Guidelines in the Computation of Cost of Audit Services Rendered to Water Districts (WD) and the Grant of Reduction of Cost of Audit Services

February 5, 2018

COA MEMORANDUM NO. 014-17

 

1. Rationale

This Memorandum is issued to:

a) address the clamor for a customized billing system for WDs, which considers the WDs' financial circumstances, such as, but not limited to the size, years of operation, presence of government subsidy, level of generated income and their financial health as government subsidized entities;

b) eliminate resentment over perceived unreasonable audit fees and consequent refusal to be audited; and

c) mitigate or prevent further increase in the unpaid audit fee assessments of COA to WDs. HTcADC

2. Definition/Description of Terms

2.1 Personnel Services (PS) refer to salaries and mandatory allowances/fringe benefits of personnel involved in the audit of the WDs as expressly authorized by law and/or other administrative issuances, including statutory contributions related thereto.

2.2 Maintenance and Other Operating Expenses (MOOE) refer to travelling expenses, communication expenses, freight and delivery charges, supplies and materials, water, illumination and power, authorized discretionary, and representation expenses and out-of-pocket expenses.

2.3 Out-of-Pocket Expenses refer to all other expenses incurred directly related to or connected with the audit of water districts.

2.4 Corporate Operating Budget (COB) refers to the detailed projection of all estimated income and expenses of the Government Owned or Controlled Corporation (GOCC) based on forecasted revenue in a given year.

2.5 Category A, B, C, or D classification of WDs is based on the Revised Local Water District Manual on Categorization and Other Related Matters (LWD-Macro) issued by the Department of Budget and Management (DBM) CY 2011 which considers the number of active service connections and points rating based on Gross Revenues, Total Assets, Net Income before Interest and Depreciation, as well as Staff Productivity Index, to distinguish between each classification. In general, category A refers to Large WDs with 75-100 points rating earned; category B refers to Big WDs with 50-74 points rating earned; category C refers to Medium WDs with 25-49 points rating earned; and category D refers to Small WDs with 1-24 points rating earned.

3. Guidelines

3.1 The cost of regular audit services by the COA shall be based on the actual cost of audit work rendered in the WDs based on the COA computation of man-hours and MOOE used.

3.2 The computation of the PS component of the audit cost for WDs under categories A, and B, shall follow the computation being applied to regular GOCCs pursuant to existing COA guidelines issued by the Planning Finance and Management Sector (PFMS), COA, for the assessment of cost of audit services to regular GOCCs.

3.3 To give consideration to WDs under categories C and D particularly those that are (a) within the 1st three years of initial operations; and (b) experiencing financial distress/losing/not yet financially viable, the audit cost may temporarily exclude the PS component until the WD becomes financially established/stable as measured by the current financial statements showing profitability and liquidity and proving the financial capability of the WD to pay.

3.4 In order to be billed with both PS and MOOE, WDs under categories C and D must meet the liquidity ratio and anyone of the profitability ratios as illustrated in Annex A hereof, based on the current year's audited financial statements with comparative analysis of the said ratios in the immediately preceding two years.

3.5 The audit cost of MOOE shall include:

a. Travel expenses of the members of the audit team as provided under Executive Order Nos. 248 dated May 29, 1995 and 298 dated March 23, 2004 (and any amendments thereto);

b. Office supplies to be used by the audit team for the duration of the audit shall be as follows (subject to 1% annual increase on account of inflation):

 

WD Category	Audit Duration (No. of audit days)	Amount (P)
A	91-150	25,000
B	70-90	20,000
C	46-69	15,000
D	15-45	10,000

 

c. Actual communication expenses such as telephone-landline, telephone-mobile, internet expenses, freight and delivery charges;

d. Out-of-pocket expenses.

3.6 The cost of travel expenses to be charged by each team shall depend on the number of days and number of team members assigned for the audit of a water district as provided in the Audit Plan.

3.7 Water Districts that are classified as A and B shall be charged with Administration Cost or Supervision cost of 10% on PS and MOOE, while those categorized as C and D which are in its first three years of operations or financially distressed shall, however, be charged Supervision cost at 5% of MOOE, until such time that they become financially stable as measured by the current financial statements which reflect the WD's profitability and liquidity based on the parameters/computation mentioned in 3.4 of this Memorandum. aScITE

4. Responsibilities

4.1 The detailed assessment of the audit cost shall be prepared by the Audit Team Leader (ATL), reviewed by the Supervising Auditor (SA), and approved by the Regional Director (RD). The assessment for WDs under categories C and D shall be supported with the financial analysis prepared by the concerned ATL based on the audited financial statements of the WD concerned to evaluate the WD's profitability and liquidity per Annex A hereof and a recommendation to grant reduction in the cost of audit.

4.2 Based on the approved assessment, if found in order, the Accounting Office of the Regional Office, shall prepare the Billing Statement consisting of the PS and MOOE for WDs under categories A and B. The Billing Statement for WDs under categories C and D shall include only the MOOE upon the recommendation of the ATL/SA as approved by the RD when audit discloses them to be not yet financially viable or in financial distress.

4.3 The RD shall transmit the Billing Statement to the WD thru the SA within 15 days after the transmittal of the AAR to the WD Management. A copy of the PS Billing Assessment shall be furnished the Bureau of the Treasury (BTr) and the Department of Budget and Management (DBM).

4.4 The SA shall cause the remittance of the PS cost of audit by the WD to the BTr, and the MOOE cost of audit to the concerned COA Regional Office.

5. Amendments and Repeals

All COA Circulars, Memoranda and other issuances inconsistent herewith are hereby revoked or amended accordingly.

6. Effectivity

This Memorandum shall take effect fifteen (15) days after publication in the Official Gazette or newspaper of general circulation.

(SGD.) MICHAEL G. AGUINALDOChairperson

ANNEX A

Financial Indicators

The financial capability of WDs may be measured through financial ratios reflective of the profitability and liquidity computed from the WD's current financial statements.

1. Financial ratios that measure profitability, where a higher margin percentage is a favorable profit indicator:

a. Net Profit Margin shows how much profit is derived from every peso of total sales. It indicates how well the WD has managed its operating expenses. It also indicates whether the WD is generating enough sales volume to cover minimum fixed costs and still leave an acceptable profit margin.

 

Formula:	Net Profit
	Total Sales

 

A net profit margin of 20% and above qualifies a WD to be assessed both the PS and MOOE components of the Cost of Audit.

b. Return on Assets evaluates how effectively the WD employs its assets to generate a return. It also measures efficiency.

 

Formula:	Net Profit
	Total Assets

 

Return on Assets of 20% and above qualifies a WD to be billed both the PS and MOOE components of the Cost of Audit.

c. Return on Net Worth/Return on Investment (ROI) determines the rate of return on the invested capital. It is used to compare investment in the agency against other investment opportunities. There should be a direct relationship between the ROI and risk (the greater risk, the higher the return). As a rule of thumb, investment professionals favor companies with at least 5% ROI.

 

Formula:	Net Profit
	Net Worth

 

An ROI of 5% and above qualifies a WD to be assessed both PS and MOOE components of the Cost of Audit.

2. To measure liquidity, Quick Ratio gauges the ability of a WD to pay for its current liabilities by using its most liquid current assets. HEITAD

Formula:

 

(Cash & Cash Equivalents+Short-term

Investments+Accounts Receivable)

Total Current Liabilities

 

A 1:1 liquidity/quick ratio or better qualifies a WD to be assesses both the PS and MOOE.

Published in the Official Gazette on February 5, 2018.