Questions For Discussion w/ answers

1. What should the Board of Trustees policy as to how management should deal
with COA auditors findings or exceptions
The governing and policy-making body of the GSIS is the Board of
Trustees including the President and General Manager, the members of which
are appointed by the President of the Philippines.
According to the Information on Board Committees and Their Activities as
of November 30, 2013, the Board of Trustees of the Government Service
Insurance System (GSIS) constituted an Audit Committee to assist in the
oversight of GSIS financial reporting process, internal control systems, audit
process, and compliance with applicable laws, rules, regulations and code of
ethics.
The Audit Committee shall fulfill its purpose by carrying out numerous
duties and responsibilities.
One of which is to examine the results of regular and special audits of the
COA and satisfy itself that the management's responses are adequate and that
management is taking appropriate corrective actions.

2. Is the audit finding relative to the balance sheet of GSIS a serious, major or
minor one? Why?
The audit finding is a major finding because the P44 billion is a material
amount as explained in The Materiality Principle of Generally Accepted
Accounting Principles (GAAP). Financial statement items are considered material
(large enough to matter) if they could influence the economic decisions of users.
The materiality concept is the universally accepted accounting principle that all
material matters are to be disclosed.
Another evidence for it to be considered a major audit finding is that the
GSIS were unable to provide required records. Thus, the finding qualified as one
of the criteria as stated in the website of Audit and Management Services of
James Madison University for the fundamental considerations on reporting
(major) significant matter, which is noncompliance with requirements.

3. Suppose that the Board of Trustees decided to take corrective action. What are
the processes that GSIS will likely go through? Will the Board and management
agree to the correction process once they understood the correction process?
The processes that GSIS will likely go through are enumerated as follows:
For the reconciliation of the Salary Loan General Ledger and Subsidiary Ledger
of GSIS for that agency:
o Massive posting by the internal reconciliation department (IRD)
o Regular extraction analysis

For the Loans to Members account amounting to P44 billion which was not
correctly and reliably kept in such detail necessary to keep up with the standards
of IFRS and any accepted accounting procedures:
o Review all cash transactions and all affected accounts and establish
correct balances and adjust as necessary;
o Verify/validate and establish the common reasons for non-collection of
Premiums that are supposed to be automatically deducted from the salary
of the plan-holder. Reconcile the accounts and prepare the necessary
adjustments to come up with correct balances. Likewise, analyze accounts
for clearing and adjust accordingly;
o Conduct inventory of all active plan holders and that Claims and Losses
Payable must be set up for each of the legitimate plan holders; and

For the errors in the take-up of the remittance by computerized media as

required by IT of GSIS:
o GSIS should enhance its computerization program to avoid lower
transaction processing time for salary and policy loans.
o Creation of teams to review the present capabilities and weaknesses of

the computer programs.

For the delays by the agency in submission of remittances:

o Revisit and review for revision of conflicting policies for more effective and
beneficial effect to members;
o Strictly implement the provisions of the charter specifically Section 41 (w)
of the Republic Act 8921 (otherwise known as the Government Service
Insurance Act of 1997) to impose discipline for prompt remittance;
o Vigorously pursue their billing and collection effort to avoid recurrence of
unremitted collection; and
o Reconcile/resolve the open items especially those items with open credits
upon processing of members claims for retirement, life, and other benefits
with GSIS in order to minimize post retirement adjustments in members
records.

Yes, the board and management will agree to the correction process once
they understood the correction process because if not, GSIS will not have an
audited financial statement that will enable the business to enhance their overall

operations. The audited financial statement will serve as a clean evidence that
GSIS is truly earning profits from its operations.

4. What will be the effect on the balance sheet of these corrective measures? In
particular, if some loans turn out to be non-existent at the end of the corrective
process, what will the effects on the balance sheet and actuarial soundness of
GSIS?
The effect on the balance sheet of these corrective measures:
o It helps can help companies identify and correct errors before closing
because a balance sheet account reconciliation is the comparison of the
accounts general ledger trial balance with another source, such as a sub
ledger.
o It greatly increases the GSIS ability to proactively identify and resolve
issues that could result in misstatements of its financial records and lead
to substantial write-offs. The GSIS will have a clear understanding of and
be able to explain what has been recorded within its balance sheet
accounts. It must be able to state with certainty that the amounts recorded
have been reviewed and are in fact legitimate, collectible or payable
amounts.
o Without performing reconciliations, inaccurate recording of transactions
may occur that would result in incorrect reporting and could impact
resources.

In particular, if some loans turn out to be non-existent at the end of the

corrective process, the effects on the balance sheet are as follows:
o It does not effect the company's total resources or sources of resources
o There will be substantial write-offs. Thus, avoiding overstated accounts
receivable when they decide to write off those that are deemed, in fact,
uncollectible.
Its financial statement stated a loan to members account amounting to
P44 billion, if some loans turn out to be non-existent, the amount that is left is
below what is required to maintain the actuarial soundness of the GSIS.
"Actuarial soundness" means funding and insurance sufficient to pay those
losses and their related costs, which are known or are projected by the Government

Service Insurance System (GSIS) from analysis of claims, loss experience and
risk factors.

References:
http://www.coa.gov.ph
http://www.gsis.gov.ph
http://newsinfo.inquirer.net/163299/gsis-should-give-members-benefits-despite-employersdeficienciescoa
http://newsinfo.inquirer.net/341909/gsis-has-p11b-in-unreconciled-accounts-coa
http://strategiccfo.com/wikicfo/account-reconciliation/
https://www.ucalgary.ca/finance/files/finance/fr-balance-sheet-reconciliations-instructions.pdf
https://policy.umn.edu/finance/reconciliation-proc03

CASE SYNOPSIS: LOANS TO MEMBERS OF GSIS

Government Service Insurance System (GSIS) was one of the two largest
pension funds in the Philippines proving benefits in the form of loans for
employees in the government sectors. In May 2010, the Chairman of the Board
of Trustees of GSIS received the audited financial statements of GSIS for 1999,
which included a Commission on Audits report stating that they were unable to
confirm loans to members as of December 31, 1999 amounting to P44 billion
because of inadequacy of GSIS records, which is needed to validate the said
accounts. He decided to include the Commission on Audits report as one of the
items to be discussed with his Board.
GSIS envisioned itself into becoming The Social Security Institution in
the country by delivering timely, prompt, effective and efficient service to
beneficiaries. It opened loan windows that its members can use for various
purposes. At the nucleus of the social security administration system was the
computer-based membership and claims administration. Starting in 1996, it
shifted from a mainframe based computer environment to an open system
computer platform. As a result, reports said that it lowered the transaction
processing time. Since then, it started coordinating with government institutions
and batch filling of loans and claims application.

GSIS has a systematic way of loans to members operation that may give
insights on why the records of borrowing members may become inaccurate or
delayed. It follows a standard procedure that was followed by everyone. Errors
were likely to creep in whenever a government agency submitted to GSIS a total
remittance that did not match the sum details for borrowing members. With
regards to the problem raised by the COA Auditor, GSIS enumerated possible
cause(s) of the non-update member records.
Furthermore, errors ensure that the records of the government agency
and of GSIS do not reconcile. As a result would lead to the most serious
consequence of the impossibility of preparing financial statements that was in
conformity with reporting standards for loans. Whenever the Controller did not
have the reconciling data so one had no choice but to use estimates. However,
estimates were not accepted accounting procedures and not IFRS compliant.
Even then, the balance of Loans to Members was not supported by an updated
subsidiary ledger of members and this was what COA pointed out in their
Opinion.