EXECUTIVE SUMMARY

A. Introduction

Section 13 of Republic Act (R.A.) No. 7227 created the corporate body known as the
Subic Bay Metropolitan Authority (SBMA). The SBMA is the operating and
implementing arm of the Government of the Philippines in developing the 67,000-hectare
area of Subic Bay Freeport (SBF) into a self-sustaining industrial, commercial, financial,
and investment and academe center to generate, among others, employment opportunities
in and around the Zone.

The SBMA plays a key role in the national government's efforts to achieve international
competitiveness and provide for its integration with the global economy.

To accomplish this, it shall embark to manage and develop the ship repair and
shipbuilding facilities, container port, as well as the oil storage and refueling stations;
attract and maintain local and foreign investments to promote the economic and social
development of the country primarily in Central Luzon; establish and regulate the
operation and maintenance of utilities, services and infrastructures; operate directly and
indirectly tourism-related activities; and protect the Freeport's forests.

B. Financial Highlights

The financial position and results of operations for CYs 2020 and 2019 are shown below:

(In Thousands of Pesos)

Financial Position Increase/ (Decrease)
2020 2019
Amount %
Total Assets ₱35,541,345 ₱34,160,379 ₱1,380,966 4.04%
Total Liabilities ₱12,398,606 ₱12,280,775 ₱ 117,831 0.96%
Stockholders’ Equity ₱23,142,739 ₱21,879,604 ₱1,263,135 5.77%
Increase/ (Decrease)
Results of Operations 2020 2019
Amount %
Total Revenues ₱ 4,380,217 ₱ 4,202,369 ₱ 177,848 4.23%
Total Expenses ₱ 2,441,989 ₱ 2,539,149 ₱ (97,160) 3.83%
Net Income after Tax ₱ 1,938,228 ₱ 1,663,220 ₱ 275,008 16.53%

C. Scope of Audit

The audit covered the financial transactions and operations of SBMA for the year ended
December 31, 2020. We conducted our audit in accordance with International Standards
of Supreme Audit Institutions (ISSAIs) and we believe that it provided reasonable basis
for the audit results.

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The objectives of the audit were to (a) ascertain the level of assurance that may be placed
on management’s assertions on the financial statements; (b) recommend agency
improvement opportunities; and (c) determine the extent of implementation of prior
year’s audit recommendations. The thrust areas identified in the audit instructions were
audited on a sampling basis and the significant findings are incorporated in Part II of the
report, itemized as follows:

1. Financial Audit
a. Cash
b. Cash Advances
c. Receivables
d. Inventories
e. Investment Property
f. Property, Plant and Equipment
g. Trust Liabilities
h. Financial Liabilities

2. Other Audit Areas

a. Gender and Development (GAD);

b. Compliance with Tax Laws;
c. Compliance with R.A. No. 8291 or the Government Service Insurance System
(GSIS) Law;
d. Compliance with R.A. No. 9679, Home Development Mutual Fund (HDMF)
Law of 2009; and
e. Compliance with R.A. No. 7875 or the Revised Implementing Rules and
Regulations of the National Health Insurance Act of 2013

D. Independent Auditor’s Report

We rendered a modified (qualified) opinion on the fairness of presentation of the

financial statements of the Subic Bay Metropolitan Authority as of December 31, 2020 in
view of accounting errors and omissions affecting the different accounts as follows:

1. Inaccuracy in the recording of inventories totaling to ₱70,896,374.56 due to (a)

inclusion of non-existent items of ₱62,719,261.40 in the reported balance of the
Inventories account as at year-end; (b) issued/consumed inventories of
₱2,520,037.75 were still recognized in the books of accounts; (c) inconsistent
application of inventory costing method; and (d) non-recognition of impairment on
obsolete inventories carried at cost amounting to ₱5,657,075.46, inconsistent with
the Philippine Accounting Standards (PAS) 2;

2. Misstatement of Investment Property by ₱14,679,976,088.62 due to: a) erroneous

recognition of various investment properties under Land and Fully Depreciated

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 Building accounts amounting to ₱13,933,376,379.10 and ₱557,187,824.38,
respectively; b) inclusion of an owner-occupied property amounting to
₱1,418,745.37 under Investment Property-Buildings; and c) unrecorded lessee
development commitment valued at ₱197,625,000.00. Likewise, full disclosure of
the accounts in the Notes to the Financial Statements (FS) was not provided as
required under Philippine Accounting Standard (PAS) 40;

3. Inaccurate and unreliable Property, Plant and Equipment account balances due to
(a) unreconciled variance of ₱1,860,590,249.12 between the records of Accounting
versus the reports of the Land and Assets Development Department (LADD) and
Procurement and Property Management Department (PPMD); (b) non-provision of
accumulated impairment losses for unserviceable assets; (c) repairs and
maintenance expenses inappropriately capitalized as Property, Plant and Equipment
(PPE) for ₱28,212,653.63; (d) completed Construction in Progress (CIP) in the
amount of ₱38,260,038.64 not reclassified to appropriate PPE accounts; and e) non-
existent movable assets and demolished buildings totalling to ₱45,674,372.56 still
recorded in the books of accounts, which were inconsistent with Philippine
Accounting Standards (PAS) 16;

4. Erroneous accounting treatment for the receipt of Government Grants and

deliveries of procured items paid out of the Grants resulting to the understatement
of related PPE/Investment Property/Expenses by ₱74,266,753.70; overstatement of
Receivables by ₱422,623,677.75; overstatement of Financial Liabilities by
₱348,356,924.05; understatement of Deferred Income by ₱126,748,606.70;
understatement of Trust Liabilities by ₱370,759,356.30; overstatement of retained
earnings by ₱502,586,852.00; understatement of Subsidy Income by
₱5,078,889.00; and other various unaccounted effects of non-recognition of
delivered assets, their related accumulated depreciation, depreciation expense and
related amortization of deferred and subsidy income, inconsistent with PAS 40; and

5. Inappropriate recognition of Accounts Payable to take up the year-end accrual of

liabilities and subsequent payments of claims, resulting to the overstatement of
Financial Liabilities and Property, Plant and Equipment accounts by
₱14,449,483.24 and ₱12,922,683.24, respectively, and understatement of Retained
Earnings by ₱1,526,800.00.

In view of the foregoing deficiencies, we recommended and management agreed to

undertake the following courses of action:

 On Inventories

a. Direct the Accounting Department to prepare the following adjusting entries to

derecognize non-existing inventories:

Account Debit Credit

Retained Earnings-Prior Year’s ₱62,719,261.40

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 Account Debit Credit
Adjustment
Office Supplies and Materials ₱10,498,220.42
Medical, Dental and Laboratory 205,509.12
Supplies
Fuel, Oil, lubricants 14,101,098.04
Maintenance Supplies Inventory 3,302,689.39
Spare Parts 34,508,103.83
Other Construction Materials 103,640.60
Inventory

Account Debit Credit

Retained Earnings-Prior Year’s
Adjustment ₱2,520,037.75
Office Supplies and Materials –
Direct Issuance ₱945,355.77
Medical, Dental and Laboratory
Supplies – Direct Issuance 152,752.19
Maintenance Supplies Inventory –
Direct Issuance 1,402,242.30
Spare Parts – Direct Issuance 19,687.49

b. Emphasize the requirements of the memorandum on the closing of SBMA books,

particularly item b.7, to ensure that the direct issuances are expensed in the correct
period;

c. Direct the Accounting Department and the PPMD to coordinate and provide
mechanisms in order to apply consistent inventory costing methodology for
inventory – direct issuance; and

d. Direct the PPMD to include in its regular inventory count the conduct of appraisal
of unusable inventories and forward the documentation to the Accounting
Department as basis for inventory write-downs.

 On Investment Property

e. Instruct the LADD to (i) come up with the necessary database and reasonable
allocation method to be able to allocate cost on the land as owner-occupied and
land to be classified as investment property and prepare the necessary adjusting
entry to reclassify the same; (ii) provide information on the fair values of
investment property for disclosure purposes; and (ii) give timely information to
the Accounting Department as regards the development commitments that were
taken over by management; and

f. Instruct the Accounting Department to prepare the following adjusting entries:

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 Account Debit Credit
Investment Properties- Buildings ₱5,571,878,244.02
AD-Fully Depreciated - Buildings 5,014,690,419.62
and Structures
Fully Depreciated - Buildings and
Structures ₱5,571,878,244.02
Acc. Dep.- Investment Property- 5,014,690,419.62
Bldgs.

Account Debit Credit

Buildings ₱14,472,496.34
Acc. Dep.- Investment Property- 6,259,381.48
Bldgs.
Investment Properties- Buildings ₱14,472,496.34
Accumulated Depreciation - 6,259,381.48
Building

 On Property, Plant and Equipment

g. Instruct the Accounting Department in coordination with the Technical

Departments concerned to (i) come up with mechanisms that will enable the
recognition of asset impairment; (ii) adopt accounting policies and controls that
will provide guidance on the recognition of repairs as capital expenditure or
expense as well as provide attribution of expenditures to the related asset being
replaced for derecognition purposes; and (iii) based on the results of the inventory
taking, provide adjusting entries to establish PPE balances that are verifiable as to
existence, condition and accountability.

 On Government Grants

h. adopt PAS 20 in the recognition of Government Grants;

i. emphasize to end-users and the PPMD the need to provide prompt information
and documentation to the Accounting Department for the proper recording of the
receipt of goods/services procured out of the Grants and effect the adjusting
entries made for such unrecorded receipts; and

j. draw the necessary Journal Entry Voucher (JEV) taking up the adjustments on the
different accounts affected, if warranted.

 On Financial Liabilities

k. direct the Accountant to enhance and strengthen monitoring and review

procedures in the preparation of journal entries for all payment transactions and
accrual of payables to state the Liabilities account at a more accurate balances as
at year-end.

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E. Summary of Other Significant Audit Observations and Recommendations

Summarized below are the significant audit observations noted during the audit and the
corresponding recommendations.

1. Due to delayed endorsement of lease agreements and supporting documents to the

Accounting Department, the client accounts and related Statement of Accounts (SOA)
were not timely created in the computerized system or captured as the transactions occur
thus, resulting in the understatement of both Receivables and Service/Business Income
accounts by ₱16,009,006.87. Relatedly, there was also an understatement by ₱800,450.34
in the Income Tax and Inter-Agency Payable accounts. (Observation No. 1)

We recommended that management direct the Accounting Department to strengthen

accounting controls by (a) issuing an annual memorandum for the purpose of timely
recognition of receivables and related income in the accounting books; (b) include an
attestation requirement in the memorandum by the concerned head that the submitted
information is complete; and (c) draw the following adjusting entries:

Account Debit Credit

Retained Earnings ₱8,804,953.78
Dividends Payable ₱8,004,503.44
Income Tax Payable 800,450.34

2. Out of the recorded Advances to Officers and employees of ₱147, 310,027.23 a

total of ₱141,130,026.23 or 96.6% was not supported by subsidiary ledgers (SLs),
inconsistent with Section 7.2.1e of COA Circular No. 2009-006 dated September 15,
2009; thus, the recovery from each employee/accountable person for his/her unliquidated
accounts was not enforced, which may result to possible financial losses on the part of the
Agency. (Observation No. 2)

We recommended that management (a) instruct the Department Head, Accounting

Department to (i) implement existing manual controls designed to countercheck the
accuracy and integrity of the Integrated Financial Management System (IFMS); and (ii)
see to it that journal entries are duly supported with details before the financial
transactions are approved for recognition in the system.

3. Out of the four litigation cases of the Subic Bay Metropolitan Authority (SBMA)
pending with the Court and other adjudication bodies, one involving an amount of
₱10,173,295.12 was erroneously disclosed as a Contingent Liability despite the
remoteness of settlement in favor of the other party. Meanwhile, one case for ₱10,000.00
was not disclosed as a Contingent Asset although the collection of the claim in question
is considered probable. Similarly, a contingent claim for ₱29,402,500.00 under a pending
lawsuit was not disclosed when there is a possibility of subsequent outflow of resources
affecting the Agency. Lastly, there was no provision and disclosure for a probable
obligation amounting to ₱501,561.15. Such omissions and erroneous accounting policy
stemmed from inadequate procedures in the closing of the books of accounts at year-end

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which resulted to qualitative and quantitative misstatements in the Financial Statements
(FS). (Observation No. 8)

We recommended and the management agreed to undertake the following courses of

action:

a. Require the Legal Department to forward the documentation required in the

memorandum for consideration in the preparation of the year-end Financial
Statements; and

b. Direct the Accounting Department to (i) include the required documentation for
information on provisions and contingencies in the yearly memorandum on the
closing of SBMA books; (ii) provide disclosures thru the Notes to Financial
Statements as required by PAS 37; and (iii) prepare the following adjusting
journal entries for the unrecorded provision for a liability that is probable.

F. Summary of Total Suspensions, Disallowances and Charges at year-end

Audit disallowances amounting to ₱12,507,789.56 remained unsettled as of year-end

contrary to COA Circular No. 2009-006 dated September 15, 2009. Likewise, audit
disallowances prior to the effectivity of the aforementioned Circular amounting to
₱140,605,881.78 remained outstanding.

G. Status of Implementation of Prior Years’ Unimplemented Audit

Recommendations

Out of 84 audit recommendations embodied in the Annual Audit Report for CYs 2010 to
2019, 48 were fully implemented, 35 were partially implemented and one was not
implemented.

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