TOURISM INFRASTRUCTURE AND ENTERPRISE ZONE AUTHORITY

ANNUAL AUDIT REPORT FOR CY 2011

EXECUTIVE SUMMARY

Introduction

The Tourism Infrastructure and Enterprise Zone Authority (TIEZA), with business
address at the Department of Tourism Building, T.M. Kalaw Street, Ermita, Manila, is a 100
percent government-owned and controlled corporation. It was created pursuant to
Presidential Decree No. 189 and amended under PD 564, was reorganized as the Tourism
Infrastructure and Enterprise Zone Authority (TIEZA) attached to the Department of Tourism
for purposes of program and policy coordination pursuant to Section 63 of RA 9593,
otherwise known as “The Tourism Act of 2009”. Its mandates are as follows:

a. To designate, regulate and supervise the Tourism Enterprise Zones (TEZs)

established under this Act.

b. To develop, manage and supervise tourism infrastructure projects in the country.

c. To supervise and regulate the cultural, economic and environmentally

sustainable development of TEZs toward the primary objective of encouraging
investments therein.

d. To ensure strict compliance of the TEZ operator with the approved development
plan. Pursuant thereto, the TIEZA shall have the power to impose penalties for
failure or refusal of the tourism enterprises to comply with the approved
development plan which shall also be considered a violation of the terms of
accreditation.

e. To continue previously exercised functions by the PTA under Presidential Decree

No. 564, not otherwise inconsistent with the other provisions of the Act. It shall,
however, cease to operate the Duty Free Philippines Corporation.

In addition to its mandate to regulate and supervise TEZs, the TIEZA shall likewise
be deemed a government infrastructure corporation under the provisions of Executive Order
No. 292, otherwise known as the Administrative Code of 1987.

The TIEZA administration is headed by Secretary Ramon R. Jimenez, Jr.,

Chairman of the Board, and Mr. Mark T. Lapid, Chief Operating Officer.

TIEZA is attached to the Department of Tourism for purposes of administrative

supervision and control. Its corporate powers and functions are vested in and exercised by
the Board of Directors.

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 The Members of the Board of Directors/Officers of TIEZA as of December 31, 2011
are as follows:

Secretary Ramon R. Jimenez, Jr. Officers:

Chairman of the Board
Mark T. Lapid
Mark T. Lapid Chief Operating Officer
Vice-Chairman of the Board
Teresita D. Verde
Deputy General Manager
Government Sector Representatives: Finance Sector

Secretary Rogelio L. Singson Lydia T. Cosuco

Secretary LuwalhatiAntonino Deputy General Manager
Secretary Ramon Jesus P. Paje Administration Sector
Secretary Jesse M. Robredo
Atty. Edgar T. Bocar
Private Sector Representatives: Deputy General Manager
Asset and Management Sector
Director Carlos Honorio B. Estepa, Jr.
Director Vivian D. Otaza Atty. Joy M. Bulauitan
Director Lucas M. Nunag Deputy General Manager
Tourism Enterprise Zone

Engr. Miguelita A. Mariano

Officer-in-Charge
Infrastructure Sector

TIEZA operates six Entities and 13 Travel Tax Field Offices as follows:

Entities

a. Balicasag Island Dive Resort

b. Banaue Hotel and Youth Hostel
c. Club Intramuros Golf Course
d. Gardens of Malasag Mountain Resort
e. Hilaga (Paskuhan Village)
f. Zamboanga Golf Course and Beach Park

Field Offices

a. NAIA 1 Travel Tax Counter

b. NAIA 2 Travel Tax Counter
c. NAIA 3 Travel Tax Counter
d. San Fernando City (La Union) Travel Tax Office
e. Laoag City Travel Tax Office
f. Baguio City Travel Tax Office

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 g. Iloilo City Travel Tax Office
h. Cebu City Travel Tax Office
i. Zamboanga City Travel Tax Office
j. Davao City Travel Tax Office
k. Cagayan de Oro City Travel Tax Office
l. Diosdado Macapagal International Airport (DMIA) -Clark Travel Tax Unit
m. One-stop Processing Center – Clark Travel Tax Unit

Scope of Audit

The audit covered the operations of TIEZA for CY 2011. The audit involved
performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depended on the auditor’s judgment,
including the assessment of the risks of material misstatement of the financial statements,
whether due to fraud or error.

Audit Opinion on the Financial Statements

The Auditor rendered a qualified opinion on the fairness of the presentation of the
financial statements of the TIEZA for the year 2011, for reasons stated in the Audit
Certificate in Part II A of the Report

TIEZA’s Financial Performance

The TIEZA’s financial condition and results of operations are presented below:

Comparative Financial Condition

2011 2010 Increase
(Decrease)
Assets 10,059,469,734 9,099,778,916 959,690,818
Liabilities 1,219,179,984 1,197,740,587 21,439,397
Equity 8,840,289,750 7,902,038,329 938,251,421

Comparative Results of Operations

2011 2010 Increase
(Decrease)
Income 2,086,721,095 1,984,703,388 102,017,707
Expenses 1105,295,344 1,204,556,426 ( 99,261,082)
Net Income 981,425,751 780,146,962 201,278,789

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Summary of Significant Audit Observations and Recommendations

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

presented in Part II A of the Report:

A. Reiteration of Previous Year’s Audit Observations and Recommendations

1. The extension of the contract for security and janitorial services for
Tourism Infrastructure and Enterprise Zone Authority (TIEZA) Head Office
and its entities was made without complying with the Condition No. 3 in
Item 4, Appendix G of Republic Act No. 9184 which states that the procuring
entity has to substantially undertake the procurement activities required
prior to award of the new contract.

We therefore reiterated our recommendation that Management strictly ensure that

procurement of security and janitorial services be done in accordance with Item 4
of Appendix G and Article IV, Section 10 of RA 9184.

We also recommended that Management refrain from including provisions in the

contract the following phrases as these have the effect of extending the contract
without the benefit of public bidding and therefore violate RA 9184.

a. “shall be automatically renewed for a period of two years depending upon the
Agency’s satisfactory performance”, or

b. “shall remain in force for a period of one year after expiration of this contract”,
or

c. “to continue on a month-to-month basis if there is no award to a winning

bidder”.
 
2. Lands acquired by the Authority either by purchase or donation which were
booked up at P136.651 million remained untitled to date.

We reiterated that Management exert enough efforts to have the land titled in the
name of TIEZA, and cause the dropping from the books the land located at
Kennon-Rosario Junction, La Union.

3. TIEZA continued to grant financial assistance of P290,000 and

sponsorships totaling P611,250 to several non-government corporations
and associations for activities which have no significant impact on tourism
and which appear to be outside of the mandate of TIEZA. These donations
were considered unnecessary as defined under COA Circular No. 85-55A.

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 We therefore recommended that Management:

a. Stop the practice of granting financial assistance and sponsorship fees

particularly to activities like golf, beauty contest, tournament, festivals and
similar activities as the grant of the same benefited only the recipient
organization and not the general public; and

b. Formulate specific guidelines/criteria in the grant of financial assistance and

sponsorship fees within the legal mandate of TIEZA, for approval by the
TIEZA Board.

4. Fund transfers to LGUs and NGAs totaling P93.949 million remained

unliquidated from one to more than five years despite the completion of the
projects for which the funds were transferred. Of these unliquidated fund
transfers, the amount of P34.174 million pertained to completed projects as
at year-end.

We recommended that Management:

a. Communicate with the concerned LGUs/NGAs and request immediate

liquidation of fund transfers in strict compliance with the provisions of the
MOA and also inform the project engineer to include in his functions the
monitoring of liquidation of the fund transferred;

b. Demand for the refund of unexpended balance of fund transferred, if any, in

order to fully liquidate the account;

c. Make the necessary adjusting entry on the liquidation of financial assistance

by NPDC in order to reflect the correct balances of the account; and

d. Require the concerned LGUs/NGAs to strictly implement the projects

pursuant to the MOA and the POW.

5. Substantial amount of travel tax assessments in the amount of P104.060

millionremained outstanding and uncollected as of December 31, 2011,
depriving the Authority of additional funds needed for its infrastructure
projects, as well as other government agencies to sustain their various
projects.

We reiterated our previous year’s audit recommendation that Management exert

its best efforts to collect these long outstanding assessments from different
airlines especially from those of 1999 and prior years of the Philippine Airlines
which contributes the huge amount of long outstanding assessments and from
those airline companies that have ceased operations; and likewise, make
persistent follow-ups and review of these cases filed by Legal Department to
ensure immediate settlement of these long outstanding assessments.

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 B. Current Year’s Audit Observations and Recommendations

6. Discrepancy of P650,848.23 between book balances and inventory count of

Equipment accounts (Furnitures and Fixtures, IT Equipment,
Communication Equipment, Sports Equipment) at P112.35 million and
P111.70 million, respectively, existed due to missing equipment or those
not found during the count.

We recommended that Management:

a. Hold the accountable officers personally liable for the missing equipment, and
may allow them to apply for relief from accountability therefor;

b. Strictly require the inventory team to conduct an actual physical count of the
properties/items issued to its officers and employees to determine if their
accountabilities still exist; and

c. Cause the recording of purchases in the books only when there is already
actual delivery, inspection and acceptance of the property purchased.

7. Property, Plant and Equipment (PPE) accounts still included undisposed

unserviceable property amounting to P21.923 million representing .0384%
of the total PPE account balances, which were not reclassified to Other
Assets account.

We recommended that Management:

a. Initiate the immediate disposal of the above unserviceable property to prevent

their deterioration so as to obtain the best price; and

b. Pending disposal, draw a Journal Entry Voucher to reclassify unserviceable

property to Other Assets account.

8. Weaknesses in internal control practices such as non-issuance of official

receipts in strict numerical sequence, non-documentation of transfer of
fund from one accountable officer to another, use of collections as change
fund and to pay for the same-day travel tax refund and change fund to pay
for petty expenses and delayed submission of reports of collections and
deposits disclosed risk of possible loss and misuse of funds.

We recommended that Management:

a. Revisit and strictly implement its internal control policies and procedures in
the handling of collections, deposits and disbursements of funds at the travel
tax units/offices to avoid opportunities of possible errors/risks and misuse of
funds;

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 b. Document the proper turnover of accountabilities on the transfer of fund from
one AO to another by indicating on the turnover document the series of
official receipts issued and the denominations of collections; and ensure that
said document is signed by both the outgoing and incoming AO;

c. Refrain from using collections as change fund and as payment for same-day
travel tax refund since there are cash advances established for change fund
and for payment of same-day refund;

d. Strictly observe the purpose for which the cash advances are granted such
that the cash advance for change fund shall only be used for exchanging bills
to its equivalent amount in smaller denominations - cash advance for same-
day travel tax refund for payment of travel tax refund paid on the same day
and the petty cash/working fund for payment of petty/small expenses of the
Travel Tax Units/Offices;

e. Expedite the processing of replenishments of cash advances and have the

concerned officers/employees be made answerable for the delay in
processing and if possible, impose disciplinary actions upon them;

f. Write down peso denominations as well as the series of official receipts

issued on the deposit slips as an internal control measure in monitoring
collections against deposits;

g. Indicate also the amount in words, aside from the amount in figures, on the
official receipts as an internal control measure to check the amount collected
and avoid using one or more series of official receipts at the same time;

h. Require the accountable officers to report to the TIEZA - Main Office for the
timely completion of the Report of Collections and Deposits;
 
i. Evaluate the existing policies and procedures on the reporting, processing
and reimbursement of same-day travel tax refund to address the delay in the
replenishment of the fund;

j. Update and record all transactions in the cashbook. Maintain a duplicate

copy of PCF vouchers for proper monitoring of the transactions of the funds;

k. Brief, update and enforce all Accountable Officers to implement policies and
procedures regarding the handling of cash; and

l. Require reconciliation between the collections of the accountable officer and

the travel tax assessor’s reports to check the correctness of the amount
collected against the travel tax assessed.
 
9. Cash advance granted for foreign travel of the Manager, Regional
Monitoring Department, was fully liquidated only after 113 days, in violation
of Section 14 of Executive Order No. 298 and Section 4.1.3 of COA Circular
No. 97-002. Also, the cash advance granted was excessive as 45% of the
amount was returned in cash.

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 We recommended that Management comply with the provisions of COA Circular
No. 97-2002 and Section 14 of Executive Order No. 298 for a more efficient and
effective control in the grant and liquidation of cash advance; and refrain from
granting excessive cash advance.

10. The accuracy and validity of the year-end balances of Due From LGUs and
Due from NGAs at P54.759 million and P15.101 or a total of P69.860 million
representing funds transferred to LGUs and NGAs could not be ascertained
due to the unreconciled discrepancy of P67.415 million between the book
balance and the results of confirmation with the LGUs and NGAs.

We recommended that Management strengthen the monitoring of unliquidated

fund transfers to LGUs and NGAs through follow-up letters and demand for its
liquidation in order to reflect an accurate and reliable balance of the Due From
LGUs/NGAs accounts.

We also recommended that Management demand for the immediate refund of the
unutilized fund transferred to the Municipality of Banaue, Ifugao since this only
shows that the fund requested was not really necessary.

11. The balance of Advances to Contractors as of December 31, 2011 amounted

to P47.211 million, of which P42.987 million or 91% represents advances
which remained dormant for two to 23 years and the possibility of
recoupment was already very remote and renders the account unreliable
while only P1.941 million or 4% and P2.282 million or 5% pertained to
advances on on-going projects and current projects awaiting approval of
variation orders.

We recommended that Management:

a. Initiate and pursue legal actions against contractors who, after being granted
the 15% advance payment did not commence work or abandoned the
projects; and have them blacklisted not only from the list of accredited
contractors of TIEZA but also with the Department of Public Works and
Highways;

b. Release advances only after ensuring that the contractor can start the project
without hindrances that might prevent him from starting the project;

c. Direct the Infrastructure Sector and Accounting Division to well coordinate the
processing of advances since there were instances when talks for the
recession/termination of the contract is already ongoing or there were already
problems with the contractor but since the Accounting Division has no
knowledge of the talks going on, the request for advance payment was
processed and eventually, the contractor was paid;

d. Verify/Check subsidiary ledger on Advances to Contractors diligently before

processing of the request for advance payment to check if similar advances
were previously granted to the same contractor on previous projects that was
rescinded/terminated at no fault of the Authority; Direct the Infrastructure
Sector to devise measures so that a repeat of the same situation will never

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 happen; Likewise, in the processing of progress payments, also verify/check
the subsidiary ledger on advances to contractors since there were instances
when the same contractor was paid for his progress accomplishment on
another project and this will be an opportunity for TIEZA to offset/apply the
progress payment to the advances paid on previous project;

e. File with the bonding company on the forfeiture of the surety and
performance bond in favor of the Authority due to non-implementation of the
project; If the failure to implement the project is mainly due to the fault of the
contractor, hold the Project Engineer assigned to supervise the project, who
should have recommended the forfeiture of the bond, and impose
appropriate sanctions against the Project Engineer;

f. Since the law allows payment of the 15% advance payment up to two (2)
installments, consider adopting this scheme so as not to expose the Authority
of disbursing the whole 15% in case the contractor failed to commence work,
which should be specified in the Instruction to Bidders and other relevant
Tender Documents; and

g. Notwithstanding the foregoing recommendations, revisit its previous policy

that was revoked for no reason at all that “A certification from the Project
Engineer that the contractor had already mobilized the project” shall be
required prior to the grant of advance payment.

12. The Authority paid JFJ Construction and Supply, Inc. (JFJCSI) the amount
of P650,216 representing 15% advance payment for the Construction of the
Multi-purpose Tourism Assistance Center, Loboc, Bohol despite the fact
that the project was already suspended.

We recommended that Management:

a. Conduct an appropriate detailed engineering on every project being

requested by the proponent prior to the approval and funding of the project so
that delays in the implementation of the project will not be encountered; and

b. Consider the possibility of including in the MOA with the proponent (LGU) that
any cost in revisions of the Program of Work approved by TIEZA shall be
shouldered by the LGU.

13. An ocular and technical inspection of the Project-Development Plan of Rose

Garden at Burnham Park, Baguio City showed that the project was not well
maintained by the local government and that the contractor failed to
accomplish the end bleacher of the Amphitheater as provided in the
Program of Work amounting to P1.765 million.

We recommended that Management:

a. Suggest the collection of a reasonable entrance fee to the proponent of the

project for the upkeep and maintenance of the Rose Garden, in addition to the
designation of an administrator or care taker of the park if our aim is to boost
the Baguio City’s tourism – generating potential as a major economic

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 contributor to the country’s tourism development program; and improve the
Rose Garden, particularly the plants, to make it more beautiful and attactive to
tourists; and

b. Cause the deduction of the amount corresponding to the unaccomplished

work items under the Amphitheater work item amounting to P1,765,108.96
from the progress billing.

14. The Project - Construction of Argao Airstrip Perimeter Fence, Dalaguete,

Cebu, was implemented without the appropriate detailed engineering as
provided under Annex A of the Implementing Rules and Regulations of
Republic Act No. 9184, which caused the suspension and delay in the
completion of the project.

We agreed with the recommendation made by the Project Engineer to request the
assistance of the Office of the Corporate Legal Counsel to address the
concerns/claims posed by the residents and former lot owner to avoid
deterioration of the finished portions of the project.

We also recommended that assistance of the LGU concerned be sought to settle

the issue of the residents on their ROW problem considering the zoning
guidelines prescribed by the LGU.

We further recommended that henceforth, before any project is undertaken, a

complete detailed engineering should be made including a thorough land survey,
and right to ownership be properly verified and secured by the Authority to ensure
the fast implementation and completion of the project, which is a basic
requirement in any infrastructure project and has been the subject of our several
audit observations in the past.

15. Using Direct Contracting as an alternative method of procurement for the

Project - Conceptualization, Supply and Installation of Materials and Labor
for the 2011 Christmas Decorations and Lightings at DOT Building, Club
Intramuros and their Environs to Kabukiran Gardenwith contract cost of
P2.500 million, did not meet the condition under Section 50. (a) of the IRR of
R.A. 9184, that procurement of items can be obtained only from the
proprietary source.

We recommended that the Direct Contracting mode of procurement be adopted

only when the procurement of items can be obtained from proprietary source.

16. Variation Orders (VO) for six TIEZA infrastructure projects totaling P3.247
million were processed beyond the timeframe of 30 calendar days, ranging
from 192 to 334 days as at year-end, contrary to the provisions of Annex E
of the Implementing Rules and Regulations (IRR) of Republic Act (R.A.) No.
9184, and were made the reason for the suspension of projects. Some
projects were nearing completion when suspended, and the unreasonable
long delay in completion may lead to non-acceptance by the project
proponent in case some of the completed components of the project have
already been destroyed or damaged at no fault of the contractor.

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 We recommended and Management agreed that the processing up to the
approval of variation orders within a period of 30 calendar days be strictly
followed in accordance with the provisions of Annex E of the IRR of R.A. 9184.

17. Awarding of contract for the Conceptualization of Name and Logo of the
PTA Wakeboarding Site in Clark, Pampanga amounting to P784,000.00was
made through direct contracting mode of procurement, in violation of
Section 50 of the Revised IRR of RA 9184, and the payment to the
contractor of P617,400 was considered unnecessary as there has been no
wakeboarding project since the contract was executed.

We recommended that Management strictly follow competitive bidding in all its

procurement and refrain from procuring based on non-existing projects.

In view of the fact that the Project was irregularly procured and non-existing as of
today, we will issue Notice of Disallowance.

18. TIEZA paid additional compensation in the form of monthly allowance and
honorarium directly to the lawyers of the Office of the Solicitor General, in
violation of COA Circular No. 76-25 B.
. 
We recommended that since the memorandum of agreement has been entered
into by and between TIEZA and the OSG, all payments should have been
remitted to the OSG and not directly to the individual lawyers listed in the MOA in
compliance with COA Circular 76-25 B.

19. Copies of contracts executed by TIEZA and their supporting documents

were not furnished to COA within five working days, contrary to COA
Circular No. 2009-001.

We recommended and Management agreed to comply strictly with COA

regulations on the timely submission of copies of government contracts and
supporting documents.

20. Audit disallowances amounting to P3.73 million remained outstanding for

more than five to 18 years, which could be attributed to the non-
implementation of remedies an agency head is directed to resort to.

We recommended that Management enforce immediate settlement of all long

overdue disallowances especially those who are still with the Authority.

Status of Implementation of Prior Year’s Audit Recommendations

Of the 59 audit recommendations embodied in the previous year’s Annual Audit

Report, 25 were implemented, 23 were partially implemented and 11 were not implemented.
Details are presented in Part II B of the Report.

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COA-TIEZA Audit Group/Teams

The TIEZA Main Office, six (6) Branches/Entities and thirteen (13) Field Operating
Units/Travel Tax Units are audited by TIEZA Audit Group E headed by Ms. Gloria H. Cruz,
Supervising Auditor and by the following audit teams:

Audit Team Name/Position Designation

TIEZA Main Office Rosalie D. Sarmiento Audit Team Leader

Club Intramuros Golf Course
(CIGC)
Balicasag Island Dive Resort
(BIDR)
Banaue Hotel and Youth
Hostel (BHYH)
Zamboanga Golf Course and
Beach Park (ZGCBP)
HilagaPaskuhan Village
Gardens of Malasag
Mountain Resort (GMMR)
State Auditor IV
Myrna T. Petalio Audit Team Leader
State Auditor IV
Marcelita Sarmiento Audit Team Leader
State Auditor V
Jolly D. Ogtalon Audit Team Leader
State Auditor III
Arlene Marcos Audit Team Leader
State Auditor IV
Florita B.Dalida Audit Team Leader
State Auditor IV
Fe T. Bangga Audit Team Leader
State Auditor IV

The audit of BIDR, BHYH, ZGCBP, Hilaga and GMMR was under the supervision of
the Regional Director of COA Regional Offices concerned. As of date of consolidation, the
audit reports for CY 2011 on the BIDR and BHYH were not received.

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