ZNAC RUBBER ESTATE CORPORATION ANNUAL AUDIT REPORT FOR CY 2012 EXECUTIVE SUMMARY

INTRODUCTION The ZNAC Rubber Estate Corporation (ZREC), with business address at Unit 1405, West Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, is a subsidiary of the Human Settlements Development Corporation (HSDC) and a government-owned and controlled corporation. It was formally incorporated and duly registered on May 17, 1984 under Securities and Exchange Commission Registry No. 120669. ZREC is formed to engage in the business of a general agricultural products development company and for such purpose, to develop, construct, maintain, operate and lease agricultural land, experimental stations, warehouse for agricultural products and by-products; to buy and sell, manufacture, import and export or otherwise deal in farm, chemicals and agricultural tools and machines, equipment, accessories, appurtenance, products and by-products of said business; to purchase, own, improve, maintain and sell farm and agricultural estates; to invest funds to support agricultural production; to conduct basic and applied resources, training, consultancy, technology dissemination, conferences and seminars, print and publish mail order catalogues, newspapers, journals, magazines, books and other technical, literary and pictorial works relating to the foregoing activities and to carry on any business activities connected with the production, cultivation, harvesting, processing, manufacturing and marketing of any and all kinds of agricultural products and in the rendering of agricultural services of whatever kind and nature. (Sec. 2, Articles of Incorporation) Currently, ZREC is engaged in the commercial crop production, specifically rubber with operations located at Tampilisan, Zamboanga del Norte, covering an area of about 1,000 hectares agricultural land owned by Zamboanga del Norte Agricultural College (ZNAC) used by ZREC under a usufruct agreement for 50 years. The Corporation maintains two separate books: one for the Project Site and one for the Head Office. The Project Site Bookkeeper prepares the reports on cash receipts, sales and cash disbursements while the Head Office Accountant prepares Journal Entry Vouchers, Bank Reconciliation Statements and the General Ledgers of the Project Site. Separate financial statements are prepared by the Head Office Accountant for the Project Site and the Head Office. Combined financial statements of the Head Office and Project Site are then prepared. SCOPE OF AUDIT The audit covered the operations of ZREC for Calendar Year (CY) 2012. The audit involved performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depended on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
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FINANCIAL HIGHLIGHTS The financial profile of ZREC for CYs 2012 and 2011 is as follows: (In Millions) Particulars Assets Liabilities Equity Sales Cost of Sales Expenses Net income after tax CY 2012 CY 2011 Increase (Decrease) P (2.083) (2.967) 0.884 (8.458) (4.521) (0.427) (2.506)

P356.867 P358.950 341.319 344.286 15.548 14.664 12.875 21.333 8.635 13.156 2.852 3.279 1.262 3.768

AUDITORS OPINION The Auditor rendered a qualified opinion on the fairness of the presentation of the financial statements of ZREC for CY 2012, because the accuracy and completeness of Capital Stock amounting to P7.400 million could not be ascertained due to non-updating of the Corporations Stock and Transfer Book, and non-issuance of stock certificates to investors, namely: Human Settlements Development Corporation and Technology Resource Center (TRC). Additionally, the sale of ex-pond coagula was not subjected to percentage tax of three per cent as required under Republic Act (RA) 8424 Tax Reform Act of 1997, as amended by RA 9337, resulting in the understatement of Due to BIR account and overstatement of Sales account by P1.761 million for CYs 2009 to 2012. SUMMARY OF SIGNIFICANT AUDIT OBSERVATIONS AND RECOMMENDATIONS For the above-mentioned audit observations which caused the issuance of a qualified opinion, we reiterate the following recommendations: 1.1 Amend the Articles of Incorporation to correct the error in the number of shares and amount indicated for Ms. Carmen Guerrero Nakpil and Mr. Ernesto M. Ordoez; Coordinate with HSDC and National Agribusiness Corporation (NABCOR) as to the net assets transferred amounting to P4.900 million considered as deposit to subscription and make representation with these government agencies by requesting that the said amount be applied as payment to the unpaid subscriptions amounting to P3.825 million (P5.100 million P1.275 million) and the remaining amount of P1.075 million as additional paid-up capital. Then, issue the corresponding stock certificates to HSDC/NABCOR amounting to P4.900 million once it agreed to their proposal; Require the Corporate Secretary to update the Stock and Transfer Book (STB) in compliance with Section 7, Article IV of the By-Laws of the
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1.2

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Corporation which states that the Secretary shall be the custodian of and at all times maintain the corporate books and record and shall be the recorder of the Corporations formals actions and transactions. He shall have the following specific powers and duties: keep or cause to keep record books showing the details required by law with respect to the stock certificates of the Corporation, including ledgers and transfer books showing all shares of the Corporation subscribed, issued and transferred. 1.4 1.5 1.6 Issue stock certificates to TRC and HSDC corresponding to their fully paid up subscriptions of P1.225 million and P1.275 million, respectively; Require the stockholders to sign in the STB and stock certificates booklet to acknowledge receipt of stock certificate issued; Require the former Board of Directors to return the stock certificates issued in their name and cancel the same prior to issuance of stock certificates to the newly elected Board of Directors; and Provide adequate disclosure in the Notes to Financial Statements by indicating the name of investors, number of shares and amount subscribed and amount fully paid up by the investors which should tally with the amount indicated in the Balance Sheet and Statement of Changes in Stockholders Equity. We reiterate our previous audit recommendation that Management adhere strictly with the applicable provisions of RA 9337 to avoid future tax assessments from the Bureau of Internal Revenue (BIR). We also recommend that Management disclose in the Notes to Financial Statements sufficient information regarding tax liability to enable users to understand its nature, date of settlement and amount.

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The other significant observations and recommendations are as follows: 3. The significant decrease of 40 per cent in sales revenue for CY 2012, as compared with CY 2011, might affect the agencys continuing operations if Management would not institute measures that would immediately address the declining sales. We reiterate our previous years audit recommendations that Management: a. Rehabilitate the existing rubber trees by applying chemicals/fertilizers that would increase production; b. Conduct research on how to improve the yield of coagula in the rubber trees; and c. Study the possibility of extending the Usufruct Agreement so that any improvements on the site will yield acceptable return on ZRECs investment.
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4. Cash collected from sales of ex-pond coagula was used directly in paying the 50 per cent share of the tappers, instead of depositing intact to the bank, contrary to Section 69.1 of Presidential Decree (PD) 1445. We reiterate our previous years audit recommendations that Management: a. Require the buyers of ex-pond coagula or customers to pay in check to avoid possible misuse or embezzlement of collections; b. Deposit collections intact on the next banking day and refrain from using collections in paying the tappers as well as the small farmers; and c. Establish a revolving fund for the purpose of paying the 50 per cent share of the tappers and in buying ex-pond coagula from small farmers. Further, we recommend another alternative solution in case establishment of revolving fund is not feasible; that is, Management set guidelines on the amount and frequency of deposits considering the distance of the bank to the Project site and to request from COA exemption from the requirement of daily deposit of collection under Section 134 of Government Accounting and Auditing Manual (GAAM), Volume I (COA Decision No. 2012-164 dated October 15, 2012). 5. Cash advances amounting to P1.137 million remained unliquidated as of December 31, 2012 contrary to COA Circular No. 2012-004 dated November 28, 2012, thereby resulted in the overstatement of total assets and retained earnings. We reiterate our recommendation that Management submit to the Commission on Audit a request for write-off of Advances to Officers and Employees for unliquidated cash advances of the deceased Project Manager. We also recommend that Management: a. Intensify efforts to locate the whereabouts of the former employees and demand liquidations of their outstanding cash advances; and b. Execute an affidavit that the disbursement vouchers (DVs) and the supporting documents relative to the grant of cash advances could no longer be located. STATUS OF UNSETTLED DISALLOWANCES, CHARGES AND SUSPENSIONS Below is the status of audit disallowances, charges and suspensions as of December 31, 2012. Summary of Audit Disallowances Notice of Disallowance Amount Status (ND) No. /Date 09-001 (08) P 639,200 Disallowance was affirmed under CGS March 23, 2009 Decision No. 2010-002 dated June 5, 2010.

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Notice of Disallowance (ND) No. /Date

Amount

Status No appeal was received from Management relative to the above decision.

09-002 (07) March 23, 2009 09-003 (07) March 23, 2009

587,000

-do-

184,000 Bank charges of P137,000 had been deducted from the final release of funds to the Foundation. Management was not able to recover the balance of P47,000 since the concerned Non-Governmental Organization had already moved out. 110,000 No appeal received 471,200 70,000 35,000 -do-do-do-

09-004 (08) March 23, 2009 10-001 (09) Sept. 28, 2010 10-002 (09) Sept. 28, 2010 10-003 (09) Sept. 28, 2010

There was no Notice of Finality of Decision previously issued for audit disallowances and there were no unsettled audit suspensions as of December 31, 2012. STATUS OF IMPLEMENTATION OF PRIOR YEARS AUDIT RECOMMENDATIONS Of the 93 audit recommendations embodied in the previous years Annual Audit Reports, 40 were implemented, one was partially implemented, and 52 were not implemented. Of the 52 recommendations not implemented, 22 recommendations pertain to utilization of Priority Development Assistance Funds (PDAF). This matter is also covered in the audit conducted by the Special Audits Office, Special Services Sector, this Commission, for which a separate report shall be issued. The corresponding Notices of Disallowance (ND) will be issued by the same Office. The current ZREC Audit Team issued a demand to Management to comply/implement the recommendations and with information that non-compliance thereof may result in the disallowance of the transactions.