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NATIONAL AGRIBUSINESS CORPORATION ANNUAL AUDIT REPORT FOR CY 2011

EXECUTIVE SUMMARY

Introduction

The National Agribusiness Corporation (NABCOR), an entity primary engaged in the production of livestock and agriculture products, was formally incorporated and registered on June 26, 1984 with the Securities and Exchange Commission (SEC) under SEC Registration No. 121272, with an authorized capital stock of P200 million which was later increased to P300 million in March 1990.

Since its incorporation, NABCOR is a wholly-owned subsidiary of Strategic

Investment Development Corporation (SIDCOR), now Human Settlements Development Corporation (HSDC).

On May 13, 2003, NABCOR executed various Deeds of Assignment in favor of

HSDC on the assignment and transfer of all shares of stock in all of its subsidiaries, namely:

1. Philippine Genetics, Incorporated (PGI) 2. ZNAC Rubber Estate Corporation (ZREC) 3. San Carlos Fruit Corporation (SCFC) 4. Agro-Livestock Commercial Development Corporation (ALCDC) 5. INCA Coffee Estate Corporation (ICEC) 6. Kaunlaran Food Corporation (KFC)

However, the said transfer/assignment did not take effect in the books. To date, only ZREC and ALCDC, now PADCC, are operational. The operations of the rest have been suspended or they were closed due to heavy losses. NABCOR’s Objectives

NABCOR was formed to engage in the primary production of livestock and agricultural crops consisting of fruits, vegetables and its by-products; to raise, breed and develop livestock both from domestic and foreign sources; to process and manufacture the same through appropriate processes and adaptation of local and foreign technologies; to transform them subsequently into raw materials and/or finished products for food, commercial, and/or industrial purposes; to sell and dispose such raw materials and/or finished products either locally or abroad; and in connection therewith, to construct, own, lease and operate or manage production plans, factories, buildings and warehouses for the processing and manufacturing of said raw materials and/or finished products.

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As Corporate Arm of the DA

On August 11, 2005, a Deed of Assignment was executed by HSDC in favor of the Department of Agriculture (DA), assigning to the latter, all its shares of stock with NABCOR. As provided for in the agreement, the transfer was in answer to DA’s need of a corporate vehicle, which has the flexibility to fast track the implementation of its programs and projects.

As a corporate arm of the DA, NABCOR sees itself as the leading government

corporation in the development of agribusiness enterprises in the countryside to improve productivity and real incomes of Small Farmers and Fisherfolk (SFF) within the context of farmer-focused, market-led and sustainable agriculture. Its mission of promoting agribusiness through the incubation of pioneering and missionary undertakings is focused for the benefit of the SFF.

NABCOR has a corporate structure that enables the DA to recover investments,

raise funds and avail loans as a way to fill in gaps in budgetary requirements to fully implement DA’s programs and projects without the usual delays caused by bureaucratic red tape. NABCOR can source its own funds via equity investments, grants and loans to implement viable and sustainable undertakings. NABCOR has the ability to attract and accelerate the flow of private sector investments through joint ventures, or other business arrangements. NABCOR acts as the trading and marketing arm of DA in the acquisition and distribution of products and inputs to the SFF. Further, NABCOR initiates “pioneering” or “missionary” projects in areas where investments are badly needed but private sector participation is not available. Major Projects Operated and Managed by NABCOR

The major projects operated and managed by NABCOR are the Agrifreeze Processing Complex (APC) and the Post Harvest Processing and Trading Centers (PHPTCs). In 2010 and 2009, ten additional PHPTCs were inaugurated and became fully operational. These were in addition to the four originally established Corn Centers. Below is the full list of these projects:

Project Location

Corporate Investment - Agrifreeze Processing Complex (APC)

Bldg. 7157, Claro M. Recto Avenue, Clark Freeport Zone

PHPTC Talakag San Antonio, Talakag, Bukidnon Under Joint Venture Agreement

PHPTC Kabacan NFA Compound, Osias Kabacan, North Cotabato

PHPTC Banga Purok Hinigiran, Brgy. Reyes, Banga, South Cotabato

PHPTC Malungon Purok Maliwanag, Malungon, Saranggani Province

PHPTC Sergio Osmeña Poblacion Alto Sergio Osmeña, Zamboanga del Norte

PHPTC Bayugan Mabuhay, Bayugan, Agusan del Sur PHPTC Ramon Magsaysay Ramon Magsaysay, Zamboanga del Sur

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PHPTC Sagay Sagay, Negros Occidental PHPTC Rosales Carmen West, Rosales, Pangasinan PHPTC Bantay Bulag, Bantay, Ilocos Sur PHPTC Jones Payac, Jones, Isabela PHPTC Kabankalan Hilamonan, Kabankalan, Negros Occidental PHPTC Madella Dipintin, Madella, Quirino PHPTC Alamada Camansi, Alamada, North Cotabato

The NABCOR’s On-Going Projects by Core Business are as follows:

a. Establishment and Development of Agribusiness Enterprise Centers

• Post Harvest Processing and Trading Center for Corn – can accommodate up to

100 metric tons of corn on cob per day and has modern post harvest machineries capable of producing premium quality corn grains from fresh out-of-the-farm corn on cobs. It operates thru two-stage drying coupled with sheller and an indirect type of heat exchangers.

• Agri-Freeze Processing Complex – equipped with state of the art processing, post harvest facilities and refrigeration system that is capable of processing huge quantity and high quality frozen products like frozen mango, mango puree, frozen okra and frozen processed meat.

• Sta. Barbara Rice Processing Complex – can store up to 1,100 metric tons of

rice. Its technologically advance milling system produces premium quality rice through the controller, huller, husk aspirator, pre-cleaner and paddy separator, brown rice de-stoner, two stages abrasive rice polisher, friction rice polisher, whitener, rice bins, color sorter, length grader, conveyor, bagger and dust collector.

b. Market Development and Promotion

• Barangay Food Terminal / Barangay Bagsakan and Bagsakan Center Support

Projects – these DA projects were implemented for job creation, support for entrepreneurs, agribusiness land development and food security by making the food available at reasonable prices. These projects involve direct marketing of agriculture and fishery products from farm to the end users.

c. Management and Consultancy Services • Maunlad na Agrikultura TV Program – an award-winning weekly TV Program of

the DA that reaped the Best Agriculture TV Program twice from the Philip Morris Brightleaf Agriculture Journalism Awards for the year 2008 & 2009. For five years now, Maunlad na Agrikultura has continuously served as a medium for information dissemination of agricultural policies and programs as well as on-going projects and undertakings of the DA Family. The show also features stories of farmers, fisherfolk and entrepreneurs who have been successful in the field of agriculture.

• ASEAN Integrated Pest Management ( ASEAN IPM) Knowledge Network – a Philippine initiative for regional cooperation in sustainable development with the ASEAN region that was approved during the 19th meeting of the ASEAN Ministers on Agriculture and Forestry (AMAF) held in Bangkok, Thailand on September 1997. It is an electronic, internet-like Knowledge Management Facility that ensures IPM Knowledge to be available at the point of need by

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program implementers and policy-makers. It is envisioned to help government and non-government organizations improve the effectiveness of their program implementation by making knowledge sharing easy among national IPM programs in the ASEAN region.

• Support to Philippine Agricultural and Fisheries Biotechnology Program –

mandated to promote agricultural growth and development through increased productivity by providing policy framework, directing public investments and establishing partnerships with other institutions in order to provide support systems and structures that would ensure the benefits of agricultural development to the poor particularly to areas in the countryside.

• Comprehensive Livelihood and Emergency Employment Program Intervention in Bohol (CLEEP) – is a General Program of the National Government in mitigating the impact of the financial crisis in 2009. Since agriculture contributes employment for about 35% in the country, the DA is tasked to provide support programs. The objective of the program is to improve farmers’ income opportunities through diversification of farming components and enhancement of farming practices through technology transfer and information dissemination.

• Rubber Development Program Office (RDPO) – created through Special Order

157 signed by Sec. Arthur C. Yap on March 6, 2007 designating NABCOR as the lead implementing agency of the National Rubber Development Program (NRDP). Its function is to synchronize all rubber initiatives; maintenance of rubber database; linkages with major rubber players; expansion of rubber production areas; and marketing.

• High Value Commercial Crops (HVCC) Support Projects – development of HVCC crops that offer higher income potential such as but not limited to coffee, vegetable, rubber, citronella, aloe vera and ubi. These projects were implemented to improve farmers’ income opportunities through diversification of farming components and use of improved varieties; enhance farmers’ know-how through technology transfer, more particularly organic farming and disseminate information on other lucrative farming endeavors.

• Postharvest, Information, Education and Communication (PIEC) Support

Services to the GMA Banner Programs – provision of postharvest support services including but not limited to capacity building of the farmers and fisherfolk, advocacy campaign/information dissemination (information, education, communication or IEC) that would support endeavors in line with addressing and mitigating the impact of climate change. The general objective of the project is to provide the farmers and fisherfolk of the needed postharvest and IEC support services in order to mitigate the impacts of climate change as well as capacitate them in implementation of globalized trading order.

d. Bulk Procurement of Farm Inputs and Equipment

• Brine Immersion Freezer / Liquid Quick Freeze Project – is geared on the

provision of a Liquid Quick Freeze machine that is capable to function both as an ice maker and as a quick freezer for agri-fishery products. This shall provide a revolutionary technology which shall service and accommodate the pre-cooling requirements of fruits, vegetables, livestock and fishery products.

• Dairy Goat Development Project – aims to promote dairy goat production to address hunger and nutrition issues; and dairy enterprise development. The project aims to infuse dairy goats and establish dairy goat modules to develop

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the quality of goat milk and other dairy goat products. The project includes training for proper goat raising and goat farm management. It also aims to provide employment and livelihood opportunities for the beneficiaries.

• Modernized Organic Farming Systems through Greenhouse Facility – This

project aims to promote organic farming through the use of protective culture and indigenous pest control practices. It also provides employment to farmers during off-season production. This project involves the establishment of greenhouses, trainings on greenhouses maintenance, vegetable and organic fertilizer production, and market development support. The project provides a total of 17 units of greenhouse to 10 strategically selected sites.

NABCOR’s Organizational Structure and Personnel

From December 20, 2006 to December 12, 2010, the set of the Board of Directors was composed of the following:

Chairman: Jesus Emmanuel M. Paras Members: Alan A. Javellana Clayton A. Olalia Dennis B. Araullo Bernie G. Fondevilla Raymundo H. Ramos

Felix Jose S. Montes

On December 13, 2010, a new set of the Board of Directors assumed office composed of the following:

Chairman: Proceso J. Alcala (DA Secretary) Members: Alan A. Javellana, (NABCOR President) Emerson U. Palad Pedrito R. Mendoza Honesto F. Baniqued Renato M. Sison Eden V. Austria

Mr. Alan A. Javellana served as NABCOR President from December 2006 up to

September 2011 while Mr. Honesto F. Baniqued served as Executive Vice President and Chief Operating Officer effective February 4, 2011 and as NABCOR President effective October 3, 2011.

Scope of Audit

The audit covered the operations of NABCOR for CY 2011.

As of December 31, 2011, there are two on-going special audits, as follows: 1. Performance audit conducted by the Special Audit Office, Special Services

Sector, this Commission, of all the projects implemented out of funds released by the DBM to the DA for CYs 2007 to 2009 which were in turn released by the Department of Agriculture (DA) to NABCOR as implementing agency.

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2. Special audit conducted by the Fraud Audit and Investigation Office, Legal Services Sector, of the fund transferred by the Department of Agriculture and attached agencies to the National Agribusiness Corporation, including the procurement of ice making machines with liquid quick freeze in the total amount of P455 million.

In view of the foregoing, this report covered only the financial and compliance aspects of the fund utilization by NABCOR as implementing agency of Priority Development Assistance Funds (PDAF) releases, with COA Circular No. 2007-001 dated October 25, 2007 prescribing guidelines in the granting, utilization, accounting and auditing of the funds released to Non-Governmental Organizations/People’s Organizations (NGOs/ POs).

Audit Opinion on the Financial Statements

The Auditor rendered an adverse opinion on the fairness of the presentation of the financial statements of NABCOR for CY 2011 for reasons stated in the Audit Certificate under Part I of this Report. NABCOR’s Financial Profile A comparative financial profile of NABCOR for CYs 2011 and 2010 is presented below.

Particulars

(In Millions) CY 2011 CY 2010

Assets P2,945.655 P3,275.878 Liabilities 4,643.269 4,274.005 Net Capital Deficiency (1,697.614) (998.127) Sales 35.383 49.602 Net (Loss)/Income (43.771) (10.758)

PDAF Received from the Department of Agriculture The DA transferred to NABCOR a total amount of P58.650 million for the period CY 2011 out of the PDAF of Senators/Congressmen for the implementation of various projects. .

In 2011, NABCOR released to NGOs/POs the total amount of P30.143 million

out of the funds received from the Department of Agriculture (DA) broken down as follows:

NGOs/Foundations Amount Sagip-Buhay People Support Foundation, Inc. P29,100,000 Kaagapay Magpakailanman Foundation, Inc. 1,042,750 Total P30,142,750

Summary of Audit Observations and Recommendations

Below is a summary of the significant findings and recommendations with details

discussed in Part II.A of this Report.

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Reiteration of CYs 2009-2010 Audit Observations and Recommendations

1. Financial transactions for the year 2011 could not be adequately substantiated

in view of the non-submission of disbursement vouchers (DVs) amounting to P68.693 million and journal entry vouchers (JEVs) amounting to P5.987 billion, thus, the accuracy and validity of the balances of accounts could not be ascertained. Likewise, there was no reasonable assurance as to the reliability of the generated financial data due to the absence of or inadequate accounting system controls.

Our previous recommendations are reiterated that Management:

a. Comply with Sections 4 and 107 of P.D. 1445 and pertinent provisions of COA Circular Nos. 97-004 and 2009-006; and

b. Cause the immediate submission of properly approved and fully documented DVs and JEVs listed in Annexes A to F for audit purposes.

We also suggested that a system audit be conducted on the computerized accounting structure to determine whether controls are in place and adequate to ensure the reliability of financial data. In this regard, management may request the services of the Technical Services Office, Special Services Sector, this Commission, coursed through this office.

Management committed to comply with the recommendations. Further, Management requested the conduct of a system audit on NABCOR’s accounting system addressed to the Cluster C Director, through this Office.

As of December 19, 2012, a total of 9 DVs and 34 JEVs for CY 2011 in the amounts of P197,463.43 and P7,446,436.64, respectively, were received.

CY 2011

Unsubmitted per AOM

Submitted

% of Submitted to Unsubmitted

Vouchers per AOM Amount Qty Amount Qty Amount Qty

DVs P 68,692,524.98 102 P 197,463.43 9 0.29% 8.82% JEVs 5,987,106,974.44 696 7,446,436.64 34 0.12% 4.88%

As of the same date, only one DV and 18 JEVs for CY 2009 and 2010 in the amounts of P20,601,583.20 and P67,645,682.26, respectively, were received.

CY 2009-2010

Unsubmitted per AOM

Submitted

% of Submitted to Unsubmitted

Vouchers per AOM Amount Qty Amount Qty Amount Qty

DVs 432,777,130.53 145 20,601,583.20 1 4.76% 0.69% JEVs 5,951,856,947.55 515 67,645,682.26 18 1.14% 3.49%

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2. Although bank reconciliation statements as of December 31, 2011 were prepared, the differences dating way back in CY 2006 between the balances per books and per bank confirmation of P959.559 million or an increase of 221 per cent from last year’s, had remained unadjusted. This resulted in credit or negative balances of several savings/current accounts totaling P3,406.536 million, or an increase of 95% from last year’s, thus, accuracy and reliability of the balance of the Cash in Bank account amounting to P61.168 million as of December 31, 2011 could not be ascertained. We reiterated our previous years’ recommendations that:

a. a monthly bank reconciliation statement be prepared separately for each

bank account and in a timely manner; and b. necessary adjustments be made to bring the book balance reconciled with

the bank records and to eliminate the existing credit (negative) balances of the cash in bank sub-accounts.

Management commented that separate monthly bank reconciliation statements for each bank account were prepared effective 2012. Further, adjustments reconciling the book and bank balances were taken up in the books as of December 31, 2011. However, adjustments to eliminate the negative balances will be made and taken up in the books in 2012.

3. The balance of the Property, Plant and Equipment (PPE) accounts as of December 31, 2011 of P1,049.136 million included items not held for use in the NABCOR operations amounting to P843.619 million, contrary to Philippine Accounting Standards 16 and 31. Moreover, the existence, accuracy and completeness of PPE held for use in NABCOR operations amounting to P205.517 million could not be ascertained due to NABCOR’s failure to conduct physical inventory and to provide adequate allowance for depreciation.

We reiterated the previous years’ recommendations that Management:

a. Reclassify PPE pertaining to PDAF, Postharvest and other projects to appropriate account/s in conformity with PAS 16 and 31, inviting attention to COA Circular No. 94-013 dated December 13, 1994 on the accounting treatment of transactions related to fund transfers;

b. Execute Deed of Donation for the transferred/donated PPE items;

c. Provide adequate allowance for depreciation for PPE held for use in operations including leasehold improvements. In determining the useful life of PPE for the computation of depreciation, please refer to COA Circular No. 2003-007 dated December 11, 2003 and Paragraph 56 of PAS 16 regarding leasehold improvements which provides that in determining the useful life of an asset, legal or similar limits on the use of the asset such as the expiry dates of related leases should be considered; and

d. Create an Inventory Committee to conduct physical inventory of all assets and prepare separate reports for assets pertaining to Projects and PDAF

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indicating description of the asset, acquisition cost and date, name of beneficiary/end users, location, date of deed of donation and other necessary information for monitoring purposes and accountability pending liquidation of the fund transfers.

Management stated that the Property Officer, with the assistance of project officers, facilitated the execution of Deeds of Donation. An Inventory Committee was created which conducted physical count of PPE at the Agrifreeze Processing Complex on November 28 and 29, 2012. The next physical count was scheduled on December 18 and 19, 2012 at the Central Office, however, this did not push through. Further, adequate allowance for valuation for PPE and leasehold improvements will be provided in CY 2012.

4. The validity and reliability of Long Term Payables amounting to P2,094.397 million could not be ascertained due to the unreconciled and unadjusted variance of P409.729 million between the book balance and creditors’ records and misclassification of the amount of P1,375.805 million as interest payable, which pertained to accrued interest expense considered as current liability.

We reiterated our last year’s recommendations that Management:

a. Coordinate with the concerned creditors for the reconciliation of the book balance with their records to come up with the correct balances and adjust the books, if necessary;

b. Look into the proper accounting treatment of interest payable and make the

appropriate corrections; c. Reverse the long outstanding payable to PNB if no current valid claim is filed;

and d. Make representation with the Philippine Genetics, Inc. to resolve the alleged

issue on the PDIC payable.

Management stated that adjustments were made to reconcile PDIC and NABCOR’s books in 2012 per JEV Nos. 12-12-2456 and 12-12-2457 both dated December 10, 2012. Further, the long outstanding payable to PNB was reversed per JV No. 12-12-2463 dated December 11, 2012.

A.2 CY 2011 Audit Observations and Recommendations – Financial Statement Audit

5. The existence and accuracy of the Materials Inventory balance of P76.929

million as at year-end was found doubtful due to unaccounted difference of P71.041 million between the total balances per books of the Head Office and Agrifreeze of P74.840 million and the physical inventory of P3.799 million; existence of inventory items with negative balances amounting to P28.448 million; and non-submission of the physical inventory report on the inventory balance of PHPTC-Talakag amounting to P2.089 million.

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We recommended that:

a. The Head Office and Agrifreeze work together to:

i. reconcile their records with the physical inventory report prepared by Agrifreeze; and

ii. analyze the credit entries made to the materials inventory account and

prepare the necessary adjusting entries to eliminate the negative balances;

b. PHPTC-Talakag conduct physical count of inventories, prepare the

corresponding inventory report and reconcile with book balance; c. Management require, for audit purposes:

i. the Agrifreeze to submit copies of Bin/Stock Cards of inventories as of December 31, 2011; and

ii. the Finance Department to submit JV09090784 dated September 30,

2009 and JV08120001 dated December 24, 2008.

Management commented that reconciliation of Agrifreeze records and physical inventory report is on-going. Likewise, adjusting entries to eliminate the negative balances will be reflected in the books for CY 2012. Management submitted copies of Agrifreeze warehouse inventory reports for the year ended December 31, 2010 and from January 1 to December 31, 2011; and monthly monitoring records for January to May 2011 and August to December 2011. Copies of JV No. 09-09-784 and 08-12-0001 were also submitted.

6. The accuracy of the total Cost of Goods Sold of P66.798 million for the year could not be ascertained in light of the flaws noted in the Cost of Goods Sold Statement (CGS) of Agrifreeze Processing Complex, specifically the inappropriate inclusion of P21.467 million pertaining to costs incurred for toll processing that were not relevant to the production and sale of goods and the difference of P1.864 million existing between its books and the CGS.

We recommended that Management:

a. Revise the Cost of Goods Sold Statement of Agrifreeze, and incorporate only items that are directly associated with the production and sale of goods in the computation of the Cost of Goods Sold;

b. Prepare adjustments based on the revised Cost of Goods Sold Statement to

reclassify expenses treated as part of Cost of Goods Sold to the appropriate accounts; and

c. Analyze and account for the difference between the books and the CGS and

prepare adjusting entries accordingly.

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Management submitted the following comments:

a. As to the inappropriate inclusion of P21,466,766.15 pertaining to costs incurred for toll processing were not relevant to the production and sale of goods because of:

i. Absence of direct material cost component – Cost of Goods Sold

does not pertain only to manufacturing cost alone. It pertains also to Conversion Cost (Direct Labor and Overhead) especially for service type of business and tolling businesses like Agrifreeze wherein Agrifreeze received revenue as payment for Conversion Cost it provided to its client.

ii. No sale that had transpired on the part of Agrifreeze – As service type

of business, Agrifreeze recorded its income as Service Revenue rather than Sales because in sales, there should be transfer of ownership which does not apply to a service type of business wherein there is no inventory maintained.

b. “Tips in Tax Filing by Dr. Ruperto P. Somera” downloaded from the PICPA

Website as the basis for its presentation of Cost of Goods Sold, to wit:

“Contents and Format of Financial Statements to be Attached to the Annual Income Tax Return or Information Return

The Profit and Loss Statement/Income Statement shall show

separately by segment (there should be proper labeling), with breakdown of the specific accounts, the following:

I. Sales/ Revenues; II. Cost of Goods Sold (for seller of goods)/ Cost

of Services (for seller of services); III. Selling and Administrative Expenses; IV.Financial Expenses, if any; V. Other Income; and VI.Other Expenses”

c. The difference of P1,864,212.12 between the books and Cost of Goods Sold

Statement were now reconciled and the necessary adjusting entries were made in September 2012.

Agrifreeze recorded its income from processing of hotdogs for Purefoods Hormel as Service Income while direct labor and overhead provided to tolling/processing of hotdogs as conversion cost under Cost of Goods Sold account. As stated in the above-cited PICPA article, the Income Statement shall show separately by segment. Thus, we believe that conversion cost should be recorded as Cost of Services and not Cost of Goods Sold which should be deducted from Processing Fees. The Income Statement should then be presented as follows:

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Sales xxx Cost of Goods Sold xxx Gross Profit/(Loss) on Sales xxx Processing Fees (Toll) xxx Cost of Services xxx Gross Profit/(Loss) on Services xxx INCOME xxx

A.3 Grant, Utilization and Liquidation of Cash Advances

7. The accountable officers who were issued cash advances were not bonded; bonds were insufficient to cover their accountabilities; and cashbooks were not maintained to record transactions pertaining to the cash advance, all contrary to COA Circular No. 97-002. Further, recurring expenses were paid out of the petty cash fund contrary to Section 39 of the National Government Accounting System, Volume I.

We reiterated our previous years’ recommendations that Management:

a. Ensure strict compliance with the pertinent provisions of COA Circular No. 97-002, P.D. 1445, Treasury Circular No. 02-2009 and Section 39 of NGAS Volume I; and

b. Prepare and submit the required monthly Report of Accountability for

Accountable Forms. Management informed that the two accountable officers will be adequately bonded upon the renewal of their bonds in May 2013. Further, the salaries of accountable officers with unliquidated cash advances and all amounts due them were withheld until full satisfaction of the outstanding amount. As of December 2012, all outstanding cash advances were fully liquidated. With respect to the Communication Allowance drawn from the petty cash fund for January and February 2012, Management explained that this was done mainly due to an unforeseen and emergency situation that calls for immediate cash disbursement. Management assured that similar situations will be avoided as far as practicable and as long as the same will not hamper the Company’s operations.

8. Cash advances granted to officers and employees which were used to defray

payment of traveling and other related expenses of the Corporation remained unliquidated in the total amount of P5.074 million as of December 31, 2011 contrary to Section 89 of PD 1445 and COA Circular No. 97-002 dated February 10, 1997. We reiterated our previous years’ recommendations that Management:

a. Adhere strictly to the provisions of Section 89 of PD 1445, COA Circular No.

97-002 and Section 14 of Executive Order No. 298;

b. Require the concerned officers and employees to immediately liquidate their cash advances. In case of failure to liquidate within the time allowed by

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regulations, cause or order the withholding of the payment of any money due the concerned official or employee;

c. Stop granting additional cash advances if previous cash advance has not

been liquidated; and

d. Strictly implement the prescribed period to liquidate the cash advance of 30 days for local travel and 60 days for foreign travel.

Management commented that the provisions of PD 1445, COA Circular No. 97-002 and Executive Order No. 298 are now strictly implemented.

A.4 Allowances and Other Benefits, and Contractual Services

9. NABCOR Board of Directors and Corporate Secretary were granted various allowances/benefits such as honoraria, transportation allowance, clothing/uniform allowance and financial assistance in the total amount of P1.691 million, contrary to Executive Order No. 24.

We recommended that Management:

a. Adhere strictly to the provisions of Executive Order No. 24; and b. Require from the members of the NABCOR Board of Directors to refund the

honoraria, transportation allowance, clothing/uniform allowance and financial assistance received.

Management submitted the following comments on the foregoing issues:

a. On Honoraria -

i. The honoraria of P5,000.00 granted to the Member of the Executive

Committee for the Post-Harvest and Information Education and Communication (PIEC) and Members of the Executive Committee for the High Value Crops and Commodities (HVCC) should not be construed as violating Section 8 of E.O. 24 because the limitation covers only Committee meetings of the Board of Directors and does not include or refer to Executive Committees of Projects mandated to implement programs of the DA. We have to understand that E.O. 24 was passed to check possible abuses of members of the Board of Directors when exercising their duties and responsibilities as members of the Board of Directors but does not cover works not related to BOD functions.

b. On Transportation Allowance -

ii. The grant of transportation allowance to four members of the BOD

and the corporate secretary does not violate Section 8 of E.O. 24 because the BOD members are not only regular BOD members but they are also managing directors of various projects of the

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corporation. As managing directors, they perform not only managerial functions but also project implementation and attend to day-to-day operations. In the performance of day-to-day operations, they do a lot of travel throughout the country relative to project monitoring, evaluation and follow-up works. Hence, a travel allowance is justified because the work involved is not related to works/functions of a BOD member.

iii. With respect to the Corporate Secretary, he is not a member of the

BOD and should be classified as an officer or manager of the corporation. He does not only attend and perform works during board meetings but more importantly, performs day-to-day corporate secretariat, legal and managerial functions just like other officers and managers of the corporation. Not being a member of the BOD, E.O. 24 does not apply to the Corporate Secretary.

iv. NABCOR, however, respectfully considers COA’s observation to

comply with E.O. 24. Rest assured that we will immediately comply and act accordingly.”

Hereunder are our rejoinders to the Management comments:

a. Section 8 of E.O. 24 states that compensation of the members of the BOD

shall be in the form of per diems and subject to limits as provided for under Sections 9 and 10 of the E.O. and salaries, allowances, benefits and other bonuses shall not be allowed unless specifically authorized by law or Charter and approved by the President, provided that the total of the foregoing compensation and per diems shall not exceed the limits stipulated under Sections 9 and 10 of E.O. 24.

b. Under the Corporation Code and the NABCOR’s By-Laws, the functions of

the Board pertain to policy-making only. As stated above, the designation of regular BOD members as managing directors of various projects of the corporation was without legal basis, and as such, they were not entitled to honoraria and fixed transportation allowance.

c. While it may be true that the Corporate Secretary is legally not a member of

the BOD, we still maintain our stand since he was not paid salaries as an officer/manager of the corporation but was only granted per diems. As such, he is also not entitled to fixed and commutable transportation allowance since he does not head an organizational unit nor has supervisory function. However, pursuant to EO 24, the Corporate Secretary may be allowed to reimburse transportation expenses in going to and from the place of meetings, travel expenses during official travel, communication expenses and meals during business meetings.

d. The Corporate Secretary was not entitled to financial assistance pursuant

to DBM Circular Letter No. 2002-2 which states that “Year End Bonus and retirement benefits are personnel benefits granted in addition to salaries. As fringe benefits, these shall be paid only when the basic salary is also paid.” The Corporate Secretary is not part of the NABCOR personnel and is not paid the basic salary. Hence, he is not entitled to the year-end benefits

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such as the financial assistance which is a personnel benefit granted in addition to salaries and which is paid only when the basic salary is also paid.

We will issue the necessary Notice of Disallowance.

10. NABCOR’s personnel plantilla and salary schedule was not approved by the Board of Directors and was not submitted to the Office of the President through the Department of Budget and Management (DBM) or through the Governance Commission for Government Owned or Controlled Corporations (GCG), for review and approval.

We recommended that the Personnel Plantilla and Salary Schedule be approved by the Board of Directors in accordance with the Company’s By-Laws and submitted for approval to the Office of the President through the Governance Commission for GOCCs. No Management comments were received as of audit date.

11. Allowances and other benefits were granted to officers and employees in CY 2011 totaling P5.452 million without sufficient legal basis.

We recommended that Management submit legal basis for the grant of the subject allowances and benefits, or approval from the Office of the President, without which the same shall be disallowed in audit.

Management contended that NABCOR is a government owned and controlled corporation without original charter, hence, NABCOR is not covered by existing rules and regulations issued by the Civil Service Commission. Instead, relevant rules issued pursuant to the Labor Code of the Philippines govern its human resource concerns which allow the grant of salaries and emoluments approved by its governing board. Presently, NABCOR is cooperating with the Governance Commission for GOCCs in the latter’s active pursuit to standardize all salaries, allowances and emoluments of GOCC officers and employees.

We maintain our stand that Board Resolutions approved by the Board of Directors were not sufficient basis for the grant of allowances and other benefits to NABCOR officers and employees. They should be reviewed and approved by the Governance Commission for GOCCs pursuant to RA 10149.

12. The validity and accuracy of the amount of P6.989 million paid to the contractor under General Services account cannot be established due to non-stipulation in the contracts of services of the number of personnel, including trainees, supplied by the contractor; non-compliance of the computation of payments to skewers and deboners with the rates specified in the contract; and the absence of guidelines in determining the required manpower supply of Agrifreeze Project.

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We recommended that Management:

a. Require Agrifreeze to submit/explain the basis in determining the number of personnel supplied by the contractor in the absence of a specific provision in the contract of services;

b. Request the Agrifreeze concerned contractor to refund the amount of

P105,705.53 paid for the trainees; c. Re-compute the amount paid to the skewers/deboners using piece rates

prescribed in the contract and collect from the contractor any overpayment. d. Prepare guidelines in determining the manpower requirement of Agrifreeze

Project which will serve as basis for future contract of manpower services; and

e. Ensure that all the terms of a contract of service are comprehensive and

detailed to preclude questions on its real intent.

Management submitted the following comments:

a. The exact number of personnel cannot be stipulated in advance in the contract due to the nature of the business which is manufacturing. The number of personnel supplied will be based on the Production Order requirements submitted by the Purefoods Hormel Corporation every week, while the contract covered a certain period of one month or more up to one year and it is not advisable to have a frequent revision of said contract, considering the cost and time consumed before it gets signed/approved.

Bidding for the manpower services is still on-going, and this issue will be addressed in the new contract.

b. Letter to J. Alcabasa General Services demanding a refund for the said

amount was already sent.

c. They are still in the process of re-computation of the amount paid to skewers/deboners because some data regarding the per piece produced per employees will be retrieved from the warehouse/stock room.

d. On the requirement that Management prepare guidelines in determining the

manpower requirement of Agrifreeze, this will be addressed in the new contract.

We requested a copy of the letter addressed to J. Alcabasa General Services demanding the refund of the payment to the trainees. However, Agrifreeze furnished the Team with a letter dated November 5, 2012 addressed to Mr. Jose L. Alcabasa soliciting feedback or concerns regarding the issues discussed in the AOM.

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A.5 Dairy Goat Development Project 13. The validity of the Contracts for the Supply and Delivery of Dairy Goats Lot 1

and Lot 2 awarded to Ebenezer Goat Farm for the purchase of 4,794 heads dairy goats under Livestock Inventory and Donation accounts with total contract price of P74.944 million under the Dairy Goat Development Project could not be established due to the non-submission for audit of the required documents for the procurement of goods as provided in R.A. 9184 and its Amended Implementing Rules and Regulations.

We recommended that Management immediately submit for audit the documents required in Annex Q in compliance with the applicable provisions of R.A. 9184 and its Amended IRR. No Management comments were received as of audit date.

14. The accuracy of the payments made to Ebenezer totaling P71.048 million

under the Livestock Inventory and Donation accounts could not be ascertained in view of the discrepancies in the quantity of the imported goats delivered by the supplier and inspected/accepted by NABCOR as against the total number released from quarantine and as per tag list issued by the Australian Quarantine and Inspection Service. Likewise, documents that form part and/or requirements of the contract agreements and other necessary reports, which could attest that the goats delivered to and paid for by NABCOR conformed to the agreed specifications were not submitted for audit.

We recommended that Management:

a. Account for the discrepancies noted in the quantity of imported goats delivered and inspected/accepted, released from quarantine and cleared for exportation to establish the actual quantity of the goats paid;

b. Submit for audit the documents that form part and/or requirements of the two

contract agreements and other reports cited above showing that the specifications stated in the contracts were met.

No Management comments were received as of audit date.

15. NABCOR failed to impose liquidated damages on Ebenezer Goat Farm for breach of the delivery terms of the contact agreements, contrary to the specific conditions of the contracts and Section 68 of the Amended Implementing Rules and Regulations of R.A. 9184.

We recommended that Management collect from the supplier the liquidated damages for breach of the delivery terms of the contract in accordance with the specific conditions of the contracts and Section 68 of R.A. 9184 and its Amended IRR.

Management commented that while the urgency of the delivery requirements for the said animal is required under the terms and conditions of the contract, health factor

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is one of the main reasons for the cause and/or circumstances of delays in the release of animals from the quarantine site to recipients. These circumstances were beyond the control of NABCOR/ Ebenezer Farm and should not be taken to impute a general impression of unjustifiable deviation in pursuing the entire project, as discussed below.

a. Some animals exhibited weakness and other symptoms of respiratory

incapacity due to stress brought by drastic fluctuations in temperature; b. Difficulty in the synchronization of delivery schedule and availability of

recipients to receive the animals; c. Preparedness of the recipients to accept due to:

i. Areas like Pampanga, Tarlac and the whole Region II were hit by drought causing decline in pasture production effecting the fodder supplies;

ii. It was also observed that during the said delivery dates, several

typhoon like Dante/Kujira (2009), Ondoy/Ketsana (September 2009), Pepeng/Parma (October 2009), Basyang/Cosyong (2010), Juan/Megi (October 2010), Pedring/Nesat (October 2011), Sendong/Washi (December 2011) occurred hampering the scheduled delivery.

iii. Some farm households have insufficient labour to both take their

animals to other grazing areas and continue with necessary farming operations;

iv. Climate change increases the prevalence of parasites and diseases

that affect livestock. The earlier onset of rain and warmer day could allow some parasites and pathogens to survive more easily. In areas with increased rainfall, moisture-reliant pathogens could thrive.

We appreciate the reasons/circumstances cited by Management that caused the delay in the delivery of the goats by the supplier, however, Clause 16 of the General Conditions of the Contract specifically provide the procedures in case of delays in the supplier’s performance, which were not complied with:

16.2 If at any time during the performance of this Contract, the Supplier

should encounter conditions impeding timely delivery of the goods, the Supplier shall promptly notify the Procuring Entity in writing of the fact of the delay, its likely duration and its cause(s). As soon as practicable after receipt of the Supplier’s notice, and upon causes provided for under GCC Clause 20, the Procuring Entity shall evaluate the situation and may extend the Supplier’s time for performance, in which case the extension shall be ratified by the parties by amendment of Contract.

16.3 Except as provided under GCC Clause 20, a delay by the Supplier in

the performance of its obligations shall render the Supplier liable to the imposition of liquidated damages, unless an extension of time is agreed upon without the application of liquidated damages.

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GCC Clause 20 provides:

20.1 The supplier shall not be liable for liquidated damages, if and to the

extent that its delay in performance or other failure to perform its obligations under the contract is the result of a force majeure. Force majeure or fortuitous event shall be interpreted to mean an event which the contractor could not have foreseen, or which though foreseen, was inevitable. It shall not include ordinary unfavorable weather conditions and any other cause the effects of which could have been avoided with the exercise of reasonable diligence by the contractor.

Hence, we maintain our observation and recommendation.

16. Incurrence of expenses amounting to P2.756 million in connection with the

quarantine of the imported goats procured under the Dairy Goat Development Project was without legal basis.

We recommended that Management immediately collect from Ebenezer Goat Farm the amount of P2.756 million representing quarantine related expenses that should be for the account of the said supplier. Management submitted the following comments:

a. Based on the Guidelines for the Importation of Live to the Philippines issued by the Philippine Government through the Bureau of Animal Industry (BAI), the animals that arrive in the country shall undergo a quarantine period of at least thirty (30) days. During the quarantine period, the animals shall be subjected to periodic inspection and serological testing if warranted by the deputized Veterinary Quarantine Officer and those deputized by the BAI. No animal shall be removed from the location of quarantine while undergoing the isolation period.

b. A separate quarantine facility is needed with the ability to accommodate

animals upon arrival. If a specific quarantine facility is not present, then newly acquired animals should be isolated from the established collection in such a manner as to prohibit physical contact, to prevent disease transmission, and to avoid aerosol and drainage contamination. Such facility is obligatory for issuance of permit. If the receiving institution lacks appropriate facilities for isolation of large animals, an accredited institution may be applied to the receiving institutions protocol. In such a case, Ubay stock farm in Bohol and Central Luzon State University in Muñoz, Nueva Ecija are the two biggest quarantine sites available in the Philippines in terms of location nearest to the possible beneficiaries. No other government facility is capable to hold/contain large number of imported animals during the time of importation.

c. However, this two large quarantine sites accredited by BAI is designed for

large ruminants such as cattle and not for small ruminants or goat and

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sheep. NABCOR was constrained to redesign the paddocks/cage that will suit the BAI requirement/standard procedure for animal containment, specifically small ruminants. NABCOR needs an area with adequate shelter that completely separates the imported goats to protect the other goats from any unknown or undisclosed health problems that the new goats might have.

d. NABCOR incurred P2,755,888.61 for quarantine related expenses at the two

quarantine areas which include construction, preparation and maintenance of the quarantine areas. The said expenses were reflected in the project’s approved Work and Financial Plan, hence, expenses to this account have been foreseen. Medical supplies, veterinary services and professional fees were incurred after the 30 days quarantine period. However, purchases of the said items were anticipated by NABCOR and put into inventory for immediate release once the 30 days quarantine period lapses, as contingency measures to lessen the mortality of the goats in transit and upon delivery.

We maintain our view that the quarantine related expenses incurred before the final acceptance of NABCOR should be for the account of the supplier pursuant to Clause 6.2 of the Special Conditions of the Contract.

A.6 Agricultural Competitive Enhancement Fund (ACEF) Cold Chain Project

17. Thirty-three units of Brine Immersion Freezing machines costing P4.645

million each or a total of P153.285 million representing 34% of the total procured 98 units of P455.210 million which were purchased in 2010 remained undistributed as of December 31, 2011, way beyond the timeline for the implementation of the project which was scheduled to be completed on the 4th quarter of CY 2010. As a result, losses were sustained in terms of warehouse management fee of P125,117.79, depreciation in value of the machines, and deprived benefits expected to have been derived from the project.

We reiterated our previous year’s recommendations that Management:

a. Assess the progress of the implementation of the project through

reevaluation of:

i. The capability of the recipients to provide the counterpart resources including maintenance of the machine; and

ii. The need of the recipients for the machine in connection with the

volume of their produce;

b. Formulate alternative plans for the economic disposition of the remaining units;

c. Ensure the continuous economical operation of the machines; and

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d. Formulate the mechanism for the regular monitoring of the operation of the machines.

The same comments as in last year were submitted by Management.

A.7 Implementation of Priority Development Assistance Fund (PDAF) Projects

18. PDAFs of two legislators totaling P29.100 million were released to Sagip-

Buhay People Support Foundation, Inc. (SBPSFI) despite its failure to comply with the requisites for entitlement to government funds contrary to Section 4.4 of COA Circular No. 2007-001. Likewise, the procedure for the availment, release, utilization, accounting and reporting of funds were not in conformity with Sections 4.5.2 to 4.5.6, 5.4 and 6.1 of the same COA Circular and the Memoranda of Agreement. Further, documents attached to the liquidation reports submitted by SBPSFI were incomplete, contrary to Section 4(6) of P.D. 1445 while those submitted revealed deficiencies casting doubts on the validity of liquidation reports submitted.

We recommended that Management:

a. Require SBPSFI to submit the documents listed under Item Nos. 18.4.a, 18.4.b, 18.6(d-f); and

b. Submit justification/explanation/requirements, and address the deficiencies

noted under Item Nos. 18.4.c, 18.5, and 18.6(a-c).

Management submitted the following comments:

a. On non-compliance with the provisions of COA Circular No. 2007-001 relative to the submission of documents required for entitlement to government funds as provided in Item 4.4.

i. Financial Reports audited by an Independent Certified Public Accountant for the year 2010 was not submitted.

Under relevant Philippine Accounting Rules and Regulations, financial statements of corporations, foundations and/or associations are required to be audited yearly by an independent auditor. Entities are required to file their Audited Financial Statements (AFS) for the preceding year with the Securities and Exchange Commission, the Local Government Units (as basis of tax liabilities) and the Bureau of Internal Revenue (as basis of Income Tax Returns). Since the project was initiated in December 2, 2010, upon the request of the Office of Sen. Honasan, the audited financial statements for the year 2010 of the Foundation was not yet available at that time.

ii. Documentary requirements to substantiate compliance with Item 4.5 relating to the procedures for the availment, release and utilization of government funds were not submitted by the GO, such as:

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(1) List of priority projects within the GO’s Work and Financial Plan

NABCOR is a government owned and controlled corporation that parallels the thrusts and objectives of the DA and acts as the latter’s corporate arm. Its mandate is to promote Philippine agribusiness in any manner. It is submitted that the above-stated project is within the ambit of NABCOR’s capabilities as a corporation. Being an attached agency of the DA and pursuant to the MOA dated December 16, 2010 executed by and between the DA and NABCOR, there was no apparent need for the said PDAF Projects to be identified and made public since said project was already in line with the mandate of NABCOR and that project and its beneficiaries were clearly mandated by the DA.

(2) Furthermore, since the proponent NGO and/or Foundation was

properly identified by the Office of Sen. Honasan in a letter dated December 2, 2010, pursuant to the MOA dated July 28, 2011 entered into among NABCOR, Sen. Honasan and the Foundation, NABCOR has completely relied upon the Office of Sen. Honasan to conduct the necessary bidding and legal processes to secure a beneficiary for the said project in a fair and lawful manner.

iii. Bids and Awards Committee Accreditation

Item 4.5.2 clearly states that accreditation and/or evaluation of the NGO/PO shall be conducted by the BAC and/or committee created for said purpose. It must be noted that the NGO/PO was clearly and unequivocally designated by the Office of Sen. Honasan.

b. On non-compliance with the Memoranda of Agreement –

i. NABCOR is currently exerting its best efforts to secure the

enumerated documents and undertake all available remedies against the Foundation in this regard. NABCOR is also in the process of coordinating with its statutory counsel – the Office of the General Corporate Counsel (OGCC) – to address the pending issues. Management assured that they will immediately inform COA of any developments on these matters at the soonest possible time.

ii. NABCOR’s justification/explanation why it did not exercise its option

provided in Article IV of the MOA considering the apparent breach of the Terms of Agreement by the proponent, NABCOR has the right or option to terminate the agreement -

The project is an agricultural missionary project that is in line with NABCOR’s mandate, specifically its mission and vision. In good faith, NABCOR management relied on the Foundation’s capabilities to implement said project pursuant to the MOA dated May 23 2011 signed by the parties involved. The project has a period of one year from start of implementation. NABCOR has initiated efforts to coordinate with the OGCC to file the necessary legal remedies available to NABCOR in order to protect its interests on the funds released for the Project. NABCOR management shall

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immediately provide COA with the documents appertaining to its actions taken.

iii. SBPSFI and NABCOR clarify the deficiencies and all other issues noted -

NABCOR is currently exerting all efforts to formally inform the officers of SBPSFI of the abovementioned COA observations and to compel them to submit the required documents for compliance on this matter.

Management submitted the following:

a. Project Proposal for the projects “Development and Implementation of

Agricultural Production” by Sen. Honasan and “Livelihood Development Program” by Congresswoman Hontiveros signed by NABCOR employees and officials and approved by the DA Director – HVC; however, Item 4.4 of COA Circular 2007-001 requires the submission of a complete project proposal signed by the NGO’s officers;

b. Authority of Mr. Cacal to sign Box A of the Disbursement Vouchers of

all transactions related to PDAF Projects; and c. Certified true copies of Check Nos. 495312 dated March 1, 2012 and

495313 dated April 26, 2012 representing the 3rd and 4th tranches of fund releases of Congw. Hontiveros PDAF Project. However, the original copies of the said cleared checks were not submitted for audit. Original cleared checks numbered 495306 and 495311 dated September 14, 2011 and February 9, 2012, respectively, remain unsubmitted as of December 27, 2012.

In its letter dated December 18, 2012, Management prayed that the AOM issued regarding this issue be lifted and that NABCOR and its employees and officers be freed from any liability.

Pending submission of the required documents enumerated under 18.4.a, 18.4.b and 18.6(d-f) and justifications/explanations/requirements under 18.4.c, 18.5 and 18.6(a-c), our observations still stand.

19. PDAF of a legislator amounting P1.043 million was released to Kaagapay Magpakailanman Foundation, Inc. (KMFI) despite its failure to comply with the requisites for entitlement to government funds contrary to Section 4.4 of COA Circular No. 2007-001. Likewise, the procedure for the availment, release, utilization, accounting and reporting of funds were not in conformity with Sections 4.5.2 to 4.5.6, 5.4 and 6.1 of the same COA Circular and the Memorandum of Agreement (MOA). Further, documents attached to the liquidation reports submitted by KMFI were incomplete, contrary to Section 4 (6) of P.D. No. 1445 while those submitted revealed deficiencies casting doubts on the validity of liquidation reports submitted.

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We recommended that Management:

a. Require KMFI to submit the documents listed under Item Nos. 19.5.a, 19.5.b and 19.7(a,d);

b. Submit justifications/explanations/requirements, and address the deficiencies

noted under Item Nos. 19.5.c, 19.6, and 19.7(b-c); c. Return to the Department of Agriculture the unused project funds pursuant to

the Memorandum of Agreement between DA and NABCOR.

Management has the following comments:

a. On non-compliance with the provisions of COA Circular No. 2007-001 relative to the submission of documents required for entitlement to government funds as provided in Item 4.4.

i. Financial Reports audited by an Independent Certified Public Accountant for the year 2010 was not submitted –

Since the project was initiated in December 2, 2010 upon the request of the Office of Cong. Umali, the audited financial statements for the year 2010 of KMFI was not yet available at that time. Due to the recent reorganization currently being conducted by NABCOR, they are still in the process of searching for the AFS for the year 2009. They shall immediately submit the same to comply with the requirement.

ii. Disclosure by the Foundation of other related businesses, if any, and extent of ownership therein as required in Item 4.4.4 -

No other document was submitted by the Foundation, however, NABCOR deems the Foundation compliant with the abovementioned requirement upon its submission of its AFS as the same is considered independent as audited by an external CPA. NABCOR at that time relied solely on said document as a form of disclosure of “other related businesses”, if any.

iii. Work and Financial Plan (WFP) and Statement of Sources and Details of Proponent’s Equity Participation as required in Item 4.4.5 –

The WFP is included as an attachment and/or annex of the Project Proposal. With regard to the Statement of Sources and Details of Proponent’s Equity Participation, the document needed was not submitted by the Foundation. However, the AFS was relied upon as basis of the Foundation’s assets and/or equity in terms of monetary value. Since the same was audited by an independent CPA, NABCOR at that time relied on said document as a form of disclosure of its “equity participation”.

iv. Documentary requirements to substantiate compliance with Item 4.5 relating to the procedures for the availment, release and utilization of government funds were not submitted by the GO, such as -

(1) List of Priority Projects within the GO’s Work and Financial Plan

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Since the proponent NGO and/or Foundation was properly identified by the Office of Cong. Umali in a letter dated December 8, 2010, pursuant to the MOA dated May 23, 2011 entered into among NABCOR, Cong. Umali and KMFI, NABCOR has completely relied upon the Office of Cong. Umali to conduct the necessary bidding and legal processes to secure a beneficiary for the said project in a fair and lawful manner.

(2) Bids and Awards Committee Accreditation

Item 4.5.2 clearly states that accreditation and/or evaluation of the NGO/PO shall be conducted by the BAC and/or committee created for said purpose. It must be noted that the NGO/PO was clearly and unequivocally designated by the Office of Cong. Umali.

b. NABCOR’s justification/explanation why it did not exercise its option provided in Article IV of the MOA considering the apparent breach of the Terms of Agreement by the proponent, the NABCOR has the right or option to terminate the agreement –

The project is an agricultural missionary project that is in line with NABCOR’s mandate, specifically its mission and vision. In good faith, NABCOR management relied on the Foundation’s capabilities to implement said project pursuant to the MOA dated May 23 2011 signed by the parties involved. The project has a period of one year from start of implementation. NABCOR has initiated efforts to coordinate with the OGCC to file the necessary legal remedies available to NABCOR in order to protect its interests on the funds released for the Project. NABCOR management shall immediately provide COA with a report on the matter after consultation with the OGCC.

c. NABCOR to return to the DA the unused funds –

At present, NABCOR’s Finance Department is currently reconciling its accounts for the proper disposition of the above-stated funds. Management assured that they shall and will abide by the rules and regulations governing this matter.

d. KMFI and NABCOR clarify the deficiencies noted –

NABCOR is currently exerting all efforts to formally inform the officers of the Foundation of the abovementioned observations and to compel them to submit the required documents for compliance on this matter.

Likewise, Management submitted the following documents: a. Project Proposal for the projects “Economic Improvement through

Agricultural and Livelihood Programs” by Cong. Umali signed by NABCOR employees and officials and approved by the DA Assistant Secretary. Item 4.4 of COA Circular 2007-001 requires the submission of a complete project proposal signed by the NGO’s officers;

b. Authority of Mr. Cacal to sign Box A of the Disbursement Vouchers of all

transactions related to PDAF Projects;

In its letter dated December 18, 2012, Management prayed that the AOM issued regarding this issue be lifted and that NABCOR and its employees and officers be

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freed from any liability. However, pending submission of the required documents enumerated under 19.5.a, 19.5.b, 19.7 and 19.7(a,d) and justifications/ explanations/requirements under 19.5.c, 19.6 and 19.7(b-c), our observations still stand.

A.8 Other Issues 20. NABCOR did not prepare and submit its Corporate Operating Budget for CY

2011 to the Department of Budget and Management (DBM) as required under Corporate Budget Circular No. 20 dated April 27, 2005.

We reiterated last year’s recommendation that Management strictly adhere to the provisions of Corporate Budget Circular No. 20 requiring the submission of its COB to the Department of Budget Management through the Department of Agriculture. Management commented that the new management of NABCOR has only started in 2011. However, an appropriate and effective turnover of relevant documents was not conducted by the former officials. Nevertheless, Management assured that only regular operating requirements have been incurred by NABCOR in 2011. Moreover, they are currently preparing the Corporate Operating Budget for 2013.

21. Payment of gasoline consumption amounting to P0.689 million of privately owned vehicles used for various travels was contrary to the provisions of COA Circular No. 96-004 dated April 19, 1996.

We recommended that Management adhere strictly to the provisions of COA Circular No. 96-004 and require the refund of the above amount from all personnel concerned. Management explained that gasoline expenses were incurred in the course of performance of official functions. Inasmuch as NABCOR does not own government vehicles, these gasoline costs were incurred in conjunction with the rental of public/private utility vehicles necessary in traveling to and from project sites and venues of official functions. It is common practice that lessors of public/private utility vehicles for hire do not include the costs of gasoline in the rental fees of these vehicles. Hence, it is but compulsory for NABCOR to pay for the gasoline of the vehicles rented. This arrangement of bearing the costs of gasoline also effectively reduces the cost of transportation rental. Management assured that they shall comply with relevant rules for future similar transactions.

During the exit conference, it was discussed that the payment of gasoline expenses for privately-owned vehicles hired during official travels may be allowed in audit. However, gasoline expenses incurred for travel using privately-owned vehicles of NABCOR officers and employees still cannot be allowed in audit.

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Status of Implementation by the Auditee of Prior Years’ Audit Recommendations

Of the 34 audit recommendations embodied in the CY 2008 Annual Audit Report, two were implemented, five were partially implemented and 27 were not yet implemented. Details are discussed in Part II.B of this Report.