Republic of the Philippines

COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City, Philippines

INDEPENDENT AUDITORS REPORT

THE BOARD OF TRUSTEES

Local Water Utilities Administration
Katipunan Road, Balara
Quezon City

Report on the financial statements

We have audited the accompanying financial statements of the Local Water Utilities
Administration, which comprise the statement of financial position as at December 31,
2010, and the statement of income, statement of changes in equity, and statement of cash
flows for the year then ended, and a summary of significant accounting policies and other
explanatory information.

Managements Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial
statements in accordance with generally accepted state accounting principles in the
Philippines and for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due
to fraud or error.

Auditors Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Philippine Standards on Auditing. Those
standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance whether the financial statements are free from material
misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditors
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entitys preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entitys internal control. An audit also includes evaluating the appropriateness of the
accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our audit opinion.

Basis for Adverse Opinion

Financial assistance released to Water Districts in the amount of P2.347 billion as of

December 31, 2010, or 52% of the carrying amount of the total receivables, were recognized
as claims from the National Government despite the absence of legal basis or document to
support the claim.

The cash and cash equivalents in the amount of P639.5 million is not sufficient to cover all
recognized trust liabilities of LWUA as of the same date of P1.973 billion. More specifically,
the Water District Portfolio Fund of P 1.9 million is not enough to pay the maturity/termination
value of the deposits made by the Water Districts of P154.3 million.

The LWUA investments of P480 million and deposit of P300 million with the Express Savings
Bank Inc. (ESBI) were still not terminated/recovered despite BSP Monetary Board Resolution
Nos. 605 and 1301 dated April 29, 2010 and September 16, 2010, respectively, which
disallowed the transfer of 60% share of the total voting stock of ESBI to LWUA and directed
ESBI to return all government deposits from various government agencies.

Stale/cancelled and unreleased checks in the amount of P103 million at December 31, 2010
were not adjusted back to cash in bank resulting in the understatement of both the cash in
bank and liability for special funds accounts and overstatement of loans receivable to Water
Districts.

The balance per books of certain foreign loans payable in the total amount of P3.419 billion
as of December 31, 2010 differ from the confirmed amounts in the total amount of P2.837
billion, or a net variance of P 582 million.

Adverse Opinion

In our opinion, because of the significance of the matters discussed in the Basis for Adverse
Opinion paragraphs, the financial statements do not present fairly the financial position of
Local Water Utilities Administration as at December 31, 2010, and of its financial performance
and its cash flows for the year then ended in accordance with generally accepted state
accounting principles in the Philippines.

Emphasis of Matter

We draw attention to Note 31 of the financial statements, which describes the uncertainties
related to the lawsuits or claims by third parties against LWUA which are either pending in
courts or under negotiations. No provision for contingency is recognized in the financial
statements since the outcome of said lawsuits or claims are not presently determinable.
Report on the Supplementary Information Required Under Revenue Regulations 15-
2010

Our audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary information on taxes, duties and license
fees in Note 32 to the financial statements is presented for purposes of filing with the Bureau
of Internal Revenue and is not a required part of the basic financial statements. Such
information is the responsibility of management. Because of the significance of the matters
described in the Basis for Adverse Opinion paragraphs, it is inappropriate to and we do not
express an opinion on the information referred to above.

COMMISSION ON AUDIT

PRISCILLA DG. CRUZ

Supervising Auditor

May 31, 2011

LOCAL WATER UTILITIES ADMINISTRATION
STATEMENT OF FINANCIAL POSITION
December 31, 2010
(in Philippine Peso)

Notes 2010 2009

ASSETS
Current Assets
Cash and cash equivalents 2, 3 639,508,077 920,911,227
Receivables, net 2, 4 4,474,961,666 3,166,010,825
Supplies inventory 5 4,453,877 3,015,912
Other current assets 2, 6 106,926,257 100,430,432

Total Current Assets 5,225,849,877 4,190,368,396

Non-Current Assets
Long-term receivables, net 7 11,505,245,710 12,092,371,447
Long-term investments 8 852,785,349 843,731,598
Property and equipment, net 9 227,617,693 181,498,370
Other non-current assets 10 358,266,800 253,392,772

Total Non-Current Assets 12,943,915,552 13,370,994,187

TOTAL ASSETS 18,169,765,429 17,561,362,583

LIABILITIES AND EQUITY

Current Liabilities
Accounts payable 11 1,203,990,957 637,270,243
Payables to government agencies 12 223,459,366 85,279,774
Other current liabilities 2,13 2,254,709,000 2,029,604,154

Total Current Liabilities 3,682,159,323 2,752,154,171

Non-Current Liabilities
Loans Payable, Government of the Phils 2, 14 2,185,731,859 2,372,837,063
Loans Payable - Foreign, net of current portion 2, 15 5,139,117,319 5,452,169,682
Loans Payable, Local 2, 16 424,973,333 516,626,666
Deferred Credits 17 784,229,828 715,655,452

Total Non-Current Liabilities 8,534,052,339 9,057,288,863

TOTAL LIABILITIES 12,216,211,662 11,809,443,034

EQUITY 5,953,553,767 5,751,919,549

TOTAL LIABILITIES AND EQUITY 18,169,765,429 17,561,362,583

See accompanying Notes to Financial Statements.

4
LOCAL WATER UTILITIES ADMINISTRATION
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2010
(With comparative figures for 2009)

1. AGENCY INFORMATION

Presidential Decree No. 198 dated May 25, 1973 (as amended by Presidential
Decrees Nos. 768 and 1479), otherwise known as the Provincial Water Utilities Act of
1973, created the Local Water Utilities Administration (LWUA) as a specialized lending
institution for the promotion, development and financing of local water utilities. This
law authorized LWUA to service major provincial urban areas with at least 20,000
population through the water districts. Part of the mandate is to provide a composite of
financial, technical and institutional development and regulatory services to water
utilities. Meanwhile, Executive Order No. 124 issued in 1987, abolished the Rural
Waterworks Development Corporation (RWDC) and transferred RWDCs functions and
responsibilities to LWUA. This issuance virtually placed all of the 1,500
cities/municipalities outside Metro Manila as LWUAs target areas. Since 1987, the
new beneficiaries of LWUA included relatively smaller water districts than those in the
70s or 80s.
Some of the major functions of LWUA include the following:
Prescribes minimum standards and regulations in order to assure acceptable
standards of construction materials and supplies, maintenance, operation,
personnel training, accounting and fiscal practices for local water utilities;
Furnishes technical assistance for personnel training program for local water
utilities;
Monitors and evaluates local water standards;
Effects systems integration, joint investment and operations, district annexation and
de-annexation whenever economically warranted.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies adopted in preparing the financial statements of

the Local Water Utilities Administration are as follows:

Basis of Preparation
The financial statements of LWUA have been prepared using the historical cost basis
in compliance with the accounting principles generally accepted in the Philippines.

Functional and Presentation Currencies

The financial statements are stated in Philippine peso, rounded to the nearest peso.

Statement of Compliance
The Local Water Utilities Administration has adopted the following Philippine
Accounting Standards (PAS) by the Accounting Standards Council (ASC) in

8
preparation for the full adoption of PAS / Philippine Financial Reporting Standards
(PFRS).

PAS 1 (Revised 2007) Presentation of Financial Statements, provides a framework

within which an entity assesses how to present fairly the effects of transactions and
other events; provides the base criteria for classifying assets and liabilities as
current and non-current; prohibits the presentation of items of income and expense
as extraordinary items; and specifies the disclosures about the key sources of
estimation which management has made in the process of applying the entitys
accounting policies.
PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors removes
the concept of fundamental error to correct prior period errors. It defines material
omission or misstatements, and describes how to apply the concept of materiality
when applying accounting policies and correcting errors.
PAS 12, Income Taxes, which prescribes the accounting treatment for income
taxes. It requires the recognition of deferred income tax liability for taxable
temporary differences, with certain exceptions and deferred income tax asset for
deductible temporary differences, with certain exceptions, if it is probable, a tax
benefit will be realized. It also deals with the presentation of income taxes in the
financial statements and the disclosure of information relating to income taxes.
PAS 16 Property, Plant and Equipment, provides additional guidance and
clarification on recognition and measurement of items of property, plant and
equipment. It also provides that each part of an item of property, plant and
equipment with a cost that is significant in relation to the total cost of the item shall
be depreciated separately.
PAS 21 The Effects of Changes in Foreign Exchange Rates", provides additional
guidance on the translation method and on determining the functional and
presentation currencies.
Revenue Recognition
The Corporation employs the modified accrual basis of accounting where revenues are
recognized to the extent that it is probable that the economic benefits associated with
the transactions will flow to the corporation and the amount can be measured reliably.

Cash Equivalents
Cash Equivalents are short term highly liquid investments that are readily convertible
to known amounts of cash with original maturities of three months or less from dates of
acquisition and that are subject to insignificant risk of changes in value.

Investments
Investments in government bonds and treasury notes are valued at cost. The
difference between the net proceeds from the sale of government securities and its
cost is recorded under the Income (Loss) on Sale of Government Securities account.
Realized gains or losses are included in determining the net income for the period in
which they occur.

9
Bad Debts
For performing loans, estimated uncollectible accounts are determined at 25% of
interest receivable and current portion of long-term loans receivable, and 4% of long-
term portion of loans receivable. On the other hand, non-performing loans and loans
to non-operational Water Districts are provided with a 40% allowance.

Property, Plant and Equipment (PPE)

Property and equipment are carried at cost, less accumulated depreciation, which is
computed using the straight-line method over the estimated useful lives of the assets
ranging from five (5) to thirty (30) years. As of balance sheet date, there was no
indication that an item of LWUAs PPE is impaired , using the assessment
procedure provided in IAS 36. LWUA uses the Cost Model in recognizing an item of
PPE. Under this model, there is no need for appraisal or revaluation of PPE.

Repairs and maintenance costs are charged to operations as incurred and significant
renewals and betterments are capitalized. When assets are retired or otherwise
disposed of, the cost and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is credited or charged to current operations.

Inventories
Inventories are stated at cost determined by the first-in, first-out method. Subsequent
change in accounting policy from FIFO method to the Moving Average Method shall
take place upon completion of the Computerized Supplies Inventory System.

Income Tax
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial reporting bases of assets
and liabilities and their related tax bases. Deferred tax assets and liabilities are
measured using the tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.

The account Deferred Tax Asset is presented and classified under Other Non-
Current Assets, net of the Deferred Tax Liability, as follows:

2010 2009
Deferred Tax Assets 542,119,074 485,544,555
Deferred Tax Liability 261,681,142 261,681,142

Net Deferred Tax Assets 280,437,932 223,863,413

Foreign Currency Transactions

Outstanding loans from USAID, DANIDA and other foreign currency denominated
loans where the Corporation undertakes the foreign exchange fluctuation risk are
stated at their current values.

Engineering Services/Well Drilling

To ensure the successful implementation of the water supply system financed by the
Corporation, well drilling and engineering services are rendered to the water districts
for a fee. Expenses relative to these services are booked as Deferred Charges when

10
 incurred and eventually transferred to the receivable when billed or expense accounts
when the implementation of the water supply system is discontinued.

Unearned Income from Well Drilling Contracts

The income from Well Drilling Projects (WDP) is recorded under the Unearned Income
from Well Drilling Contracts. The final revenue from WDP shall be based on the Final
Well Drilling Cost Report submitted within thirty (30) days after project completion.
The basis for determination of cash generated from each completed WDP is the
Income and Expense Report submitted by the Cost Accounting Division.

Unearned Income from Engineering Study

The costs for the Water District Financed Technical Services (WDFTS) of LWUA are
recorded under Unearned Income from Engineering Study. The final revenue from the
technical services shall be based on the final Technical Service Report submitted by
LWUA to WD upon completion of the WDFTS. The basis for determination of cash
generated from the service rendered is the difference between the collections from the
WD and the actual disbursements of LWUA for the service rendered.

3. CASH AND CASH EQUIVALENTS

This account consists of:

2010 2009

Cash on hand 38,793,304 62,829,558

Cash in bank local currency 538,736,916 792,052,381
Cash in bank foreign currency 24,074,888 23,390,650
Short- term investments 37,902,969 42,638,638
639,508,077 920,911,227

4. RECEIVABLES

This account consists of:

2010 2009
Trade Receivables
Loans receivables from GOCCs 912,016,761 815,280,716
Interest receivables 1,146,696,009 935,240,281
Receivables from Well Drilling Projects 7,600,254 7,201,883
Receivables from Engineering Studies 518,400 1,394,829
Total 2,066,831,424 1,759,117,709
Less allowance for doubtful accounts 802,745,112 689,050,376

Trade Receivables, net 1,264,086,312 1,070,067,333

11
 2010 2009
Non-trade Receivables
Due from Officers and employees 4,815,642 10,179,786
Receivables from Government
Agencies 841,749,648 898,065,699
Miscellaneous 2,369,351,536 1,192,739,479
Total 3,215,916,826 2,100,984,964

Less : allowance for doubtful accounts 5,041,472 5,041,472

Non-trade Receivables, net 3,210,875,354 2,095,943,492

4,474,961,666 3,166,010,825

Loans receivables from GOCCs account represents the current portion of

outstanding long-term loans receivables due from Water Districts (WD) & from the
Rural Waterworks and Sanitation Association (RWSA) aged one year from the
balance sheet date.

Interest receivables represents receivables from interests earned on currently maturing

portion of outstanding loans from Water Districts and the RWSA.

Receivables from well drilling projects represents the amounts due from water districts
for its well drilling projects undertaken by the Corporation.

Receivables from engineering studies represents the amounts due from water districts
for engineering studies undertaken by the Corporation

Due from officers and employees represents receivables from medical loans granted
to LWUA officials and employees as well as amounts of cash advances for traveling
expenses.

Receivables from Government Agencies represents those due from National

Government Agencies (NGAs) in the amount of P3,524,530, those interest bearing
loans due from the Local Government Units in the amount of P 4,712,581, and those
from Water Districts billed on open account in the amount of P833,512,537.
Receivable from NGAs pertains to the advances made to the Bureau of Treasury
(BTr) for the debt servicing of the Corporations foreign loans. An offsetting
arrangement was earlier approved by the Department of Finance to effect immediate
offsetting of these advances against other National Government relent loans to the
Corporation.

Miscellaneous receivables represents the amounts released for the implementation

of Water Supply Projects under the former Presidents Priority Program on Waterless
Municipalities /Barangays and which were chargeable against the Presidential Social
Fund (PSF).

12
5. SUPPLIES INVENTORY

This account consists of:

2010 2009

Office supplies inventory 1,311,284 2,075,330

Medical, dental and laboratory supplies 408,223 540,722
Other supplies inventory 2,734,370 399,860

4,453,877 3,015,912

The Office supplies inventory account consists of supplies purchased/held for

consumption in the normal course of LWUA operations.

The Medical, dental and laboratory supplies account consists of drugs and medicines
purchased/held for issuance to LWUA officers and employees in need of medical
attention.

The Other supplies inventory account consists of water supply materials which are
still not issued and are being kept in stock for future use of water districts.

6. OTHER CURRENT ASSETS

This account consists of:

2010 2009

Advances to contractors 52,231,577 38,888,309

Advances to consultant 25,971,098 25,971,098
Advances to water districts 26,567,483 33,567,483
Prepaid expenses 491,490 549,306
Guarantee Deposits 1,664,609 1,454,236
106,926,257 100,430,432

Advances to contractors account represents prepayments made to contractors for the

mobilization of the government water supply projects.

Advances to consultants account represents prepayments made to consultants for the

preparation of detailed engineering designs and construction supervision of water
supply projects funded by foreign loans.

Advances to water districts account includes releases of funds to different water

districts for earthquake rehabilitation, as well as for Water Districts struck by Typhoon
Reming, and advances to defray take-over expenses. The amounts released to the
various water districts shall be subject to liquidation or shall be reported on as soon as

13
 the purposes for which it was given have been served.

Prepaid expenses account pertains to payments of insurance premiums of LWUA

vehicles and other insurable properties.

Guarantee Deposits refer to prepayments made to various firms / individuals such as

advances to Manila Electric Company, PLDT for telephone deposits, deposits to C.
Lotti for the opening of a special account for feasibility study, etc.

7. LONG-TERM RECEIVABLES

This account consists of:

2010 2009
Loans receivable from water districts
(WD) 12,224,778,204 12,788,140,895
Restructured receivables WD 533,258,488 503,285,676
Employees multipurpose loan
receivables 223,310,794 201,761,398
Unbilled loans and accounts
receivables-WD 96,050,064 96,050,064
Loans receivables- RWSA 29,774,898 30,173,156
13,107,172,448 13,619,411,189
Less: Allowance for bad debts 1,601,926,738 1,527,039,742
11,505,245,710 12,092,371,447

Loans receivable from water districts comprises of the peso and foreign cost releases
to finance the development of various water supply projects in the provincial areas.
They bear graduated interest rates ranging from 8.5% to 15% per annum depending
on the amount of the loan with a 26-year repayment period. Special loans as well as
new service connection loans carry graduated interest rates ranging from 7.5% to 9%
per annum.

In an effort to improve its collection performance, the Corporation adopted the

following policies:

Restructuring of water district loans;

Imposition of a 2% penalty charge on arrears by water districts with restructured

accounts;

Requirement of post-dated checks to cover debt service remittances of water

districts requesting for additional loans or financial assistance, those extended with
restructuring concessions, and those seeking clearance for outside borrowing;

Adoption of the first-in, first-out method in the application of debt service payments;

Submission of the water districts annual budgets to the Corporation; and

14
 Take-over of water districts defaulting on debt service payments.

Restructured Receivables Water Districts - these are loans collectible from water
districts at reduced interest rates (7.5% - 9% ) to make loans affordable and to fast
track project implementation in small water district areas. Length of amortization
payments was likewise modified to ease payment by water district borrowers.

Unbilled loans and accounts receivable WD represents project expenditures the

billings of which have been deferred pending completion of the contract and
acceptance of the project.

Loans receivable - RWSA represents receivable from interest bearing long-term loans
extended to various rural waterworks and sanitation associations for the development
of water supply in the rural areas.

8. LONG -TERM INVESTMENTS

The account includes :

2010 2009

Advances to Express Savings Bank Inc 400,000,000 400,000,000

Investments in Bonds 341,126,720 363,324,018
Investments in Subsidiaries 80,003,070 80,003,070
Advances to LWUA Consult, Inc. 31,655,559 404,510

852,785,349 843,731,598

Advances to Express Savings Bank..P400,000,000

In order to meet the requirements imposed by the Bangko Sentral ng Pilipinas, as part
of Express Savings Bank ,Inc. (ESBI) rehabilitation program, the LWUA Board of
Trustees, in Resolution No. 336 dated August 17, 2009, made advance payment to
ESBI for stock subscription in the amount of four hundred million pesos
(P400,000,000.) In August 25, 2009, Managers Check No. 130424 was paid to the
United Coconut Planters Bank in the amount of P400,000,000 for LWUAs stock
subscription to ESBI. The payment was treated by LWUA as an advance payment to
the capital subscription, thus increasing the capital of ESBI. ESBI issued Official
Receipt No. 56928 acknowledging receipt of the P400,000,000.

Investments in Bonds..P341,126,720
This account represents placements in agrarian reform bonds. The interest rates are
aligned with that of the 91-day Treasury Bills and payable within six (6) months from
date of issue and every six (6) months thereafter. Ten percent (10%) of the bonds
original face value matures every year and paid to the bondholder until the tenth
year/maturity date.

Investments in Subsidiaries ..P80,003,070

In June 2009, LWUA purchased sixty percent (60%) of the total issued and
outstanding common shares of Express Savings Bank Inc. (ESBI), a private banking
institution currently under a Bangko Sentral ng Pilipinas (BSP) administered
rehabilitation. LWUA paid P80,003,070 for the 445,377 shares to the various owners
of these shares.

15
LWUAs decision to operate a quasi bank, to be later named as the Water and Energy
Bank, was anchored on the following grounds:

Republic Act 7721 as implemented by Section 14 of BSP Circular No. 51 dated

October 14, 1994, Under this Circular, LWUA may own up to sixty percent (60%) of
the voting stock of a domestic bank;

LWUA has been favored to invest /create a subsidiary and such act is within Its charter
to do so, pursuant to the legal opinion from the Office of the Government Corporate
Counsel (OGCC) dated September 23, 2009, OGCC citing Sections 50,59 and 71 of
PD 198.

Advances to LWUA Consult, Inc. P31,655,559

The LWUA Consult, Inc. (LCI) was created through LWUA Board Resolution Nos. 152
and 360 both series of 2009 adopted last June 30 and August 25, 2009, respectively.
As a wholly-owned subsidiary of the Local Water Utilities Administration, it aims to
specifically augment / complement LWUA in the latters primary task of promoting and
developing provincial water supply systems by providing specialized technical
assistance to local water utilities and other water supply developers/providers.

LWUA Board Resolution No. 609 authorized the deposit with Express Savings Bank,
Inc., Cabuyao Branch the amount of P31,250,000, as paid up capital of LCI. Its
Certificate of Incorporation was duly registered last December 7, 2009 with the
Securities and Exchange Commission under Registration No. CS 200918943. As a duly
incorporated entity, the LWUA Consult, Inc. is distinct from LWUA with its own corporate
structure but dependent on LWUA for policy direction.

This P405,559 represents the liquidation of cash advance for the registration of the
incorporation of LWUA Consult, Inc. with the Securities and Exchange Commission.
The creation of the subsidiary was envisioned under Board Resolution No. 152 series of
2009 dated June 30, 2009 and Resolution No. 608 series of 2009 dated November 10,
2009. The SEC approved its registration on December 7, 2009.

9. PROPERTY AND EQUIPMENT

The roll forward analysis of this account follows:

Furniture & Engineering
Land Building & Office & Laboratory Other
Improvement Improvement Equipment Equipment Equipment Total
CY 2010
At January 1 1,664,620 147,815,713 129,591,064 109,563,568 68,214,280 456,849,245
4,414,812
Additions 46,969,495 18,939,265 14,122,101 81,445,673
Disposals (1,093,636) (1,053,018) (218419) (9,271,948) (11,637,021)

At Dec. 31 1,664,620 190,691,572 132,952,858 128,284,414 73,064,433 526,657,897

CY 2010
Accumulated
Depreciation
At January 1 62,637,131 69,183,906 97,997,627 45,532,211 275,350,875
Depreciation 4,678,909 14,905,200 830,567 5,206,640 25,621,316

Disposals (984,272) (947,715) (193,1987)

16
 Furniture & Engineering
Land Building & Office & Laboratory Other
Improvement Improvement Equipment Equipment Equipment Total

At December
31 , 2010 66,331,768 83,141,391 98,828,194 50,738,851 299,040,204
Net Book
Value At
December 31 1,664,620 124,359,804 4,981,1467 29,456,220 22,325,582 227,617,693

CY 2009
At January 1 1,664,620 141,042,766 89,054,291 106,793,741 48,435,099 386,990,517
Additions - 6,772,947 7,185,685 2,956,470 17,667,020 34,582,122
Transfers - - 37,678,219 12,503 2,850,368 40,541,090
Disposals - - (4,327,131) (199,146) (738,207) (5,264,484)

At December
31 1,664,620 147,815,713 129,591,064 109,563,568 68,214,280 456,849,245

Accumulated
Depreciation :
CY 2009
At January 1 - 56,117,450 43,838,956 98,262,288 42,856,128 241,074,822

Depreciation - 6,519,682 29,272,872 166,025 4,328,633 40,287,212

Disposals - - (3,927,923) (430,686) (1,652,550) (6,011,159)

At December
31, 2009 - 62,637,132 69,183,905 97,997,627 45,532,211 275,350,875
Net Book
Value At
December 31 1,664,620 85,178,581 60,407,159 11,565,941 22,682,069 181,498,370

10. OTHER NON-CURRENT ASSETS

This account consists of:

2010 2009
Deferred tax assets 280,437,932 223,863,413
Deferred engineering study cost 60,012,520 10,243,816
Restricted funds 1,974,198 956,313
Deferred well drilling cost 1,540,632 4,027,712
Other deferred charges 14,301,518 14,301,518
358,266,800 253,392,772

Deferred tax assets pertains to prepaid tax arising from certain expenses not
currently deductible for income tax purposes pursuant to PAS 12, details of which are
as follows:

2010 2009
Deferred Tax Asset 542,119,074 485,544,555
Deferred Tax Liability 261,681,142 261,681,142
Deferred Tax Assets. (net) 280,437,932 223,863,413

17
 Paragraph 72 of PAS 12 states : Although current tax assets and liabilities are
separately recognized and measured, they are offset in the balance sheet subject to
criteria similar to those established for financial instruments in IAS 32 Financial
Instruments : Disclosure and Presentation.

Paragraph 74 of PAS 12 also states, An entity shall offset deferred tax assets and
deferred tax liabilities, if, and only if:

(a) the entity has a legally enforceable right to set off current tax assets against
current tax liabilities, and

(b) the deferred tax assets and the deferred tax liabilities relate to income taxes levied
by the same taxation authority on either:

(i) the same taxable entity; or

(ii) Different taxable entities which intend either to settle current tax liabilities
simultaneously, in each future period in which significant amounts of deferred
tax liabilities or assets are expected to be settled or recovered.

Deferred engineering study cost refers to the expenses incurred in connection with the
preparation of project feasibility studies and detailed engineering designs of unbilled
on-going projects. The costs of billed projects are eventually transferred to the
engineering study expense account.

Deferred well drilling cost includes the cost of manpower, travel, materials, rent, gas
and oil, repairs and maintenance, and other expenses incurred in connection with in-
house well drilling projects. Cost relative to this service is eventually transferred to the
well drilling expense account when billed or discontinued.

Other deferred charges account is used to record deferred charges other than costs of
engineering studies; construction supervision; and well drillings that are held for future
billing to various water supply projects.

11. ACCOUNTS PAYABLE

This account consists of:

2010 2009
Notes and acceptances payable 1,000,000,000 500,000,000
Interest payable 140,223,070 81,797,068
Payables Unliquidated Obligations 58,258,692 50,051,556
Payable to officers and employees 5,509,195 5,421,619

1,203,990,957 637,270,243

Notes and acceptances payable pertains to the outstanding balance of short-term

loans with the Philippine Veterans Bank. Additional P500,000,000 was received in
2010 from Philippine Veterans Bank thus bringing a total of P1,000,000,000

18
 outstanding as of date. The loan is used exclusively to bridge finance LWUAs
existing and maturing loans. This carries an interest rate of 6.8421% per annum. All
loans were secured by the assignment of LWUAs Trade / Business receivables.

12. PAYABLE TO GOVERNMENT AGENCIES

This account consists of the following :

2010 2008

Due to Government Owned and

Controlled Corporations (GOCCs) 168,796,130 81,778,935
Due to Bureau of Internal Revenue (BIR) 54,663,236 3,500,839
223,459,366 85,279,774

Due to GOCCs pertains to collections of loans from Water Districts thru bank credits.

Due to BIR pertains to the amount of income tax and tax withheld from
contractors/suppliers and employees for remittance to the Bureau of Internal Revenue
(BIR). As of Balance Sheet date, Income Tax Payable amounted to P44,470,310 , and
withholding tax payable amounted to P10,192,926.

13. OTHER CURRENT LIABILITIES

This account consists of:

2010 2009
Loans payable, current foreign 274,526,857 302,608,052

Loans Payable , current -GOP 138,539,256 135,283,775

Loans payable, current domestic 91,653,333 91,653,333
Guaranty deposits payable 60,933,985 55,795,215
Other payables 1,689,055,569 1,444,263,779

2,254,709,000 2,029,604,154

Loans payable, current- foreign represents the currently maturing portion of loans
received through loan agreements executed by and between the LWUA as the
borrower and the foreign lending banks as the lenders mainly to finance, on a long-
term basis, the development of various water systems in different cities, municipalities
and rural areas of the country.

Loans Payable current- Government of the Philippines is the current portion of loans
executed by and between the Republic of the Philippines(RP) as the borrower and the

19
 foreign lending banks as the lender. Subsidiary loan agreements were likewise
executed by and between the LWUA, as the implementing agency and sub-borrower,
and the RP as the sub- lender to LWUA.

Guaranty Deposits Payable refers to the amount collected or withheld from contractor
as 10% retention on contract payments to guarantee performance of the project and
are refundable to the contractor.

Other Payables include the following :

2010 2009
Liabilities for special fund 1,512,588,602 1,249,442,954
Depository liabilities 154,358,295 155,044,381
Miscellaneous 22,108,672 39,776,444

1,689,055,569 1,444,263,779

Liabilities for special fund are the amounts received in trust by the Corporation and
represent government subsidy support fund for the development of various water
supply system projects thru the Department of Health (DOH) and the Department of
Public Works and Highways (DPWH). Depository liabilities are amounts received
from various water districts on a voluntary basis for safekeeping and investments in
line with the LWUAs mandate to act as a depository of WDs reserve funds.

14. LOANS PAYABLE GOVERNMENT OF THE PHILIPPINES (relent loans )

This account consists of:

2010 2009
USAID 033 US$15M
At 2% per annum from 1975 to 1985,
3%, thereafter, payable in 30 annual
installments of $286,330.88 starting
July 17, 1985 and increasing
thereafter, up to July 17, 2015. 204,164,174 231,353,597

USAID 042 US$ 20M

At 2% per annum from 1977 to 1987,
3% thereafter payable in 30 annual
installments of $305,410.85 starting
April 13, 1987 and increasing
thereafter, up to April 13, 2017 275,538,350 302,306,638

20
 2010 2009
ADB 1056-PHI US$14.06M
At 10% per annum payable in 25
annual installments of US$247,600
starting February 15, 2001, increasing
thereafter up to August 15, 2025. 612,753,060 631,847,841

ADB 1057-PHI US$2.7M

At 10% per annum payable in 20
annual installments of $101,800
starting February 15, 1995 increasing
thereafter up to August 15, 2014. 64,449,019 74,832,117

ADB 1599 - $292 T

At rate applicable to Republic loan
plus the rate of 1% payable in 25
annual installments on May 15 and
November 15 in each year up to Nov.
15, 2022 13,114,268 13,118,922

IDA 920-PHI US$14M

At 0.75% service charge per annum
payable in 40.5 annual installments of
$96,086 starting August 15, 1989,
increasing thereafter up to February
15, 2029. 38,855,382 46,234,787

OECF PH-P82 Y.945B

At 8.7% per annum payable in 20
annual principal payments of
Y46,110,000 starting January 20,
1998 to January 20, 2018. 94,549,880 103,334,836

OECF PH-P124 Y.789B

At 9% per annum payable in 20.5
annual principal payments of
Y38,468,000 starting April 20, 2000 to
April 20, 2022. 26,437,695 45,941,669

OECF PH-P149 Y6.212B

At 4.9% per annum payable in 20.5
annual principal installments of
Y151,520,000 starting December 20,
2004 and increasing thereafter up to
December 20, 2024 911,551,329 970,742,519

French Protocol FF24M

At 3% Treasury Loan per annum payable
in 30 annual installments of
FF1,313,933.60 starting December 31,
1990 to December 31, 2020 82,857,958 88,407,912

21
 2010 2009

2,324,271,115 2,508,120,838
Less : Current Portion 138,539,256 135,283,775

Loans Payable GOP 2,185,731,859 2,372,837,063

Loans Payable Government of the Philippines are loans executed by and between
the Republic of the Philippines (RP), as the borrower and the foreign lending banks, as
the lender. Subsidiary loan agreements were, likewise, executed by and between the
LWUA, as the implementing agency or one of the implementing agencies, and sub-
borrower, and the RP, as the sub- lender to LWUA.

15. LOANS PAYABLE - FOREIGN

This account consists of:

2010 2009

ADB 1269-PHI US$21.1M

At interest based on the cost to the
bank of such currencies plus spread
which ranges from 6.3% to 6.7% per
annum payable in 20 annual
installments of $733,100 starting March
1, 1999, increasing, thereafter, up to
September 1, 2018. 754,549,497 800,818,653

ADB 1472-PHI US$45M

At 6.79% per annum payable in 20
annual installments of $848,500 starting
March 1, 2002, increasing, up to
September 1, 2021. 1,028,261,027 1,070,480,361

OECF PH-P154 Y6.131B

At 2.5%, Principal (I) and 2.1%,
Principal (II) per annum payable in 20
annual installments of Y149,600,000
on August 20, 2005 and Y299,070,000
from February 20, 2006 through August
20, 2025. 814,345,797 862,606,880

OECF PH-P181 Y7.228B

At 2.5%, Principal (I) and 2.1%,
Principal (II) per annum payable in 20.5
annual installments of Y176,320,000
on March 20, 2007 and Y352,584,000
through March 20, 2027 1,796,773,137 1,900,980,910

22
 2010 2009

Australian Aid US$14.8M

At 2.25% per annum payable in 9.5
annual installments of $740,000 starting
July 15, 2001 to January 15,2011. 73,981,068 146,018,986

KFW PTWSP I & II Euro 14.700M

German Financial Cooperation with the
Philippines aimed to upgrade the WSS
of Water Districts 945,733,650 973,871,944

Total Loans Payable Foreign 5,413,644,176 5,754,777,734

Less : Current Portion 274,526,857 302,608,052

5,139,117,319 5,452,169,682

Loans payable foreign represents loans received through loan agreements executed
by and between the LWUA as the borrower and the foreign lending banks as the
lenders mainly to finance, on a long-term basis, the development of various water
systems in different cities, municipalities and rural areas of the country.

16. LOANS PAYABLE LOCAL

Loans payable local includes the three (3) Term Loans from the Land Bank of the
Philippines made in three (3) tranches of P500 Million per tranche. These loans
showing a balance of P424,973,333 in 2010 and P516,626,666 in 2009 are secured
as follows:

80% by the assignment of LWUAs Trade Receivables; and

20% by the assignment of LWUAs Agrarian Reform Bonds

The status of these term loans is as follows:

1st Tranche P500,000,000

This Term Loan of P500 Million carries an interest rate equal to deposit rate plus 4%
spread, subject to quarterly repricing but in no case shall the rate be lower than 10%
per annum. It is payable in 20 equal quarterly amortizations. The loan was availed of
in one single drawdown. This was fully repaid in 2009.

2nd Tranche - P500,000,000

This Term loan carries interest on LBPs prime lending rate plus 2% spread, subject to
quarterly repricing but in no case shall the rate be lower than 9.5% per annum. It is
payable in 20 equal quarterly amortizations to commence at the end of the 8th quarter
from the initial drawdown date, plus a balloon payment on the maturity of the loan.
The full amount of the loan was availed in 2004 in five (5) drawdowns. Starting April
2010, the interest rate was reduced to 8.5% per annum upon the request of LWUA.

Principal of the loan is to be amortized based on a 15- year term payable in twenty

23
(20) equal quarterly amortizations to commence at the end of the eight (8th quarter
from initial drawdown date.

The following Table shows the year and corresponding amounts of availment and
repayments.

DATE AVAILMENT REPAYMENT BALANCE

2004 P500,000,000 500,000,000

2005 500,000,000
2006 25,000,000 475,000,000
2007 33,333,334 441,666,666
2008 33,333,333 408,333,333
2009 33,333,333 375,000,000
2010 33,333,333 341,666,667
2011 33,333,334*** 308,333,332

*** current portion for 2010 loans

3rd Tranche P291.60 Million

The approved Term Loan is for P500 Million, but only P291.60 Million were availed of.
It carries an interest rate equivalent to LBPs prime lending rate plus 2% spread,
subject to quarterly repricing but in case shall the rate be lower than 9% per annum.
Its repayment is equivalent to 20 equal quarterly amortizations to commence at the
end of the 9th quarter from the initial drawdown date , the first quarter of 2006. There
were two (2) drawdowns from the loan, one in 2006 and another in 2007. Starting
April 2010, the interest rate of this loan was reduced to 8% per annum upon the
request of LWUA.

Schedule below shows the year and corresponding amounts of availment and
repayments

DATE AVAILMENT REPAYMENT BALANCE

2006 P220,000,000 P220,000,000
2007 71,600,000 291,600,000
2008 291,600,000
2009 58,320,000 233,280,000
2010 58,320,000* 174,960,000
2011 58,320,000** 116,640,000

* current portion for 2009 loans ** current portion for 2010 loans

24
 To summarize, the outstanding balances of the Term Loans are as follows:
Outstanding Balance

2010 2009
1st Tranche
2nd Tranche 341,666,667 375,000,000
3rd Tranche 174,960,000 233,280,000

Total Loans Payable 516,626,667 608,280,000

Less: Current Portion

2nd tranche 33,333,334 33,333,334
3rd tranche 58,320,000 58,320,000
91,653,334 91,653,334
Loans Payable Local, net of
current portion 424,973,333 516,626,666

17. DEFERRED CREDITS

This account consists of:

2010 2009
Interest earned but not collected 593,170,293 526,935,631
Unearned income from well drilling
contracts 169,966,980 169,966,980
Deferred income from housing loans 20,383,853 18,044,139
Unearned income from engineering study 708,702 708,702

784229828 715,655,452

The account Interest earned but not collected pertains to uncollected past due
interests of various water districts whose terms have been modified in accordance with
the restructuring agreement.

18. CAPITAL STOCK

The Corporations authorized capital stock of 12,500,000 shares at P200 par value or
P2.5 billion has been fully subscribed and paid in by the National Government as of
1993.

19. DONATED SURPLUS

This account represents subsidy support from the National Government and the cost
of completed water supply projects funded out of the proceeds of grants from the
National Government loaned out to water districts. Pursuant to the General
Appropriations Act, said releases may be treated as equity contribution of the National
Government to the Corporation in the event that its authorized capitalization is

25
 increased by law.

20. MISCELLANEOUS SURPLUS

This account represents the cost of Levels II and III water supply projects constructed
by the Department of Public Works and Highways (DPWH) and turned-over to the
Rural Waterworks Development Corporation (RWDC) pursuant to Executive Order No.
124 issued in January 1987 and for documentation and collection pursuant to a
Memorandum of Agreement dated January 27, 1983. It also includes the net assets of
LWUA as a national government agency prior to its incorporation in 1975.

21. PRIOR YEARS ADJUSTMENTS

Details of this account are as follows:

2010 2009
Economic Assistance 2009 /
Personal Services 2008 (34,143,000) 1,023
Open account billings 6,028,015
Materials and supplies (1,123,308)
Debt service charges 4,750,452
Amortization / Penalty & Interest billings
to WDs 7,906,594 (4,221,487)
Miscellaneous fines / fees 437,772
Adjustments for taxes (69,019,434)
Water districts billing adjustments, net (2,747,216)
Adjustments for operating expenses (21,022,189)
Liquidation of outstanding cash advances (3,777,992)
Other prior period expenses (2,812,643)
Foreign exchange losses 32,354,477
Engineering Services 11,812,873
Profound contributions LWUA share 9,104,270
Advances by the Bureau of Treasury (7,204,326)

(34,585,596) (57,299,063)

The LWUAs Board of Trustees authorized the grant of Economic Assistance for CY
2009 to LWUAs officials and employees through the adoption of Board Resolution No.
114 series of 2010 in March 9, 2010. This was pursuant to the 2007-2010 Collective
Negotiation Agreement entered into by and between the LWUA Management and the
LWUA Employees Association for Progress (LEAP). An amount equivalent to P57,000
were paid in 2010 to each of the LWUA regular officials and employees and to its
contractual employees.

26
22. MISCELLANEOUS INCOME

Details of this account are as follows:

2010 2009
Miscellaneous fee for document
reproduction, chemical testing,
application and processing fees ,etc. 3,851,570 4,452,701

Pre-termination fees - 11,350,207

3,851,570 15,802,908

23. OPERATING EXPENSES

This account consists of:

2010 2009
PERSONAL SERVICES

Other bonuses and allowances 197,040,859 346,227,979

Salaries and wages Regular 184,246,596 157,133,908
Additional compensation (ADCOM) 110,621,697 98,762,048
Other personnel benefits 37,829,331 32,066,065
Life and retirement insurance contributions 19,275,025 18,658,422
Personnel Economic Relief Allowance
(PERA) 14,154,521 14,502,874
RATA 16,244,890 14,993,852
Clothing / uniform allowance 3,564,000 3,561,160
PHILHEALTH contributions 1,858,250 1,791,225
Terminal leave benefits 1,103,882 696,872
PAG-IBIG contributions 591,499 679,928
ECC contributions 649,861 728,143
Honoraria 242,538 180,600

587,422,951 689,983,076

MAINTENANCE AND OPERATING EXPENSES

Bad debts 188,581,732 274,734,633

Professional Services 24,777,550 23,275,922
Confidential, intelligence, extraordinary and
miscellaneous expenses 30,977,117 38,217,958
Depreciation 30,169,233 25,181,151
Travelling 12,279,920 22,514,688
Taxes, insurance premiums and other fees 9,151,916 12,108,495

27
 2010 2009
Service expenses 18,697,632 19,842,279
Utility expenses 14,200,606 12,029,521
Subsidies and donations 7,056,500 8,053,946
Repairs and maintenance 8,075,419 6,710,405
Advertising expenses 3,709,249 5,086,743
Supplies and materials expenses 4,364,781 4,632,278
Communication expenses 3,915,081 3,066,167
Training and scholarship expenses 2,445,198 3,019,654
Rent expenses 639,896 777,010
Subscription expenses 233,463 673,903
Other maintenance and operating
expenses 3,542,051 2,252,960

362,817,344 462,177,712
950,240,295 1,152,160,788

24. FINANCIAL EXPENSES

This account consists of:

2010 2009
Interest Expense 438,251,475 484,880,579
Bank Charges 9,635 927,029
438,261,110 485,807,608

25. INCOME TAX EXPENSE

Components of income taxes are as follows:

2010 2009
Current tax 155,520,248 106,730,540
Income tax benefit (56,574,519) (82,420,390)
Deferred tax - -
98,945,729 24,310,150

Numerical reconciliation between tax expense and the product of accounting income
multiplied by the tax rate of 30% in 2010 and 2009 are as follows:

28
 2010 2009

Accounting Income 335,165,543 93,609,176

Tax expense at 30% 100,549,663 28,082,753

Tax effect of non-deductible interest
expense 1,046,187 2,911,840

Tax effect on non-taxable interest income (2,650,121) (6,684,443)

98,945,729 24,310,150

Details of Current tax are as follows:

2010 2009
Sales/ Revenue/ Receipts/ Fees 1,689,462,841 1,665,990,814
Less: Cost of Services 456,909,579 495,943,752
Gross Income from Operations 1,232,553,262 1,170,047,062
Non Operating , Taxable Other Income 25,027,022 40,044,297
Total Gross Income 1,257,580,284 1,210,091,359
Less: Deductions 739,179,458 854,322,893
Net Taxable Income 518,400,826 355,768,466

Tax Rate 30% 30%

Current Tax 155,520,248 106,730,540

The computed current tax does not include the deferred tax on Current Year
2010 Bad Debts expense.

Details of the computed Income Tax Benefit are as follows:

2010 2009
Allowance for Bad Debts end 2,404,671,850 2,216,090,118
Less : Allowance for Bad Debts, beginning 2,216,090,118 1,941,355,485
Provision for bad debts (debited to
Deferred Tax Asset account ) 188,581,732 274,734,632
Tax Rate 30% 30%

Income Tax Benefit 56,574,519 82,420,390

The computed Income Tax Benefit does not include the CY 2010 gain on foreign
exchange.

29
26. AUTHORIZATION TO ISSUE FINANCIAL STATEMENTS

The LWUA Board of Trustees adopted on February 22, 2011, Resolution No. 32
Series of 2011. Such authorized the issuance of LWUAs Calendar Year 2010
Financial Statements, in compliance with the Philippine Accounting Standard No. 10.

27. INTERESTS AND OTHER DEBT SERVICING CHARGES

The amounts presented in the Cash Flow Statement ( P347,022,839 for 2010 and
P419,844,524 for 2009 ) represent payments for interests and Other Debt Service
Charges on LWUAs existing loans. These were classified consistently as operating
cash flows. Such events enter into the determination of net income (loss) for the
period, and is therefore classified within the Cash Flows from Operating Activities.

28. PROCEEDS FROM GOVERNMENT SUBSIDIES

The amounts represent government subsidy support fund for the development of
various water supply system projects given to LWUA thru the Department of Health
(DOH) and the Department of Public Works and Highways (DPWH). These were
neither presented under the Income Statement nor under the Statement of Changes
in Equity. Rather, the same was taken up as credit to the account Liability for Special
Funds upon receipt of the fund and debited upon release to the beneficiary water
districts.

In June 2010, Local Water Utilities Administration was a beneficiary of a subsidy

received from the DOH in the amount of P375,000,000. The amount was intended
for the supply of potable water to waterless municipalities as per Memorandum of
Agreement by and among DOH, LWUA and the Department of Budget and
Management. The amount was acknowledged by LWUA under Official Receipt No.
252533.

29. EFFECTS OF EXCHANGE RATES DIFFERENCES ON CASH AND CASH

EQUIVALENTS

The effects of exchange rates differences on cash and cash equivalents were taken
up as a direct charge against the liability account Adjustment in Foreign Exchange
Values.

30. DIVIDENDS PAID

LWUA did not declare dividends for CYs 2010 and 2009 in view of its requests
with the Department of Finance (DOF) for exemption from dividend remittances.
LWUA justified that they are in dire need of huge capital to finance its on-going
projects. Because of the magnitude of LWUAs program for the next five to ten
years, using the funds for the payment of dividend will significantly deprived LWUA
of project financing.

Pursuant to LWUA Board Resolution No. 446 dated September 15, 2009, LWUA will
defer payment of dividend until it shall have accumulated enough funds for the

30
 proposed increase in capitalization from P2.5B to P25 B

31. CONTINGENCIES

LWUA is contingently liable for lawsuits or claims filed by third parties, which are
either pending in the courts or are under negotiations. These cases involve, among
others, civil actions for reconveyance of title/ properties, return of investment, eminent
domain, collection of sum of money, and other land tenure problems. There is no
provision for contingency recognized in the financial statements since the outcome of
the said lawsuits are not presently determinable.

The significant legal cases are as follows:

a. Honorable Jed Patrick E. Mabilog vs. LWUA, et al

b. Metro Iloilo Water District Board of Directors, Petitioner vs. LWUA, et al

c. Jalbuena, Plaintiff vs. MIWD Board of Directors and Edwin Reyes, MIWD IGM,
Defendants

d. LWUA Employees Association for Progress (LEAP), Petitioner vs. LWUA

Chairman Prospero A. Pichay as Chairman of LWUA Consult Inc., and
Administrator Daniel I. Landingin as Acting President of LCI and Members of
LCI Board, Respondents

e. Engr. Felipe G. Picazo, Petitioner vs. Daniel I. Landingin et al, Respondents

f. Tapilon Rural Waterworks and Sanitation Assoc. Inc. (TARWASAI), Petitioner

vs. LWUA, et al, Respondents

g. RD Policarpio & Co., Inc., Claimant vs. Butuan City WD & LWUA, Respondents

h. LWUA vs. Municipality of Borbon, Cebu et al

i. Melchor Beltran, Plaintiff vs. Bonbon RWSA & LWUA

j. Norma P. Somoray, et al, Plaintiffs vs. Serapia Obayan & LWUA, Defendants

k. Buhi Rural Waterworks and Sanitation Asso., Inc. (BRWSA, Inc.), et al,
Petitioners vs. Buhi Rural Waterworks and Sanitation Multipurpose Coop., et al,
Defendants

l. Atty. De Jesus, Petitioner vs Office of the Ombudsman, et al, Respondents

m. Felipe Sarmiento, Petitioner vs. Hon. Orlando Hondrade, et al, Respondents

n. LWUAs Rationalization case which is still pending at the Quezon City RTC

31
32. Report on the Supplementary Information required under Bureau of Internal (BIR)
Revenue Regulation 15-2010

Records show that LWUA is a VAT registered corporation, however, input VAT was not
recognized on all its procurement of goods and services. In a letter dated October 22,
2010, LWUA , thru the Office of the Government Corporate Counsel (OGCC), has filed a
protest to the BIR, protesting BIRs Letter of Authority (LOA) No. 039-2010-299 issued
on September 29, 2010. The following reasons were cited by the OGCC :

The LOA is legally defective, void and unenforceable for failure to specify the kind
of tax to be examined;

The LWUA remains exempted from the payment of income taxes and percentage
taxes by virtue of Republic Act No. 10026;

The gross revenues of the water district are excluded from the computation of
gross taxable income subject to percentage taxes, hence, not covered from the
imposition of franchise and value added taxes

Taxes, licenses, and withholding taxes accrued and paid during the year were as follows :

Paid in 2010 for

taxes incurred in
Taxes and Licenses 2010 Prior Years
Corporate Income Taxes
Paid in 2009 * 48,330,223
Paid in 2010 ** 62,719,715
To be paid in 2011 44,470,310
Total before income tax benefit 155,520,248
Income Tax benefit 56,574,519
Provision for Income Tax 98,945,729
Add:
Fringe benefit taxes 6,946,194 1,927,593
Documentary stamp tax 2,298,233
Total taxes and licenses 108,189,556 1,927,593
Add : Taxes withheld
On compensation 22,338,275
Creditable withholding taxes 4,819,166
Final Withholding taxes 6,100,795
On WDDP Deposits 1,495,936

Taxes withheld 34,754,172

Total taxes and licenses paid / 142,943,728 1,927,593

accrued / withheld

32
 * There was an overpayment of P48,330,223.51 in the corporate income tax due
for CY 2009. This was presented in the Cash Flow of 2009. This overpayment
was applied subsequently in tax year 2010 for first and second quarter of 2010.

** T o Cash Flow Statement

Pursuant to Section 33 of Republic Act (RA) 8424, otherwise known as Tax Reform Act of
1997, fringe benefit taxes were treated by LWUA as charges to its operations.

Section 33 . Special Treatment on Fringe Benefits

A) Imposition of Tax.- A final tax of thirty-four percent (34%)

effective January 1, 1998, and thirty three percent (33%) effective
January 1, 1999; and thirty two percent (32%) effective January 1,
2000 and thereafter, is hereby imposed on the grossed up monetary
value of fringe benefit furnished or granted to the employee (except
rank and file employees as defined herein) by the employer
(underscoring ours ), whether an individual or a corporation ( unless
the fringe benefit is required by the nature of, or necessary to the
trade, business or profession of the employer, or when the fringe
benefit is for the convenience or advantage of the employer). The tax
herein imposed is payable by the employer which tax shall be paid
in the same manner as provided for under section 57(A) of this
Code. xxx.

LWUA records further show that there were no tax cases under preliminary
investigation, litigation and/or prosecution in courts or bodies outside the BIR. Likewise,
there were no known amounts of deficiency tax assessments, whether protested or not.

33
34
COMMENTS AND OBSERVATIONS
FINANCIAL AUDIT

1. Financial assistance released to Water Districts in the amount of P2.347 billion as of

December 31, 2010, or 52% of the carrying amount of the total receivables, were
recognized as claims from the National Government despite the absence of legal
basis or document to support the claim.

In CY 2009 Annual Audit Report we have observed that the receivable from the
Government of the Philippines (GOP) has no legal basis or legal document to support the
claim except for the verbal commitment from the Office of the President thru the
Presidential Social Fund (PSF) to release P6 billion for the project. Management explained
that LWUA will pursue the collection of the PSF from the National Government as the said
fund was already committed for the implementation of the Water Supply Project under the
Presidents Priority Program on Water (P3W).

We then recommended that in the event the release of the PSF will no longer be feasible in
view of the change in the administration, LWUA will have to find ways to meet its financial
commitments to the water districts, municipalities and/or barangays and that adjusting
entries be made in the books of accounts.

There was no PSF fund received in CY 2010 but Management continue to release funds to
various water districts using the LWUA Corporate Fund which amounted to
P1,176,224,725.39. Comparison of year end balances would show the increase as follows:

December 31, 2010 December 31, 2009 Increase

Miscellaneous P2,347,635,781.76 P1,171,411,056.37 P1,176,224,725.39
Receivables -GOP

We are reiterating our previous years recommendations (i) for the reversal of entries made
and that the releases to the water districts be treated as loans receivable; (ii) that the
financial assistance granted to the water districts be funded from the intended sources and
(iii) that prior approval from the LWUA Board of Trustees should be secured for corporate
funds utilized for other purpose.

Management informed that they are now in the process of scrutinizing and classifying fund
releases to various water districts in order to come up with proper charging of accounts and
reconciliation for the correct amount to be adjusted/reversed.

In the exit conference, Management commented that the recommendation for the reversal
of entries and that the releases to the water districts be treated as loans receivable cannot
be implemented as there was a Memorandum of Understanding between LWUA and the
Water Districts that a portion of such releases will be treated as Grants to Water Districts.

The previous recommendation was made in order for LWUA to recover the amounts
released to the Water Districts. However, if the same cannot be implemented, Management
should take other course of action to recover the funds released. Otherwise, the persons
responsible for the disbursements without authority to charge it from the non existing fund
should be held liable.

34
2. The cash and cash equivalents in the amount of P639.5 million is not sufficient to
cover all recognized trust liabilities of LWUA as of the same date of P1.973 billion.
More specifically, the Water District Portfolio Fund of P 1.9 million is not enough to
pay the maturity/termination value of the deposits made by the Water Districts of
P154.3 million.

Section 6 of the GAA FY 2010 provides that trust funds shall not be paid out except for the
fulfillment of the purpose for which the fund was received.

Grants/subsidies received from the National Government for the development of various
waterworks programs are recorded as a trust account (liability for special funds) upon
receipt. On the other hand, the Water District Portfolio Accounts are deposited by the Water
Districts as reserve funds for the purpose of ensuring repayments of its obligations. The
deposit plus interest is repayable to the water district on due date.

Balance Sheet of LWUA as of December 31, 2010 showed the following balances:

Cash
Cash in banks P 562,811,804
Cash on hand 38,793,304
Short Tem Deposits 37,902,969
Total Available Cash P 639,508,077

Trust Liabilities
Due to Government Owned & Controlled P168,796,130
Corporations
Due to BIR 54,663,236
Guaranty Deposits Payable 60,933,985
Other Payables 1,689,055,569
P1,973,448,920

Meanwhile, the Cash Special Savings Deposits Water District Deposit Portfolio (WDDP)
has a balance of P1,974,198 only while the total deposits made by the Water Districts
under the Depository Liability account amounted to P154,358,295.

As can be gleaned from the foregoing information, the cash and cash equivalents are not
sufficient to pay the various trust accounts of LWUA. Management failed to keep the trust
receipts intact so as to meet its obligation to extend financial assistance to the Water
Districts for the development of waterworks projects and the remittances to the government
agencies of the statutory obligations and the possible claim of the contractors for the refund
of the retention money.

This maybe partly attributed to the adjustment in the books of accounts in the amount of
P666,581,409 in December 2010 under JV No. 137-10 wherein financial assistance granted
to Water Districts previously debited to the Trust Account (Liability for Special Fund) were
reclassified to Miscellaneous Receivables Government of the Philippines. The account
Liability for Special Fund was again credited in recording the transaction.

35
 Likewise, the cash held by LWUA for the WDDP is also not enough to pay the Water
Districts upon termination/withdrawals of its deposits.

Management informed that they are now in the process of scrutinizing and classifying fund
releases to various water districts in order to come up with proper charging of accounts and
reconciliation for the correct amount to be adjusted/reversed.

On the Water District Deposit Portfolio (WDDP) fund, management explained during the
exit conference that the fund was being used to relend to Water Districts and that they are
keeping track of the maturity period of these deposits to facilitate payment when due.

We recommended that Management strictly monitor its cash flows to ensure that trust funds
are disbursed solely for the intended purposes and strictly adhere to the provision of
Section 6 of the GAA FY 2010.

3. The accuracy and reliability of the balances of the Liability for Special Fund
accounts in the amount of P1.02 B is doubtful due to stale/cancelled and unreleased
checks in the amount of P103 million at December 31, 2010 that were not adjusted
back to cash in bank resulting in the understatement of both the cash in bank and
liability for special funds accounts and overstatement of loans receivable to Water
Districts.

Included in the Liability for Special Fund Account are grants/subsidies received from the
DOH and DPWH which as of December 31, 2010 showed the following subsidiary ledger
balances:

Agency Amount
DPWH (P3W) 102,200,116.27
Department of Health 917,145,732.59
Total 1,019,345,848.86

Meanwhile, the ending balance of the Liability for Special Fund President Social Fund
(PSF) was reclassified to Miscellaneous Receivables Government of the Philippines at
the end of the year
.
Analysis of the accounts showed that LWUA checks were prepared as disbursements for
the release of funds to the Water Districts and were recorded as deductions from the funds
received from the DOH, DPWH, PSF (using LWUA Equity funds) in the Project Cash
Disbursement Register (PDR). However, these checks were not actually released to the
Water Districts for unknown reasons. Hence, at the end of the month, an adjusting entry is
prepared to record the unreleased checks. In the subsequent month, a reversing entry is
prepared to record again the unreleased checks as check disbursements for the month.

LWUA Management could not explain the need for preparing the checks, recording it in the
books but not releasing it to the concerned Water Districts until it become stale check. It is
the usual practice to prepare checks when actual payments are to be made.

Furthermore, we noted that checks payable to the Water Districts were reported
staled/cancelled per Monthly Report of Cancelled/Spoiled/Staled Checks for the month of
August 2010 and for the period October to December 2010 totalling P103,320,502.42 but
these were not recorded in the books, thus understating the Liability for Special Fund/Loans
Receivable accounts and the corresponding cash in bank accounts, to wit:

36
 Bank account Month Amount
LBP 142-1007-16 August 40,635,749.22
October 2,945,177.00
November 5,469,863.00
December 54,269,713.20
Total P103,320,502.42

We recommended that Management stop the practice of preparing checks but not releasing
it and consider the procedure of immediately issuing out the signed checks, especially
those payable to the Water Districts and chargeable to the Liability for Special Fund
account, and to prepare adjusting entry to record the amount of stale checks not recorded
in the books.

Management took note of the recommendation and informed that the unrecorded stale
checks were reversed in February 2011.

4. The balance per books of certain foreign loans payable in the total amount of P3.419
billion as of December 31, 2010 differ from the confirmed amounts in the total
amount of P2.837 billion, or a net variance of P 582 million.

Confirmation of outstanding balances of the Loans Payable Foreign received from three
(3) foreign lending institutions, out of the six (6) confirmation letters sent, showed that only
one (1) loan account balance, the AUSAID/EFF 378 in original currency of $60,636.76,
reconciled with the LWUA records. On the other hand, confirmation replies from the Asian
Development Bank and the KFW revealed a net variance of P581,620,923.47 between the
balance of the loan in the original currency per LWUA records and the amounts confirmed
recomputed at the BSP exchange rate as of December 31,2010.

Results of confirmation of outstanding balances of the Loans Payable Foreign

In Original Currency

Loan Currency Per LWUA Per confirmation Difference

account records from foreign bank
ADB 1599 USD 251,734.89 913,429.99 661,695.10
ADB 1472 USD 17,627,020.35 19,002,076.41 1,375,056.06
ADB 1269 USD 12,714,655.14 12,833,654.58 118,999.44
ADB 1056 USD 10,560,700.99 12,262,790.51 1,702,089.52
ADB 1057 USD 1,003,008.68 963,162.45 (39,846.23)
KFW Euro 14,145,483.33 14,123,251.65 (22,231.68)

Results of confirmation of outstanding balances of the Loans Payable Foreign

In Philippine Peso

Loan account Per LWUA Per confirmation Difference

records from foreign bank
ADB 1599 P 13,114,268.07 P 40,085,875.11 P (26,971,607.04)
ADB 1472 1,028,261,026.89 833,906,123.25 194,354,903.64
ADB 1269 754,549,496.60 563,204,931.24 191,344,565.36
ADB 1056 612,753,060.06 538,152,561.53 74,600,498.53

37
 ADB 1057 64,449,018.78 42,268,384.12 22,180,634.66
KFW 945,733,649.95 819,621,724.63 126,111,925.32
Total P3,418,860,520.35 P2,837,239,599.88 P581,620,920.47

We recommended that the Accounting Division should regularly reconcile the balances of
the Loans Payable- Foreign accounts to fairly present the accurate amount of foreign loans
outstanding at the end of each year.

Management agreed to prepare the reconciliation statements for the Loans Payable-
Foreign accounts.

5. Erroneous posting from the Journal Voucher Register (JVR) to the General Ledger of
the balances of the accounts Liability for Special Fund and the Cash in Bank for the
month of September 2010 remain uncorrected at the end of the year resulting in the
discrepancy of P114.89 million between the General Ledger balance and the Trial
Balance/Balance Sheet of the said two accounts.

The Journal Voucher Register is the registry of all Journal Vouchers issued during a
particular period. The totals of each account are summarized at the end of each month and
posted in the General Ledger which should agree with the amounts in the Trial Balance.

Audit of the accounts Liability for Special Fund (Account 8-84-930) and Cash in Bank
Equity (Account 8-70-300 ) showed a difference of P114,892,538.26 between the Trial
Balance/Balance Sheet and the General Ledger as of December 31, 2010 as shown below:

Account Account Balance per GL Balance per Trial Difference

Code Balance/Balance
Sheet
Cash in Bank 8-70-300 P 312,174,138.50 P 427,066,676.76 P114,892,538.26
Equity Account
Liability for 8-84-930 P1,397,696,063.50 P1,512,588,601.76 P114,892,538.26
Special Fund

The discrepancy was due to the uncorrected error in posting of the said account balances
in September 2010. Verification of the Liability for Special Fund account revealed that the
total credits in the JVR for the month of September 2010 was P451,535,536.24. However,
the amount posted as total credits in General Ledger amounted to only P336,642,997.98
with a difference of P114,892,538.26.

Analysis showed that the difference was due to two journal entries in the JVR that bear the
same Journal Voucher (JV) No. 09-119-10 both dated September 30, 2010. One JV is to
record deposits for the month of September in the amount of P147,550,343.89 and another
is to take up unreleased checks for the month of September in the amount of
P114,892,538.26 . However, the JV to record the unreleased checks for the month of
September 2010 in the amount of P114,892,538.26 was not posted in the General Ledger.

Similarly, the corresponding debit to the account which is the Cash in Bank LWUA Equity
showed a discrepancy between the GL balance and the JVR in the amount of
P114,892,538.26.

However, we noted that although the balances of the Cash in Bank and Liability for Special
Funds per General Ledger were both understated by P114,892,538.26, the amounts

38
 reported in the Trial Balance/Balance Sheet already includes the amount of the unrecorded
JV in the General Ledger. It is unclear how the difference of P114,892,538.26 was reflected
in the Trial Balance/Balance Sheet to arrive at the account balance for Cash in Bank-LWUA
Equity and the Liability for Special Fund in the amount of P 427,066,676.76 and
P1,512,588,601.76, respectively, when such amount was not posted in the General Ledger.

We recommend that Management (i) should ensure that the financial data shown in the
Financial Statements and the Trial Balance agree with the account balances appearing in
the General Ledger and (ii) to submit a clarification on how the account balance for Cash in
Bank and Liabilities for Special Fund were arrived at considering the error in posting in the
General Ledger.

Management commented that the Journal Voucher taking up the unreleased checks for the
month of September 2010 was inadvertently omitted in the course of General Ledger
preparation for the 4th quarter of CY 2010 using the in-house designed program. As a
result, the financial data shown in the Financial Statements and Trial Balance did not agree
with the Cash in Bank and Liability for Special Funds account balances. Nonetheless, the
accuracy of accounting information being processed using the BALMORI Software was not
and will not in any way be affected by such an omission.

To avoid similar occurrences in the future, measures were undertaken by the concerned
unit by installing additional quality check points during the processing stage and before the
final release of the Financial Statements and other reports.

6. A net variance of P92.93 million exists between the balance per books and the
confirmed bank balance for the Cash in Bank Local Currency Current and Savings
Accounts. Moreover, the bank statements for the Cash in Bank Collection Fund
Account and the LWUA-Nippon Joseguido Sekkei (NJS) Joint Account (JA) were not
updated.

The balance per books of the Cash in Bank Local Currency Accounts as of December 31,
2010 in the amount of P538,736,916 is lower by P92,927,327 when compared with the
balance confirmed by the banks in the total amount of P631,664,243. Details shown below:

Account Amount per Amount per Difference

books bank
Cash in bank P103,552,169 P196,538,417 P92,986,248
Local Currency-
Current
Cash in bank 435,184,747 435,125,826 ( 58,921)
Local Currency-
Savings
Total P538,736,916 P 631,664,243 P92,927,327

The variance was mainly due to the following:

Outstanding checks as of December 31, 2010 P135,583,218

Unreconciled difference for the Collection Fund ( 42,594,277)
Account
Unreconciled difference for LWUA-NJS JA ( 20,693)
Adjustments not taken up in the books as of 30,000
December 31,2010

39
 Dormant bank accounts not confirmed by the ( 70,921)
banks
Total P 92,927,327

The unreconciled difference for the Collection Fund account and LWUA-NJS Joint Account
in the amount of P42 million and P20,693 respectively could not be verified due to lack of
updated bank reconciliation statement. The last monthly bank reconciliation statement
submitted for the Collection Fund Account and the LWUA-NJS Joint Account was up to
December 2006.

Further, there are four bank accounts that remain in the books of LWUA but are either
inactive or closed and not confirmed by the banks, to wit:

Bank Account Number Amount

PNB CA No. 244-85006-27 Earthquake Rehab P 2,000
LBP SA No. 03-504-3401-0257-73 AR Bonds 10,000
LBP SA No. WD Branches 54,250
PNB SA No. 244-702458-9 Special Bank 4,671
Charges
Total P70,921

The above observations had been reported in the previous Annual Audit Reports.

We reiterated our recommendation that monthly bank reconciliation statements for the
Collection Fund Account and LWUA-NJS Joint Account should be updated to properly
account and report the correct cash in bank balances. For closed accounts but still
appearing in the books, proper representation with the bank should be undertaken for the
retrieval of the bank statements and for corresponding adjustments.

Management agreed to update the monthly bank reconciliation statements for the
Collection Fund Account and LWUA-NJS Joint Account and will make proper
representation with the bank for the retrieval of the bank statements and for corresponding
adjustments

7. Advances to Water Districts in the amount of P 24.2 million were still outstanding
even though the projects have been completed while P2.3 million remains dormant
for more than ten (10) years.

The Advances to Water Districts account in the amount of P26, 567,482.66 as of December
31, 2010 pertains to the release of funds to the Water Districts for earthquake rehabilitation
and to defray take over expenses. The amounts released shall be subject to liquidation as
soon as the purpose for which it was given has been served.

We have brought to the attention of management the issue on the unliquidated advances to
Water Districts in the CY 2009 AAR and we were informed that necessary adjustment will
be made as soon as the required liquidation documents are made available to support
appropriate entries in the books of accounts.

As to the advances made for the rehabilitation of projects damaged by typhoon Reming,
management commented that of the total cash advances outstanding as of December 31,
2009 totaling P31.219 million, about 97% or P29.9 million were liquidated after the Balance
Sheet Date, which was supposed to be in CY 2010.

40
 However, review revealed that the only transaction recorded in the books in CY 2010 was
the reclassification to the grants account of the amount of P7 million released to the Manolo
Fortich Water District in Bukidnon. Therefore, the advances to the Water Districts in the
amount of P24.2 million are still outstanding even though the project have been completed
while P2.3 million are dormant for more than ten (10) years.

We reiterated our recommendation for Management (i) to exert effort to require the
concerned Water District to liquidate their respective advances and (ii) to facilitate the
immediate processing of the liquidation vouchers submitted in order to update their
accountability.

No management comment was received on the issue.

8. The reliability and validity of Payables Miscellaneous account in the amount of P8

million or 49% of total payable of P17 million is doubtful due to dormant accounts.

Verification of the Payables Miscellaneous Account showed that 49% of the outstanding
balance of P17,487,652.33 or P8,208,801.79 as of December 31, 2010 are dormant
accounts since 2002 to 2007 as shown below:

Year the account Amount

become dormant
2002 P3,058,362.30
2003 222,735.47
2004 382,733.80
2005 39,331.33
2006 3,887,870.75
2007 617,768.14
Total P8,208,801.79

The Miscellaneous Accounts Payable that remain dormant from three to nine years include
payables to various employees, suppliers and contractors in the amount of P181,047.86,
P1,236,046.65 and P6,791,707.28, respectively, or a total of P8,208,801.79.

These dormant accounts cast doubt on the reliability and validity of the payable accounts of
P8 million.

Management informed that the outstanding balances were due to the non-submission of
valid claims/request for payment from payees.

We recommended that Management review and analyze the account to determine whether
there are still valid claims to these payables. Otherwise, necessary reversing entries should
be made to close the account.

41
9. Unreconciled difference of P1.38 million between the payroll fund book balance and
the cashbook of the Disbursing Officer

The Payroll Fund, the account used to record payments of salaries and allowances of cadet
engineers of LWUA, has an outstanding balance of P1,469,087.04 as of December 31,
2010.

The cash book of the Disbursing Officer however showed only a balance of P85,858
representing excess amount from the CY 2010 anniversary incentive allowance granted on
December 17, 2010. Thus, a difference of P1,383,229.04 exists between the payroll fund
book balance and the cash book of the Disbursing Officer as at the end of the year.

In CY 2009 AAR, we have observed that the said discrepancy was due the unliquidated
cash advances for salaries and wages granted before CY 2005 appearing in the books of
accounts. On the other hand, the Disbursing Officer alleged she has already liquidated said
cash advance.

We reiterated our recommendation for the immediate reconciliation of the accounting

records with the Disbursing Officers cash book so that final accountability, if any, could be
determined.

It was explained during the exit conference that on-going reconciliation is still being
undertaken.

10. The LWUA investments of P480 million and deposit of P300 million with the Express
Savings Bank Inc. (ESBI) were still not terminated/recovered despite BSP Monetary
Board Resolution Nos. 605 and 1301 dated April 29, 2010 and September 16, 2010,
respectively, which disallowed the transfer of 60% share of the total voting stock of
ESBI to LWUA and directed ESBI to return all government deposits from various
government agencies.

In June 2009, LWUA purchased sixty percent (60%) of the total issued and outstanding
common shares of Express Savings Bank Inc. (ESBI), a private banking institution. LWUA
paid P80,003,070 for the 445,377 shares to various owners of these shares after the
execution of a Deed of Absolute Sale by and between the original owners (as the seller)
and the LWUA (as the buyer).

The bank also applies for a quasi-banking authority with BSP, one of the requirements of
which is to comply with the minimum adjusted capital accounts of at least P650 million or
such amounts as maybe required by the Monetary Board in the future.

Thus, to increase the authorized capital stock of ESBI and pursuant to LWUA Board
Resolution No. 336, series of 2009, LWUA paid the amount of P400 million on August 25,
2009 as an advance payment to the capital subscription pending approval by the BSP and
registration with the Securities and Exchange Commission (SEC) of the amended Articles
of Incorporation.

In the LWUA Annual Audit Report for CY 2009, we noted that the Investments to ESBI
totaling P480 million are contrary to the provision of Section 15 of the General
Appropriations Act (GAA) for Fiscal Year 2009 which states that:

42
 Sec15. Restrictions on the use of Government Funds. No
government fund shall be utilized for the following purposes:

xxx

(f) To be invested in non-government securities, money

market/placement and similar investments or deposit in private
banking institutions.

The provisions of this Section shall also apply to GOCCs. xxx

This provision is also reiterated under Section 17 of the GAA for FY 2010.

We also observed that the Investment/advances to ESBI are considered disadvantageous

to LWUA and that the said investment was not supported with any Memorandum of
Agreement or Certificates of Investment that would provide protection for LWUAS
investment/advances.

Likewise, Management failed to submit duly certified copies of the following documents
which they previously promised that they will require ESBI to execute and submit to COA:

1. Certificate of stocks/shareholding of LWUA issued by ESBI for the

P480 million purchase/investment;

2. Branching Authority from Bangko Sentral ng Pilipinas (BSP) issued

to LWUA for the latter to operate a branch of the ESBI bank within
the LWUA premises. ESBI is currently operating within the LWUA
premises, as extension of the Main Branch;

3. Registration with the SEC of the amended Articles of Incorporation;

4. BSPs Monetary Board approval on the P80 million transfer of

shares in compliance with BSP Circular No. 309 dated November
16, 2000 and the P400 million advances which aimed to satisfy the
capital requirements of ESBI; and

5. Approval by the President of the Philippines for the creation of

ESBI/WE bank.

Audit Query on the status of the application for approval of LWUAs acquisition of 60% of
the outstanding voting stock of ESBI reveals that based on available documents, the
Monetary Board in its Resolution Nos. 605 and 1301 dated April 29, 2010 and September
16, 2010, respectively, disallowed the transfer of 60% of the total voting stock of ESBI to
LWUA and requires ESBI to return all government deposits from various government
agencies. On November 15, 2010 the ESBI Chairman, Prospero Pichay, Jr. asked the BSP
and the Monetary Board as to why LWUA is not qualified to acquire 60% of the voting stock
of ESBI and to reconsider the denial for ESBIs request for approval. The Monetary Board
Secretary informed Chairman Pichay that the request for reconsideration was referred to
the BSP Deputy Governor, Supervision and Examination Sector for appropriate action.
However, neither LWUA nor ESBI have been notified of BSPs official action on the matter.

43
To this date, P480 million is still invested with ESBI and another P300 million was still
deposited to the accounts of ESBI. No remedial measures to recover the return of
investments are being instituted by LWUA.

We reiterate our recommendations that Management should consider terminating the

investments and institute remedial measures to recover the return of the P480 million
investments and the P300 million deposits from ESBI in view of the Monetary Board
Resolution Nos. 605 and 1301. If the investments and deposits will not be recovered,
appropriate charges should be filed against persons responsible for the
investments/deposits not recovered.

Management comment is quoted hereunder:

On the onset, we would like to reiterate that the ESBI investment was done
with prior consultation.The records will show that LWUA sought approval from
the Office of the President thru then Executive Secretary Eduardo Ermita per
the latters Memorandum dated 14 October 2009. Likewise, the Office of the
Government Corporate Counsel (OGCC) issued Opinion No. 242 Series of
2008 dated 16 October 2008, and OGCC Letter dated 14 September 2009,
that favourably approved the ESBI investment. This emphasizes LWUAs
transparency with all its transactions.

We would like to bring your attention to the fact that if the ESBI investment was
infirm from the very start then the Bangko Sentral ng Pilipinas ( BSP) and the
Monetary Board (MB) should have advised LWUA immediately or, at the very
least, they should not have encouraged such investment. However, the BSP
and MB did the direct opposite by advising LWUA to further address the
deficiency requirements of ESBI and to submit additional documents in support
of the investment as clearly set written in the letters of the Integrated
Supervision Department II dated 17 August 2009 and 10 September 2009. On
the contrary, the BSP declared in its letter dated 22 January 2009 that LWUA
should just acquire an existing bank in view of the formers moratorium. Since
neither the BSP nor the MB prevented the said investment, there is truly
nothing unsound with it.

The money for the ESBI investment came from internal cash generation (ICG) or
collections from loans from water distribution. Such monies are corporate funds
that do not fall within the purview of the General Appropriations ACT (GAA).
Moreover, the restrictions under Section 15 (f) of the GAA are limited only to
investments on non-government securities, money market placements and
similar investments, or deposit in private banking institutions. Since the LWUA
investment with ESBI does not fall under any of the aforementioned restrictions,
there is no violation of Section 15 (f) of the GAA

On the matters of the documentary requirements, we clarify as follows:

1. We respectfully request that we defer the submission of the

Amended Articles of In corporation, the BSP/MB approval and the
certificate of stocks for the Php400 million investment because these
are dependent upon the final resolution of LWUAs request for
reconsideration.

44
 2. For PHp80 million investment (out of the PHp480 million thereof), we
may submit certified copies of the corresponding certificate of stocks
to your good office.

3. ESBI is not operating as a branch in LWUA, but only acts to receive

and process documents from water districts for the latters
convenience instead of going to Cabuyao, Laguna from LWUA.

4. The Presidents approval was already obtained through Executive

Secretary Eduardo Ermita who issued Memorandum dated 14
October 2009, as previously discussed.

Separately, we recognize the authority of the Honorable COA to audit and

examine public funds and LWUAs accounts. However, we believe that there is a
need to draw a line between such authority and questioning the managements
decisions. Inasmuch as we would like to address the issues raised in the
captioned AOM, none of us can do so until the ESBI investment has been
absolutely resolved. Clearly, it is too early on your part to recommend further
action or even assume that charges would be filed.

As the captioned AOM itself stated, the matter of approval of LWUAs

investment with ESBI is still pending consideration before the MB per the letter
of the Office of the Secretary, Monetary Board dated 22 November 2010. Simply
put, it is premature at this point in time to make any conclusions, steps or
recommendations unless the matters surrounding the said investment have
attained finality.

The new Acting members of the Board of Trustees of LWUA informed the Audit Team that
they already approved and issued Board Resolution No. 74 Series of 2011 directing the
LWUA Administrator and the Acting Deputy Administrator for Investment and Financial
Services to initiate the immediate transfer of LWUA deposits/investments with all non-
government banks, including the Express Savings Bank, Inc. (ESBI), to authorized
government depository banks.

11. Securing a loan in the amount of P500 million from the Philippine Veterans Bank
while allowing a cash deposit of P300 million to remain idle in a thrift bank, Express
Savings Bank Inc (ESBI) did not constitute sound fund management resulting in a
lower interest income earned of P2.7 million and an unnecessary interest expense of
P16 million. Likewise, the deposit made with ESBI, a non government depository
bank, was contrary to Department of Finance (DOF) Department Order No. 27-05.

LWUA made an initial deposit in the amount of P300 million with Express Savings Bank
(ESBI) on October 9, 2009 based on the Board of Trustees Resolution No. 303 series of
2009. Analysis of the transaction revealed that as of December 31, 2010 the fund remained
intact earning an interest income of P2,707,353.65 only.

On the other hand, we noted that LWUA secured another loan from the Philippine Veterans
Bank in the amount of P500 million on February 2, 2010 with yearly interest ranging from
6.8178% to 7.2004% for the purpose of financing its water supply projects nationwide. For
CY 2010, the interest paid for the said loan amounted to P29, 054,772.71.

45
Securing a loan and paying interest while allowing the cash deposit in Express Savings
Bank to remain idle for more than one year did no constitute sound fund management. Had
management make use of its idle funds with ESBI Bank of P300 million, it will avail only of a
P200 million loan from the PVB and the interest due thereon will only be P12,722,187,22 or
a savings of P16,332,585.49 or 52% of the total interest paid.

Likewise, the deposit made at ESBI bank was contrary to DOF Department Order No. 27-
05 dated December 9, 2005 which prohibits any government agencies, including
Government Owned or Controlled Corporation to deposit government funds in any other
banks except authorized government depository banks. Under the guideline, prior DOF
approval is to be secured if funds are to be deposited in banks other than the Land Bank of
the Philippines and the Development Bank of the Philippines.

The Bangko Sentral ng Pilipinas in a Circular Letter series of 2006 issued on March 14,
2006 reminded the banks to take appropriate measures to ensure that government offices
that maintain deposit accounts with them have complied with the DOF directive, otherwise,
affected deposit accounts may have to be closed.

We recommended that Management consider closing the deposit accounts with the ESBI
bank amounting to P300 million in compliance with the DOF Department Order 27-05 and
use the fund in financing its water supply projects before renewing and securing new loans
with other banks.

Management comments are quoted hereunder:

On the matter of securing loans from the Philippine Veterans Bank (PVB), this is
part of LWUAs overall strategy intended to widen its possible fund sources,
especially in times of urgent needs.

The P300 Million which LWUA deposited with Express Savings Bank, Inc. (ESBI)
was necessary in order to address the capital inadequacy of the Bank, and as
directed by BSP. The impact of this deposit made may not be realized overnight,
but given time, we believe that this action on the part of LWUA can be a positive
and rewarding investment.

Consequently, we will defer taking action on your recommendation to close the

LWUA account with ESBI considering that request for approval of LWUAs
acquisition of 60% of the voting stocks of ESBI is still pending with BSP and the
Monetary Board.

On the other hand, we believe that LWUA can deposit such amount with ESBI
considering that LWUA is deemed majority owner of the Bank.

Finally, while we do take note of your audit observations, our agencys long-term
goal to expand its business operations within the parameters of its charter, must
likewise be given due course. The responsibility to set policies and programs
belong to us, hence, we cannot be stymied by any form of interference in the
exercise of our prerogatives.

While fiscal responsibility rests with the Head of the Agency it is also the role of COA under
Section 25(1) of PD 1445 to ensure that such fiscal responsibility of the Head of Agency
has been properly and effectively discharged.

46
 The new Acting members of the Board of Trustees of LWUA informed the Audit Team that
they already approved and issued Board Resolution No. 74 Series of 2011 directing the
LWUA Administrator and the Acting Deputy Administrator for Investment and Financial
Services to initiate the immediate transfer of LWUA deposits/investments with all non-
government banks, including the Express Savings Bank, Inc. (ESBI), to authorize
government depository banks.

12. Grants / subsidies received from the National Government as Budgetary Support to
Government Corporation in the amount of P399 million remain unutilized thus,
defeating the purpose for which it was granted.

LWUA received grants/subsidies in CY 2009 from the National Government as Budgetary

Support to Government Corporation in the amount of P400 million.

Special Provision No. 8 of the General Appropriations Act for CY 2009 on Budgetary
Support to Government Corporation stated that the subsidy for Projects of the Local Water
Utilities Administration shall be used exclusively for the projects of water districts and that
unless otherwise provided in the terms and conditions of the grant, all grants and subsidies
to water districts shall be actually transferred to the exclusive account of the water districts
which shall implement the project, or bid the same to qualified contractors, or do the actual
purchase of materials needed in the construction, repair or rehabilitation of the respective
water projects.

The subsidiary ledger for the Liability for Special Fund Account - Budgetary Support to
Government Corporation as of December 31, 2010 showed a balance of P393,403,169 and
the disbursements from the fund amounted to only P6,596,831 consisting of the following:

Date Check no Payee Amount

December 29, 402402 Jaen Water District P 934,888
2009
April 19, 2010 402768 Cabarroquiz Water 5,661,943
District
Total P6,596,831

Audit revealed that Check Number 402768 dated April 19, 2010 amounting to P5,661,943
payable to Cabarroquiz Water District was not released for unknown reason until it
eventually become stale as shown in the report of stale checks for October 2010. This was
not recorded in the books thus, understating the fund balance of the Liability for Special
Fund Account - Budgetary Support to Government Corporation by P5,661,943 and the
corresponding Cash in Bank account. Management should not have prepared the check if
the supporting documents are not complete.

Consequently, only the amount of P934,888 was actually disbursed out of the fund and the
balance as of December 31, 2010 of the fund - Budgetary Support to Government
Corporation shall be P399,065,112.

Failure to release the funds to the intended beneficiaries defeats the purpose for which it
was granted by the National Government.

We recommended that Management immediately transfer the funds to the intended

beneficiary Water Districts in accordance with the conditions in the Special Provisions of the

47
 General Appropriation Act of CY 2009 to achieve the purpose for which it was granted and
that appropriate adjusting entry be taken up in the books to record any cancellation of
checks.

No management comment was received on the issue.

13. Dividends payable to the National Government in the amount of P 671.86 million for
Calendar Year 2008 has not been booked and remitted as required under Section 5 of
RA 7656.

Republic Act 7656 requires Government Owned and Controlled Corporations to declare
and remit at least fifty percent of the annual net earnings as dividend to the National
Government.

In Note 30 of the Notes to Financial Statement for CY 2009 it was disclosed that per LWUA
Board Resolution No. 446 dated September 15, 2009 LWUA will defer payment of
dividends until it shall have accumulated enough funds to increase its proposed
capitalization from P2.5 billion to P25 billion. LWUA did not declare dividends for CYs 2008
and 2009 in view of its pending requests with the Department of Finance (DOF) for the
exemption of dividend remittance.

The Department of Finance in its letter dated November 9, 2009 has billed LWUA the
amount of P671.86 Million corresponding to a 100% dividend remittance to NG of LWUAs
CY 2008 Net Income as adjusted.

The amount of P671.86 Million has neither been taken up as a liability in its books of
accounts nor has been remitted to the National Government.

We recommended that LWUA recognize its dividends payable pending the approval of the
exemption from the DOF so that the liability is recognized in the books of accounts.

Management informed that a letter to the Secretary, Department of Finance dated

November 25, 2009 has been sent reiterating the request for exemption from remitting
dividends from its earnings.

We believed, however, that pending the approval of the exemption from the DOF, it would
be more prudent for LWUA to declare dividends and record the same as Dividends Payable
in the books of accounts. Considering the possibility that the request for exemption may not
be approved, it would be sensible to recognize the Dividends Payable in the LWUA books
of accounts.

14. The purchase of 100 units of portable equipment for water quality testing in the total
amount of P109.89 million is not supported with available funds contrary to the
provision of Section 85 of PD 1445. Furthermore, 34 units of the purchased portable
equipment costing P37 million were confirmed not being used by the recipient Water
Districts and therefore considered unnecessary expenditures.

LWUA Board Resolution No. 530 dated October 13, 2009 authorized the negotiated
procurement of portable water quality monitoring equipment for distribution to the Water
Districts (WDs) throughout the country to help them conduct rapid testing/assessment of
the water quality especially in situations where short term exposure is health related, such

48
as microbial contamination because of its potential to cause outbreaks of waterborne-
diseases.

The recipient Water Districts were identified based on the following:

Depressed WDs and those situated in islands or remote places that do not have
easy access to nearby testing laboratories but have the available personnel to
handle the water quality analysis. These WDs were identified/recommended by
Areas 1 to 9 of Water District Development for Luzon, Visayas and Mindanao;

WDs which are willing to undertake water quality analyses for other WDs or
share the use of equipment to LGU-run water supply system and other private
water supply providers within the area at reasonable service costs;

WDs under the LWUA take-over management are also given preference to
express support to the WD;

WDs with water quality problems to ease the monitoring of questionable water
quality parameters and facilitate appropriate measures;

WDs where the Water Safety Plan (WSP) Program has already been introduced
by LWUA for water quality testing and monitoring essential to said WSP.

Seminar /training workshops on the analyses and evaluation, operation and maintenance of
said equipment were conducted for the recipient WDs.

However, the following observations were noted on the procurement of portable water
quality monitoring equipment:

The procurement was not supported with adequate funds contrary to the provisions
of Section 85 of PD 1445 requiring the presence of appropriation before entering into
contracts. The procurement was finally charged against the non-existing receivables
from the National Government.

One hundred (100) units of portable equipment for water quality testing was delivered to
LWUA by Aspen Multi-System Corporation with contract cost of P109,888,999 inclusive of
taxes or a unit cost of P1.1 million. The equipment was distributed to 97 Water Districts and
three (3) units were for the use of LWUA Laboratory.

The purchase of said equipment was initially charged to the Liability for Special Fund
account President Social Fund (PSF) using the LWUA Equity fund, it being included in the
LWUA Annual Procurement Program for CY 2009. However, at the end of CY 2010, the
purchase was reclassified to Miscellaneous Receivable Government of the Philippines. In
previous Audit Observation Memorandum, we noted that recognizing the receivable has
no legal basis or legal document to support the claim except for the verbal commitment
from the Office of the President thru the Presidential Social Fund (PSF) to release P6 billion
for the project.

In effect, no fund has been received from the National Government for the purpose and
therefore, not in accordance with Section 85 of PD 1445 which requires that no contract
involving the expenditure of public funds shall be entered into unless there is an
appropriation.
49
Thirty Five (35) units of portable water quality monitoring equipment costing P38
million were found not used by the recipient Water Districts based on the results of
confirmation on the use of the equipment.

Confirmation letters were issued to the 97 recipient WDs and to the LWUA laboratory to
ascertain the following:

if the equipment was received and being used;

received but not being used;
did not receive the equipment and;
the personnel attended the seminar/workshop.
Summary results of confirmation showed the following:

Result of confirmation Quantity Cost

(in million
pesos)
Received and being used 45 49.45
Received but not being used 29 31.86
Received but returned to LWUA 11 12.09
Sub total 85
No reply yet 12 13.18
Total 97 106.59
Given to LWUA Laboratory 3 3.30
Total 100 109.89

Of the three units given to the LWUA Laboratory, only two (2) units are presently at the
Water Supply Training Center Laboratory while one unit which was used during the
demonstration of the equipment last year remains at the Office of the Board Chairman of
LWUA.

The Water Districts are not using the equipment due to the following reasons:

Lack of funds to pay LWUA since the cost of the equipment was
considered loans of the Water Districts;
Defective units and expired powder reagents;
Lack of laboratory room and chemist to do the water testing;
Result of water testing not acceptable by DOH

The eleven (11) Water Districts that received and returned the equipment were the
following:

1. Morong Water District, Bataan

2. Metro Kalibo Water District

50
 3. Camarines Norte Water District
4. Oroquieta City Water District
5. Malay Water District
6. Pearanda Water District
7. Cagayan de Oro Water District
8. San Joaquin WD
9. Dingle Pototan WD
10.Metro Bangued WD
11.Malitbog WD

The San Joaquin WD returned it due lack of funds and had no chemist to do the water
testing. The other WDs did not give any reason for returning the equipment.

Based on the results of the confirmation, it may be inferred that the purchase and
distribution of the portable equipment were not properly planned and coordinated with the
concerned Water Districts prior to their purchase.

The replies given on why the units were not being used showed that information on the
need of the Water Districts for the said equipment was not solicited. Likewise, the financial
capability to pay was not taken into consideration in view of Management decision to bill
20% of the cost of the equipment from the Water Districts.

Management upon inquiry submitted information that the equipment that were returned
were given to the following Water Districts:

1. Metro Siargao WD
2. Cantilan WD
3. Panabu WD
4. Gapan City WD
5. Sta Rita WD, Pampanga
6. Numancia WD
7. Morong, Rizal WD

Inspection revealed that the three units from Dingle Pototan WD, San Joaquin WD and
Metro Bangued WD were left unused at the LWUA laboratory, the unit for Morong, Bataan
WD was not claimed and that there were two units that have not been released and left idle.

Based on the above information, 35 units of water testing equipment costing P38,461,440
maybe considered unnecessary expenditures of government funds. Computation shown
below:

29 units not used by WDs P31,868,100

6 units idle/unused at the LWUA 6,593,340
Lab
Total P38,461,440

We recommended that Management immediately; (i) take appropriate action on how to

make use of the 29 units received but not being used by the Water Districts and the six
units not being used for the purposes it was intended, (ii) to require the supplier to remedy
the defective units or replace it with new one as provided for in paragraph 17, Warranty of
the General Provision of the Contract.

51
 We also recommended that Management determine where the cost of the units will be
charged other than the Miscellaneous Receivables Government of the Philippines.
Otherwise, persons responsible for the purchase without funds available may be held liable
as provided under Section 87 of PD 1445.

Management explained during the exit conference that the procurement of portable
equipment was funded under the DOH Fund and that they are going to scrutinize and
classify fund releases in order to require Accounting Department to adjust the charging of
the portable equipment to DOH Fund instead of Miscellaneous Receivables-GOP.

As to the distribution of the portable equipment, it was also explained that there was a prior
survey conducted with the Water Districts on the need for procuring the equipment. They
committed to give the planning documents to the Audit Team.

15. The IT consultant who recommended the award through direct contracting of the
development of the Water District Geographical Information System & Database
Management (WDGIS/DBM) did no pass the recruitment and hiring process for
consultants required under RA 9184. Likewise, there was no contract agreement with
LWUA which is not in accordance with the provisions of NCC Memorandum Circular
No. 2004-01 dated June 7, 2004.

Section 5 of the National Computer Center Memorandum Circular No. 2004-01 cites the
role of the I.T. Professional in the procurement of Information and Communications
Technology in the government. Pertinent provisions quoted hereunder:

5.4 However, to facilitate project implementation, Section 53.(e) of the IRR-A

allows the procuring agency who may not have the proficiency and
capability to undertake a particular procurement, to recruit and hire
consultants as procurement agents to assist them directly, or train their staff
in the management of the procurement function. The ICT Consultant(s)
must be hired based on their proven expertise, experience and capability
and should not have any business interest on any of the items under bid.

5.5 In the absence of an I.T. Professional, the ICT Consultant may function as
the I.T. Professional in the same procurement project, subject to the
provisions of a service contract approved by the agency head upon
recommendation of the BAC. (underline supplied)

LWUA entered into a contract for the Water District Geographical Information System &
Database Management (WDGIS/DBM) with Secur Links Network and Technologies Inc. in
the amount of P223.8 million. The contract stated that:

WHEREAS, the LWUA BAC, as recommended by the professional IT

Consultant, solicited information from five (5) IT companies to ascertain the
reasonableness of price proposals and obtain information for integrated
systems and solutions that will meet the objective defined in the Terms of
Reference (ToR);

WHEREAS, out of the five (5) invited IT companies, only three responded and
submitted the requested information;

52
 WHEREAS, the LWUA BAC endorsed the three proposals to the professional
IT consultant for evaluation and recommendations;

WHEREAS, the LWUA BAC in its Res. 40-09, adapted the recommendation of
the professional IT consultant and recommended the award, through the direct
contracting of the development of the Water District Geographical Information
System and Database Management System (WDGIS/DBM), inclusive of the
cost of application systems development, licensing and infrastructure to Secur
Links Network and Technologies, Inc. xxx

Information gathered revealed that the IT Consultant did not enter into any contract with
LWUA and that the consultancy services were rendered at no cost to LWUA. The Board of
Trustees approved the direct hiring of the professional IT Consultant.

Although the consultancy services rendered were free, the same should have been covered
with a contract agreement as provided under NCC Memorandum Circular No. 2004-01.
Without a contract, the obligation and undertakings of the Consultant cannot be defined and
therefore the contractual agreement that could bind both LWUA and the IT Consultant to an
undertaking with corresponding liability could not be enforced. Consequently, any reference
to the undertakings or recommendation of the consultant may only be considered as
information or knowledge given which carries no official or legal value or importance other
than mere information. Having of no legal application therefore, the information supplied by
the consultant should not have served as the official basis or reference of the BAC in
awarding of the contract.

Therefore, the following issues need to be address by LWUA Management:

1. On the recruitment and hiring of the IT Consultant -.

RA 9184 stipulates that the procuring agency shall undertake eligibility

check, short listing of prospective bidders, bidding and evaluation of bids on
the procurement of consultants. LWUA has to submit pertinent
documents/justification on the BAC selection process and establishing the
capability of the IT Consultant.

2. On the authority of the IT Consultant to evaluate the submitted bid

proposals and recommend the award of the contract in the amount of
P223.8 million to the Bids and Awards Committee

There is no existing contractual relationship between the Consultant and

LWUA as evidenced by the absence of a contract agreement. LWUA should
provide the authority vested on IT consultant to undertake the bid
evaluation and submit recommendation.

3. On the basis of authority of the Bids and Award Committee (BAC) to

adapt the recommendation of the professional IT Consultant as basis
of the award of the WDGIS/DBM project to Secur Links Network and
Technologies, Inc.

The employment of the consultant in the procurement process is not defined and its
obligation in the process has not been established or accounted.

53
 The services rendered by the IT Consultant without a contract agreement is deemed
disadvantageous to LWUA because the IT Consultant cannot be held accountable and
responsible in the event that misinformation and subsequent problems arises in the award
of the contract and in the performance of the work by the contractor recommended by the
IT Consultant.

We recommended that Management explain/clarify the issues noted taking into

consideration the provisions of RA 9184 and NCC Memorandum Circular 2004-001 for our
reference and guidance in audit.

Management has no written comments as of this date, however during the exit conference,
Management informed that the contract between LWUA and the consultant is for
notarization. In addition, the consultant is included in the list of NCC Information
Technology consultants.

We maintain that at the time of audit, there was no contract between LWUA and the
consultant. If indeed there was a contract, it should have been signed at the time the Board
of Trustees under Board Resolution No.711 dated December 15, 2009 approved the direct
hiring of the professional IT Consultant.

We also maintain that the hiring of consultants should be in accordance with the provision
of RA 9184 on the hiring of consultants and not merely on the NCC list of consultants.

16. LWUA risks losing its financial exposure of P58 million due to non-recoupment of the
advances paid to contractors and consultants on various projects.

The Procurement Law (RA 9184) states that advance payments shall be repaid by the
contractor by deducting fifteen percent (15%) from his periodic progress payments.

The accounts Advances to Contractors and Advances to Consultants has an ending

balance of P52.23 million and P25.97 million, respectively. Audit showed that some of the
accounts have been dormant from five to twenty years already. Other findings shown
below:

Year end balance Amount Dormant Percent

Advances to Contractors P52,231,578 P33,008,033 63
Advances to Consultants 25,971,098 25,971,098 100
Total P78,202,676 P58,979,131 75

Notable among the advances were those granted to the following:

Advances to Contractors
Titan Construction Corporation P 15, 198,771.93
C.B.Garay Philwide Builders 10,756,997.75
New Sampaguita Builders Construction 2,095,667.54

Advances to Consultants
BCEOM Societe Francaise P 18,275,962.96
Nippon Joseguido Sekkei 7,453,641.60

54
 The audit observation has been brought to the attention of Management in CY 2005 LWUA
Annual Audit Report wherein we recommended that the consultants be required to liquidate
their advances.

As to the advances to the contractors, we then recommended that Management pursue the
claim against the surety bond of Titan Construction Corporation which has subsequently
decided not to continue with their project after receiving said advances. Management
commented then that the case of Titan Construction Corporation has been referred to the
LWUA Legal Department for their appropriate action.

Management commented that in the case of Titan Construction Corporation, LWUA has
submitted the claim to Cunningham Toplis Philippines, a GSIS acrredited adjuster in May
18, 2006. For the advances to C.B. Garay Philwide Builders, the then Resident Engineer
informed that the project is not yet terminated and that the final variation order will be
prepared to close the account. The documents related to the New Sampaguita Builders
Construction Account are no longer available and have been disposed.

As regards the advances to consultants, the Project Manager informed that there are still
journal vouchers pending with the Internal Control Office for review. In so far as the
consultants are concerned, they have liquidated the advances.

We recommended that Management:

1. Get in touch with the Cunningham Toplis Philippines to find out the reason
for the delay of the claim.
2. Require the Project Engineer to immediately submit the final variation order
documents in order to close the advances.
3. Determine persons responsible for the loss of the documents on the New
Sampaguita Builders Construction account and for the unlquidated
advances.
4. Determine the reasons for the delay in the processing of the journal
vouchers and inform the persons concerned of the issues that need to be
resolved regarding the documents submitted.

17. LWUAs initial investment of P31.25 million in LWUA CONSULT, Inc. (LCI) was
deemed disadvantageous to LWUA as the initial result of operation of LCI showed a
net loss of P18.49 million. Moreover, LWUA no longer earn from Well Drilling
activities as this was taken over by LCI.

LWUA Management approved the creation of a subsidiary corporation, Water Technology

Research and Development Center, Inc under its Board Resolution No. 152 dated June 30,
2009. Its corporate name was later changed to LWUA Consult, Inc. pursuant to Board
Resolution No. 608 dated November 10, 2009.

Subsequently, LWUA Board Resolution No. 609 series of 2009 authorized the deposit of
P31.25 million to Express Savings Bank Inc. corresponding to the initial paid up capital of
LWUA for the incorporation of LWUA Consult, Inc.

We observed that the initial investment of P31.25 million in LWUA Consult, Inc. (LCI) was
deemed disadvantageous to LWUA for the following reasons:

55
 1. Accounting records showed that for CY 2010, LWUA did not earn
any income from well drilling activities as LCI takes over the well
drilling function. Data gathered disclosed that prior to the creation
of LCI, LWUA earned considerable income from said activity as
shown below:

Year Income from well

drilling (in pesos)
2010 0
2009 484,592
2008 4,340,785
2007 7,659,542.95
2006 28,238,967.01

2. The financial statements of LWUA Consult, Inc for CY 2010

showed a net loss of P18.49 million due to non-operating
expenses, such as payment of extraordinary expenses and
allowances to LWUA officers and employees assigned therein, in
the total amount of P17.2 million.

3. The vision/mission and the primary purpose for which LCI was
created under its Articles of Incorporation may not be achieved with
only well drilling activities undertaken in CY 2010. Likewise, the
necessity of its creation may be an issue considering that well
drilling is a function of LWUA taken over by LCI after its
incorporation.

While LWUA Consult, Inc. aims to specifically augment/complement LWUA in the latters
primary task of promoting and developing provincial water supply systems by providing
specialized technical assistance to local water utilities and other water supply developers and
providers, the result of its operation showed that its activities are limited to the same activities
formerly being undertaken by LWUA, an indication that LCI is just an extension office or
special project office of LWUA. Thus, the necessity of investing in a subsidiary may be an
issue.

Management commented that the records of the Cost Accounting Division, Accounting
Department showed that LWUA had been losing heavily on its well drilling activity after
taking into consideration all the fixed and variable expenses.

They also explained that well drilling is just one of the activities of LWUA Consult, Inc. (LCI)
and it is in stage of project development and might enter into bulk water supply project in
joint venture with private investors which at best LWUA cannot undertake.

They also assured that they will be fine tuning LCI operation to make it a profitable business
enterprise.

The audit team was informed during the exit conference that a case was filed at the Quezon
City Regional Trial Court against the officials of LWUA for the creation of LCI.

We recommended that LWUA Management re-evaluate the necessity of investing in a

subsidiary that performs the same function as that of its parent company and may continue
being disadvantageous to LWUA.

56
18. Actual expenses for Personal Services exceeded the DBM approved Corporate
Operating Budget by P318.94 million contrary to Section 4(1) of PD 1445.

Section 4(1) of PD 1445 provides the fundamental principle governing financial transactions
and operations of any government agency, one of which states that No money shall be
paid out of any public treasury or depository except in pursuance of an appropriation law or
other specific statutory authority.

LWUA submitted to the Department of Budget and Management (DBM) its Corporate
Operating Budget for CY 2010 appropriating the amount of P748,027,000 for its Personal
Services. However, only the amount of P 268,481,000 of the proposed budget was
approved by DBM for the said pay item or a variance of P479,546,000.

Review of the LWUA Statement of Income for the year ended December 31, 2010 showed
an actual expense for Personal Services of P587,422,951.38 or a variance of
P318, 941,951.38 when compared with the DBM approved budget of P 268,481,000.

The excess of actual expenses over the DBM approved budget of P318,941,951.38 is
accounted for as follows

DBMApproved Savings
EXPENSES COB ACTUAL (ExcessExp.)
OtherBonusesandAllowances
BoardPerDiem 192,000.00 134,000.00 58,000.00
13thMonthPayandOtherBonuses 28,708,000.00 196,906,859.09 (168,198,859.09)
SalariesandWagesRegular 180,748,000.00 184,246,597.32 (3,498,597.32)
AdditionalCompensation
CostofLivingAllowance 284,000.00 70,352,551.25 (70,068,551.25)
AmeliorationAllowance 70,000.00 17,568,136.11 (17,498,136.11)
MealAllowance 586,000.00 22,500,290.00 (21,914,290.00)
Children'sAllowance 232,000.00 200,720.00 31,280.00
OtherPersonnelBenefits
ExecutiveCheckup 876,534.79 (876,534.79)
Hospitalization&OtherMedicalBenefits 1,180,000.00 12,091,323.98 (10,911,323.98)
ProfoundContribution 93,000.00 23,206,126.49 (23,113,126.49)
P.E.R.A 14,328,000.00 14,154,520.52 173,479.48
Life&RetirementInsuranceContributions 21,690,000.00 19,275,025.08 2,414,974.92
Representation&TransportationAllowance 7,978,000.00 16,244,889.73 (8,266,889.73)
Clothing/UniformAllowance 2,388,000.00 3,564,000.00 (1,176,000.00)
PhilhealthContributions 2,062,000.00 1,858,250.00 203,750.00
TerminalLeaveBenefits 1,103,881.56
6,500,000.00 3,740,772.70
GratuityPay 1,655,345.74
PagibigContributions 726,000.00 591,500.00 134,500.00
ECCContributions 716,000.00 649,861.36 66,138.64
Honoraria 242,538.36 (242,538.36)

TOTAL 268,481,000.00 587,422,951.38 (318,941,951.38)

57
Not included in the Personal Services Account is the 2009 Economic Assistance in the
amount of P34,143,000 granted to officers and employees pursuant to LWUA Board
Resolution No. 114 dated March 9, 2010 without proper approval from the DBM. This was
charged to prior years adjustment account.

The reason for the overdraft was the disallowance by the DBM for lack of legal basis the
benefits and allowances granted to LWUA officers and employees. The grant of said
benefits in CY 2009 has been disallowed under various Notices of Disallowances issued by
this Office.

LWUA in its appeal Memorandum mentioned, among others, the following arguments:

RA 8041, otherwise known as the National Water Crisis Act of 1995 which
recognized the principle of non-diminution of pay and benefits of MWSS and
LWUA personnel.

They argued that the notice of disallowance was based on the DBM approval
of the LWUA COB for CY 2009 that was lacking in specifics and that they
were in quandary as to the foundation of the no legal basis finding by both
the COA and DBM.

They further argued that subject disallowance run counter to the clear
mandate under RA 8041 and the intention of its framers to protect the
employees of LWUA.

That the second sentence of Section 12, RA No. 6758 does not qualify as to
the source of benefit. It is enough that the benefit has been existing prior to
the effectivity of RA 6758 and that it has not been included in the
standardized salary rates. And that the continuous grant is limited to
incumbents only to gear the compensation policy toward standardization
without upsetting the principle of non-diminution of pay.

Said allowances was authorized under LWUA Board Resolutions which

corporate act was neither whimsical nor willful as it was based on legal
premises. And that, even if the order is illegal, if it is patently legal and the
subordinate is not aware of its illegality, the subordinate is not liable, for then
there would only be a mistake of fact committed in good faith.

There is no Supreme Court ruling yet that said allowances were without legal
basis and prior to such jurisprudential pronouncement, the good faith of the
LWUA officers and employees in receiving said benefits must be upheld.

Payment for subject benefits were disallowed for non-compliance with the conditions
imposed under Section 7 of RA 8041 and Section 5 of EO 286, (National Water Crisis Act
of 1995) specifically on the lack of final approval from the Office of the President. The DBM,
being the alter ego of the Office of the President of the Philippines, has the authority to
allow the grant of the allowances/benefits. Without such authority, the grant is without legal
basis.

We reiterated our previous years recommendation that LWUA should incur expenditures
within the limits of the DBM approved budget and that the granting of personnel benefits
58
 and the CY 2009 economic assistance without legal basis should be discontinued and the
officials and employees responsible and accountable should be required to refund the
amount they received in excess of the authorized and approved rates and those without
legal basis.

The argument that the subject disallowance was based on the DBM approval of the LWUA
COB for CY 2009 that was lacking in specifics and that they were in quandary as to the
foundation of the no legal basis finding by both the COA and DBM is untenable. As
previously stated, the DBM, being the alter ego of the Office of the President of the
Philippines, has the authority to allowance the grant such allowances/benefits. Without such
authority, the grant is without legal basis.

19. Actual Extraordinary Miscellaneous Expenses (EME) and Miscellaneous Expenses

for CY 2010 exceeded the DBM approved budget by P25.61 million and P4.38
million, respectively. Likewise, EME in the total amount of P26.1 million were not
supported by receipts and /or documents evidencing disbursements as required
under Section 3 of COA Circular No. 2006-001 dated January 3, 2006.

For CY 2010, LWUA spent P26,164,732.61 for Extraordinary Miscellaneous Expenses and
P4,812,384.15 for Miscellaneous Expenses while the DBM approved budget showed a
total amount of P554,000 for Extraordinary Miscellaneous Expenses and P432,000.00 only
for Miscellaneous Expenses showing a total over expenditure of P 29,991,116.76, as
follows:

Extraordinary Miscellaneous Total

Miscellaneous Expenses
DBM-Approved Budget P 554,000.00 P 432,000.00 P 986,000.00
Actual Expenses 26,164,732.61 4,812,384.15 30,977,116.76

Under/(over) expenditures P(25,610,732.61) P(4,380,384.15) P(29,991,116.76)

Likewise, analysis of the reimbursement for Extraordinary Miscellaneous Expenses

revealed that LWUA officials still reimbursed their monthly extraordinary miscellaneous
expense allocation at the beginning of the month without the required official receipts and/or
other documents evidencing disbursements. Only a certification was attached to the claims
attesting for the incurrence of the extraordinary miscellaneous expenses of
P26,164,732.39. Of this amount, propriety of expenses could not be assessed as these
were not properly documented.

In the CY 2009 LWUA Annual Audit Report, we indicated that pending COA Decision on the
Petition for Review submitted by LWUA, the EME should be supported by official receipts
as required under COA Circular No. 2006-001.

In addition, COA Corporate Government Sector (CGS) Cluster B Decision No. 2010-003
dated April 13, 2010, pertinent to ND No. 09-001-GF (06) issued on July 21, 2009
disallowing payment of EME for CY 2006, ruled that a certification issued by the official
concerned for the purpose of claiming EME cannot be construed as other documents
evidencing disbursement. The said CGS decision also stated that a certification is not of
the same class as a receipt because a receipt is issued by a third person while a
certification is issued by a claimant, usually self serving. Moreover, certifications are not

59
evidence of disbursements but are just assertions made by the claimant that they have
spent a fixed amount every month for meetings, seminars, public relations and the like.

Meanwhile, reimbursement for Miscellaneous Expenses incurred by LWUA officials

totaled P4,812,384.15. Further examination of reimbursement for Miscellaneous Expenses
revealed the following audit observations:

1. Various reimbursements of official receipts from miscellaneous

expenses include expenses for expensive gift items, flower
arrangements and similar expenses which may be considered
questionable unless properly justified.

2. Out of the total reported miscellaneous expenses, we noted that

many were spent for meals during Saturdays, Sundays and
Holidays.

3. Reimbursement for various meeting expenses was supported

with official receipts but were for take-out and food delivery of
breakfast meals usually good for one (1) to two (2) person only .

4. Official receipts for KTV Bars was also included in the

reimbursement for miscellaneous expenses.

5. Also included in the reimbursement of miscellaneous expenses

for various meetings were official receipts for the purchase of
wines and other alcoholic beverages which are considered
excessive and extravagant expenditures.

6. There were also expenses reimbursed under the miscellaneous

expenses that should have been appropriately categorized
under regular budget allocation of LWUA, such as payment for
PLDT, hotel accommodations, purchase of office and computer
supplies, matured A/R Bonds, cost of check booklets, purchase
of wind breaker jackets, and Balikbayan magazines.

7. Similarly, payments for honorarium for the valuation of LWUA

artworks in the total amount of P60,000 is properly chargeable
to other services expense.

We reiterate our prior years audit recommendations that Management should :

1. Limit the reimbursement of extraordinary and miscellaneous

expenses within the approved amount of each
Department/Official in the DBM-approved Corporate Operating
Budget.

2. Strictly comply with the provisions of COA Circular No. 2006-

001 dated January 3, 2006 specifically on adopting non-
commutable or reimbursable basis for payment of extraordinary
expenses and supporting the claims with receipts and/or other
documents evidencing the disbursement.

60
 3. Categorize miscellaneous expenses within the contemplation of
Section II of COA Circular No. 2006-001

4. Make the necessary adjustment to reclassify the proper

charging of miscellaneous expenses accounts.

Management commented that they firmly maintain that the certifications, albeit not being
official receipts, nevertheless fall within the context of documents evidencing
disbursements and that COA Circular 2001-01 (?) failed to specifically state that
certifications are no longer acceptable to support the claims, hence, must still be
considered as allowed that said circular is violative of equal protection clause of the 1987
Philippine Constitution.

It was also their position that the CGS Cluster B Decision No. 2010-003 dated April 13,
2010 is not consistent with how COA treats the claims for reimbursements of extraordinary
expenses of National Government agency officials and requiring such receipts is an
interpretation beyond the mandate of the circular.

We stand by our audit recommendation that pending COA Decision on the Petition for
Review submitted by LWUA, the EME should be supported by official receipts as required
under COA Circular No. 2006-001.

Management took note of the recommendations on the reimbursement of miscellaneous

expenses.

20. LWUA continued the grant of Executive Check- Up and Hospitalization benefits to
LWUA Board of Trustees and officials and employees amounting to P4.913 million
for CY 2010 despite the disapproval from the Department of Budget and Management
(DBM) and COAs recommendation to discontinue the grant if no approval was
secured from DBM.

In the CY 2009 Annual Audit Report, we recommended that LWUA should seek the
approval of the DBM for the granting of Executive Check- Up to LWUA Board of Trustees
and officials and employees and to discontinue the reimbursement of said benefits if no
approval was secured from said Office.

The DBM approved Corporate Operating Budget of LWUA for CY 2010 showed that the
budget for executive check up in the amount of P2,850,000 was disapproved as there is no
legal basis for such benefit. Meanwhile, the budget for medical benefits has an over
provision of P10,977,000 since only 472 incumbents as of June 30, 1989 was allowed to
be given P2,500 per year.

Despite the disapproval from the DBM, Management continue to grant reimbursement of
actual hospital medical expenses charged to Executive Check up and Hospitalization and
other medical benefits accounts which amounted to P876,534.79 and P4,036,323.98,
respectively, or a total amount of P4,912,858.77 during the year.

Management informed that the Executive Medical Program was first implemented in LWUA
under Board Resolution No. 15 series of 1977, dated February 9, 1977 and continued up to
the present. The grant of said benefit was also supported by the directive of the Civil
Service Commission under MC No. 17, s. 1989. Thus, to discontinue said benefit is
contrary to the principle of non-diminution of pay and benefits which has been applied by

61
 the Supreme Court in numerous cases before it and in Section 5 of the National Water
Crisis Act of 1995 and Section 7 of RA 8041.

With respect to the grant of said benefit to those hired after June 30, 1989, Management
cited the Supreme Court decision in Irene V. Cruz, et.al vs. COA (GR No. 134740, October
23, 2001) that the classification of COA as to who were entitled to the benefits and
excluding therefrom those employees hired after October 31, 1989 has no legal basis. It
was held that the date of hiring of an employee could not be considered a substantial
distinction.

It is emphasized that the DBM disallowed the grant of said benefit in the Corporate
Operating Budget for lack of legal basis.

We reiterated our previous years recommendation to discontinue the reimbursement of

executive check up and hospitalization benefits to LWUA Board of Trustees and officials
and employees if no approval was secured from the Department of Budget and
Management (DBM).

21. Outstanding cash advances of P4.38 million remain unliquidated although the
purpose for which these were granted had already been served contrary to the
provisions of Section 89 of PD 1445 and COA Circular No. 97-002 dated February 10,
1997.

Sec. 89 of PD 1445, the State Audit Code of the Philippines states that a Cash Advance
shall be reported on and liquidated as soon as the purpose for which it was given has been
served.

COA Circular No. 97-002 provides for the specific time frame for the liquidation of cash
advances; to wit:

a. Maintenance and Other operating expenses as the purpose for

which it was given has been served.

b. Official Travel within sixty (60) days after return to the

Philippines in case of foreign travel or within thirty (30) days after
return to his permanent official station in the case of local travel.

The Cash Special Disbursing Officer account as of December 31, 2010 amounted to
P11,092,988.87 of which P4,383,688.09, remain outstanding even if the purpose for which
it was granted has been served.

Analysis showed the following observations:

a. There were cash advances for well drilling projects in the amount of
P2,668,566.32 which remain unliquidated even if the projects have been
completed;

b. A cash advance granted to defray expenses for the LWUA Anniversary in

September 2009 in the amount of P1,369,394.74 remained outstanding;

c. An employee who retired September 18, 2009 was granted clearance

despite having an outstanding cash advance of P156,047.76;

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 d. Other cash advances granted for specific purpose in the amount of
P189,679.27 remain outstanding even if the purposes which they were
granted have long been served

Demand letters have been sent to accountable officers with outstanding balance of more
than P50,000. As of to date, we have not received any reply nor information if documents
have been submitted for liquidation.

The non-liquidation of the cash advances would affect the Other Current Asset Account and
the respective expense account and ultimately the Retained Earnings Account.

We recommended that Management require the Accountable Officers to settle immediately

the outstanding cash advances. Failure of the accountable officers to liquidate his cash
advance within the prescribed period shall constitute a valid cause for the withholding of his
salary or claims from LWUA as provided under COA Circular 97-002.

Management promised during the exit conference that they will submit additional
documents for the liquidation of outstanding cash advances.

22. Lawyers of the Office of the Government Corporate Counsel (OGCC) were paid
honorarium in the total amount of P391,000 without any indication that the three
conditions for the grant of allowance exists as provided for under Executive Order
No. 878 dated March 4, 1983.

Section 6 of Executive Order No. 878 states that:

When the exigency of the service so requires, any member of the

legal staff of the OGCC may be assigned or designated in a
concurrent capacity to act as corporate officer of the government-
owned or controlled corporations being serviced by the OGCC,
provided the Government Corporate Counsel (GCC) approves the
assignment or designation. Whenever any member of the legal staff of
the OGCC is assigned/designated to perform additional or special
tasks in any of the client corporations, he is allowed to receive such
additional compensation and privileges as may be granted them by
the government corporations concerned.

In COA Decision No. 94-040 dated February 1, 1994 it has been decided that for proper
grant of allowances, there must be three concurring conditions as follows:

When the exigency of the service so require;

That the OGCC approves the assignment or designation; and
The OGCC lawyers are assigned and/or designated to perform additional or
special task in any of the client corporation.

It further stated that:

Here, even if OGCC lawyers are assigned to perform additional task in any of
the client corporations, they are not entitled to additional compensation if the
exigency of the service does not so require, that is, the additional task can be
satisfactorily accomplished by regular employees or lawyers of the client

63
 corporation. The same is true if such exigency ceases to exist. Conversely,
even if the exigency of the service so requires, still OGCC lawyers are not
entitled to additional compensation and privileges if the tasks they are
performing are not special or additional tasks. In other words, they are not
entitled thereto if they are performing regular functions.

It is, therefore, necessary to determine the regular function of the OGCC.

OGCC is precisely tasked to be the principal law office of the GOCCs

and must be responsive to the legal assistance needed by these client
corporations. (PD 1415; Section 10 Ch.3, Title III, Bk. IV E.O. 292)
Without these client government corporations, OGCC has no task to
perform, no functions to exercise, no reason to justify the grant of
salaries and allowances to its lawyers not only from GOCCs but also
from OGCC itself. Certainly, the rendition of legal assistance, in any
form, to these GOCCs cannot be taken out of the ambit of the regular
functions of the OGCC.

The OGCC lawyers were paid monthly honorarium ranging from P5,000 to P7,000 or a total
of P391,000 during the year. The disbursement was solely based on the memo brief from
the LWUA Corporate Legal Counsel and Board Secretary requesting the preparation of
check voucher for the payment of honorarium directly to the OGCC lawyers who rendered
contract review, opinions and other forms of legal services to LWUA. The supporting
documents failed to establish that the OGCC lawyers are assigned to perform additional or
special task in LWUA.

We recommended that Management should submit evidence to support the existence of

the three concurring conditions for the grant of allowances. Otherwise, the payment of said
allowance should be discontinued.

The OGCC submitted copies of the official designation of the OGCC lawyers as In-
house/Detailed Counsels of LWUA. They also informed that the OGCC lawyers receiving
honorarium at LWUA were designated by the Government Corporate Counsel as members
of the Water and Environment Team handling LWUAs legal concerns such as, among
others, attendance in court hearings in Quezon City and in any part of the country where
LWUA is a party to a case and render legal services that are normally not considered part
of their legal work.

However, we noted that it was the OGCC lawyers, instead of LWUA being the client
corporation, who submitted the list of the additional task/services performed by OGCC
lawyers and thus considered self serving information. The proof/evidence required to
support the existence of the three concurring conditions for the grant of allowances should
come from LWUA.

Management submitted the required LWUA attestation on the need for the services of
OGCC lawyers.

We recommended that henceforth, all payments should be duly supported with

proof/evidence to support the existence of the three concurring conditions for the grant of
allowances.

64
23. The payments made to the concerned Water Districts for the maturity/termination of
their Investment in the LWUA Water District Deposit Portfolio Fund in the amount of
P15.6 million were not in accordance with the repayment condition stated in the
Certificate of Deposit which requires the return of its properly endorsed original copy
to LWUA.

Article V, Section 8 of the Financial Assistance Contract, executed by and between LWUA
and the Water District, provides that for the purpose of insuring repayments of its
obligations, and providing for the continuous viability and growth of the borrower (Water
District), the borrower commits to develop and maintain reserve funds and deposit its
reserve funds with LWUA under a LWUA Water District Portfolio Account.

The Water Districts investments in the LWUA Water District Deposit Portfolio Fund are
recorded as Depository Liabilities in the LWUA books of accounts. Upon receipt of the fund,
a Certificate of Deposit is issued duly signed by the Acting Deputy Administrator,
Investment & Financial Services and the Administrator of LWUA. The Certificate shows the
validity date, the amount, the due date, the interest rate per annum and it also states that
the deposit is repayable to the water district on due date upon the return of the certificate
properly endorsed.

The Portfolio Fund balance at the end of the year amounted to P 148,448,587.97. The total
amount of investments terminated was P 15,603,747.31 consisting of payments to the
following Water Districts:

Check No DATE PAYEE AMOUNT

406301 May 4, 2010 Pili WD P4,000,000.00
427374 Aug 12, 2010 Kabacan WD 1,000,000.00
427806 Sept 13,2010 Metro Kalibo WD 6,757,262.05
431542 Nov 5, 2010 Isabela WD 583,466.40
431913 Dec 2, 2010 Alaminos WD 1,209,018.85
432068 Dec 10, 2010 Tabaco WD 2,054,000.01
TOTAL P15,603,747.31

Verification of the payments revealed that the original copies of the properly endorsed
Certificate of Deposits were not attached to the vouchers. We were informed that the said
certificates were not returned by the Water Districts.

Without the original copy of the document, the accuracy and validity of the transactions
pertaining to the termination/withdrawal of deposits cannot be ascertained.

We recommended that Management instruct the Cash Management Division to comply with
the condition in the Certificate of Deposits requiring the Water Districts to surrender the
properly endorsed original copy upon the termination/withdrawals of their investment.

Management informed that the return of Certificate of deposits is strictly required from the
WD together with other documents. The original copy of the certificate is kept in the Water
Districts individual folder and form part of their file.

If there is any deviation, it was just an accommodation and meant not to delay the
supposed delivery of good service to our partners, the WD Investors. Management

65
 submitted authenticated photo copies of the original certificate of deposit of the water
district with terminated accounts.

We, however, noted that the photo copies of the certificate of deposit were not properly
endorsed as required in the repayment condition.

Management promised during the exit conference to furnish the Audit Team with photo
copies of the duly endorsed certificate of deposit.

24. Travel expenses in the amount of P10 million were not supported by certificate of
appearance signed by authorized officials of the agency visited by the LWUA
official/employees.

This is a reiteration of an audit observation incorporated in the CY 2008 Annual Audit

Report.

Section 3.1.2.2 (e) of COA Circular No. 96-004 dated April 19, 1996 requires that officials
and employees concerned shall liquidate cash advances for travel and it shall be supported
by, among others:

e. Certificate of appearance or a copy of the report on the accomplishments

of the purpose of the travel duly noted by the agency head or his authorized
representative. Xxx

The above provision treats separately the preparation of Certificate of Travel Completed
and that of the Certificate of Appearance. The latter is an attachment to the Certificate of
Travel Completed.

Examination of the travel expenses incurred by the officials and employees of LWUA in the
total amount of P10,288,689.30 showed that the Certificate of Travel Completed and the
Certificate of Appearance was combined into one document as Certificate of Travel
Completion and Appearance.

The traveler certifies that he personally appeared in the place/s and date/s indicated
therein; that the purpose of the travel has been served accordingly and that the statement is
made in lieu of the Certificate of Appearance required under Section 11.1.2 of DBM-COA
Circular 86-1 dated November 12, 1986.

The statement that the official/employee personally appeared in the place/s and date/s
indicated in the Certificate of Travel Completion and Appearance is considered self-serving.
The veracity that the travel was actually undertaken is not certain since the Certificate of
Appearance was not signed by the authorized officials of the agencies visited by the
official/employees who went on travel.

We reiterated our recommendation in CY 2008 Annual Audit Report that all liquidation of
cash advances or claim for reimbursement of travel expenses should be supported by a
Certificate of Appearance signed by the authorized official of the office visited by the LWUA
employee or a copy of the report on the accomplishments of the purpose of the travel duly
noted by the agency head or his authorized representative as required under COA Circular
No. 96-004.

66
 Management requested that LWUAs personnels Report of Travel Completion be
considered compliance of the requirement of a copy of the report on the accomplishment of
the purpose of the travel.

We found the content of the report on the accomplishment required under Section 3.1.2.2
(e) of COA Circular No. 96-004 dated April 19, 1996 different from the Certificate of Travel
Completion and Appearance submitted by LWUA officers and employees. The report of
accomplishment is the report of work done in connection with the travel by the concerned
officers or employees duly noted by the agency head or his authorized representative. The
Certificate of Travel Completion and Appearance by LWUA merely contains a certification
that the LWUA personnel personally appeared in the place/s and date/s indicated therein
and that the purpose has been served accordingly. Thus, the report of Travel Completion
and Appearance cannot replace the requirement of a copy of the report of accomplishment.

25. Public Information Expense of at least P2 million spent by LWUA in CY 2010 were
contrary to the provisions of COA Circular No.85-55A on the prevention of Irregular,
Unnecessary, Excessive or Extravagant Expenditures on uses of Government Funds
and Property.

On February 17, 2010, LWUAs accomplishment reports highlighting its exemplary show
of good governance and to celebrate LWUAs anniversary were published and advertised in
various print media. However, such advertisements were deemed unnecessary as
contemplated under COA Circular 85-55A. The circular further provides that expenses for
advertisements of anniversaries, etc. in newspaper, TV, or radio merely for publicity or
propaganda purposes are unnecessary except when the nature of the agencys mission
would require such expenses as in the case of promotion of trade or business.

In addition, one of the austerity measures adopted under Administrative Order No. 103
dated August 31, 2004, directing the continued adoption of austerity measures in the
government is the suspension, among others, of paid media advertisements except those
required in the issuance of agency guidelines, rules and regulations, the conduct of public
bidding and the dissemination of important public announcements.

LWUA Accomplishment Report for CY 2009 was published in leading newspapers for a
cost of P1,194,325.44 and the Special Cover Feature featuring LWUA in the Philippine Free
Press newspaper for a cost of P250,000.00.

Moreover, it was also noted that LWUA sponsored the cost of production and airtime of the
Philippine Womens Basketball League (PWBL) on Solar Basketball TV for P500,000.00. It
was explained that the media mileage offered by sponsoring the 1st season of the PWBL
is reasonable compared to the current cost of outdoor media advertising.

However, TV advertisements for publicity or propaganda are considered unnecessary as

the nature of the LWUAs mission would not warrant such expenses. Succeeding
transactions expenses like birthday gifts to media people, donations/financial assistance
during a golf tournament, purchase, supply and delivery of 623 pcs. Christmas hams in the
amount of P289,695.00 for LWUA employees are properly chargeable to Miscellaneous
Expense of the agency.

We recommended that LWUA should adhere strictly to the provisions of COA Circular No.
85-55A aimed at preventing unnecessary, excessive and extravagant expenses. LWUA

67
 should monitor and control the Public Information Expenses to be incurred in order to
minimize, if not prevent wasteful, excessive and unnecessary expenses.

Management informed that the publication of LWUA accomplishment report in leading

newspapers were done in compliance with the then directive from the Office of the Press
Secretary exhorting all government agencies to come up with such accomplishment
reports. More than mere publicity or propaganda, these were meant to highlight LWUAs
vital role in the water supply sector in their pursuit to allow local government officials make
a more informed choice as to whether or not they would adopt the LWUA water district
approach to their water supply concerns.

The sponsorship in the Philippine Womens Basketball League (PWBL) was to the
advantage of LWUA and was in support of the governments program for youth, sports and
physical fitness development.

They will also monitor and control future public information expense to strictly adhere to
COA Circular No. 85-55A and to be in full conformity with the austerity cost saving
measures of the government.

26. Disbursements for financial assistance to Water Districts in the amount of P293
million were supported by Acknowledgement Receipts instead of Official Receipts as
required under COA Circular 2004-006. Likewise, the failure of the Water Districts to
issue Official Receipts as proof of receipt of fund is not in accordance with Section
of 68 of PD 1445.

COA Circular 2004-006 dated September 9, 2004, which prescribed the guidelines and
principles on the acceptability of the evidence of receipt of payment for disbursements,
states that the general objective of examining the evidence of receipt of payment is to
establish that the funds disbursed have actually been received by the payee.

Section 3.3 thereof provides that the evidence of payment may be a paper-based document
or an electronic document. A paper-based evidence of receipt of payment may be in the
form, among others, of an Acknowledgement Receipt. The specific provision quoted as
follows:

3.3.1 (c).Acknowledgement Receipt (AR) The AR shall be acceptable

for disbursements made from the cash advance of the
disbursing official where the payee is not a business entity
required by the Bureau of Internal Revenue to issue ORs. It
may be printed, typewritten or handwritten and must bear the
signature of the payee.

Examination of the sample payments of the financial assistance granted to the Water
Districts revealed that disbursements in the total amount of P293,578,125.70 were not
supported with Official Receipts. Instead, payments in the amount of P146,739,209.14
received by the Water Districts were supported by Acknowledgement Receipts signed by
the respective General Managers or signed by the person authorized by the Area Manager
of LWUA to receive the check payment. Meanwhile, there were also disbursements to
Water Districts amounting to P146,838,916.56 supported by Acknowledgement Receipt and
also deposit slip as proof of deposit to the account of LWUA and the Water District Joint
Account.

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 Considering that the recipient Water Districts are government corporations they are by law
required to issue Official Receipts upon receipt of funds as provided for under Section 68 of
PD 1445, quoted hereunder:

Section 68. Issuance of official receipt. - (1) No payment of any

nature shall be received by a collecting officer without immediately
issuing an official receipt in acknowledgement thereof. X x x

Without the official receipts being required by LWUA in the release of the financial
assistance to the Water Districts, there is the risk that the funds disbursed may not be
actually received by the payee and were not properly accounted for.

We recommended that Management require the Water Districts to issue Official Receipts for
the amount released to them and that henceforth, only Official Receipts issued by the Water
Districts should be accepted as evidence of receipt of payment in compliance with COA
Circular 2004-006 and Section 68 of PD 1445.

Management partially complied by submitting official receipt issued by the water district for
financial assistance in total amount P130,990,328.19. The General Manager of the following
Water Districts issued certification that they receive the fund in lieu of official receipt, to wit:

Amount
1. San Rafael Water District P 5,500,000.00
2. Sto Tomas Water District 7,235,450.00
3. Cuatero Water District 6,311,098.31
4. Dao Water District 6,732,189.54
5. Dumalneg Water District *25,880,638.27
6. Luba Water District 8,683,917.12
7. Bangui Water District 6,928,750.00
8. Sta Praxedes Water District 5,240,494.00
9. Lasam Water District 9,254,602.00
10. Dasol Water District 1,444,000.00
11. San Rafael Water District 5,500,000.00
Total P88,711,139.24
*Total for three separate fund releases

Management informed that for payments supported by Acknowledgement Receipts signed

by the LWUA Resident Engineers authorized by the Area Manager to receive the check
payment, they have exerted efforts to make series of follow-ups for them to submit the
required Official Receipts to be issued by the recipient Water Districts but to no avail. To
prevent voluminous documents that might pile up in their custody, they were forced to
transmit the documents for post-audit even without the evidences of payment.

Some of the recipient Water Districts which issued Acknowledgement Receipts in lieu of
Official Receipts, claimed that they are newly formed Water Districts, hence the required
Official Receipts for the payment were not yet available at the time they received the checks
Nevertheless, they will be sending letters to these Water Districts and require them to issue
the Official Receipts.

69
 We found the certification issued by the General Managers of the Water District not
acceptable in audit since it is not in accordance with COA Circular 2004-006 and Section 68
of PD 1445.

We reiterated our recommendation that Management require all Water Districts (whether
newly created or not) to issue Official Receipts for the amount released to them.

27. The accuracy, propriety and validity of the Payables Unliquidated Obligations in the
amount of P29.9 million could not be ascertained in the absence of supporting
documents and runs counter with the provisions of existing laws, rules and
regulations.

Section 4 (6) of PD 1445 provides that claims against government funds shall be supported
with complete documentation.

Analysis of the Payables Unliquidated Obligations account revealed that expenditures

amounting to P 29.9 million were not supported with documents. These consist of claims for
the following:
Payees Nature Amount
Various employees Cost of living allowance P22,892,752.15
Various employees Hospitalization and medical benefits 3,824,218.75
Various employees Travel - local 1,989,730.92
Various employees Executive check up 680,000.00
Various employees Other Miscellaneous expenses 555,000.00
Total P29,941,701.82

The absence of documents to prove that the obligations were valid, proper and accurate
and complies with government laws, rules and regulations rendered the account doubtful
and contrary to the provision of Section 4(6) of PD 1445. This may also result in the
overstatement of the payable account and the related expense account.

We recommended that Management strictly comply with the provision of Section 4(6) of PD
1445 on the complete documentation of payables recorded in the books. Only those fully
supported claims should be recognized as valid obligations and that the documents
supporting thereto should be attached to the journal vouchers for recording in the books of
accounts.

28. LWUA through its GAD Focal Point was able to continuously undertake activities for
Gender Mainstreaming that resulted in improved level of GAD awareness not only at
LWUA but also at the Water District level although the allocated fund does not
represent the fund requirement of at least five (5)% of the total budget for CY 2010.

Pursuant to the annual General Appropriations Act (GAA), agencies are tasked to formulate
a Gender and Development (GAD) plan and to implement the same by utilizing at least 5%
of their total budget appropriations.

LWUAs Corporate Operating Budget (COB) for Calendar Year 2010 as approved by the
Department of Budget and Management (DBM) amounted to P366,197,000.00 thus, it is
mandated to allocate at least P18.3 million for GAD plans and programs.

Review of LWUAs COB for CY 2010 disclosed that the approved budget for GAD
Administered Programs included under Outside Training and Seminars Account was

70
P1,800,000. The amount represents 9% only of P18,309,850, the total mandated allocation
for GAD plans / programs of LWUA.

The amount does not represent the fund requirement to at least five (5%) of the total
appropriations of the agency as authorized under the annual General Appropriation Act,
however, LWUA was able to undertake GAD activities required for the stages of gender
mainstreaming.

GAD Accomplishment Report for calendar year 2010 revealed that LWUA had successfully
undertaken GAD activities to sustain and improve its level of awareness on Gender and
Development not only at LWUA but also at several Water Districts by performing the
following:

Appreciation Session for Field Managers and Advisors with resource speaker
from NCRFW.
Production of quarterly GAD Magazine called GAD Speaks
Seminar on Magna Carta for Women and Violence Against Women and their
Children with resource speaker from NCRFW
Conduct of continuing Gender Sensitivity Trainings
Attendance to ILO-PCW sponsored facilitators training on Participatory Gender
Audit
Coordination/visit with briefings/orientation/exposure trip to LGU-WD GAD
environmental projects.

In line with gender and development mainstreaming activity at the water district area,
LWUA GAD Focal Point has come up with a project in partnership with the Public Affairs
Department entitled Kilusang Ugnay sa Tubig or Kilusan for short. Kilusan is a
community movement for hygiene, sanitation and water conservation initiated by the LWUA
GAD Focal Point with barangay leaders as the target participants. Kilusan hopes to
empower the barangay leaders of their vital roles in nation-building that will result to a
multiplier effect to influence the community in the practice of proper hygiene, sanitation and
water conservation. The Public Affairs Department has a similar program, Buhay Kyut
Program which caters to school children. KYUT stands for Kalusugan, Yamang Ugnay sa
Tubig. Kilusan aims to:

Create awareness among the barangay leaders on their vital role in nation
building particularly in the areas of hygiene, sanitation and water conservation
Educate and inculcate on the participants the best practices of hygiene,
sanitation and water conservation
Sustain the movement by involving the water district in the area and giving them
the lead role in the Kilusan
Help the water district come up with a sustainable assistance program for the
marginalized barangays related to hygiene, sanitation and water conservation.

The pilot implementation of the Kilusan which was approved on July 7, 2010 will be a
marginalized barangay of a Water District.

We commended the LWUA GAD Focal Point for undertaking activities for Gender
Mainstream despite allocation of minimal fund requirements. It is therefore recommended
that GAD Focal Point should initiate the increase in the budget for GAD administered
program subject to availability of cash to continue its implementation.

71
 Management took note of the recommendation and assured that they will gladly consider
increasing the Gender Development budget at at least 5% of the total appropriations for the
succeeding years. However, for CYs 2011 and 2012, they would abide by the budgets of
P6.4 million because the same have already been approved and also to conform to call for
austerity which is a significant improvement over the P1.8 million budget in CY 2010.

29. Status of audit suspensions, disallowances and charges as of December 31, 2010

Total audit disallowances found in the audit of various transactions of the LWUA, as of
December 31, 2010, amounted to P137,460,931.71, based on the Notice of
Disallowances issued. There were no Notice of Suspension and Notice of Charge issued as
of December 31, 2010.

From March 18, 2004 to July 22, 2009, prior to the effectivity of the RRSA, COA records
disclosed that several transactions totalling to P81,925,063 have been disallowed in audit.
Various Motions for Reconsideration were subsequently filed before the appropriate
offices of the COA Central Office in accordance with the Rules of Procedure.

72
 Local Water Utilities Administration
CY 2010 Annual Audit Report
Status of Implementation of the Prior Years Audit Recommendation

Audit Findings Recommendations Remarks

COMPLIANCE AUDIT
1.Miscellaneous Receivables arising from claims In the event that the release of
from the government of the Phils. amounting to PSF will no longer be feasible
P1.254 billion has no legal basis or document to in view of the change in the
support the claim contrary to the Accounting administration, LWUA will then Not
Principle on Objectivity. There was only a have to find ways to meet its Implemented
commitment on the part of the Office of the financial commitments to the See Finding
President thru the Presidential Social Fund to water districts, municipalities No. 3
release the subsidy to LWUA which represent 40% and/or barangays. It is
of the P3.166 billion net realizable value of recommended, therefore, that
receivables as of December 31, 2009. corresponding adjustments be
made in the LWUAs books of
accounts.
2.The purchase of the 60% common shares of Management should secure
Express Savings Bank Inc. (ESBI) for P80M and from the Office of the
the payment of P400M for Stock Subscription by President exemptions from the
LWUA to increase the authorized capital stock of provision of Section 15 of the
ESBI were contrary to Section 15 of the General General Provisions of the 2009
Appropriations Act for FY 2009. Moreover, the General Appropriations Act in
required approval for the quasi-banking authority of investing LWUA funds to a
ESBI is still pending with the Monetary Board of private banking institutions. It Not
BSP. is also recommended that the Implemented
approval of the Monetary See Finding
Board be immediately secured No.10
for ESBI to engage in a quasi-
banking function.

Return of the initial

investments of P80M and
P400M additional infusion of
capital with the ESBI pending
the approval of the
BSP/SEC/OP.
3.3.1 Non-realization of the proposed and the DBM Management to exert more
approved corporate and other income resulted in effort to realize both income
bigger government subsidies and borrowings. and other sources of receipts.
Not
3.2 Actual Expenditures for Personal Services and LWUA should incur Implemented
Maintenance and Other Operating Expenses expenditures within the limits See Finding
exceeding the DBM-approved Corporate Operating of the DBM-approved budget. No. 18

73
 Local Water Utilities Administration
CY 2010 Annual Audit Report
Status of Implementation of the Prior Years Audit Recommendation

Audit Findings Recommendations Remarks

Budget of LWUA for CY 2009 by at least P370.48 Any increase in the approved
million Corporate Operating Budget in
the course of the budget year
shall require submission and
approval of a supplemental
COB to cover the additional
corporate expenditures.
Management should also
strictly monitor all its expenses
so that the DBM approved-
budget would not be
exceeded.
In the absence of the legal
basis and proper authorization
for the payment of additional
personnel benefits, it is
recommended that granting of
personnel benefits without
legal basis should be
discontinued and the officials
and employees responsible
and accountable should be
required to refund the amount
they received in excess of the
authorized and approved rates
and those without legal basis.
4.Actual Extraordinary and Miscellaneous Expenses Management should adopt the
for CY 2009 was in excess of the DBM-approved following remedial measures:
budget by P2.588 million. Furthermore, 1. Limit the reimbursement of
Extraordinary Miscellaneous Expenses (EME) for extraordinary and
the period January to December, 2009 in the total miscellaneous expenses within
amount of P25.3 million were not supported by the approved amount of each
receipts and/or documents evidencing Department/Official.
Not
disbursements as required under Section 3 of COA 2. Management should strictly
Implemented
Circular No. 2006-001 dated January 3, 2006 comply with the provisions of
See Finding
COA Circular No. 2006-001
No. 19
dated January 3, 2006
specifically on adopting non-
commutable or reimbursable
basis for payment of
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 Local Water Utilities Administration
CY 2010 Annual Audit Report
Status of Implementation of the Prior Years Audit Recommendation

Audit Findings Recommendations Remarks

extraordinary expenses and

supporting the claims with
receipts and/or other
documents evidencing
disbursements.

3. Categorized miscellaneous
expenses within the
contemplation of COA Circular
No. 2006-001 Section 11

4. Make the necessary

adjustment to reclassify the
proper charging of
miscellaneous expenses
accounts.
5.Actual expenses in the total amount of P2.4 million Management should seek the
for Executive Check-up of the LWUA Board of approval of the DBM for the
Trustees and other LWUA Officials and Employees granting of Executive Check- Not
has no legal basis or approval from the Office of up to LWUA Officials and Implemented
the President of the Phils./Secretary of Budget and Board of Trustees. If no See Finding
Management approval is obtained, No. 20
discontinue the reimbursement
of Executive Check-up.
6.RATA totaling P1.190 million claimed by the The granting of said RATA be
members of the LWUA Board of Trustees has no discontinued effective Implemented
legal basis and not in accordance with Section 55 immediately. Notice of
of PD 198. Disallowance
No. 09-001-
CF-(10)
dated
October 14,
2010 for
P1.19 million
was issued.
7.Advances to water districts worth P2.3 million The following remedial
remain dormant for more than ten (10) years while measures are recommended: Not complied
P31.2 million was still outstanding despite 1. Ensure proper liquidation of See Finding
completion of the project. all advances in accordance No. 7
with the rules and regulations

75
 Local Water Utilities Administration
CY 2010 Annual Audit Report
Status of Implementation of the Prior Years Audit Recommendation

Audit Findings Recommendations Remarks

prescribed under COA Circular

No. 97-002
2. Exert effort to require the
concerned water district to
liquidate their respective
advances.

3. Facilitate the immediately

processing of liquidation
vouchers submitted by the
concerned water districts in
order to update their
accountability.
FINANCIAL AUDIT
8.The reported balance of Cash in Bank-Local Management should make the
Currency, Current and Savings Deposit accounts necessary reconciliation of the Not complied
were understated by P205 million mainly due to recorded Cash-in-Bank, Local See Finding
outstanding checks as of year-end. Currency account with the No.6
bank balances as of
December 31, 2009 to
properly account and report
the correct cash in bank.
9.The Payroll Fund book balance of P1.6 million as The following remedial
of December 31, 2009 differs by P1.37 million measures are recommended:
against the records of the Disbursing Officer 1. Reconcile accounting
showing a cash balance of P258,069.84 only. records with the records of the Not
Disbursing Officer Implemented
2. Facilitate the immediate See Finding
processing of liquidation No.9
vouchers submitted by the
Accountable Officer and
record the adjustments to
reflect and correct the amount
of the Payroll Fund and update
her accountability.
3. Ensure that the proper
liquidation of all payroll fund
releases are in accordance
with the rules and regulations

76
 Local Water Utilities Administration
CY 2010 Annual Audit Report
Status of Implementation of the Prior Years Audit Recommendation

Audit Findings Recommendations Remarks

prescribed under COA Circular

No. 97-002; and
4. Prepare the necessary
adjustment for liquidation that
was taken-up twice in the
book.
10. Various adjustments/reclassifications were In the course of the
made after the date of the financial statements to examination of the financial
reflect the correct amount of the accounts. transactions and operations of
LWUA for Calendar Year
2009, several Audit Implemented
Observations Memorandum
(AOMs) were issued to inform
management of the
observations noted and to
recommend various
adjustments or
reclassifications to reflect the
correct amount of the
accounts.
GENDER and DEVELOPMENT
11.The LWUA GAD Focal Point was able to Management should continue
undertake GAD activities required for the stages implementing GAD activities Partially
of gender mainstreaming although its allocated despite allocation of minimal Implemented
fund does not represent the fund requirement fund requirements. Moreover, See Finding
equivalent to at least five (5%) of the total budget GAD Focal Point should No.28
for CY 2009. initiate the increase in the
budget for GAD plan subject to
availability of cash.

77