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HON. ARMANDO G.

PANGANIBAN
Professor

This report describes government budgeting, accounting and auditing arrangements. For the purposes of this report, government comprises national government agencies, local government units and government owned and controlled corporations.

Introduction describes fiscal pressures and recent developments. Legal Framework for Government Accounting sets out the key laws that govern government accounting and auditing arrangements. Organizational Roles and Responsibilities describes the organizations that coordinate budgeting, accounting and auditing within government. Budgeting and Reporting Calendar presents the annual timetable for budgeting and reporting processes. Accounting and Reporting Arrangements describes accounting and reporting arrangements, including bases of accounting and the contents of financial reports. Accounting Information Systems discusses the status of accounting information systems.

Report Structure

Report Structure
Internal Auditing describes internal auditing arrangements and requirements. Government Accounting Personnel discusses the competency and availability of government accounting personnel, and recent legislative initiatives to reduce constraints. Public Financial Management Reform Program describes the objectives and activities of the Governments public financial management reform program. Anticorruption Measures examines initiatives to reduce graft and corruption. Issue Synopsis: Government Budgeting and Accounting summarizes the issues identified in this chapter and in other diagnostic studies.

Introduction
DIAGNOSTIC STUDY OF ACCOUNTING AND AUDITING PRACTICES IN THE PHILIPPINES
The Philippines realized fiscal surpluses between 1994 and 1997, prior to the Asian financial crisis. However, indicators have deteriorated significantly in the past 3 years. The Arroyo administration faced a worsening fiscal position that the Aquino government have inherited. Unless the Government curbs expenses and improves revenue collection, the coffers of the government can go empty that will spell bankruptcy for the ruling system because as early as 2001, budget deficit have reached P200 billion ($4.2 billion).

Introduction
The weak fiscal position is creating tensions with multilateral development banks. Moreover, it restricts the Governments ability to address infrastructure issues and poverty reduction. Furthermore, the Philippines experiences significant ongoing problems with corruption. With annual capital expenditure exceeding $3.5 billion, the procurement of goods and services, and implementation of infrastructure projects by the Government present significant opportunities for graft.

Government accounting and auditing arrangements were formulated in 1947. They have many strengths including the use of double entry bookkeeping, a mixed cash-accrual accounting base, a cadre of well-trained accountants, and potential access to a large external pool of trained accountants.

Public management arrangements are characterized by institutional and regulatory rigidities.

Efforts to modernize the public sector have gathered pace in recent years. Among other things, the Government has tried but has not yet succeeded in the:
1. develop a Medium-Term Expenditure Framework (MTEF); 2. introduce output and outcome performance measures and targets; 3. overhaul procurement practices; 4. introduce 3-year baseline budgeting; 5. modernize auditing practices; 6. introduce computerized financial management information systems; and 7. prepare for the introduction of full accrual accounting.

Legal Framework for Government Accounting


The Constitution of the Philippines 1987 mandates the keeping of government accounts, the promulgation of accounting rules, the audit of financial reports, and the submission of reports covering the Governments financial operations and position.
In particular, Article IX defines three constitutional commissions as being separate and independent bodies. These are the Civil Service Commission (CSC), the Commission on Elections, and the Commission on Audit (COA). The Constitutional provisions relating to prescriptiveany reform effort must take consideration. COA are them into

At the beginning of the 20th century, the Second Philippine Commission, acting as a legislative body, enacted appropriations measures for the annual expenditures of the government. This was in accordance with the Philippine Bill of 1902, which decreed that disbursements from the National Treasury were to be authorized only in pursuance of appropriations made by law.

With the passage of the Jones Law in 1916, the Philippine Legislature was set up with two chambers: the Philippine Senate and the House of Representatives. The GovernorGeneral was to submit, within 10 days of the opening of the Legislature's regular session, the annual budget. Two years later, the Council of the State was formed to prepare the budget that the Governor-General was required to submit to the Philippine Legislature.

Budget Office was formed to assist in the preparation, enactment and implementation of such appropriations made by law. Four divisions made up the Office: A Budget Division took charge of agency regular budgets; an Expense-Central Division took care of special budgets; a Service Inspection Division screened appointments and requests for the creation of positions; and an Administrative Division handled routine administrative matters. The Constitution of 1935 established both budget policy and procedure, which were

The Budget Commission was established by Executive Order (EO) No. 25 issued on April 25, 1936. It became a Ministry by virtue of Presidential Decree (PD) No. 1405, signed on June 11, 1978. Following the pattern in the United States Federal Government, the Budget Commission was, and the Ministry of the Budget continues to be, part of the Office of the President and separate from the other fiscal agencies of government that form part of the Ministry of Finance.

The first Budget Law was passed on December 17, 1937 as Commonwealth Act (CA) No. 246. It took effect on January 1, 1938, providing for a line-item budget as the framework of the governments budgeting system. CA No. 246 called for a balanced budget emphasizing matching proposed expenditures with existing revenues.

On June 4, 1954, Republic Act (RA) No. 992, otherwise called the Revised Budget Act, was enacted providing for an enhanced role of the Budget Commission as the fiscal arm and budgeting adviser of the President. The preparation of the budget was to include the aggregation of the programs of the different departments and agencies of the Government. At this point, a performance

The Integrated Reorganization Plan of 1972, under Presidential Decree No. 1, implanted re-organizational changes in the Budget Commission with four of its units retained: the Budget Operations Office; National Accounting Office; Management Office; and Wage and Position Classification Office (WAPCO). Five staff units were provided the Commission: for planning service; for financial and administrative services; or training and information services; a Legislative Staff; and a Data

The change to a parliamentary form of government was instituted by the 1973 Constitution. The legislative branch of the government, then referred to as the Batasang Pambansa, saw the minister in charge of the budget, chairing the Committee on Appropriations and Reorganization. Through the Budget Reform Decree of 1977, the planning, programming and budgeting linkages of the Ministry was further strengthened.

WHEREAS, the national budget is a major instrument for development, requiring careful design of the preparation, legislation, execution, and accountability phases of budgeting. WHEREAS, the experience of the years has been reflected in various improvements in the budget process, and embodied in C.A.

WHEREAS, the budget process as implemented prior to September 21, 1972 was not able to fully support national objectives and plans; WHEREAS, national interest calls for the institutionalization of budgetary innovation realized during the New Society and developed within the context of the Constitution of 1973. NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the

Section 3. Declaration of Policy. It is hereby declared the policy of the State to formulate and implement a National Budget that is an instrument of national development, reflective of national objectives, strategies and plans. The budget shall be supportive of and consistent with the socioeconomic development plan and shall be oriented towards the achievement of explicit objectives and expected results, to ensure that funds are utilized and operations are conducted effectively, economically and efficiently. The national budget shall be formulated within the context of a regionalized government structure and of the totality of revenues and other receipts, expenditures and borrowings of all levels of government and of the government-owned or controlled corporations.

Section 4. Planning and Budgeting Linkage. The budget shall be formulated as an instrument for the attainment of national development goals and as part of the planning-programming-budgeting continuum. Levels of revenue, expenditure and debt shall be established in relation to macroeconomic targets of growth, employment levels, and price level change, and shall be developed consistent with domestic and foreign debt, domestic credit and Balance of Payments objectives for the budget period. The aggregate magnitudes of the budget shall be determined in close consultation among the planning and fiscal agencies of government. Budgetary priorities shall be those specified in the approved national plans, keeping in mind the capability and performance of the implementing agencies concerned. Agency budget proposals shall

Section 5. National Resource Budget. The finances of government shall be analyzed and determined as the aggregate of revenue, expenditure and debt of all units of government, including the national government and its agencies and instrumentalities, local government units and government-owned or controlled corporations. The national government budget shall be evolved within the framework of the total impact of government activity on the national economy. The budgets of government corporations and local governments shall be consistent in form and

Section 6. Regional Budgeting. The budgets of national government agencies shall take into full and explicit consideration the goals, plans and requirements of their respective regional offices, in the interest of full government response to local thinking and initiative. The budget preparation process shall originate at regional and local levels, and shall be consolidated and reviewed by the central offices of the various national agencies. The regional development strategies and plans, including physical framework and resource-use plans, shall be

Section 12. Fiscal Year. The fiscal year for all branches, subdivisions, instrumentalities, departments, bureaus, offices and agencies of the Government of the Republic of the Philippines, including government-owned or controlled corporations and local governments shall be the period beginning with the first day of January and ending with the thirty-first day of December of each calendar year.

Section 13. Submission of the Budget. The President shall, in accordance with section sixteen (1), Article VIII of the Constitution, submit within thirty days from the opening of each regular session of the National Assembly as the basis for the preparation of the General Appropriations Act, a national government budget of estimated receipts based on existing and proposed revenue measures, and of

Section 13. (continuation) The President shall include in his budget submission the proposed expenditure level of the Legislative and Judicial Branches and of Constitutional bodies, which shall have undergone the same process of evaluation and which shall have been subject to the same budgetary policies and standards applicable to agencies in the Executive Branch. The President may transmit to the National Assembly, from time to time, such proposed supplemental or deficiency appropriations as are, in his judgment, (a) necessary on account of laws enacted after the

Section 18. Budget Evaluation. Agency proposals shall be reviewed on the basis of their own merits and not on the basis of a given percentage or peso increase or decrease from a prior year's budget level, or other similar rule of thumb that is not based on specific justification. Proposed activities, whether new or ongoing, shall be evaluated using a zero-base approach and on the basis of (a) relationship with the approved development plan, (b) agency capability as demonstrated by past performance, (c) complementarities with related activities of other agencies, and (d) other similar criteria. The realization of savings in a given budget year and the consequent non-utilization of funds appropriated or released to a given agency shall not be a negative factor in the

The 1973 Philippine Constitution was superseded by the Provisional Constitution under Proclamation No. 3 of President Corazon C. Aquino. The legislative power was temporarily reposed on the President. Budgetary functions once more were exercised by the Office of Budget and Management.

EO No. 292, issued pursuant to the 1987 Constitution, provided for major organizational subdivisions of the Department of Budget and Management.

Section 1. Declaration of Policy. - The national budget shall be formulated and implemented as an instrument of national development, reflective of national objectives and plans; supportive of and consistent with the socioeconomic development plans and oriented towards the achievement of explicit objectives and expected results, to ensure that the utilization of funds and operations of government entities are conducted effectively; formulated within the context of a regionalized governmental structure and within the totality of revenues and other receipts, expenditures and borrowings of all levels of government and of government-owned or controlled corporations; and prepared within the context of the national long-term plans and budget

Section 4. Office of the Secretary. - The Office of the Secretary shall consist of his immediate staff, the Budget Control Staff, Research Staff, a Regional Coordination Staff for Luzon, and a Regional Coordination Staff for Visayas and Mindanao.

Sec. 10. The Budget Operations Office. - The Budget Operations Office shall review and analyze the work and financial flows, the budgetary proposals of national and local government agencies and corporations, check each agency's compliance with the budgetary policies and project priorities, determine the budgetary implications of foreign assisted projects from the time of project design to the negotiation for financial assistance, prepare recommendations for fund releases, formulate and implement fiscal policies and plans for budget

In 1992, under Fidel V. Ramos, government budgeting aimed to make the National Budget an instrument for breaking the boom and bust cycle that had characterized the Philippine economy in the past. Beyond sustaining the operations of government and its projects, the budget became an economic stimulus and a means to disperse the gains of

At the outset of Joseph Estradas presidency, the Asian financial crisis that characterized the period prompted the national leadership to take a second look at the countrys economic policies and strategies. To maintain macroeconomic stability in light of the effects of the economic turmoil, the government had to raise domestic demand by sustaining expenditures and pump-priming the areas of public infrastructure and social services. It had to adopt an expansionary fiscal policy by allowing a reasonable level of cyclical deficit to be financed largely through foreign borrowing while offsetting the negative impact of deficit by introducing structural reforms in the budget process. During this period, from mid-1998 to end of 2000, the DBM continued to introduce budgeting reforms that were meant to

Under President Gloria MacapagalArroyo, the DBM focused its efforts on deepening fiscal responsibility, enhancing the efficiency of public expenditures, and promoting good governance. Along with these major areas of concern, it intensified efforts at strengthening intergovernmental relations, eliciting increased participation from the private sector in the overall budget process and in intensifying public information on the administrations fiscal policy, thrusts, and budget policies and procedures. It likewise stepped up efforts at enhancing internal management in line with its vision to be seen as an organization that influences the spending behavior and management of resources of

The following organizations play central roles in budgeting, accounting and auditing arrangements.

The COA audits the general accounts of the Government, promulgates accounting rules and regulations, and submits the annual financial report of the Government, its subdivisions, and agencies (including government owned or controlled corporations).

The DOF is responsible for:


(i) formulating, institutionalizing, and administering fiscal policies in coordination with other concerned subdivisions, agencies, and instrumentalities of the government; (ii)managing the financial resources of government; (iii)supervising the revenue operations of all LGUs; (iv)reviewing, approving and managing all public sector debt; and (v)rationalizing, privatizing and ensuring the public accountability of corporations and assets owned, controlled or acquired by the Government.

The DOF oversees three operating bureaus: 1. the Bureau of the Treasury (BTr); 2. the Bureau of Internal Revenue (BIR); and 3. the Bureau of Customs.
The Bureau of the Treasury (BTr)
The BTr plays a pivotal role in the cash operations of the national government. It is responsible for:
(i) (ii) (iii) receiving and keeping national funds; managing and controlling disbursements of national funds; and maintaining accounts of financial transactions of all national government offices, agencies, and instruments.

The DBM is responsible for the design, preparation and approval of the accounting systems of government agencies. It is also responsible for coordinating and implementing the annual budget process. Furthermore, the Department manages the process of cash disbursement as well as monitoring compliance with appropriations.

The DBCC comprises representatives from DBM, DOF, Bureau of Treasury, NEDA, and BSP. All agency budgetary requirements must pass through the Council.

The objectives of the DBCC are to:


(i) set budget parameters based on available resources; (ii) conduct budget hearings; and (iii) submit the resulting consolidated budget to the House of Representatives (particularly the Committee on Appropriations).

BUDGETING AND REPORTING CALENDAR


The following presents the indicative budgeting and reporting calendar for national government agencies. The Budget Calendar: National Government Agencies
Budget Stage I. Budget Preparation Jan Mar Month t - 1 Budget year ( t ) t + 1 Budget forums and associated consultations. Submission of Budget Proposals: GOCCs; departments (without regional units); and departments with regional units. DBM evaluates agency budget proposals. Inter-agency coordination and consultation. Initial presentation of proposed budget to the President and Cabinet. Printing of budget documentation. Proposed national budget submitted to Congress.

AprMay AprJun Jun


Jul Jul

BUDGETING AND REPORTING CALENDAR


Budget Stage II. Legislation & Authorization Month t - 1 AugNov Nov III. Budget Implementation DecJan Budget year ( t ) t + 1 Review and evaluation: budget hearings; floor deliberations; and Congressional approval. Approval of General Appropriation Act (GAA) Preparation of Agency Budget Matrix and submission to DBM Release of funds (1st week of January and 10 days before JanSep.) Obligation and disbursement of Funds Submission of requests for budget adjustments or modifications Submission of quarterly financial and physical reports, including project implementation progress. Submission of quarterly reports to the President, House Committee on Appropriations, and Senate Committee on Finance

JanDec JanOct IV. Reporting AprJan

AprJan

ACCOUNTING & REPORTING ARRANGEMENTS


In accordance with the Constitution of 1987; fund, obligation and cashdisbursement-ceiling accounting methods are used in government. These methods are based on and hence similar to, those used in the US government (before it began its move to accrual accounting). The table below presents an illustrative comparison of Philippine government and commercial accounting.

ACCOUNTING & REPORTING ARRANGEMENTS

ACCOUNTING & REPORTING ARRANGEMENTS


CHART OF ACCOUNTS Organizations are required to use a standard chart of accounts as prescribed by COA. ACCOUNTING STANDARDS A variety of accounting standards are applied in the preparation of financial reports. These include the prescriptions set out by the Government Financial Statistics (GFS) system, and COAs accounting rules and chart of accounts. The Public Sector Committee (PSC) of IFAC began issuing International Public Sector Accounting Standards (IPSASs) in May 2000. IPSASs are based upon IASs. COA is planning the move to full accrual accounting. In this respect, it is considering the appropriateness of IPSASs as the basis for government accounting standards.

ACCOUNTING & REPORTING ARRANGEMENTS


FINANCIAL REPORTING Government financial reports and statements, like commercial entities, are prepared based on official accounting records. In the case of government organizations, specific laws and regulations tightly prescribe the format and contents. The timing of reporting requirements is set out in the budget calendar above. However, financial reports are generally not provided in a timely manner. The requirement to prepare and submit balance sheets and operations statements was introduced in 1979.

ACCOUNTING & REPORTING ARRANGEMENTS


Financial statements in government accounting include:
i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii.

current assets, contingent assets, fixed assets, current liabilities, contingent liabilities, allotted appropriations, income, invested surplus, contingent surplus, national clearing account, the total surplus, and assorted notes to the accounts.

ACCOUNTING & REPORTING ARRANGEMENTS


Accounting Information Systems in Government
The national government accounting system is largely paper based. Financial reports from national agencies, including those with computerized systems, are manually processed and consolidated by COA. Existing computerized systems are of varying types.
This variation is to be expected in such a diversified environment comprising a wide range of organizations with differing roles and objectives.

ACCOUNTING & REPORTING ARRANGEMENTS


Internal Auditing
The Internal Auditing Act 1962 (RA 3456) introduced internal auditing requirements to the national government. A 1965 amendment (RA 4177) extended the Acts coverage to governmentowned and controlled corporations (GOCCs) and local government units (LGUs). In 1992, President Aquino directed that government internal-control systems be strengthened (AO 278) the Association of Government Internal Auditors (AGIA), among others, was instructed to ensure that internal audit practices, methods, and procedures be improved through continuing education and be conducted in accordance with internal auditing standards. The AGIA represents internal auditors in government and promotes their professional development. It now has thousands of members that more than doubled from had 1,177 at January 1999.

ACCOUNTING & REPORTING ARRANGEMENTS


Government Accounting Personnel
The Philippine civil service has grown dramatically over the past 5 decadestotal government personnel more than tripled between 1960 and present. The Civil Service Commission (CSC) manages personnel arrangements in the civil service. These arrangements are characterized by a high degree of regulation and rigidity. This rigidity has adversely affected the ability of government organizations to retain high-quality accounting personnel. Entrance salaries and conditions for government accountants compare very favorably with the private sector. Consequently, and in contrast with many other countries, government agencies have no difficulty attracting high-quality accounting personnel. These comparatively high salaries, combined with an oversupply of CPAs, enable government organizations to adopt very strict screening criteria.

ACCOUNTING & REPORTING ARRANGEMENTS


Government Accounting Personnel (continuation)

However, the government salary structure is flatter than that of the private sector. Senior private sector accountants earn as much as 630 % more than their public sector counterparts.
A major contributing factor is the mandated linkage between the Presidents salary and government salariesthe former has not increased for some years. Consequently, senior government officials are difficult to retain. Moreover, these comparatively low salaries provide a supportive environment for graft and corruption.

ACCOUNTING & REPORTING ARRANGEMENTS


This constraint has been recognized and the following legislative measures prepared in response:

HOUSE BILL NO. 9182 (2000). An Act professionalizing the government


accounting service to serve as a tool for effective management and control of government services, creating for the purpose the government accounting office under the DBM and for other purposes.

SENATE BILL NO 1333 (2000) declares all employees holding permanent


positions in various agencies performing accounting, budgeting, internal audit and other related government accounting functions as the vanguards of the Governments financial and material resources. The Bill also exempts government accountants from the provisions of RA 6758 (The Compensation and Position Classification Act 1998) by providing them additional compensation and incentives such as subsistence allowances and longevity pay.

SENATE BILL NO 439 (2000) seeks to professionalize government


accounting services so that the profession may serve as a tool for effective management and control of government resources as it does for private business. It seeks to create the government accounting office under the DBM.

ACCOUNTING & REPORTING ARRANGEMENTS


Accurate, relevant, and timely financial information from the accounting system is essential for the monitoring of programs and projects, budget control, economic analysis, policy formulation, decision-making, and spotting possible areas for anomalies. Personnel in government accounting positions are required to hold a CPA license. Despite their professional training and standing, their role is largely limited to bookkeeping, due to the complicated legal accounting framework and the absence of computerized systems. Little time is available for financial analysis and providing financial advice to management.

ACCOUNTING & REPORTING ARRANGEMENTS


Public Financial Management Reform Program
The objectives of the Governments public financial management reforms are to:
(i) - allocate and manage expenditures via a MediumTerm Expenditure Framework (MTEF); (ii) - strengthen feedback mechanisms for budget formulation through enhanced budget and performance monitoring; (iii) - improve the performance management environment by simplifying budgeting rules; (iv) - introduce incentives for better performance management; and (v) - increase management flexibility to ensure performance results.

ACCOUNTING & REPORTING ARRANGEMENTS


Public Financial Management Reform Program
The reforms are based on a benchmarking study of the Philippine expenditure management system vis--vis its neighboring countries (Australia, Korea, Malaysia, New Zealand, Singapore, and Thailand) in terms of the three important expenditure outcomes: maintaining fiscal discipline, facilitating strategic prioritization at the oversight level, and enhancing the implementation efficiency of line agencies. The reform program comprises several activities as follows: SECTORAL BUDGET CEILINGS. Six-year sectoral budget ceilings
were introduced for the Fiscal 2000 budget. These sectoral budgets were developed with the multi-sector Planning Committees of the National Economic and Development Authority (NEDA). These Committees include representatives from Congress, local government, academia, the private sector and nongovernment organizations. The process involved various government implementing agencies in a participative and proactive manner.

ACCOUNTING & REPORTING ARRANGEMENTS


Public Financial Management Reform Program THREE-YEAR BUDGET BASELINES. The 6-year
sectoral ceilings served as the basis for allocating resources to implementing agencies using a budget baseline approach.

STRENGTHENING EVALUATION MECHANISMS.

First, locally funded projects will be subjected to the same approval process that applies to those funded from foreign sources. Second, the performance measurement will be mainstreamed. A set of performance indicators will have to accompany all new policies or projects that are submitted to NEDA or DBM. The ultimate objective is to foster an evaluation culture.

ACCOUNTING & REPORTING ARRANGEMENTS


Public Financial Management Reform Program
IMPROVING GOVERNMENT ACCOUNTING AND INTERNAL CONTROL. Adopting private sector accounting and reporting practices, such as full accrual accounting will enhance the usefulness of accounting information. It will also enable organizational outputs to be meaningfully costed. SEPARATING ACCOUNTING AND AUDITING FUNCTIONS. COA, the Philippines supreme audit institution, undertakes accounting, internal control and auditing functions in government. These groupings are incongruous. IMPROVING PROCUREMENT PROCEDURES. The DBM has launched the Electronic Procurement System to improve the efficiency and transparency of the government procurement process.

ACCOUNTING & REPORTING ARRANGEMENTS


Anticorruption Measures
ADBs anticorruption policy has three objectives:

(i)

supporting competitive markets, and efficient, effective, accountable, and transparent public administration as part of ADBs broader work in governance and capacity building; (ii) supporting promising anticorruption efforts on a case-to-case basis and improving the quality of ADBs dialogue with its developing member countries on a range of governance issues, including corruption; and (iii) ensuring that ADBs projects and staff adhere to the highest ethical standards.

ACCOUNTING & REPORTING ARRANGEMENTS


Anticorruption Measures
The Government considers corruption a major concern. It has adopted a comprehensive approach towards improving governance as described in the Ten Point Jump Start Anti-Corruption Program. Efforts to eradicate corruption from the public sector focus rest on the effective implementation of existing initiatives and the pursuit of reforms towards reducing opportunities for corruption. These efforts include: (i) deregulating and privatizing public functions; (ii)increasing transparency and public oversight of government and public sector functioning; (iii)vigorously pursuing efforts to root out corruption from those agencies and public processes such as procurement where they mainly exist through improved audit and other special measures; (iv)enabling better judicial functioning and equitable access to the legal system; and (v)reforming agencies that have particularly high interaction with the public such as the police.

ISSUES AND RECOMMENDATIONS


This part of my report identifies and describes constraints and proposes corrective actions. With minor departures, these include the following selected issues:
The Commission on Audit is responsible for promulgating accounting and auditing rules. These responsibilities are defined in Article IX of the Constitution 1987. The coexistence of these responsibilities is inconsistent with the concept of auditor independence. The absence of computerized accounting information systems, combined with complex accounting regulations:
(i) relegates the role of most government CPAs to that of highly qualified bookkeepers. Little time is left for value-added activities, such as financial analysis; and (ii) means that financial reports are rarely prepared in time to be useful for decision-making purposes.

ISSUES AND RECOMMENDATIONS


There is no consistent set of accounting standards for budgeting and reporting. Major reporting differences result. Auditors spend the majority of their time on compliance auditing (checking transactions). Minimal time is spent on financial attest auditing as more effort is applied to value-for-money audits. Comparatively attractive starting salaries attract high-quality personnel into government accounting. A flat earnings structure means that higher-level salaries are far from competitive. This creates retention problems and provides a supportive environment for graft and corruption.

The Philippine Constitution emphasizes the importance of accountability in the government. Article XI simply and bluntly begins: Public office is a public trust, before it adds that officials and employees should serve the people with responsibility, integrity, loyalty and efficiency. In the government budget cycle, accountability is laid down by the need for government agencies and departments submit to submit quarterly and monthly income statements; statements of allotment, obligations and balances along with other financial reports and documents for audit - a formal process whereby the authenticity, accuracy and reliability of financial accounts or transactions are checked and approved.

There are several kinds of audit:


One is FINANCIAL AUDITING wherein financial transactions and accounts are checked to ensure the submitting government agency has complied with the rules and regulations, specifically the pre-agreed and government accounting system. Another type is PERFORMANCE AUDITING whereby one is looking at the systems of the agency to assess it has delivered on its institutional purpose and mandate by linking the budgets with results or results-based budgets. An INTERNAL AUDIT, as the name suggests, an internal check on agency systems and processes. External Auditing involves an outside audit body being brought in to look at the agency.

PRE-AUDITING refers to auditing by agencies before approval of transactions while post-auditing is auditing by an independent body after.

INTRODUCTION
Philippine public accounting practices originated in the 1700s. The enactment of the Accountancy Law 1923 gave formal recognition to the accounting profession. This law granted CPA certificates to those who successfully passed the CPA examinations and established the Board of Accountancy (BOA) to regulate the profession. In 1929, the Philippines Institute of Accountants was created--one of the oldest professional accountancy organizations in Asia and one of the major key players in the development of accounting standards in the country. There are now over 100,000 Philippine CPAs. The Philippine Accountancy profession is considered as one of the worlds most vibrant but also one of the most restricted due to various regulations in the application of standards (Reid, 2002).

Basically, the Philippine standards were patterned after the US GAAP. However, in 1997, the accounting standard setting body in the Philippines decided to start a program to move fully to international accounting standards issued by the International Standards Committee (IASC) and since then has continued its adoption of international accounting standards. In November 2004, the Philippine Accounting Standard Council (ASC) approved the adoption of revised IASs called Philippine Accounting Standards (PASs) and the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) called Philippine Financial Accounting Standards (PFRS) with first implementation effective January 2005.

RATIONALE
Kieso et al (2007) defined generally accepted accounting principles (GAAP) as those principles that have substantial authoritative support. To the question Why one set of documents are more authoritative that others? Two sets of explanations were given by Kieso et al (2007) and these are: (2) that the body issuing the pronouncements are recognized by the Securities and Exchange Commission (SEC) and (2) prior to the issuance of the standard, its contents are: (1) debated in a public forum, (b) exposed in writing to the public for comments, and (2) approved by the Board. Generally accepted accounting principles (GAAP) vary from country to country due to differences in the legal system, levels of inflation, culture, degrees of sophistication and use of capital markets, and political and economic ties with other countries (Spiceland et al, 2007).

These differences cause huge problems for multinational companies. Companies doing business in other countries experience difficulties in complying with multiple sets of accounting standards to convert financial statements that are reconciled to the GAAP of the countries they are dealing with. As a result, different national standards impair the ability of companies to raise capital in the international markets.

In response to the problem, the International Accounting Standards Committee (IASC) was established in 1973 to develop international accounting standards. In 2001, the IASC created a new standard setting body called International Accounting Standard Board (IASB). The objective is to identify the best accounting standards to be followed in the financial accounting and reporting of all countries around the world.

The IASBs objectives are:

(1) to develop a single set of high quality, understandable global accounting standards, (2) to promote the use of these standards, and (3) to bring about convergence of national and international accounting standards.
The IASC issued 41 Accounting standards (IASs) which were endorsed by the IASB in 2001 (Table 2). In addition, IASB has made revisions and has issued eight standards of its own called International Financial Reporting Standards (IFRS) (Table 2). While IASB has no authority to enforce these standards, since compliance is voluntary, many countries have based their national standards on international accounting standards (Spiceland et al, 2007).

The main problem is that different countries use different national accounting standards which make it difficult and costly to compare financial statements for investments decision-making. Globalization, growing interdependence of international financial market, and increased mobility of capital have increased the pressure and demand for the convergence and harmonization of reporting frameworks and standards. There is a need to have a set of financial accounting standards that will allow for greater transparency, comparability, and efficiency in financial reporting worldwide.

The Accounting Standards Council (ASC) was created in 1981 to establish generally accepted accounting principles (GAAP) in the Philippines. ASC is funded by the Philippine Institute of Certified Public Accountants (PICPA). The ASC annual subsidy from the PICPA Foundation of P50,000 (approximately US$977) covers meals during meetings and other incidentals. The ASC members serve without any remuneration. ASC is composed of eight representatives from the profession, regulators, and preparers: four representatives from PICPA; and one representative from the SEC, the Bangko Sentral ng Pilipinas, the Board of Accountancy, and the Financial Executives Institute of the Philippines (FINEX).

ASC formed an Interpretations Committee whose main purpose is to identify, discuss, and resolve on a timely basis emerging issues affecting financial reporting. Its members consist of representatives from auditing firms, the SEC, and the Board of Accountancy. The authority of ASC pronouncements comes from the approval and recognition of the standards by the regulators. Exposure drafts of proposed accounting standards are issued for comment, to members of PICPA, members of the Financial Executives Institute of the Philippines (FINEX), and interested persons and organizations in the business community, and the comments are considered in the finalization of the standard. Accounting standards approved by the Accounting Standards Council are submitted to the Board of Accountancy for approval. ASC-approved accounting standards, when approved by the Board of Accountancy and the Professional Regulation Commission, become part of Philippine GAAP.

Prior to 1996, the accounting standards in the Philippines were mostly based on the accounting standards issued by the U.S.-based Financial Accounting Standards Board (FASB). It was, however, in 1997 that the ASC formally decided to totally move to IAS. In November 2004, ASC approved the issuance of the new and revised Philippine Accounting Standards (PASs) and new Philippine Financial Reporting Standards (PFRSs) which directly corresponds to IASBs IAS and IFRS. The adoption of international accounting standards was a result of the Philippine regulatory bodies involvement in international organizations. The Philippine Securities and Exchange Commission (SEC), a member of the International Organization of Securities and Commissions (IOSCO), agreed with the other IOSCO members to adopt the international accounting standards to uphold high quality, and transparent financial reporting to promote credibility and competence in the capital markets

The Philippine Board of Accountancy (BOA) under the supervision of the Philippine Professional Regulation Commission (PRC) supports the adoption of the international accounting standards since part of its responsibilities is to implement the general agreement on trade in services (GATS). The Philippine Institute of Certified Public Accountants (PICPA) supports the work of the International Accounting Standards Council (IASC) being a member of such organization. The World Bank and the Asian Development Bank also recommended the adoption of the international accounting standards (UNCTAD, 2005).

The Accounting Standards Council (ASC) started the move towards the adoption of international accounting standards as early as 1996. Prior to this, Philippine generally accepted accounting principles (GAAP) were based mainly on US-based accounting standards. Under its IAS project, the ASC replaced US-based standards and adopted IAS with no local equivalent, and updated previously issued IAS-based standards. The adoption of IAS followed the exposure process for accounting standards issued by the ASC. Since the Philippine GAAP was written in English, there were no translation problems as were encountered by other countries. In 2005, ASC completed the adoption of the IFRSs issued by the International Accounting Standards Board (IASB) and the revised versions of previously adopted IASs. It renamed the designation of accounting standards it issues to Philippine Accounting Standard (PAS) and Philippine Financial Reporting Standard (PFRS) to correspond to the adopted IASs and IFRSs, respectively. IAS and IFRS were adopted with very minor modification, such as effective dates.

Small and medium enterprises were given some relief by ASC from new financial reporting standards. There are a significant number of small and medium entities in the Philippines. When originally issued, the new international accounting standards that became effective in 2005 were intended to be applicable to all reporting entities required to file financial statements in accordance with Philippine GAAP. In 2005, the IASB undertook a project to develop accounting standards suitable for entities that do not have public accountability, referred to as non-publicly accountable entities (NPAEs). When preparing their 2005 financial statements, NPAEs are given the option not to apply the new international accounting standards that became effective in 2005 but to apply instead the accounting standards that were effective in 2004.

The Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) are the new set of Generally Accepted Accounting Principles (GAAP) issued by the Accounting Standards Council (ASC) to govern the preparation of financial statements. These standards are patterned after the revised International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB). (UNCTAD, 2005).

The key players in the development of financial accounting standards in the Philippines support the change to the international accounting standards:
Accounting Standards Council Accounting Standards Council (ASC) was formally launched by the Board of Directors of Philippine Institute of Certified Public Accountants (PICPA) on November 18, 1981. The main function of the ASC is to establish and improve accounting standards that will be generally accepted in the Philippines. In 2006, the ASC was folded into the Financial Reporting Standards Council (FRSC).

Financial Reporting Standards Council (FRSC)


The Financial Reporting Standards Council (FRSC) was established by the Board of Accountancy (BOA) in 2006 under the Implementing Rules and Regulations of the Philippine Accountancy of Act of 2004. Its main function is to establish generally accepted accounting principles (GAAP) in the Philippines. The FRSC is the successor of the Accounting Standards Council (ASC). The FRSC carries on the decision made by the ASC to converge Philippine accounting standards with international accounting standards issued by the International Accounting Standards Board (IASB). The FRSC consists of a Chairman and members who are appointed by the BOA and include representatives from the Board of Accountancy (BOA), Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP), Financial Executives Institute of the Philippines (FINEX) and Philippine Institute of Certified Public Accountants (PICPA). The FRSC has full discretion in developing and pursuing the technical agenda for setting accounting standards in the Philippines. Financial support is received principally from the PICPA Foundation.

The FRSC monitors the technical activities of the IASB and issues Invitations to Comment on exposure drafts of proposed IFRSs as these are issued by the IASB. When finalized, these are issued as Philippine Financial Reporting Standards (PFRSs). The FRSC similarly monitors issuances of the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, which it adopts as Philippine Interpretations. The FRSC issues news releases to announce the issuance of final Standards and Interpretations, exposure drafts and other matters which are posted in the Philippine Accounting Standards section of the PICPA website (www.picpa.com.ph). The FRSC formed the Philippine Interpretations Committee (PIC) in August 2006 to assist the FRSC in establishing and improving financial reporting standards in the Philippines. The role of the PIC is principally to issue implementation guidance on PFRSs. The PIC members were appointed by the FRSC and include accountants in public practice, the academe and regulatory bodies and users of financial statements. The PIC replaced the Interpretations Committee created by the ASC in 2000.

Board of Accountancy
The Board of Accountancy (BOA) is one of the Professional Regulatory Boards which exercise administrative, quasi-legislative, and quasi-judicial powers over the accounting profession in the Philippines. BOA, responsible for implementing the general agreement on trade in services (GATS) mandated by the World Trade Organization (WTO), supports the adoption of international accounting standards.

Philippine Institute of Certified Public Accountants (PICPA)


PICPA was accredited by the Professional Regulations Commission as the bona fide professional organization of CPAs, giving it the responsibility of integrating all CPAs in the Philippines. PICPA is an active participant in the worlds major accounting bodies that include the International Federation of Accountants (IFAC), International Accounting Standards Committee (IASC), Confederation of Asian and Pacific Accountants (CAPA), and the ASEAN Federation of Accountants (AFA). The Philippines Institute of Certified Public Accounting (PICPA) as a member of the international Accounting Standards Committee (IASC) has the commitment to support the work of the IASC and to promote compliance with the international accounting standards.

Securities and Exchange Commission


The Philippine Securities and Exchange Commission (SEC) aims to strengthen the corporate and capital market infrastructure of the Philippines, and to maintain a regulatory system, based on international best standards and practices that promote the interests of investors in a free, fair, and competitive business environment. SEC, as a member of the International Organization of Securities Commissions (IOSCO) has to comply with the agreement with other IOSCO members to adopt international accounting standards to ensure high quality, transparent financial reporting with full disclosure as a means to attain credibility and efficiency in the capital markets. The auditor's report refers to "conformity with Philippine Financial Reporting Standards." Accounting standards in the Philippines are approved by the Securities and Exchange Commission (SEC).

The Philippines has adopted all IFRSs for 2005 with some modifications. These Philippine equivalents to IFRSs apply to all entities with public accountability that includes: Entities whose securities are listed in a public market or are in process of listing. All financial institutions including banks, insurance companies, security brokers, pension funds, mutual funds, and investment banking entities.

Public utilities.
Other economically significant entities, defined as total assets in 2004 of at least 250 million pesos (US$5 million) or liabilities of at least 150 million (US$3 million).

The modifications, which have been described as 'transition relief', are in the following areas: o o Reduced segment reporting disclosures; Exemption from applying tainting rule for a specific set of financial instruments; Commodity derivative contracts of mining companies as of 1 January 2005 grandfathered'; Insurance companies allowed to use another comprehensive set of accounting principles (also described as Philippine Financial Reporting Standards); For banks, losses from sale of non-performing assets allowed to be amortized over a period of time. Some additional changes to IASB's pension, foreign exchange, and leases Standards.

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Bangko Sentral ng Pilipinas Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. The BSP provides policy directions in the areas of money, banking, and credit. It supervises operations of banks and exercises regulatory powers over non-bank financial institutions with quasi-banking functions. BSP made a pronouncement of its adoption of the PFRS/PAS effective the annual financial statements January 1, 2005 in its memorandum to all banks and other BSP supervised financial institutions. The adoption of the new set of accounting standards in the financial industry is part of BSPs commitment to promote fairness, transparency, comparability, and accuracy in financial reporting.

Insurance Commission The Commission supervises and regulates the operations of life and non-life companies, mutual benefit associations, and trusts for charitable uses. Bureau of Internal Revenue The Bureau of Internal Revenue (BIR) is responsible for the assessment and collection of all national internal revenue taxes, fees and charges. Indirectly, however, it also influences the accounting policies of entities through the issuance of revenue regulations.

The Philippine government has agencies mandated to ensure accountability and transparency on its overall operations. These agencies are:

Office of the Ombudsman


The Office of the Ombudsman (Ombudsman) is mandated by the Constitution as protectors of the people who shall act promptly on complaints filed against officers or employees of the government including members of the Cabinet, local government units and government-owned and controlled corporations and enforce their administrative, civil and criminal liability in every case where the evidence warrants in order to promote efficient service by the government to the people. Significantly, Section 13 of Republic Act 6770 or the Ombudsman Act of 1989 states it shall give priority to high-profile complaints to high-ranking and supervisory officials involved with grave offenses and large sums of money and/or properties. The Ombudsman does not only cover officials and employees of the government, but also private individuals who have participated or in conspiracy with them in the filed complaints.

Sandiganbayan
The Sandiganbayan, or the governments anti-graft court, is mandated by the 1973 and 1987 Constitutions. It covers criminal and civil cases against graft and corrupt practices and other offenses committed by public officers and employees with Salary Grade 27 and above, including those in local government units and government-owned or controlled corporations, which are related to their official duties as determined by law. Crimes and civil cases filed against public officers below Salary Grade 27 are covered by the Regional Trial Court but Sandiganbayan is vested with Appellate Jurisdiction over its final judgments, resolutions or orders. Private individuals can also be sued before this special court if they are alleged to be in conspiracy with public officers. The Sandiganbayan is also entrusted to have original exclusive jurisdiction over special laws such as RA 3019 (Anti-graft and Corrupt Practices Law), RA 1379 (Forfeiture of Illegally Acquired Wealth), Revised Penal Code spec. Batasang Pambansa 871.

Presidential Anti-Graft Commission

The Presidential Anti-Graft Commission (PAGC) is mandated by Executive Order No. 12 to assist the President in the campaign against graft and corruption. It investigates and conducts hearings of administrative cases and complaints against Presidential appointees in the Executive Branch with Salary Grades 26 and higher including members of the Armed Forces of the Philippines and Philippine National Police of directed by the President, government-owned and controlled corporations and public officers, employees and private persons in conspiracy with alleged public officials.
PAGCs jurisdiction includes the following laws: RA 3019, RA 1379, 6713, Revised Penal Code, and E.O. 292.

Civil Service Commission The Civil Service Commission (CSC) is the central personnel agency of the government and is tasked in the recruitment, building, maintenance and retention of a highly-competent and professional workforce. It is also one of the three independent commissions established by the Constitution with adjudicative powers to render final disputes and personnel actions on Civil Service. It covers all national government agencies, local government units and government-owned and -controlled corporations.

Commission on Audit The Commission on Audit (COA) is the constitutional commission mandated to be the supreme audit institution of the government. It has jurisdiction over national government agencies, local government units, governmentowned and controlled corporations and nongovernment organizations receiving benefits and subsidies from the government.