EXECUTIVE SUMMARY

A. Introduction

Philippine Postal Corporation (PPC)

1. PPC was created by virtue of Republic Act No. 7354 otherwise known as the “Postal
Services Act of 1992”. It transformed the then Postal Service Office (PSO) from a
Bureau into a Government-Owned and Controlled Corporation. Its mandate is to plan,
develop, promote and operate a nationwide and universal postal system with network
that extends throughout the entire Philippine archipelago. By being a member of the
Universal Postal Union (UPU), a 192 member-country organization of the United
Nations, the PPC has worldwide mail linkages that enable it to send mail to any part of
the world.

2. PPC is a stock corporation composed of P10 billion authorized capital stocks divided into
45 million Class A and 55 million Class B shares, both voting and with par value of one
hundred pesos. Class A shares shall be subscribed only by the Government while Class
B maybe owned by private entities upon authorization by the PPC Board of Directors.
On record, only Class A shares are subscribed.

3. The PPC powers shall be vested in and exercised by a Board of Director of seven
members including the Postmaster General. The President of the Philippines shall
appoint all the seven members. The Board shall elect a Chairman from among its
Members.

The members of the Board so appointed by the President shall hold office for a term of
five years each, except of those first appointed, two members shall have a term of five
years, two with one year. Thereafter, the appointment is in accordance with the
Corporation Law.

4. In CY 2012, PPC integrated the 17 regions of the Philippines into nine postal areas
excluding the Central Office, through the issuance of the PPC Office Order No. 12-01
dated January 2, 2012. Currently, PPC provides mail services to these nine postal
areas, through its 1,309 post offices nationwide and to the 192 member-country
organization of the UN.

5. As of December 31, 2016, PPC had a total manpower complement of 7,905 personnel, a
2.92% decrease of 238 from last year’s total of 8,143.

Scope and Objectives of Audit

6. The audit was conducted to determine the (a) level of assurance that may be placed on
the management’s assertions on the financial statements; (b) the propriety of
transactions and the Corporation’s compliance with existing laws, rules and regulations
including Management’s policies; and (c) the extent of implementation of prior years’
audit recommendations.

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 7. The audit covered the examination of accounts, transactions and operations of PPC for
the period January 1 to December 31, 2016 in accordance with Philippine Public Sector
Standards on Auditing; and examination of the cash and accountabilities of selected
Accountable Officers. The audit involved cash examinations, data gathering through
interview, ocular inspections and other relevant procedures essential to obtain sufficient
evidential data to ascertain the propriety of the financial transactions and compliance
with applicable laws, rules and regulations.

B. Financial Highlights

1. The PPC’s financial position and financial performance for CY 2016, are shown below:

Financial Position
(in Philippine Peso)

2016 2015 Increase/(Decrease)

Assets 11,636,638,723 11,188,895,494 447,743,229

Liabilities 6,367,249,404 6,231,938,631 135,310,773

Equity 5,269,389,319 4,956,956,863 312,432,456

Results of Operation

(in Philippine Peso)

2016 2015 Increase/(Decrease)

Revenue 3,515,560,029 3,327,569,490 187,990,539

Operating Expenses 3,494,910,876 3,294,227,356 200,683,520

Income from Operations 20,649,153 33,342,134 (12,692,981)

Other Income/(Expenses)
(985,047) (30,920,278) 29,935,231
Net Income 19,664,106 2,421,856 17,242,250

C. Operational Highlights for CY 2016

1. For CY 2016, PPC reported the following major accomplishments:

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 a. A total of 74.83 million items were posted in 2016, majority or 69.9 percent of
which are from Mega Manila Area. Domestic letter post has the most share or
86.9 percent of the total mail volume posted while the remaining 13.1 percent are
distributed among other mail services.

b. Philpost has launched the new biometric Postal ID to media in April 2016 and
was able to start the data capturing in May 2016. A total of 642,638 Postal IDs
were issued featuring 84 partner merchants. This figure is 21.33 percent higher
than the total 529,637 Postal IDs issued in 2015. A total of P262.57 million gross
revenue were collected from Postal ID alone.

c. Continued implementation of the Domestic Mails Tracking System for real time
and complete events tracking;

d. Continued to provide Logistics and Warehousing Service aimed to develop

various warehouses across postal areas. In 2016 a total of P141 million revenue
were generated from the logistic services, almost 200 percent increase from the
previous year’s performance.

e. Deputized as a collecting agent of the Bureau of Customs to expedite delivery of

mails and parcels;

f. Operated the first temperature-controlled warehouse FSMDC, Port Area, Manila

which caters to the Department of Health storage requirements. The Department
of Health (DOH) is the primary client who will utilize the 945-square meters of
PPC’s Surface Mail Exchange to store medical supplies and medicines which are
intended for distribution to rural health centers in the provinces.

D. Auditor’s Opinion

The Auditor rendered an adverse opinion on the fairness of presentation of the consolidated
financial statements of the PPC for the year ended December 31, 2016 and 2015 for
reasons stated below. Details are discussed in Part II of the Report.

1. The year-end balance of Consolidated Property, Plant and Equipment accounts with net
book value amounting to P4.131 billion and P4.208 billion as at December 31, 2016 and
2015, respectively was unreliable due to: (a) inclusion of unsubstantiated or “for
reconciliation” accounts in PPC Central Office totaling P962.054 million which represents
22.13 percent of the accounts; (b) inclusion of various items with total cost of P20.990
million in the PPE account in PPC Central Office books and Postal Areas 4 and 9 with
acquisition cost below the threshold of P15,000, contrary to Paragraph 5.4 of COA
Circular 2016-006; (c) non-submission of PPC Central Office of Physical Inventory
Report of Other Heritage Assets, thus existence cannot be established; (d) non-
reconciliation of Physical Inventory Report and Accounting Records in Postal Areas 1, 2,
4, 7 and 9; and (e) discrepancies aggregating P2.45 million in Postal Area 6 due to
nonrecording and misclassification.

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2. The two sets of reciprocal accounts Due from Area Offices and Due to Central Office;
and its contra-accounts Due to Area Offices and Due from Central Office, continued to
register variances of P6.559 billion and P7.100 billion, respectively, due to the failure of
Management to properly eliminate these contra-accounts in the consolidated financial
statements, and effect the necessary adjusting entries.

3. The existence, accuracy and validity of the year-end consolidated balance of Cash in
Bank – Corporate reported at P755.693 million could not be ascertained due to: (a)
variance of P57.971 million between the Cash in Bank balance per books in the
aggregate amount of P548.283 million and the results of bank confirmation of P606.254
million; (b) unsubstantiated accounts or termed as “for reconciliation” accounts
amounting to P126.925 million; (c) identified reconciling items that remained unadjusted
in the books totaling P184.896 million and delayed submission/non-submission of
monthly Bank Reconciliation Statement (BRS) in Postal Areas 4, 5 and 6; and (d)
erroneous reclassification of the account classified as “For Recon”, in the amount of
P47.123 million in Cash in Bank – Corporate to Other Assets, account in the books of
Postal Area 6, contrary to Government Accounting Manual (GAM) Volume I.

4. The aggregate balance of the account Inventory of P975.359 million and P999.909
million as of December 31, 2016 and 2015 respectively, was not fairly presented due to:
(a) presence of unsubstantiated or “for reconciliation” accounts/items totaling P787.798
million representing 81 percent of the accounts; (b) incomplete submission of Report on
Physical Count of Inventories (RPCI) hence, reconciliation of physical count and
accounting records cannot be completed; and (c) material variance of P19.662 million
between the year-end Report on Accountability for Fuel, Oil and Lubricants; and Spare
Parts of Motor Vehicles prepared by the Accountable Officers in the aggregate amount
of P4.063 million and the balance in PPC Central Office books (good accounts) of
P23.726 million.

5. Deficiencies observed in the Accounts Receivable/Accounts Payable Mail

Remuneration as follows :

a. The year-end balances of the Accounts Receivable-Mail Remuneration (AR-MR)

and the account Other Deferred Credits were both overstated by P216.725
million due to erroneous recording of collections from various Foreign Postal
Administrators (FPA); and

b. Discrepancy of P739.146 million in AR-Mail Remuneration and P409.886 million

in AP-Mail Remuneration existed between the General Ledger and Subsidiary
Ledger due to non-adherence by PPC with the Standard Drawing Rights (SDR)
determined by the Universal Postal Union (UPU) in the recording of transactions.

6. The account Due from Subsidiaries with year-end balance of P222.850 million
remained dormant and doubtful, and their collectability was nil as four of the five
subsidiaries have been dissolved or non-operational, while one did not recognize the
liability in its books.

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 7. The Consolidated Statement of Financial Position and Statement of Comprehensive
Income for CY 2016 continued to be unreliable and inaccurate due to existing variance
between the submitted Consolidated Financial Statements and audited Financial
Statements of Postal Area Offices of Assets, Liabilities and Equity accounts and Net
Profit After Subsidy by P2.468 billion and P0.811 million, respectively, brought about by
incorrect and/or un-updated data submitted by the Accountants of PPC Areas 1 to 9.

E. Significant Audit Observations and Recommendations

In addition to the audit observations which were considered in rendering an adverse opinion,
we are stating below the other significant audit observations together with the audit
recommendations, the details of which are discussed in Part II of this Report.

1. PPC generated a measly income of P296,981 or 1.18 percent of its target revenue of
P16.399 million for two-year operation of one unit Hybrid Mail Machine acquired in 2015
costing P19.89 million, thus reasonable return of investment may not be realized to the
detriment of the government.
Recommendations:

a. Make representation with government and private entities to promote the use of
Hybrid Mail Machine; and

b. For future investment/projects, conduct in-depth planning and feasibility studies

before embarking on a costly project to avoid wastage of government funds.

2. The accuracy of the book balances of the Accounts Receivable Joint Venture and the
corresponding Trust Liability, amounting to P90.649 million and P16.356 million,
respectively, could not be ascertained due to deficiencies in the recording and
reporting/disclosures of the joint venture transactions in the financial statements,
contrary to PPSAS 1 and PPSAS 3.

Recommendations:

a. Analyze the financial transactions recognized in the Trust Liability -Joint Venture
accounts and coordinate with SSS and Filmetrics to identify the source of the
discrepancies between the respective books of accounts;

b. Reconcile the balances between the Receivable from Joint Venture (SSS) and
Ageing of Receivables to determine the cause of abnormal balances;

c. Make the necessary accounting entries to adjust the Trust Liability – Joint
Venture Account in conformity with PPSAS 3; and the Receivable from Joint
Venture (SSS) and Accounts Receivable-Trade (Filmetrics) accounts for the
proper treatment of differences and abnormal balances; and

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 d. Provide the necessary disclosures to describe the individual agreements
entered into, accounting policy applied and its amendments, and proper
presentation of accounts to faithfully represent the events and circumstances in
conformity with PPSAS 1.

3. The balance of PPC Central Office accounts Creditable VAT and Creditable Withholding
Tax amounting to P18.508 million and P18.537 million, respectively, are unreliable due
to the absence of covering Tax Certificates/Return Form 2306 (Final Tax Withheld At
Source) and Return Form 2307 (Creditable Tax Withheld At Source).

Recommendation:

Require the Tax Management Office to submit a properly filled-out BIR Forms 2306
and 2307 to support PPC’s claims in the Quarterly VAT and ITR for 2016; and
enforce strict compliance with the submission of the complete forms by Area
Accountants or responsible personnel to avoid future obligation with the Bureau of
Internal Revenue.

4. The balance of PPC Central Office Deferred Output Tax account amounting to P14.286
million was uncertain due to inability of Management to close the account to the
appropriate Output Tax account and compute the output tax corresponding to the
amount of Accounts Receivable (AR) Trade collected for CY 2016.
Recommendation:

Effect the necessary adjusting entries to reclassify/ reverse the deferred output tax to
output tax account and compute the applicable output tax to the amount of Accounts
Receivable-Trade collected to determine the correct amount of VAT Payable/ Refund
for the period.

5. Dividends due to the National Government in the amount of P322.663 million arising
from operations in calendar years 2002 to 2015, net of dividends paid under PPC-
proposed payment scheme, remain unrecorded in the PPC books of accounts, contrary
to Section 5 of the RA 7656.

Recommendations:

a. Recognize in the books the balance of dividend due to NG in the amount of

P322.664 million, pending evaluation by the DOF of PPC’s request; and

b. Take extra effort to persuade DOF to approve the request for rate adjustment in
view of the materiality of the amount which may deplete the funds of PPC; and

c. Comply strictly with provisions of RA 7656 to avoid sanctions and the payment of
penalties and charges.

6. The account Trust Liabilities registered an abnormal (debit) balance in the total amount
of P586.497 million as against the Cash in Bank trust account of P333.601 million or a
debit discrepancy of P920.099 million, contrary to the provisions of PPSAS 1 and

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 Sections 3 and 4 of PD 1445. In Postal Area 3, discrepancies existed between Cash-
Trust Funds account Funds account for issued Money Orders, Philhealth premium
remittances, Bayad Center and Consignment and its corresponding Trust Liabilities
Account, making the account balances unreliable.

Recommendations:

a. Exert extra effort to reconcile the discrepancies of Cash – Trust Fund with the
corresponding Trust Liability Accounts by checking the recording of transactions,
existence or erroneous entries and application of prescribed accounting policies.
Effect necessary adjustments, if warranted;

b. Investigate the negative/abnormal balances of trust Accounts, note any error and
effect necessary adjustments;

c. Observe the provisions of P.D. 1445 on maintenance and use of Trust Accounts
and the requirements of PPSAS for fair presentation of accounts on the financial
statements.

7. Accounts Receivable – Trade balance as of December 31, 2016 in the PPC Central
Office could not be ascertained due to the variance noted in the amount of P112.404
million between the Aging Schedule of Trade Receivables and the General Ledger (GL)
balance of P328.155 million and P215.751 million, respectively, partially brought about
by: (a) erroneous classification of receivables amounting to P50.211 million representing
receivables from joint venture/associate/affiliates and other receivables; and (b)
inclusion of Non-Trade Receivables of P46.690 million, contrary to COA Circular No.
2015-010 and par. 27 of PPSAS 1.

Recommendation:

Require the Accountant to reconcile the GL balance with the Aging schedule of
Accounts Receivable and effect the necessary adjusting entries and reclassify the
Non-trade receivables to their proper GL accounts.

8. The balance of the account Due to Officers and Employees in PPC Central Office
books of P314.486 million as of December 31, 2016 was not properly stated due to: (a)
expenses incurred in 2014 of P71.388 million remained outstanding in the books as of
December 31, 2016; (b) outstanding obligations of PPC to other government agencies
and private corporations of P4.050 million erroneously credited to Due to Officers and
Employees; (c) erroneous recording of P54.999 million in the books resulted in the
negative balance of Due to Officers and Employees; and (d) recurring existence in the
books of accounts “for verification” with abnormal debit balance of P5.800 million.

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 Recommendations:

a. Evaluate and validate all documents pertaining to 2014 transactions and revert
back to General Fund;

b. Reclassify the amount of P4.050 million to the appropriate payable account;

c. Analyze the erroneous entry made and prepare the necessary adjusting entries,
if warranted; and

d. Exert extra effort to review the “for verification” accounts to eliminate or at least
reduce the amount, and prepare adjusting entries, if warranted.

F. Summary of Total Suspensions, Disallowances and Charges

As of December 31, 2016, the total audit suspensions and disallowances totaled P146.519
million and P41.974 million, respectively. The details are presented in Part II (F) of the
Report.

G. Status of the Implementation of Prior Years’ Recommendations

Of the 98 audit recommendations for CY 2015, 28 were implemented, 36 were partially

implemented and 34 were not implemented. Eighteen audit recommendations that were not
implemented are reiterated in the current year’s report. Details are presented in Part II.

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