Republic of the Philippines Formatted: Width: 8.27", Height: 11.

69"

Commission on Audit Center for International Trade

Commonwealth Avenue, Quezon City Expositions and Missions

AUDIT OBSERVATION MEMORANDUM (AOM)

AOM No. 2017-11-17

Date: September 204, 2017

FOR : Mr. CLAYTON H. TUGONON

Executive Director
CITEM, Pasay City

Attention : Atty. ANNA GRACE I. MARPURI

OIC-Department Manager, Corporate Services Dept. /
Head, Disposal Committee

We have reviewed the disposal of motor vehicles thru public auction and observed the
following:

CITEM disposed of three motor vehicles thru public auction with an appraised value
amounting toof P226,039.62 without complying with the requirements set forth under
COA Circular No. 81-115 A, COA Circular No. 83-206, COA Circular 2012-003, COA Formatted: Font: Bold
Circular No. 89-296 and National Budget Circular No. 425, Sections ___ of COA
Circular No. 81-A dated February 2, 1981 Section 79 of P.D. 1445, COA Circular Nos.
83-206 and 89-296, among others and National Budget Circular No. 425, thus, the the
disposal was found to be detrimental or disadvantageous to the government.

By virtue of a Board Resolution dated 6 July 2017, CITEM Management conducted a public
auction in connection with the disposal of three unserviceable vehicles described as follows:

PARTICULARS PLATE NO. ACQUISITION ACQUISITION APPRAISED Date Formatted Table

DATE COST VALUE SoldDATE
SOLD
1 unit Mitsubishi SEF-447 January 12, P518,478.30 P75,640.80 August 3, Formatted: Left
L-200 Double 1996 2017
Cab Pick-Up,
1995, 2500 cc,
Diesel engine
1 unit Dong SKE-674 November 26, P717,141.06 P75,199.41 August 16, Formatted: Left
Fengxing Van, 2009 2017
2008, 2500cc,
Diesel engine
1 unit Dong SKE-653 November 26, P717,141.06 P75,199.41 August 16, Formatted: Left
Fengxing Van, 2009 2017
2008, 2500cc,
Diesel engine
TOTAL P1,952,760.42 P226,039.62
We have observed the following noticed however, that management was not able to strictly
comply with the requirements of the above pertinent law, rules and regulations oin the
disposal of the vehicles:government properties:

1. Management did not furnish the COA Team,Auditor at least twenty days before Formatted: Font: Bold
the advertisement of the call to public auction with documentswith documents Formatted: Font: Bold
as required under Section VI-A ofA of COA Circular NoCircular No. 81-115 A Formatted: Line spacing: single
dated February 2, 1981 at least twenty days before the advertisement of the call
Formatted: Font: Bold
to public auction, thus, necessary audit procedures were not conducted on the
disposal of the vehicles to determine correctness of the appraised value and Formatted: Font: Bold
reasonableness of the selling price. Formatted: Font: Bold
1. . Formatted: Font: Bold
Formatted: Font: Bold
The required documents were not submitted to COA as prescribed under The
Formatted: Indent: Left: 0.5", Line spacing: single, No
written notice received from CITEM pertains only to public auction and not an bullets or numbering
invitation for COA to witness/observe during the conduct of inspection on the
Formatted: List Paragraph, Indent: Left: 0"
property/ies subject for disposal. It was only after the public auction of which one unit
of the vehicles has already been sold that management verbally requested from COA Formatted: Indent: Left: 0.5", No bullets or numbering

to inspect the said property in order for the winning bidder to facilitate the LTO Formatted: Font: (Default) Arial
Registration that requires COAs signature in the Inventory and Inspection Report as
witness.

We granted managements verbal request for inspection even after the public
auction was conducted in order for us to verify the justification on the disposal of the
property and to check the final appraised value set, considering the physical
condition of said motor vehicles as indicated in the Inspection and Inventory
Formatted: Font: (Default) Arial
Formatted: Left, Indent: Left: 0.5", Space After: 10 pt, Line
spacing: Multiple 1.15 li, No bullets or numbering

COA Circular No. 81-115 A dated February 2, 1981. and COA Circular 89-296 dated Formatted: Font: Italic
January 27, 1989 which states that: Formatted: Left, Indent: Left: 0.5", No bullets or
numbering
Formatted: Font: Italic

Section VI-A of COA Circular No. 81-115 A requires that Formatted: Font: Italic
Formatted: Indent: Left: 1"
VI. AUDIT PROCEDURE: - Formatted: Indent: Left: 1", Space After: 0 pt, Line
spacing: single
A. A. To facilitate audit of the disposal/divestment of corporate Formatted: Indent: Left: 0.75", Right: 0.5", Space After: 0
assets as herein contemplated, the management of the pt, Line spacing: single
government corporation concerned shall furnish the Auditor at Formatted: Font: Italic
least twenty (20) days before the advertisement of the call to
public auction with a copy each of the following documents:

a) Program for disposal with time schedules;

b) Inventory Report showing the itemized list and complete

description of the assets;

c) Appraisal Report showing the appraised values of the

assets, prepared by an in house and/or independent
appraiser;

d) Disposal procedure adopted.

 which are prepared by the concerned offices/departments of the
corporation and submitted to the proper Disposal Committee or
similar body constituted by the management thereof. Formatted: Font: Italic
Formatted: Space After: 0 pt, Line spacing: single
COA Auditor was not notified nor invited to observe/witness during the inspection of
said unserviceable motor vehicles subject for disposal, thus, the conduct of
inspection without the presence of the auditor concerned was in violation of Section
79 of P.D.1445.
We were not able to request from COA Technical Audit Sector (TAS) for the
technical inspection/evaluation of the vehicles to determine a more accurate
appraised values, due to non-submission in advance of required documents.
Formatted: List Paragraph, Indent: Left: 0"
The COA Team was only given a copy of the Invitation to Bid (ITB) on ( what Formatted: No underline
date?),the morning of August 3, 2017, informing that there will be a public auction to Formatted: No underline
be conducted on (what date?) the afternoon of the same date relative to the
Formatted: No underline, Font color: Auto
aforementioned properties.
Formatted: No underline
Moreover, the Team was not invited to witness the inspection of vehicles conducted Formatted: No underline
by the Management team prior to the public auction. It was only after the public Formatted: No underline, Font color: Auto
auction when one unit of the vehicles had already been sold that management Formatted: List Paragraph, Indent: Left: 0"
verbally requested COA to inspect the said property. The inspection was requested
torequested to facilitate the LTO Registration toRegistration to the winning bidder,
since COAssince COAs signature was required in the Inventory and Inspection
Report as witness.

We granted managements verbal request for inspection oOn August 13, 2017, or Formatted: Justified, Indent: Left: 0.5"
even after the public auction was conducted,. Our signature on the Inspection and
Inventory Report, however, was only as witness/observer and does not mean that we
have concurred/passed in audit all aspects of the disposal procedures. Our
reservations are presented in this particular Audit Observation Memorandum (AOM).

Due to non- submission of the required documents, the COA Team was not able to Formatted: Space After: 0 pt, Line spacing: single
conduct the necessary audit procedures stated under Sections VI-A (1 to 5), B and C
of COA CircularCOA NoCircular No. 81-115 (Attached)and COA Circular No. 89-
296 on the audit procedure and Section VII on the COA Role during disposal,
necessary in the determination of the correctness of the appraised values of the
vehicles and the reasonableness of the selling prices.
a. COA was not invited to witness when the inspection was conducted prior to Formatted: Font: (Default) Arial
the public auction, thus, we were not present during inspection and we never had Formatted: Normal, Indent: Left: 0.75", No bullets or
a hand to recommend for approval in the manner of the disposal of said numbering
properties.

b. COA was only given a copy of the Invitation to Bid, informing us that there will Formatted: Font: (Default) Arial
be a public auction to be conducted in relation to the aforementioned properties. Formatted: Normal, Indent: Left: 0.75", No bullets or
numbering
c. COA was only able to inspect the said properties after the conduct of first Formatted: Font: (Default) Arial
public auction wherein one of the vehicles was already sold. Formatted: Normal, Indent: Left: 0.75", No bullets or
numbering
COA Auditor was not notified nor invited to observe/witness during the Formatted: Indent: Left: 1", First line: 0"
inspection of said unserviceable motor vehicles subject for disposal, thus, the
Formatted: Indent: Left: 1"
conduct of inspection without the presence of the auditor concerned was in
violation of Section 79 of P.D.1445.
Section 79 of P.D. 1445. Destruction or sale of unserviceable property.
 When government property has become unserviceable for any cause, or
is no longer needed, it shall, upon application of the officer accountable
therefor, be inspected by the head of the agency or his duly authorized
representative in the presence of the auditor concerned and, if found to
be valueless or unsalable, it may be destroyed in their presence. If found
to be valuable, it may be sold at public auction to the highest bidder
under the supervision of the proper committee on award or similar body
in the presence of the auditor concerned or other duly authorized
representative of the Commission, x x x (underscoring ours)

Likewise, COA Circular 83-206 dated May 23, 1983:

Section 3. Duties of the Disposal Committee The Committee shall

establish a standard operating procedure to govern its actions and
shall perform the following functions: (underscoring ours)
Formatted: Indent: Left: 1", First line: 0"
(1) Inspect or authorize the Ministries/Agencies field offices to inspect
the unserviceable property and equipment to verify justification for
disposal;

(2) Set the final appraised value of all disposable property considering
obsolescence, market demand, physical condition and result of
previous biddings for similar property;

(3) Recommend to the Minister or Head of Ministry/Agency for

approval, the manner of disposal taking into consideration the
pertinent provisions of the Revised Administrative Code and the
National Auditing Code.

When mManagement was asked on this matter, the concerned official of CITEM Formatted: Font: (Default) Arial
commented that inspection of theof the property for disposal indisposal in the Formatted: Font: (Default) Arial
presence of a COA Auditor is no longer required because the pre-audit has already Formatted: Normal, Indent: Left: 0.5", No bullets or
been lifted as per COA Circular 2011-002 dated July 22, 2011. numbering
Formatted: Font: (Default) Arial
The documents required doesdocuments required do not mean a pre-audit activity of
the auditor. Such documents are necessary in the conduct of post audit of the Formatted: Font: (Default) Arial
transactions. Management is not precluded from continuing with the disposal
proceedings in submitting these documents. Moreover, Section VII of above
mentioned circular clearly stated COA Role during Disposal. Likewise, inspection of
the property is not in the nature of pre-audit activity.

We recommend that Management comply with Sections VI-A (1 to 5), B and C

and Section VII of COA Circular No. 81-115 A dated February 2, 1981 (which
was reiterated in COA Circular 89-296) in the disposal of properties and
furnish the COA Team, at least twenty days before the advertisement of the call
to public auction so that COA may conduct the necessary audit procedures on
the disposal of the properties to determine correctness of the appraised value
and reasonableness of the selling price. Formatted: Indent: Left: 0.5"
Formatted: Indent: Left: 0.5", No bullets or numbering
Formatted: Numbered + Level: 1 + Numbering Style: 1, 2,
3, + Start at: 1 + Alignment: Left + Aligned at: 0.25" +
2. Audit Thecomputation on the appraised values of the vehicles based on Indent at: 0.5"
acquisition cost and formula prescribed under COA Manual on Appraisal, Formatted: Font: (Default) Arial, Bold
disclosed discrepancies in the computation of appraisal values computed by Formatted: Font: Bold
the disposal committee, which are based on acquisition cost is questionable Formatted: Font: (Default) Arial, Bold
Formatted: Font: (Default) Arial, Bold
thus, resulting in the understatement of the appraised values/selling prices of
the vehicles by P152,877.
Formatted: Indent: Left: 0.5", No bullets or numbering
a. considering the (a) discrepancy between the acquisition cost in Inventory and Formatted: Font: (Default) Arial
Inspection Report vis--vis the record of Accounting Division (b) Condition factor
used to compute appraisal value pertains to Scrap Condition, ignoring the fact that
the same is still serviceable or at least repairable.

CITEM-Disposal Committee, in computing their appraisal value for the subject Formatted: Font: (Default) Arial
properties used the formula in the COA Manual on Appraisal not taking into Formatted: Font: (Default) Arial
consideration of the following:as follows: Formatted: Font: (Default) Arial
Formatted: Font: Not Bold
a. Discrepancy between the acquisition cost in Inventory and Inspection Report
vis--vis the record of Accounting Division Formatted: Font: Not Bold
Formatted: Numbered + Level: 1 + Numbering Style: a, b, c,
b. Condition factor used to compute appraisal value that pertains to Scrap + Start at: 1 + Alignment: Left + Aligned at: 0.79" +
Indent at: 1.04"
Condition, ignoring the fact that the same is still serviceable or at least
repairable. Formatted: Indent: Left: 0.79"
Formatted: Font: Not Bold
3.1 Formatted: Numbered + Level: 1 + Numbering Style: a, b, c,
+ Start at: 1 + Alignment: Left + Aligned at: 0.79" +
Indent at: 1.04"
Appraisal Value= (Acquisition Cost x Currency Fluctuation Factor) x Condition Factor
of Property Formatted: Font: Not Bold
Formatted: Font: (Default) Arial, Italic
3.2 Using the same formula, the table on the next pagebelow shows the Formatted: Normal, Centered, Indent: Left: 0.5", No bullets
comparison of appraisal values computed by Disposal Committee vis--vis the or numbering
appraisal values computed using the acquisition cost as recorded in Accounting Formatted: Font: Italic
Division as well as the use of different condition factor considering that the subject Formatted: Centered
property is still serviceable or at least economically repairable.
Formatted: Font: (Default) Arial, Italic
Formatted: Normal, Centered, Indent: Left: 0.5"
Formatted: Font: Italic
Formatted: Centered
Formatted: Font: (Default) Arial
Formatted: Normal, Indent: Left: 0.5", No bullets or
numbering
3.3 Formatted: Font: (Default) Arial
Formatted: Font: (Default) Arial
AS COMPUTED AS COMPUTED
PARTICULARS BY DISPOSAL USING ACCTG. VARIANCE
COMMITTEE DIV ACQ. COST
1 Mitsubishi L-200 Pick-
Up P75,640.80 P 113,461.20 (37,820.40)
1 Dong Fengxing Van P75,199.41 P 132,727.76 (57,528.35)
1 Dong Fengxing Van P75,199.41 P 132,727.76 (57,528.35)
TOTAL P226,039.62 P 378,916.72 (152,877.10)

*For the detailed computation, kindly refer toAs presented under Annex A., Wwe Formatted: Font: Not Italic
computed the appraisal value on the third column of the above table based on the Formatted: Indent: Left: 0.5", No bullets or numbering
acquisition cost as recorded in the books of Accounting Division, assuming that their Formatted: Font: Not Italic, Underline
record is correct. We also takooke into consideration the use of different Condition
Formatted: Font: Not Italic
Factor (CF) based on our assessment ason the to disposed properties. that iI Instead
of relying toon the CF of 0.10 as used by CITEM-Disposal Committee which is
applicable only if the property is under Scrap Condition, we deemed it appllicable to
use the CF of 0.15 for Poor Condition, at least, is more applicable since the subject
properties are still serviceable or at least repairable.
Formatted: Font: Not Italic
Scrap Condition as defined in COA Appraisal Manual is used to describe a
property which is no longer serviceable and which cannot be utilized to any practical
degree regardless of the extent of the repairs or modifications to which may be
subjected (beyond economical repair).

Given the fact thate subject properties are still serviceable as to its operating
condition and in the absence of any proof that will show that the cost of each repair is
beyond economic threshold of 30% of the current market price of the same or similar
property and the absence of proof of its frequent breakdown, as far as the submitted
documents isare concerned,., ttThe Disposal Committee erroneously treated the
condition of the properties as Scrap.

This computation still may not present the real condition of the vehicle and its fair
market value since we were not able to request from COA Technical Audit Sector
(TAS) for the technical inspection/evaluation of the vehicles to determine a more
accurate appraised values as previously mentioned.

COA Memorandum No. 88-569 dated August 12, 1988 states that: Formatted: Indent: Left: 0.5"

Whether the property for sale is unserviceable or serviceable, the government has to
recover at least a fair market value of the property.

3.4 Thise undervaluation of the vehiclesproperty as well as CITEMs non-
compliance with wide and truthful publication requirement to attract as many bidders
as possible denied the government theCITEM a better chance of recovering a more
competitive price for the disposal of its propertyvehicles.
3.4
We recommend that management:
r
a. Require the disposal committee and accounting division to reconcile the
discrepancies in the acquisition cost and book value of 2two units Dong
Feng Van. and
b. SSubmit justification to prove that the acquisition costs used by the
disposal committee is more reliable for the computation of the appraised
values and for considering the vehicles as unserviceable, contrary to the
report of the mechanic, resulting in the questionable computation of the
appraised values using a CF factor of .10 under the scrap condition.
Formatted: Indent: Left: 0.5", No bullets or numbering
Formatted: Indent: Left: 0.5"
Formatted: Indent: Left: 0.5", No bullets or numbering
Formatted: Space After: 0 pt, Line spacing: single
Formatted: Space After: 0 pt, Line spacing: single,
Numbered + Level: 1 + Numbering Style: a, b, c, + Start
at: 1 + Alignment: Left + Aligned at: 0.5" + Indent at: 0.75"
Formatted: Indent: Left: 0.75", Space After: 0 pt, Line
spacing: single
Formatted: Space After: 0 pt, Line spacing: single,
Numbered + Level: 1 + Numbering Style: a, b, c, + Start
at: 1 + Alignment: Left + Aligned at: 0.5" + Indent at: 0.75"

To cite a specific situation that transpired during the public auction, in the first public
auction conducted on August 3, 2017, the Mitsubishi motor vehicle unit was sold
at a price close to the appraised value/floor price set by CITEM Disposal
Committee, while the other two units of vehicles are subjected to the second
bidding which was subsequently conducted on August 16, 2017. It is noticeable
from the Abstract of Canvass for the second auction that one of the bidder bid for
a price of two units Dong Feng Van (P82,150 and P67,700.50, respectively) more
than double than its previous bid during the first auction (which is only
P39,000.00 each). As to the reason of that sudden change in the bid price, that
bidder gave this statement Nagsali ng tagalabas. From such statement we can
infer that had the CITEM Disposal Committee made its advertisement of invitation
 to bid wider and not just invited their chosen bidder via telephone, with the truthful
statement in its Invitation to bid that the said property is still serviceable or can
still be reconditioned, the bidders would have offered a more competitive price for
those properties even at the first auction. As per COA Memorandum No. 88-569
dated August 12, 1988: Whether the property for sale is unserviceable or
serviceable, the government has to recover at least a fair market value of the
property.
1.1 Formatted: Font: (Default) Arial
Formatted: Normal, Indent: Left: 0.5", Hanging: 0.25", No
bullets or numbering
3. Moreover, Tthe Inventory and Inspection Report was not properly Formatted: Indent: Left: 0.5", No bullets or numbering
accomplished by concerned official, contrary to COA Circular No. 83-206 due Formatted: Font: (Default) Arial, Bold
to the baseless/false statement that said vehicles were found to be beyond
Formatted: Font: (Default) Arial, Bold
economic repair upon inspection by the CITEM Management Inspection Team
and COA representative and further recommended that said vehicles be Formatted: Numbered + Level: 1 + Numbering Style: 1, 2,
3, + Start at: 1 + Alignment: Left + Aligned at: 0.25" +
included in the disposal of unserviceable CITEM properties.. Indent at: 0.5"
Formatted: Font: Bold
was not properly accomplished by concerned official. Section 3 The
Formatted: Indent: Left: 0.5", No bullets or numbering
recommendation to the CITECOA Circular 83-206 dated May 23, 1983 states that:
Formatted: Font: (Default) Arial, Bold
Duties of the Disposal Committee The Committee shall establish a Formatted: List Paragraph, Indent: Left: 0", First line: 0"
standard operating procedure to govern its actions and shall perform the Formatted: Font: (Default) Arial
following functions: Formatted: Indent: Left: 0.75"
Formatted: No underline
(1) Inspect or authorize the Ministries/Agencies field offices to inspect the
unserviceable property and equipment to verify justification for disposal;

(2) Set the final appraised value of all disposable property considering
obsolescence, market demand, physical condition and result of previous
biddings for similar property;

(3) Recommend to the Minister or Head of Ministry/Agency for approval,

the manner of disposal taking into consideration the pertinent provisions
of the Revised Administrative Code and the National Auditing Code.
Formatted: Indent: Left: 0.75", No bullets or numbering
We have noted that procedures were not properly conducted since the Disposal Formatted: Font: (Default) Arial
Committee recommended to the CITEM Board that said vehicles were found to be Formatted: Normal, Indent: Left: 0.5", No bullets or
beyond economical repair upon inspection by the CITEM Management Inspection numbering
Team and COA representative and further recommended that said vehicles be Formatted: Font: (Default) Arial
included in the disposal of unserviceable CITEM Properties which were baseless,
Formatted: Font: (Default) Arial
considering the following:
Formatted: Font: (Default) Arial
1.2 Ms Board as to the disposal by public auction of subject property states that: Formatted: Font: (Default) Arial
said vehicles were found to be beyond economic repair upon inspection by Formatted: Font: (Default) Arial
the CITEM Management Inspection Team and COA representative and further Formatted: Normal, Indent: Left: 0.5", No bullets or
recommended that said vehicles be included in the disposal of unserviceable numbering
CITEM properties.. The said remark has no basis and not in accordance with COA Formatted: Font: (Default) Arial
Circular No. 83-206.
Formatted: Indent: Left: 0.5", No bullets or numbering
1.3 COA contended that COA Circular 2011-002 that lifted the pre-audit is a mere
administrative issuance and it cannot run counter with the provision of the law
(PD 1445), that inspection in the presence of the auditor concerned is required.
Inspection of property for disposal is an assessment as to the condition of the
item/s at hand in addition to the examination of documents required. Moreover,
COA Auditors are mandated by law to determine the scope of their audit which
includes inspection of government property/ies.
 1.4 The written notice received from CITEM pertains only to public auction and Formatted: Bulleted + Level: 2 + Aligned at: 0.75" + Indent
not an invitation for COA to witness/observe during the conduct of inspection at: 1"
on the property/ies subject for disposal. It was only after the public auction of
which one unit of the vehicles has already been sold that management
verbally requested from COA to inspect the said property in order for the
winning bidder to facilitate the LTO Registration that requires COAs signature
in the Inventory and Inspection Report as witness.

1.5 We granted managements verbal request for inspection even after Formatted: Indent: Left: 1", No bullets or numbering
the public auction was conducted in order for us to verify the justification on
the disposal of the property and to check the final appraised value set,
considering the physical condition of said motor vehicles as indicated in the
Inspection and Inventory Report, however, we found it otherwise.

The two vehicles are still serviceable (one of them has already been sold
in the first auction on August 3, 2017), and the other
Formatted: Font color: Red
one needs only minor repair as validated by the mechanic who first
inspected the same and as proven in the Checklist for Unserviceable
Equipment: Vehicles/Heavy Equipment Accomplished Form.
Formatted: Tab stops: 0", Left

Upon the inspection on August 13, 2017, our signature on the Inspection and
Inventory Report as witness was not an indication that we concurred in all
aspects of the disposal procedure, the reservation of which is indicated in this
particular observation memorandum.

1.6 Moreover, the Inventory and Inspection Report was not properly accomplished by
concerned official. The recommendation to the CITEMs Board as to the disposal
by public auction of subject property states that: said vehicles were found to
be beyond economic repair upon inspection by the CITEM Management
Inspection Team and COA representative and further recommended that
said vehicles be included in the disposal of unserviceable CITEM
properties.. The said remark has no basis and not in accordance with COA
Circular No. 83-206.

1.7 For the Disposal Committee to state in its recommendation to the CITEMs Formatted: Bulleted + Level: 2 + Aligned at: 0.75" + Indent
Board that said vehicles were found to be beyond economical repair upon at: 1"
inspection by the CITEM Management Inspection Team and COA
representative and further recommended that said vehicles be included in the
disposal of unserviceable CITEM Properties was baseless, to note the
following:

d. COA was not invited to witness when the inspection was conducted prior to
the public auction, thus, we were not present during inspection and we never
had a hand to recommend for approval in the manner of the disposal of said
properties.

e. COA was only given a copy of the Invitation to Bid, informing us that there will
be a public auction to be conducted in relation to the aforementioned
properties.
f. COA was only able to inspect the said properties after the conduct of first
public auction wherein one of the vehicles was already sold.

COA Representative was not actually present during the conduct of Formatted: Bulleted + Level: 2 + Aligned at: 0.75" + Indent
inspection. The written notice received from CITEM pertained only to public at: 1"
auction and not an invitation for COA to witness/observe during the conduct
of inspection of the property/ies for disposal. It was only after the public
auction when one unit of the vehicles had been sold that management
verbally requested COA to inspect the said property.
Formatted: Indent: Left: 1", No bullets or numbering
Inventory and Inspection Report of Unserviceable Property prepared by the Formatted: Bulleted + Level: 2 + Aligned at: 0.75" + Indent
Disposal Committee as of June 20, 2017 was baseless in stating stated that at: 1"
the condition of the property is Obsolete and Beyond Economic Repair.
We noted, however, when in truth and in factthat the samevehicles are still is
serviceable or at least susceptible of reconditioning considering the following:
Formatted: Indent: Left: 1", No bullets or numbering
The Checklist for Unserviceable Equipment: Vehicles/Heavy Equipment
Accomplished Form proved otherwise. (what did the checklist presented? Formatted: Font color: Red
Please discuss. ). This form presented, among others, the status/condition
of each part of the vehicles, including its operating condition whether the
same is S= Serviceable, M= Missing, X= Unserviceable, and NA= Not Formatted: Font color: Auto
Applicable. From the said checklist/form, it was disclosed that all the three Formatted: Font color: Auto
vehicles were serviceable (marked as S) as to the operating condition of
their engine.

The two vehicles are still operating and fully functionalre still as to its Formatted: Bulleted + Level: 1 + Aligned at: 1" + Indent
serviceability serviceable. One of them had beenhad been sold during at: 1.25"
the first auction on August 3, 2017) and the other one (which was sold on
the second auction) needs minor repair as validated by the mechanic who
first inspected the vehicles which was validated through the
abovementioned checklist and the verbal representation from the
mechanic himself. (How was this validated? Was there a document/report Formatted: Font color: Red
signed by the mechanic?
Formatted: Indent: Left: 1.25", No bullets or numbering
aAs confirmed by the Mechanic personnel who inspected the same, t,. Formatted: Font color: Auto
stating that it is the vehicles are still serviceable as to their operating
condition and no individual component is missing or unserviceable, e.
(eExcept that one of Dong Feng Vans has unserviceable
Generator/Alternator Assembly and Voltage Regulator Assembly, and the
Mitsubishi pick-up has unserviceable Voltage Regulator, in which
according to expert can be repaired/replaced economically. ) Formatted: Font color: Auto
Formatted: Indent: Left: 1", No bullets or numbering
. Also tThe unit cost disclosed in the Inspection and Inventory Report doesid Formatted: Font color: Red
not tally with the Accounting Records as follows:
Formatted: Font: (Default) Arial
1.8
Formatted: Font: (Default) Arial
Formatted: Bulleted + Level: 2 + Aligned at: 0.75" + Indent
at: 1"
ACQUISITION COST
PARTICULARS Per Inventory and Per VARIANCES Formatted: Font: (Default) Arial
Inspection Report Accounting Formatted: Indent: Left: 1", No bullets or numbering
Record
1 Mitsubishi L-200 Pick-Up 518,478.30 518,478.30 0
1 Dong Fengxing Van 717,141.06 843,841.06 (126,700.00)
1 Dong Fengxing Van 717,141.06 843,841.06 (126,700.00)
TOTAL 1,952,760.42 2,206,160.42 (253,400.00)
 It is noteworthy to mention that before planning for disposal of govt. property, Formatted: Indent: Left: 0.5", First line: 0"
management must be guided by the following provisions of COA Circular 2012-003 Formatted: Justified
dated October 29, 2012:
Formatted: Font: Italic

a. Replacement of serviceable structure/equipment is considered Unnecessary Formatted: Font: (Default) Arial, Italic
Expenditure. (If serviceable and still beneficial, the same must not be Formatted: Normal, Justified, No bullets or numbering
disposed and must not be replaced) Formatted: Justified
Formatted: Indent: Left: 0.5", No bullets or numbering
b. Continuous repair of vehicles and equipment already considered beyond
Formatted: Numbered + Level: 1 + Numbering Style: a, b, c,
economic repair as evidenced by frequent breakdown and non-use after + Start at: 1 + Alignment: Left + Aligned at: 1" + Indent
repair is consider Unnecessary Expenditure. (subject property can be validly at: 1.25"
disposed) Formatted: Font: Bold
Formatted: Font: Bold
c. Payment for repair of government equipment at a cost exceeding 30% of the
Formatted: Indent: Left: 1.25", No bullets or numbering
current market price of the same or similar equipment is consider Excessive
Expenditure (subject property can be validly disposed if the repair is no Formatted: Numbered + Level: 1 + Numbering Style: a, b, c,
+ Start at: 1 + Alignment: Left + Aligned at: 1" + Indent
longer economical) at: 1.25"
Formatted: Justified
As earlier mentioned there was not report to prove that the cost of each repair is
beyond the economic threshold of 30% of the current market price of the same or Formatted: Font: Bold
similar property and proof of its frequent breakdown, as far as the submitted Formatted: Font: (Default) Arial, Bold
documents are concerned. Formatted: Font: Bold
Formatted: Font: (Default) Arial, Bold
We recommend that management
Formatted: Numbered + Level: 1 + Numbering Style: 1, 2,
3, + Start at: 1 + Alignment: Left + Aligned at: 0.25" +
a. Comply with the requirementsConsider the pertinent provisions of Indent at: 0.5"
COA Circular 2012-003 dated October 29, 2012 before conductingon Formatted: Font: Bold
the disposal of government properties.
Formatted: Font: (Default) Arial, Bold
Formatted: Font: Bold
b. Exercise due care and diligence and present true and accurate data
in the Inventory and Inspection Report, invitation to bid as well as Formatted: Font: (Default) Arial, Bold
other documents relative to the disposal of property to prevent Formatted: Font: Bold
occurrence of misleading statements. Persons responsible in the Formatted: Font: (Default) Arial, Bold
preparation of erroneous reports should be made accountable. Formatted: Font: Bold
Formatted: List Paragraph, Right: 0", Numbered + Level: 1
+ Numbering Style: 1, 2, 3, + Start at: 1 + Alignment: Left
+ Aligned at: 0.25" + Indent at: 0.5", Adjust space between
We have observed that mManagement invited their chosen bidder by posting Latin and Asian text, Adjust space between Asian text and
numbers
oin its website or via telephone,
2. but did not advertise also comply with the requirement that the invitation to Formatted: Font: (Default) Arial, Bold
bidpublic auction must be advertised in any newspaper of general circulation Formatted: Font: Bold, No underline
or substitute publications, thus, in violation of the following: Formatted: Font: (Default) Arial, Bold
4. to attract greatest number of interested parties, in compliance with COA Formatted: Font:
Circular No. 89-296 dated January 27, 1989 and National Budget Circular No.
Formatted: Font: Bold, No underline
425.
Formatted: Font: (Default) Arial, Bold
Formatted: Font: Bold, No underline
Section 79 of PD 1445. Destruction or sale of unserviceable property Formatted: List Paragraph, Right: 0"
Formatted: Font: Bold
x x x after advertising by printed notice in the Official Gazette, or for not less
Formatted: No underline
than three consecutive days in any newspaper of general circulation, or
where the value of the property does not warrant the expense of publication, Formatted: Indent: Left: 0", First line: 0.5"
by notices posted for a like period in at least three public places in the locality Formatted: No underline
where the property is to be sold. In the event that the public auction fails, the Formatted: No underline
 property may be sold at a private sale at such price as may be fixed by the
same committee or body concerned and approved by the Commission.
(underscoring ours)

Section 6 of EO 888 dated March 18, 1983: Formatted: No underline

Formatted: Indent: Left: 0", Adjust space between Latin
Any one of the following modes of disposal, whichever is most appropriate and Asian text, Adjust space between Asian text and numbers
shall be considered:

(1) Sale thru public bidding. Sale shall be widely publicized and the Formatted: Font: Not Bold
Committee appraised value which shall be the minimum selling price
should be at realistic levels considering market demand, physical
condition, obsolescence and all other relevant factors; x x x
(emphasis ours)

COA Circular No. 89-296 dated January 27, 1989 states: Formatted: No underline

Part V. Public Auction

a. adequate publicity and notification so as to attract the greatest number of Formatted: No underline
interested parties; (vide, Sec. 79, P.D. 1445) (underscoring ours)

Formatted: Indent: First line: 0"

Formatted: No underline
National Budget Circular No. 425

NBC No. 425 Part III. A. 3. Publication of the ITB. Formatted: No underline

The ITB must be published in a newspaper of general circulation if the Formatted: Font: Not Bold
cost of such publication does not exceed 50% of the value of the property.
Otherwise, substitute publication may be availed of, by posting copies of
the ITB in conspicuous public places in the area where the property is
located or where the bidding will be conducted. Copies of the ITB may
also be sent by mail or personal delivery to prospective bidders.
(emphasis ours)

2.1 The invitation to bid was posted only in CITEMs website but not in any Formatted: Normal, Justified, Indent: Left: 0.5", Right:
newspaper of general circulation. The latest of those issuances is the National 0.25", No bullets or numbering
Budget Circular No. 425 dated January 28, 1992. Since the same is not in Formatted: Font: (Default) Arial
contravention with Section 79 of PD 1445, the same is controlling.
Formatted: Normal, Justified, Indent: Left: 0.5"

2.2 Management cited the following reasons as to why this requirement was not Formatted: Normal, Indent: Left: 0.5", No bullets or
being complied with: numbering

Formatted: Normal, Indent: Left: 0.5"

a. It has been substantially complied by the act of inviting the prospective bidder Formatted: Normal, Indent: Left: 0.5", No bullets or
through telephone and posting the Invitation to Bid in CITEM Website. numbering

b. Posting the notice or invitation to bid in a newspaper of general circulation for

3 days is cumbersome and expensive.

Formatted: Normal, Justified, Indent: Left: 0.5"

2.3 As can be viewed from the above provisions, it is required that the conduct of Formatted: Normal, Indent: Left: 0.5", No bullets or
public auction for disposal of government properties must be widely publicized in numbering
order to attract the greatest number of interested parties as possible. Management
may resort to other means like telephoning the prospective bidder or posting the
same to CITEM website, but the requirement that the same must be posted in
newspaper of general circulation, it may be cumbersome or expensive but that
should not be dispensed with until the law is amended, it is bound to be followed. The
practice cannot be an excuse to noncompliance of the law as Art. 7 of New Civil
Code provides that Laws are repealed only by subsequent ones, and their violation
or non-observance shall not be excused by disuse, or custom or practice to the
contrary.

Formatted: Normal, Indent: Left: 0.5"

2.4 We have noted also that the posting on CITEM Website with the heading Formatted: Normal, Indent: Left: 0.5", No bullets or
Disposal of Unserviceable Vehicles was misleading and tend to discourage the numbering
prospective bidder since the subject vehicles are still serviceable or at least
repairable. NBC No. 425 dated January 28, 1992 defined Unserviceable property as
one which is beyond repair and has no more utilization potential. Stating that the
property is unserviceable in the invitation to bid or notice when in truth and in fact the
same is serviceable will defeat the purpose of the law (i.e. to attract greatest number
of interested parties as possible).

Non-compliance with wide and truthful publication requirement to attract as many Formatted: Justified, Indent: Left: 0.5", Space After: 10 pt
bidders as possible denied the government the better chance of recovering more
competitive price for the disposal of its property. Formatted: Font: Not Bold

3. The computation of appraisal values which are based on acquisition cost is Formatted: Indent: Left: 0.5", No bullets or numbering
questionable considering the (a) discrepancy between the acquisition cost in
Inventory and Inspection Report vis--vis the record of Accounting Division (b)
Condition factor used to compute appraisal value pertains to Scrap Condition,
ignoring the fact that the same is still serviceable or at least repairable.
To cite a specific situation that transpired during the first public auction conducted on Formatted: Font: (Default) Arial
August 3, 2017,. tThe Mitsubishi motor vehicle unit was sold at a price close to the Formatted: Indent: Left: 0.5", Space After: 10 pt, No
appraised value/floor price set by CITEM Disposal Committee, while the other two bullets or numbering
units of vehicles were subjected to the second bidding which was subsequently Formatted: Font: (Default) Arial
conducted on August 16, 2017. It was noticeable from the Abstract of Canvass for
the second auction that one of the bidders bid for the two units Dong Feng Van at aat
individual price price of P82,150 and P67,700.50, or more than double than its Formatted: Font: (Default) Arial
previous bid during the first auction which was only P39,000.00 each.. That bidder
stated Nagsali ng tagalabas, thus, thus, the reason for the sudden change in the Formatted: Font: (Default) Arial
bid price., Formatted: Font: (Default) Arial

Considering the above situation, we canmay infer that CITEM could have attracted Formatted: Font: (Default) Arial
more interested parties and that the bidders would have offered a more competitive Formatted: Font: (Default) Arial
price had the CITEM Disposal Committee made its advertisedment the ITB of Formatted: Font: (Default) Arial
invitation to bid wideradequtelyadequately with truthful statement in its Invitation to
Formatted: Font: (Default) Arial
bid that the said propertiesty is are still serviceable or at least can still be
reconditioned. and not just invited their chosen bidder by posting in its website or via Formatted: Font: (Default) Arial
telephone. Formatted: Font: (Default) Arial
Formatted: Font: (Default) Arial
Management cited the following reasons as to why this requirement was not being
Formatted: Font: (Default) Arial
complied with:
Formatted: Font: (Default) Arial
a. It has been substantially complied by the act of inviting the prospective bidder Formatted: Font: (Default) Arial, Not Italic
through telephone and posting the Invitation to Bid in CITEM Website.
 b. Posting the notice or invitation to bid in a newspaper of general circulation for
3 days is cumbersome and expensive.

3.5 CITEM-Disposal Committee, in computing their appraisal value for the subject
properties used the formula in COA Manual on Appraisal as follows:

Appraisal Value= (Acquisition Cost x Currency Fluctuation Factor) x Condition

Factor of Property

3.6 Using the same formula, the table below shows the comparison of appraisal
values computed by Disposal Committee vis--vis the appraisal values computed
using the acquisition cost as recorded in Accounting Division as well as the use
of different condition factor considering that the subject property is still
serviceable or at least economically repairable.

AS COMPUTED AS COMPUTED
PARTICULARS BY DISPOSAL USING ACCTG. VARIANCE
COMMITTEE DIV ACQ. COST
1 Mitsubishi L-200 Pick-
Up P75,640.80 P 113,461.20 (37,820.40)
1 Dong Fengxing Van P75,199.41 P 132,727.76 (57,528.35)
1 Dong Fengxing Van P75,199.41 P 132,727.76 (57,528.35)
TOTAL P226,039.62 P 378,916.72 (152,877.10)
Formatted: Normal, Indent: Left: 0"
Substitute publication, such as posting copies of the ITB in conspicuous public places Formatted: Font: Not Italic
in the area where the property is located or where the bidding will be conducted and Formatted: Font: (Default) Arial
sending copies of the ITB by mail or personal delivery to prospective bidders, may be
Formatted: Font: Not Italic
availed of to attract greatest number of interested parties as possible.
Formatted: Font: (Default) Arial
3.7 *For the detailed computation, kindly refer to Annex A. We computed the Formatted: Normal, Indent: Left: 0.5", Right: 0"
appraisal value on the third column of the above table based on the acquisition Formatted: Font: (Default) Arial
cost as recorded in the book of Accounting Division assuming that their record is Formatted: Font: (Default) Arial
correct. We also take into consideration the use of different Condition Factor (CF)
Formatted: Font: (Default) Arial
based on our assessment as to disposed properties that instead of relying to the
CF of 0.10 as used by CITEM-Disposal Committee which applicable only if the Formatted: Font: (Default) Arial
property is under Scrap Condition, the CF of 0.15 for Poor Condition, at least,
is more applicable since the subject properties are still serviceable or at least
repairable. Scrap Condition as defined in COA Appraisal Manual is used to
describe a property which is no longer serviceable and which cannot be utilized
to any practical degree regardless of the extent of the repairs or modifications to
which may be subjected (beyond economical repair). Given the fact the subject
properties are still serviceable as to its operating condition and the absence of
any proof that will show that the cost of each repair is beyond economic threshold
of 30% of the current market price of the same or similar property and the
absence of proof of its frequent breakdown, as far as the submitted documents is
concerned, the Disposal Committee erroneously treated the condition of the
properties as Scrap. This undervaluation of property as well as CITEMs non-
compliance with wide and truthful publication requirement to attract as many
bidders as possible denied the government the better chance of recovering more
competitive price for the disposal of its property.

3.4 To cite a specific situation that transpired during the public auction, in the first
public auction conducted on August 3, 2017, the Mitsubishi motor vehicle unit
was sold at a price close to the appraised value/floor price set by CITEM
Disposal Committee, while the other two units of vehicles are subjected to the
 second bidding which was subsequently conducted on August 16, 2017. It is
noticeable from the Abstract of Canvass for the second auction that one of the
bidder bid for a price of two units Dong Feng Van (P82,150 and P67,700.50,
respectively) more than double than its previous bid during the first auction
(which is only P39,000.00 each). As to the reason of that sudden change in the
bid price, that bidder gave this statement Nagsali ng tagalabas. From such
statement we can infer that had the CITEM Disposal Committee made its
advertisement of invitation to bid wider and not just invited their chosen bidder via
telephone, with the truthful statement in its Invitation to bid that the said property
is still serviceable or can still be reconditioned, the bidders would have offered a
more competitive price for those properties even at the first auction. As per COA
Memorandum No. 88-569 dated August 12, 1988: Whether the property for sale
is unserviceable or serviceable, the government has to recover at least a fair
market value of the property.

3.5 It is noteworthy to mention that before planning for disposal of govt. property, the
management must be guided by the following provisions from COA Circular
2012-003 dated October 29, 2012:

a. Replacement of serviceable structure/equipment is considered Formatted: Indent: Left: 1", No bullets or numbering
Unnecessary Expenditure. (If serviceable and still beneficial, the same must
not be disposed and must not be replaced)
b. Continuous repair of vehicles and equipment already considered beyond
economic repair as evidenced by frequent breakdown and non-use after
repair is consider Unnecessary Expenditure. (subject property can be validly
disposed)
c. Payment for repair of government equipment at a cost exceeding 30% of the
current market price of the same or similar equipment is consider Excessive
Expenditure (subject property can be validly disposed if the repair is no
longer economical)

3.6 Also, this provision under NBC No. 425 (Manual on Disposal of Government
Property) dated January 28, 1992 found its relevance before a government
entity can validly dispose its properties.

Disposal occurs when a piece of equipment or property can no longer provide

efficient service or, though still working, has been rendered useless due to
obsolescence.

Any or all of the following conditions shall constitute disposable property:

1. Property which can no longer be repaired or reconditioned
2. Property whose maintenance cost/costs of repair more than outweighs the
benefits and services that will be delivered from its continued use;
3. Property that has become obsolete or outmoded because of changes in
technology;
4. Serviceable property that has been rendered unnecessary due to change in
the agencys functions or mandate
5. Unused supplies, materials, and spare parts that were procured in excess of
requirements; and
6. Unused supplies and materials that has become dangerous to use because
of long storage or use of which is determined to be hazardous.
 a. Formatted: Indent: Left: 0.5", Space After: 10 pt, No
We recommended that Management bullets or numbering

a. Submit explanation for the sudden change of the bid price for the two Formatted: Font: Bold
units Dong Feng Van during the second bidding by the same bidder; Formatted: Space After: 10 pt, Numbered + Level: 1 +
and. Numbering Style: a, b, c, + Start at: 1 + Alignment: Left +
Aligned at: 0.75" + Indent at: 1"
Formatted: Indent: Left: 0.5", Space After: 10 pt, No
We recommend management that: bullets or numbering
Formatted: Justified, Numbered + Level: 1 + Numbering
b. prior to the disposal activity, the Disposal Committee should see to it Style: a, b, c, + Start at: 1 + Alignment: Left + Aligned at:
0.75" + Indent at: 1"
that the subject properties have been duly inspected by the Head of
Entity or its representative in the presence of COA Auditor in Formatted: Numbered + Level: 1 + Numbering Style: a, b, c,
+ Start at: 1 + Alignment: Left + Aligned at: 0.75" +
compliance with Section 79 of PD 1445; Indent at: 1"
b. Conduct substitute publication for property disposal if posting in the
Formatted: Font: Bold
newspaper is not feasible, such as posting copies of the ITB in
conspicuous public places in the area where the property is located or Formatted: Space After: 10 pt, Numbered + Level: 1 +
Numbering Style: a, b, c, + Start at: 1 + Alignment: Left +
where the bidding will be conducted and sending copies of the ITB by Aligned at: 0.75" + Indent at: 1"
mail or personal delivery to prospective bidders, to attract greatest Formatted: Font: Bold
number of interested parties as possible
Formatted: Font: Bold
c. if it so warrants (such that the cost of publication does not exceed 50% of the
value of the property to be auctioned), it should advertise the planned public auction Formatted: Font: Bold
of disposable properties in the newspaper of general circulation and it should also Formatted: Indent: Left: 0.5", No bullets or numbering
continue with other means of encouraging prospective bidders (eg. telephoning the
prospective bidder and posting Invitation to Bid to website or social media);
Formatted: Font:
d. management should exercise due diligence and make truthful statement Formatted: Font: Bold
in accomplishing Inventory and Inspection Report as well as other documents
related to the disposal of property to prevent occurrence of misleading
statements; Formatted: Font:
e. reconciliation should be made as to the discrepancy of acquisition cost Formatted: Font: Bold
and book value of 2 units Dong Fengxing Van as recorded in Accounting
Records with that of the amount recorded in Inventory and Inspection Report
of Unserviceable Property prepared by Disposal Committee;
f. justification has to be made with regard to the disposal of the said three units
motor vehicles showing proof to satisfy the abovementioned criteria as to what
constitute disposable property/ies.
Formatted: List Paragraph, Right: 0", Adjust space between
Latin and Asian text, Adjust space between Asian text and
May we have your comments on the foregoing audit observations within fifteen (15) numbers
calendar days from receipt hereof. Formatted: List Paragraph, Indent: First line: 0", Right: 0",
Adjust space between Latin and Asian text, Adjust space
between Asian text and numbers

CHONA U. Formatted: Left

GABRONINO
State Auditor IV
Audit Team Leader

HENEDINA R. OTADOY
State Auditor V
Supervising Formatted: Left
Auditor
Proof of Service of AOM No. ________ dated __________

OFFICE Printed Name Signature Date Formatted Table

Executive Director
Disposal Committee Head
 ANNEX A

Per Disposal Committees Computation of Appraisal Value:

CURRENCY
ACQUISITION CONDITION Appraisal
FLUCTUATION
DISPOSED PROPERTIES COST FACTOR*** Value
FACTOR
(a) (c ) (a x b) x (c)
(b)
1 Mitsubishi L-200 Pick-Up 518,478.30 1.4589* 0.1 75,640.80
1 Dong Fengxing Van 717,141.06 1.0486** 0.1 75,199.41
1 Dong Fengxing Van 717,141.06 1.0486** 0.1 75,199.41

Per COA Computation of Appraisal Value considering the Acquisition Cost per Acctg. Div.
Record and increased CF Factor:
ACQUISITION CURRENCY
CONDITION Appraisal Difference
COST per FLUCTUATION
DISPOSED PROPERTIES FACTOR** Value from that of
Acctg. Div. FACTOR
(c ) (a x b) x (c) Above
(a) (b)
1 Mitsubishi L-200 Pick-Up 518,478.30 1.4589* 0.15 113,461.20 (37,820.40)
1 Dong Fengxing Van 843,841.06 1.0486** 0.15 132,727.76 (57,528.35)
1 Dong Fengxing Van 843,841.06 1.0486** 0.15 132,727.76 (57,528.35)

CFF= Peso/Dollar exchange rate on year of appraisal

Peso/Dollar exchange rate on year of acquisition
= 49.9534
34.2410
= 1.4589*

= 49.9534
47.6372
= 1.0486**

***CF
PHYSICAL CONDITION CF VALUE
Very Good 80%-100%
Good Condition 55%-75%
Fair Condition 35%-50%
Poor Condition 15%-30%
Scrap Condition 0%-10%