A.– The background, policy, concept and suggested implementation strategy of the so-called “COA Non-resident Audit Approach” is explained in full below:



The so-called “non-residency of auditing units”, as a COA policy, is not clear to many even among some senior COA officials. This is perceptible in the varied ‘name tags’ attached to it, including “withdrawal of auditing units”, and “non-resident auditing units”. Appellations such as these mislead the mind into assuming that the essence of the policy simply involves the “withdrawal” of the auditing units from the auditee agency, but as will be explained later, “withdrawal” is merely the initial step in the policy, followed by the dissolution of the auditing units as audit organizations, and the emergence of impermanent audit teams dispatched on engagement basis. Hence in order to maintain a neutral and unbiased mental frame, it is perhaps useful to refer to the COA policy simply as the “non-resident audit policy”, thereby stressing the locus of the ‘process of auditing’ and not the physical location of the audit unit.
It is, therefore, the objective of this presentation to explain the policy clearly and comprehensively, at least from my perspective, for admittedly certain details of this paper do not bear the imprimatur of the COA Commission Proper, and for which I alone bear full responsibility.

Historical Background

For a better appreciation of the subject, let us first peek into the past, then maybe venture a bit into the future, before finally concentrating on the present. Let us arbitrarily mark the evolutionary time frame of the non-resident audit policy into the Tantuico, the Guingona, and the Domingo Periods.

1. Tantuico Period (1981-1986). The non-resident audit approach first emerged as a concept in 1981 after the promulgation of the Auditing Code of the Philippines (P.D. No. 1445). Its wellspring is the “Fiscal Responsibility Policy” (Sec. 2, id.) which declares that it is the responsibility of the head of every government agency to take care that the resources of government are managed, expended, or utilized according to law and regulations, and safeguarded against loss or wastage through illegal or improper disposition.
Until 1981 when it was partially lifted, “pre-audit” (which is the examination of financial transactions before consummation) has been the traditional audit system practiced by the COA since its establishment as the Office of the Auditor for the Philippine Island in 1899. Since “pre-audit” has become antithetical to the new “fiscal responsibility” concept, COA passed Resolution No. 82-11 declaring it to be the policy of the Commission that: (a) pre-audit of disbursement is lifted whenever it is found that the agency concerned has sound internal control and accounting systems; and (b) its auditing functions shall henceforth be discharged through a comprehensive “post audit” of the finances and operations of government agencies. This issuance was followed by the creation, under COA Office Orders Nos. 82-6177 and 82-6286, of study committees tasked with designing implementation strategies to operationalize the policy of further lifting pre-audit, the comprehensive post-audit, and the eventual withdrawal of resident auditors. The committee outputs include: a) the Raul C. Flores Sub-Committee Report which found no legal obstacle to the further lifting of pre-audit; b) the Corporate Audit Office (CAO) Bulletin No. 4 which described its procedure in withdrawing corporate audit units, and the companion Guidelines for Non-Resident Auditing Units; and c) the Costibolo Report, a comprehensive implementation strategy which included recommendations for public information campaigns, personnel training programs, line managers responsibilities, and problem areas for resolutions.
As an offshoot of these studies, COA Circular No. 82-195 was passed lifting further pre-audit, excepting only those expressly mandated by law. This development paved the way for the gradual implementation of the non-resident audit policy enunciated in COA Resolution No. 82-11, with the COA leading the way starting with the experimental lifting of four corporate auditing units in 1983. By the end of 1985 a total of 257 auditing units were withdrawn, including 25 by CAO, 74 by the COA-NCR, and 158 by the other COA regional offices.

2. Guingona Period (1987). With the downfall of the Marcos government, COA leadership likewise changed hands. Among the first acts of the new COA Chairman was to reinstate pre-audit on a selective basis. Thus, COA Circular No. 86-257 observed that “the earlier elimination of the pre-audit contributed to the recent discoveries of irregular, illegal, wasteful and anomalous disbursements of huge amounts of public funds”. This necessitated the recall of all personnel of the 257 withdrawn auditing units back to their former stations at the auditee agencies, as ordered in COA Memorandum No. 86-455.

3. Domingo Period (1987-Present). Shortly after his assumption, incumbent COA Chairman Eufemio C. Domingo withdrew the auditing unit at the Manila Technical Institute under Office Order No. 87-10249. Less than a year later the landmark COA Resolution No. 88-35 was passed officially declaring it to be the policy of the Commission to withdraw auditing units from residency at the business premises of the auditees. This was immediately implemented with the withdrawal of the auditing units at the Metropolitan Waterworks and Sewerage System (MWSS), National Housing Authority (NHA), and Philippine Charity Sweepstakes Office (PCSO) under COA Office Orders Nos. 88-11212 to 11214, respectively.

In an unprecedented move in 1989, Chairman Domingo totally lifted pre-audit in all government corporations and national agencies thru COA Circular No. 89-299, thereby removing practically all hindrances for an all-out implementation of the non-resident audit policy. Another bold move was the withdrawal of the auditing unit at the City of Bacolod under Office Order No. 89-12434, the first time that the policy is implemented in the local government sector.

Policy of the Future

Judging from current developments, it will take the non-resident audit policy until the year 2020 to be completely implemented. Such may sound too distant into the future, but that time span is only three decades away, and those who are not yet in their mid-thirties will have a good chance to witness the event come to pass. Parenthetically, we feel that it might take that long for the policy to be totally institutionalized, considering that resident auditing units have been around since the creation of this Commission at the turn of the twentieth century.

This scenario is encouraged by three propitious events, viz:

Firstly, there is the 1987 Constitution which vests in the COA the “exclusive authority” to define the scope of its audit, establish the techniques and methods therefor, and promulgate accounting and auditing regulations. This absolutely wipe out all lingering doubts as to the power of the COA to institute the non-resident audit policy.

Secondly, the recently approved Standardization Act (R.A. No.67) prohibits auditing personnel from receiving all forms of allowances and fringe benefits from the management of the audited agencies. Thus, auditing personnel who formerly resist reassignments because they will lose the allowances and fringe benefits granted by the audited agencies, are now more willing to be transferred to another agency. This removes one of the serious hindrances to the non-resident audit policy.

Thirdly, the present leadership in COA appears to be firmly committed to implement the non-resident audit policy.

The Policy of Non-Resident Audit

COA Resolution No. 88-35, which officially declares the policy of non-resident audit, consists of four major parts: a rationale; the policy itself; implementing preconditions; and a delegation of authority.

For its rationale, the Resolution invoked the “fiscal responsibility” concept mandated in P.D. No. 1445, as well as the 1987 Constitution which expanded COA’s audit jurisdiction, and also vested in it the exclusive authority to define the scope of its audit and methods. It criticized the present arrangement of establishing an audit unit in every government agency and assigning a resident auditor in each, as greatly restricting the capability of the Commission to maximize the deployment and utilization of its manpower resources in the face of increasing number of auditees. It then disclosed the present thrust of the Commission “to continuously improve its audit techniques and methods to complement the Government’s efforts at accelerating development”.

The policy declaration of the Resolution simply states that “the Commission Proper has resolved, as it does hereby resolve, to declare as a policy of the Commission that its auditing units shall be gradually withdrawn from residency at the auditee’s business premises”.

To implement this policy, the Resolution imposes the following preconditions: (a) the non-resident audit policy should be implemented gradually; (b) the internal control systems of the audited agencies targeted for policy implementation are first determined, after evaluation, to be sound, adequate and reliable; and (c) withdrawal of the auditing units shall start preferably with the government corporate sector.

The Resolution then delegated to the COA Chairman the authority: to set the time frame for the implementation of the policy; to choose the auditing units to be withdrawn; and to issue the audit guidelines and administrative regulations for its proper implementation.

Non-Resident Audit as a Concept

One of the easiest ways to understand a new idea is to strip it down of its non-essential components, and to focus attention on its irreducible attributes.

Thus, if we are to describe the essential characteristics of the Non-Resident Audit Concept, we shall state it in the manner shown in Table No. 1 which enumerates the seven essential attributes of the non-resident concept. Another way of understanding a new and unknown idea is to compare it with the old familiar one as exemplified in Table No. 2, which reflects the seven comparative differences between the Resident Audit and Non-Resident Audit Venues. Finally, a diagrammatic representation showing the organizational differences between the Resident and Non-Resident Audit Organizational structures is presented in Tables Nos. 3 and 4.

Suggested Implementation Strategy

Probably next to a major reorganization in terms of unsettling effects on COA personnel, would be a shift in the policy from resident audit to non-resident audit venue. Its full implementation should therefore be approached with caution, following a well-designed implementation strategy to ensure success. Such a strategy should embody, among other things, the following basic considerations:

1. Adoption of an operations manual. Although no evaluation was made of the initial policy implementation during the Tantuico period, it is evident that the absence of an audit guide posed as a major limiting factor. Many aspects of the policy are actually unknown to those who are supposed to implement it; hence it is necessary that all operating details be clearly explained in the Manual. A suggested table of contents of such an Operations Manual is shown in Table No. 5.

2. Training Program. Coming back to the implementation strategy, a second component could be a massive training program for all heads of COA auditing units. This will serve both to clarify all aspects of the policy, as well as make it more acceptable to those affected by its implementation. For this purpose, the Operations Manual for Non-Resident Audit may be used as the main training text, which should be revised as deficiencies are identified and rectified.

3. Evaluating internal control systems. One of the preconditions in the policy implementation is the evaluation of the internal control system of the targeted agency to ascertain its reliability. To perform this task, trained operating central and regional offices personnel would be in much better positions to conduct it more objectively and effectively, rather than the staff of the unit auditors concerned who will be affected by the results of the evaluation.

4. Physical preparation for policy implementation. Prior preparations should be made before actual withdrawal of auditing units. One basic item should be the physical accommodations and facilities of the personnel affected, who will form part of the Pool of Auditors at either the COA central or regional offices. Their transfer is upsetting enough for these personnel, hence they should be provided with as much office conveniences as the COA can afford, in order to buoy up their morale. This should consist of adequate office spaces, working tables and lockers for the office staff, steel cabinets for agency permanent and current files, essential equipment such as typewriters, telephone facilities, and the necessary supplies.

5. Setting up of the Pool of Auditors. The Pool of Auditors is constituted in each of the sectoral operating offices; i.e. the Corporate Audit Office, the National Government Audit Office, and the Local Government Audit Office, as well as in each of the Regional Offices. The Pool is composed of all auditing personnel, both core and non-core, of auditing units that have been withdrawn. Membership in the Audit Teams, which replace the dissolved resident auditing units, shall be taken from this Pool of Auditors.

Going to Table No. 4, which is a Prototype Non-Resident Audit Organizational Structure, the Pool of Auditors is located under the central operating and regional offices concerned. It shall be under the direction and control of a designated Supervisor, whose proposed duties are reflected in Table No. 6 entitled “Duties of Supervisor of the Pool of Auditors”.

From among the roster of Pool members, shall be chosen those who shall compose the various Audit teams which shall be assigned, on engagement basis, to audit the government agencies vacated by the withdrawn auditing units. When thus assigned to the Audit Teams, the Pool members are responsible to, and are under the direct supervision of the Team Auditor.

6. Timing of the policy implementation. The non-resident audit policy can be more successfully implemented if it is timed shortly after the submission of the annual audit report of the auditing unit to be withdrawn, which will be about the month of March.

7. Organizing the Audit Teams. Going back to Table No. 4 (Prototype of a Non-Resident Audit Organizational Structure) Audit Teams A, B, C, and D which took over the audit of Corporations AA, BB, CC, and DD were selected from among the members of the Pool of Auditors by its Supervisor.

An Audit Team is generally composed of a Team Auditor, Assistant Team Auditor, and Team Members, and its functional chart showing the different responsibilities of each level of membership is depicted in Table No. 7.

The assignment tenure of an Audit Team shall preferably commence in March of the current year and shall extend up to February of the ensuing year. Ideally, the composition of the Audit Team assigned to audit a particular agency shall change yearly by not less than 50% of its membership. And members who are dropped from an Audit Team may be reassigned to other teams, preferably those engaged to audit agencies with functions analogous to their former audit assignments.

Other Audit Details

The non-resident audit scope follows closely that of the resident audit venue, and embraces the usual financial, compliance, and performance audits as prescribed under existing COA regulations.

As to audit approach, the account approach as embodied in COA Resolution No. 88-37 shall be observed as much as possible, but the transaction approach may be resorted to especially for compliance audit whenever necessary.

The sampling technique, as officially prescribed, shall be adopted whenever necessary by the non-resident audit teams.

As regards the custodianship of paid vouchers and other transaction documents, the same shall be under the control of the COA although these may be stored at the business premises of the auditee agency.

Evaluation and Conclusion

The non-resident audit policy, as it is implemented in the audit of NHA, MWSS, and PCSO, suffered some set backs in 1989 principally because of the inadequacies of the physical facilities at the COA Central Office which is undergoing major renovation since early last year. As a result, the personnel of the withdrawn auditing units were relocated back to their respective offices at the auditee agencies, since the office space at the COA Central Office earlier assigned to them became unavailable.
Other limiting factors to the implementation of the policy in 1989 include:

1. The personnel assigned to the NHA, MWSS, and PCSO remained with their respective auditing units which were not dissolved, instead of being absorbed into the Pool of Auditors.

2. No Audit Teams were organized to replace the withdrawn auditing units, which continued to conduct their usual audit on the accounts of NHA, MWSS, and PCSO.

3. No Operations Manual for Non-Resident Audit was made available as guide.

4. There was a felt resistance from the employees affected, who feared the loss of their allowances and fringe benefits should they be removed from their assigned agencies. This was, however, prior to the approval of the Standardization Law, R.A. No. 6758.

5. The cost of audit of the auditing units continued to be borne by the auditee agencies during the entire year of 1989.
By way of conclusion, it is emphasized that the sooner the suggested strategies are operationalized, the smoother and more effective will be the implementation of the Non-Resident Audit Policy on a much wider scale in 1990 and succeeding years.