishing a rating system to distinguish LGUs that have (i) not
complied entirely with any of the above provisions; (ii) complied partially or minimally; (iii)
complied partially but significantly; (iv) fully complied.

Further, the Presidential Anti-Graft Commission (PAGC) under the Office of the
President, can initiate the development of a plan that will ensure the periodic adoption of
the ISPPIA taking into consideration areas of risk management and assessment, control,
and governance.

At the local level, this can be complemented by enacting local ordinances that shows in
adequate detail the following:

a. Internal audit functions as stipulated in Section 4 of Budget Circular No. 2004-4;

b. Internal audit activities as stipulated in Section 1 of AO No. 278;
c. Functions of routine operating character that are excluded from internal audit as
shown in Section 2 of AO No. 278;
d. Organization and staffing based on Section 4 of Budget Circular No. 2004-4; and
e. Expression of support from management as stipulated in Section 3 of AO 278.

The M&E can be designed such that the necessary performance parameters are
measured and that information collected are fed back to relevant components of the
system. Implementation of such M&E system can be done in close collaboration with the
Department of Interior and Local Government (DILG) or at the least be incorporated in
the Local Financial Performance Management System (LFPMS) being prioritized by both
the Department of Finance (DOF) and the DILG. The status of establishment of IAS unit
can also be included as an indicator in the Local Government Performance
Measurement System (LGPMS).

One regulatory measure that can be adopted is encouraging attendance of internal

auditors to capacity building interventions offered by AGIA emanating from the Office of
the President in the form of a memorandum circular. Another is to include AGIA
activities in the list of exemptions from expenses subject to cost cutting. As an advocacy
measure, AGIA should provide the LGUs and the public as well with adequate
information on its projects and activities, especially those related to audit standards,
practices, research undertakings, and to the profession as a whole. It can also serve as
a repository of technical resources and useful tools for government internal auditing.
Specifically, it has to engage in the development and dissemination of materials for
training; technology transfer and information dissemination; quality assessment; and
documentation of exemplary practices and emerging approaches.

Capacity building must be given due priority by the LGUs. If reforms are to take place,
new auditing tasks need to be introduced requiring an upgraded set of skills and
competencies. The New Government Accounting System and its electronic component
as well as the New Government Procurement System are internal audit areas where
capacity should be further enhanced. Also, both regulatory and advocacy measures
should be undertaken to encourage compliance in consonance with certain provisions of
AO No. 278 and AO No. 70.

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References:

Administrative Order No. 70. April 14, 2003. Strengthening of the Internal Control Systems of
Government Offices, Agencies, Government Owned and/or Controlled Corporations,
including Government Financial Institutions, State Universities and Colleges and Local
Government Units. Malacañan. Manila, Philippines.

Administrative Order No. 278. April 28, 1992. Directing the Strengthening of the Internal Control
Systems of Government Offices, Agencies, Government Owned and/or Controlled
Corporations, including Government Financial Institutions, and Local Government Units,
in their Operations. Malacañan. Manila, Philippines.

Budget Circular No. 2004-4. March 22, 2004. Guidelines on the Organization and Staffing of
Internal Auditing Units (IAUs). Department of Budget and Management. Manila,
Philippines.

Memorandum Circular No. 89. August 18, 2005. Reiterating Compliance with AO 70, s. 2003
“Strengthening of the Internal Control Systems of Government Offices, Agencies,
Government Owned and/or Controlled Corporations, including Government Financial
Institutions, State Universities and Colleges and Local Government Units” and it‟s
Implementing Guidelines under DBM Budget Circular No. 2004-4. Malacañan. Manila,
Philippines.

Mendoza, Rufo R. Current State of Internal Auditing in Philippine Local Governments. A

Research Report. Association of Government Internal Auditors (AGIA). December 2005
Manila, Philippines.

Republic Act No. 7160. October 10, 1991. Local Government Code of 1991. Philippines.

The Professional Practices Framework. January 2004. The Institute of Internal Auditors.
Florida, USA.

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