i  

EXECUTIVE SUMMARY

INTRODUCTION The Government Service Insurance System (GSIS) is a social insurance institution created under Commonwealth Act No. 186 that was passed on November 14, 1936. To secure the future of all employees of the Philippine government, it administers a pension fund that provides social security benefits, such as: compulsory life insurance, optional life insurance, retirement benefits, and disability benefits for work-related accidents and death benefits to its members and their beneficiaries. On June 24, 1997, Republic Act (RA) No. 8291 was enacted into law, increasing and expanding the social security protection of the government workers, and enhancing the powers and functions of the GSIS to better respond to the needs of its membership. It insures its members against the occurrence of certain contingencies in exchange for their monthly premium contributions. Pursuant thereto, the GSIS shall administer the Social Insurance Fund (SIF); the Optional Life Insurance Fund (OLIF) and Pre-Need Fund (PNF) for the insurance coverage described in Section 26 of RA No. 8291, the Employees’ Compensation Insurance Fund (ECIF) created under Presidential Decree (PD) No. 626, as amended, the General Insurance Fund (GIF) created under RA No. 656, as amended, and such other special funds existing or that may be created for special groups or persons rendering services to the government. The governing and policy-making body of the GSIS is the Board of Trustees including the President and General Manager, the members of which are appointed by the President of the Philippines. The GSIS workforce consists of 2,621 employees, 58 per cent of whom are in the Head Office (HO) while the remaining 42 per cent are in the Branches.

Location Total

Home Office (HO) 1,517 Branch/Satellite Offices 1,104 2,621

To date, the GSIS has 42 Branch Offices and 13 Satellite Offices and several service desks strategically located in various cities and municipalities of the country. The GSIS Corporate Operating Budget (COB) for CY 2012 per Board Resolution No. 28 dated February 23, 2012 amounted to P7.256 billion, broken down as follows:

Amount Personnel services 3,395,177,723 Maintenance and operating expenses 2,510,670,755 Capital expenditures 1,349,875,474

7,255,723,952

ii  

FINANCIAL HIGHLIGHTS I. Comparative Financial Position (In billion pesos)

2012

2011 (as restated)

Increase (Decrease)

Assets 727.576 633.644 93.932 Liabilities 19.691 18.993 0.698 Equity 707.885 614.651 93.234

II. Comparative Results of Operations (In billion pesos)

2012

2011 (as restated)

Increase (Decrease)

Revenues 137.518 123.421 14.097 Expenditures 74.939 62.896 12.043 Net Revenues 62.579 60.525 2.054

SCOPE OF AUDIT The audit covered significant accounts and operations of the GSIS for calendar year 2012. It aimed to ascertain the accuracy of financial records and reports, and the fairness of presentation of the financial statements. It also assessed the propriety of financial transactions and GSIS’ compliance with laws, rules and regulations. INDEPENDENT AUDITOR’S REPORT

The Auditor rendered an unqualified opinion with emphasis of matter on the fairness of presentation of the financial statements of the Government Service Insurance System (GSIS) as at December 31, 2012 in accordance with the Philippine Financial Reporting Standards. Without qualifying our opinion, we draw attention to Note 6.4 to the financial statements on the Accounts for Clearing balance of P8.947 billion representing collections on both premiums and loans that have not yet been posted to the individual member’s accounts due to timing differences and are presented as a reduction from the total Premiums and Loans Receivable accounts. Said reduction affects the accuracy of members’ privileges and claims and the validity of the affected general and subsidiary ledger accounts as of balance sheet date. Reconciliation of the General and Subsidiary Ledgers and implementation of program enhancements are in progress. To ensure that the members receive the correct amount of benefits and/or loan proceeds, members’ accounts are manually reconciled upon filing of retirement/life insurance claims or loan applications or upon request of those concerned. We also draw attention to Note 6, which presents the General Insurance Premium Receivable balance of P1.336 billion. The said balance included the amount of

iii  

premiums receivable of P437.532 million for lapsed General Insurance policies from 2011 and prior years with an additional bad debts allowance of P305.938 million to recognize the loss/impairment of the account, which are still subject to reconciliation. We further draw attention to Notes 2.1a and 7.2 which disclosed that the System, in support of the monetary policies of the Republic of the Philippines (ROP), participated in bond exchange covering its Held-to-Maturity (HTM) and Available for Sale (AFS) investments in 2010 and 2011 for new benchmark bonds issued by the  ROP. The Securities and Exchange Commission (SEC) granted an exemptive relief from the existing tainting rule on HTM investments for entities covered by Securities Regulation Code (SRC) Rule 68. The System is not covered by the SEC and the SRC Rule 68, however, it availed of the exemptive relief, which resulted in unrealized gain on exchange of P13.361 billion for exchange offers. While the System departs from a requirement of paragraph 9, PAS 39 on the exchange of HTM investments, it also disclosed under Note 7.2, as required under paragraph 18, PAS 1, that the unrealized gain on bond exchanged totaling to P13.361 billion should have been credited to the System’s net income for CYs 2010 and 2011 and the entire HTM portfolio with amortized cost of P163.238 billion should have been reclassified to AFS investments and carried at fair value of P213.676 billion with net unrealized gain of P50.438 billion. Furthermore, Note 16 presents the GSIS Financial Reserve requirement for their mandated obligation amounting to P603.64 billion as part of the Net Worth which must be subjected to thorough study for proper presentation in the financial statements. The investment required to secure the computed reserve has to be defined in the study to conform to the provision of Section 34 of RA 8291 and other applicable rules and regulations. OTHER SIGNIFICANT AUDIT OBSERVATIONS AND RECOMMENDATIONS We acknowledge the concerted effort of Management in implementing the recommendations embodied in the Audit Observation Memoranda issued by this Office to disclose in the Notes to FS the bond swap made in 2010 to 2011, adjusted the P883.0 million discrepancy between the GL and schedules submitted and the P15.39 billion negative Surplus in the Statement of Changes in Net Worth. In addition, the following are the other significant observations and recommendations: 1. Condonation of the entire interest of P14.303 billion on the long overdue DepEd and other agencies’ Employer’s Premium Contributions and the grant of additional five per cent discount on total validated DepEd Government Share (GS) obligation estimated at P346.168 million exceeded the maximum limit of the condonation rates allowed under PPG 202-10, resulting in the foregone income of P14.649 billion for the Social Insurance Fund (SIF).

1.1 We recommended that Management:

a. Reconcile the conflicting provisions of the subject PPGs with the pertinent provisions of RA 8291 relative to condonation;

iv  

b. Follow up the actions agreed upon in the MOA on the collection/remittance of the GS and PS premiums; c. Strictly implement the provisions of RA 8291 in the collection and remittance of premiums; and d. Exercise the powers and functions of GSIS to implement the penal provisions on all persons who commit criminal acts in connection with the operation of RA 8291.

2. Long outstanding uncollected/unremitted Employees’ Premiums of P4.512 billion, P3.744 billion for the SIF and ECIF, respectively, and GSIS Employees Accounts Receivable amounting to P311.707 million, deprived the System of resources to invest and fund the retirement claims and other benefits of members continuously not imposing provisions of RA 8291.

2.1 We recommended that Management :

a. Exercise its powers and functions as provided under Paragraph c, Section 5 of RA No 8291 and require the DepEd to collect/remit the PS Premiums totaling to P4.512 billion (to include interest and penalty) so that the necessary adjustment in the records of creditable service and benefits of its members will be corrected. b. Exercise its powers and functions as provided in PD No. 626, thus, demand for remittance of long overdue premium contributions and in the event of failure or refusal of the employer to comply with the demand, necessary or proper actions should be taken to enforce the collection of unpaid premium contributions in favor of the Fund. c. Enforce the penalties on erring employers as provided in Section 3, Rule V of the amended Rules and Regulations, approved on 21 July 1987 and took effect 1 June 1987. d. Review and strictly implement the policy and procedure on collection, monitoring and control of GSIS Employees Accounts Receivable account, as well as the necessary terms and conditions on CAP and GAVLP. e. Send collection notices and/or enforced collection thru salary deduction with authorization from concerned officials and hold responsible officials who cleared the retired/separated employees of their accountabilities.

3. Conflict in the provisions of PPG No. 201-09 (GSIS Consolidated Salary Loan Plus Program) and PPG No. 217-12 (Addendum to PPG No. 201-09) and other procedures resulted in various deficiencies which includes overcharged capitalized interest of P859.835 million and excess interest of P441.122 million, thus, affecting the benefits/interest of members contrary to the GSIS objectives of promoting the welfare of its members.

v  

3.1 We recommended that Management:

a. Revisit/restudy the policies embodied in the PPG No. 201-09 and its amendments. b. Enhance the Integrated Loans, Membership, Acquired Assets and Account Management System (ILMAAAMS) to:

• conform with the provisions of PPGs and the IRR of R.A. 8291 • compute the interest on a pro-rata basis • validate outstanding balance of previous loan before the granting of

proceeds;

c. Refund and/or credit the amounts that were overcharged to the member, as well as the overpayment of loans due to delayed postings of payment to the existing loan/s; and d. Review other service loans granted to members’ with the same policies as Consolidated Loans.

4. The accounts of the Pre-Need Fund such as the Cash In Bank account; Contributions and Premiums Receivable net of credit balances amounting to P266 million and Claims and Losses Payable amounting to P23.45 million are not correctly and reliably kept in such detail necessary to keep up with the standards and safeguards against inaccurate and misleading information needed by fiscal and control agencies of the government. Moreover, Pre-Need Financial Reserve requirement is insufficiently covered by a total of P1.86 billion.

4.1 We recommended that Management:

a. Review all cash transactions and all affected accounts and establish correct balances and adjust as necessary; b. Verify/validate and establish the common reasons for non-collection of Premiums that are supposed to be automatically deducted from the salary of the plan-holder. Reconcile the accounts and prepare the necessary adjustments to come up with correct balances. Likewise, analyze accounts for clearing and adjust accordingly; c. Conduct inventory of all active plan holders and that Claims and Losses Payable must be set up for each of the legitimate plan holders; and d. Plan and target how to fill in the Financial Reserve needed to equal the actuarial reserve requirement.

5. Government agencies whose properties were insured with the GSIS administered General Insurance Fund (GIF) were deprived of their share in the Fund’s disposable surplus/net earnings of P10.906 billion due to non-compliance with the provision of Section 9 of R.A. 656.

vi  

5.1 We recommended that Management: a. Comply strictly with the provision of Section 9, RA 656, to declare and apportion any disposable surplus that may result from its operations. b. In the absence of the Implementing Rules and Regulation (IRR) for RA 656, establish guidelines to fully implement provisions thereto with emphasis on Section 9.

6. Out of the 16,351 accounts of the Investment properties amounting to P10.838 billion, 12,730 accounts or 77.85 per cent were occupied by informal settlers valued at P8.943 billion, attributed to non-implementation of the provisions of the Revised Policy Guidelines on Acquisition, Administration and Disposition of Acquired Assets, thus establishes opportunity loss to GSIS properties. 6.1 We recommended that Management strictly implement the provisions in the Revised Policy Guidelines on the Acquisition, Administration and Disposition of Acquired Assets and exhaust all legal measures to protect, safeguard the interest and preserve the rights and ownership of GSIS over the properties. 7. The System has incurred a monthly average of P12.640 million loss on its investment in the GSIS Family Bank (GFB), which could have been avoided had the System used its subsidiary for banking operations. 7.1 We recommended that Management:

a. Utilize the service of the Subsidiary in member related services such as crediting of dividends, pension, loan administration; and/or b. Utilize the Subsidiary in some day-to-day banking activities such as payroll maintenance, check disbursements, and placement of investment; and c. Include in the plans of the System the long term strategies on its investment in GFB, in view of the TRO and the BSP PCA status of the former.

8. Various lapses in the GSIS computerized system, as well as conflicting provisions of the charter/IRR provisions contributed to non-attainment of GSIS objective of prioritizing the welfare of members, thus, GSIS principle of equity is not realized, as in the 144 sample retirees who were under paid a total of P1.330 million in their retirement claims, and Premium in Arrears amounting to P4.006 million were deducted from members matured policies, Cash Surrender Value (CSV), etc. 8.1 We recommended that Management:

a. Revisit and review for revision of conflicting policies for more effective and beneficial effect to members; b. Strictly implement the provisions of the charter specifically Section 41 (w) to impose discipline for prompt remittance;

vii  

c. Vigorously pursue their billing and collection effort to avoid recurrence of unremitted collection; and d. Reconcile/resolve the open items especially those items with open credits upon processing of members claims for retirement, life, and other benefits with GSIS in order to minimize post retirement adjustments in members’ records.

9. A total of 215 Real Estate Loan (REL) accounts worth P166.143 million, which are over six months past due as at December 31, 2012, were not foreclosed due to non-implementation of Item 6.2 of the Revised Policy and Procedural Guidelines on GSIS Individual Real Estate Loan Program per Board Resolution No. 109 dated May 22, 2001 resulting in opportunity loss to GSIS. 9.1 Considering the legal bases we have cited in the preceding paragraphs, we recommended that GSIS take appropriate actions on subject accounts which have been in default for more than six months. 10. Of the total outstanding restructured loan balance of P213.648 million, as at December 31, 2012, P166.569 million or 77.96 per cent have reverted back to past due status for four months to over three years, thereby defeating the purpose of the restructuring programs. 10.1 We recommended that Management revisit the present policy/guidelines as regards to its restructuring program and consider foreclosure for recurring default on payment of restructured loans. Implement a more stringent rules which must be strictly implemented. STATUS OF IMPLEMENTATION OF PRIOR YEARS’ AUDIT RECOMMENDATIONS Out of 35 audit recommendations (12 in 2009, six in 2010 and 17 in 2011) embodied in the CY 2012 Annual Audit Report, seven were fully implemented, 24 were partially implemented and four were not implemented. Details are presented in Part II-B of this Report.