Electronic copy available at: http://ssrn.com/abstract=2392900

State of Compliance and Implementation of National Internal Audit Mandates by Local Government Units in the Philippines

Rufo R. MENDOZA, PhD, CPA

Abstract

Internal auditing is gaining more and more recognition as an important tool for improving organizational performance. In many countries, both public and private sectors advance internal audit as a profession, process and body of knowledge. The Philippines is one such country having put in place the policy framework mainstreaming internal audit in government operations. However, at the local level, confusion has emerged among the local government units as a result of conflicting policy pronouncements by the national government. This paper presents a fairly substantial description of the current state of internal audit practice and compliance to relevant policies among Philippine local government units. Specifically, it establishes a preliminary profile of the internal audit units within the local government units in terms of organizational placement, staff composition, linkages and key activities. The findings indicate that the local government units possess good potential for meeting local and international standards for internal auditing. But this would require addressing a range of issues they are currently faced with from compliance to rules and regulations to the need for capacity building for professional internal audit advancement.

INTRODUCTION Internal auditing is earning more and more recognition as an essential tool for improving organizational performance. Traditionally treated as a simple administrative task that is part of financial management, countries have come to realize that there is more to internal audit than simple review of documents, counting of assets, checking of account balances and reporting. Its importance has become globally recognized that international initiatives for the development of the internal audit process and practices, the body of knowledge and the profession developed. The International Organization of Supreme Audit Institutions (IOSAI), for instance, has been active in issuing auditing standards to help improve governance in both the developed and the developing countries. The Institute of Internal Auditors (IIA) has been actively advocating for internal audit as a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and in general the governance processes. IIA has made numerous contributions towards further development of internal auditing. IIA for instance developed (i) the Statement of Responsibilities of Internal Auditing issued in 1993 defining the scope of internal auditing as the “examination and evaluation of the adequacy and effectiveness of the organization‟s system of internal control and the quality of performance in carrying out assigned responsibilities”; *Rufo R. Mendoza, PhD is currently President of the Association of Government Internal Auditors (AGIA) and Lecturer at the Ateneo School of Government. This article is based on the AGIA-commissioned research, The Current State of Internal Auditing in Philippine Local Governments, prepared by the same author.

Electronic copy available at: http://ssrn.com/abstract=2392900

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and (ii) the Professional Practices Framework issued in 1999 which contains (a) a mandatory guide consisting of Code of Ethics and International Standards for the Professional Practice of Internal Auditing (ISPPIA); (b) practice advisories; and (c) development and practice aids developed or endorsed by the IIA. The development of internal auditing as profession came as a result of the first Certified Internal Auditor examination in 1974. In the OECD countries, the performance of internal auditing has been recognized as having contributed to the improvement of financial reporting and overall management among government organizations. Unbiased audit reports countercheck poor organizational performance serving as an effective mechanism for continual improvement. There is also great interest among the private sector in incorporating internal auditing in their operations. Their attention is shifting to corporate governance of which internal auditing plays an integral part from corporate management following debacles of corporate giants like Enron, WorldCom and American Tyco. Initiatives for Internal Auditing in the Philippines The Philippines is not lacking in initiatives pertaining to internal auditing. In fact, the government has formulated and put in place important policies mainstreaming internal audit in government operations. As early as 1962, the Philippines already had a law for internal auditing, the Republic Act (RA) 3456 or the Internal Auditing Act of 19621. This serves a general reference for succeeding policies and other legal instruments that pertain to government internal audit. In the recent past, the government made two important policy pronouncements which greatly affect the practice of internal auditing in the Philippine government today. These are (i) Administrative Order (AO) No. 70, issued by the President on April 14, 2003; and (ii) Budget Circular No. 2004-4, issued by the Department of Budget and Management (DBM) on March 22, 2004. AO No. 70 orders all government offices; agencies; government owned and/or controlled corporations; state universities and colleges; and local government units (LGUs) to organize an Internal Audit Service (IAS) in their respective offices. It also prescribes the conduct of audit in conformity with the ISPPIA and the strict observance of the Code of Ethics promulgated by the Association of Government Internal Auditors (AGIA)2. Budget Circular No. 2004-4, on the other hand, provides guidelines on the organization and staffing of internal auditing units (IAUs) in all government offices and agencies. The Office of the President issued Memorandum Circular No. 893 reiterating strict compliance of all government agencies to AO No. 70 and Budget Circular No. 2004-4. However, full compliance to these policies particularly at the local level seems a formidable challenge for LGUs since these are inconsistent with the Local Government Code (LGC) of 1991 which states that the accountant in a LGU “shall take charge of both the accounting and internal audit services of the LGU concerned.”

1 Amended in 1965 by virtue of RA 4177

2 AGIA is the premier organization that promotes the advancement of internal auditing in the Philippines.

3 Issued on 18 August 2005.

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THE AGIA STUDY In 2005, AGIA launched a major research study to determine the state of practice with respect to internal auditing rules and policies among LGUs. A major goal was to provide informed recommendations towards better understanding of the policy environment for government internal auditing, and eventually towards better local governance. The objectives of AGIA study were (i) to establish the profile of the IAS units in local governments; and (ii) assess the internal audit activities of the IAS units in terms of: quality of audit staff authoritative support relationship with management audit process and report value added of the IAS units

The study, which ran for six months from May to October 2005, involved a survey of all provinces and municipalities / cities in the country totaling to 191. However, only 24 cities and 15 provinces or a total of 39 LGUs responded to the mailed survey questionnaires. The sample size, therefore, represented only 20.42 percent of the total target population. Majority (64.11%) of the respondents had accountant positions: City/Provincial Accountant, 53.85 percent; Assistant City/Provincial Accountant, 5.13 percent; and Accountant IV, 5.13 percent.

A questionnaire was developed and distributed which determined the respondents‟ general profile and their state of practice with respect to national internal auditing rules. Specifically, the survey determined their (i) organizational profile pertaining to internal auditing; and (ii) the scope and quality of their internal auditing activities. The organizational profile of LGUs was determined by asking questions pertaining to the existence and placement of IAS unit within the organization, its staff composition, its linkage with AGIA and its professional development activities or its perceived capacity building needs. The scope and quality of internal auditing activities of the LGUs, on the other hand, was measured by asking the respondents to score certain aspects pertaining to the quality of their respective organizations‟ internal audit activities using a five-point scale4. Specifically, the respondents were asked to score quality aspects such as (i) the quality of internal audit staff; (ii) the level of authoritative support given to the IAS units; (iii) the degree of relationship between IAS unit and the management; (iv) the quality of the audit process; and the (v) the quality of the IAS units in terms of their value added services. The scores were then aggregated and averaged to generate the overall profile of the respondent LGUs in terms of the scope and quality of internal auditing activities. The following quality scale was then used: 1.00-1.80 = poor; 1.81-2.60 = fair; 2.61-3.40 = good; 3.41-4.2 = very good; and 4.21-5.0 = excellent. Key informant interviews were also conducted to augment the amount of information for making a more informed analysis and recommendations towards further internal audit development among LGUs. Descriptive statistics and frequencies were calculated for each of the items in the questionnaire. The responses of the two groups of respondents

4 Scale of 1 to 5 with 5 representing the highest score.

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from the city and provincial governments were tested at one percent (.01) significance level to find out if there is significant difference on their ratings. KEY FINDINGS Existence of IAS units. The study found that all respondents have existing IAS units in place. This is in conformance to the LGC. The local government officials were also found to be already aware of the new and expanded functions of IAS. Yet, they focus on ensuring compliance to documentary requirements for disbursements. Organizational placement of IAS within LGUs. As shown in Table 1, the IAS unit in most LGUs is under the office of the local accountant consistent with the provisions of the LGC. But the proponent views that the organizational placement prescribed in the LGC is flawed since an internal auditor, working under the supervision of the local accountant, cannot audit the local accountant limiting the functions of the internal auditor. In other LGUs, the internal audit service is separate from the accounting unit and no standard nomenclature exists across LGUs. They are either referred to as Internal Audit Service Office, Internal Audit Office, Internal Control Division, or Internal Control Unit.

Table 1. Organizational Placement of IAS in LGUs

CRITERIA

CITY n=22

PROVINCE n=15

TOTAL n=37

F % F % F %

Is the IAS unit in the LGU separate from the Accounting Department? Yes No

3

19

13.64 86.36

5

10

33.33 66.67

8

29

21.62 78.38

Total 22 100 15 100 37 100

In 56.76 percent of the LGUs surveyed, „Internal Audit‟ is the dominant name of the IAS, consistent with the LGC. The internal control nomenclature used by 27.02 percent of the respondents was developed when most local governments transferred the audit of disbursements to the office of the local chief executive and expanded the functions for control measures. The use of „pre-audit‟ name was derived from the transfer of pre-audit functions from the Commission on Audit (COA) to the LGUs. On the other hand, the term management and audit service office was adopted from the position title of most employees performing audit functions provided in the government‟s manual of position and qualification standards.

IAS Staff. There are basically two general position categories that make up the IAS staff in LGUs: 45.95 percent of IAS heads belong to the Management and Audit Analyst category and 32.43 percent belong to the Accountant position. Meanwhile, 21.62 percent of the respondents said that IAS heads occupy positions other than internal auditing and are only assigned temporarily to do the internal audit function. Such positions include fiscal examiner, executive assistant, local treasury operations officer, and assistant local treasurer among others.

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The reporting hierarchy is not uniform across the LGU respondents. A little more than half (51.35%) of the respondents said that the IAS head reports to the local chief executive as the immediate superior. In about a third (35.41%) of the respondent LGUs, the IAS head reports to the local accountant while in 13.51 %, the IAS head reports to the local administrator. In terms of employment tenure, 83.33 percent are regular and the rest are casual or contractual. As shown in Table 2, accountants dominate the profession. However, only 8.82 % of the total employees reported by the respondents are Certified Public Accountants (CPAs). Other employees are graduates of management courses, engineering, economics, law and other courses.

Table 2. Field of Specialization of IAS Employees

CRITERIA

CITY n=22

PROVINCE n=15

TOTAL n=37

Mean % Mean % Mean %

Fields of Specialization of IAS Employees Accounting (CPA) Accounting Engineering Law Economics Management Others

17 142 7 4 5

27 2

8.33 69.61 3.43 1.96 2.45 13.24 0.98

10 50 8 4 5

21 4

9.80 49.02 7.84 3.92 4.90 20.60 3.92

27 192 15 8

10 48 6

8.82 62.75 4.90 2.61 3.27 15.69 1.96

Total 204 100 102 100 306 100

Table 3 shows the educational profile of IAS heads. Majority of them (85.71%) are specialized in accounting. But apparently, there is low interest among the IAS heads to pursue graduate studies. Rather, it is fair to observe that the majority meet only the minimum qualifications standards required by the Civil Service Commission (CSC).

Table 3. Educational Attainment of IAS Employees

CRITERIA

CITY n=21

PROVINCE n=14

TOTAL n=35

F % F % F %

Highest Educational Attainment of IAS Head College degree Masteral units Masteral degree Doctoral degree

12 3 5 1

57.14 14.29 23.81 4.76

8 4 2 -

57.14 28.57 14.29

-

20 7 7 1

57.14 20.00 20.00 2.86

Total 21 100 14 100 35 100

Linkages with the Association of Government Internal Auditors. Only a quarter (25.71%) of the IAS heads and 11.44 % of the IAS employees are members of AGIA. This implies that: (i) LGUs have minimal utilization of AGIA services for capacity

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development. This also reflects the breadth of opportunity that AGIA can tap to increase its membership and expand the coverage of service delivery; and (ii) LGUs are short of compliance to AO No. 278 tasking all heads and staff of IAS units to cooperate and actively participate in the activities of AGIA.

Professional Development Activities / Training Needs. Table 4 shows the frequency of staff attendance to professional development activities. The table reveals a poor staff development initiative on the part of the LGUs.

Table 4. Frequency of Staff Attendance to Professional Development Activities.

CRITERIA

CITY n=21

PROVINCE n=14

TOTAL n=35

F % F % F %

Frequency of staff attendance to professional development activities

Quarterly Semi-annually Annually Longer than one year

1 - 6

14

4.76 -

28.57 66.67

1 2 5 6

7.14 14.29 35.71 42.86

2 2

11 20

5.71 5.71

31.43 57.15

Total 21 100 14 100 35 100

The respondents ranked the following topics for capacity development in the order of importance or priority: (1) International standards for the professional practice of internal auditing; (2) Risk-based audit approach; (3) Information technology audit; (4) Report writing skills; and (5) Fraud audit.

Quality of Audit Staff. Table 5 shows that the IAS staff conducting internal audit have the necessary educational qualifications; technical proficiency; and personal characteristics such as objectivity, professionalism and the will for continual improvement. Nevertheless, further capacity enhancement is still needed.

Table 5. Mean scores on the assessment of the quality of audit staff.

QUALITY OF STAFF CITY n=22

PROV n=14

TOTAL n=36

VALUE

1 Educational background of the IAS staff 3.64 3.43 3.56 VG 2 Technical proficiency of the IAS staff in the

conduct of audit 3.27 3.14 3.22 G

3 The degree of objectivity of the internal auditors in performing their work.

3.41 3.43 3.42 VG

4 The extent of professional care exerted by the auditors in the conduct of the audit.

3.45 3.43 3.44 VG

5 The effort to enhance the knowledge, skills, and other competencies of the internal auditors through continuing professional development.

3.23 3.21 3.22 G

Overall mean score

3.40

3.33

3.37

G

Standard deviation

.769

.880

.820

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Legend: Poor (1.00–1.80) Fair (1.81–2.60) Good (2.61–3.40) Very Good (3.41–4.20) Excellent (4.21–5.0)

Authoritative Support to IAS units. The extent of support given by top management to IAS unit determines how the latter will be able to perform its role. Table 6 shows the mean scores on the authoritative support provided by the management to IAS units.

Table 6. Mean scores on the assessment of the authoritative support provided to IAS units.

AUTHORITATIVE SUPPORT

CITY n=22

PROV n=14

TOTAL n=36

VALUE

1 The extent of defining the purpose, authority, and responsibility of the internal audit activity in the form of a charter, administrative orders, memoranda or similar authoritative documents.

3.14 3.00 3.08 G

2 Provision of funds for IAS activities 2.73 2.86 2.78 G 3 Provision of equipments, supplies, and other

physical facilities to respond to IAS requirement

2.95 3.21 3.06 G

4 Deployment/complement of the necessary manpower/human resource

3.00 3.00 3.00 G

5 Access of IAS to documents and other information

3.09 3.71 3.33 G

Overall mean score

2.98

3.16

3.05

G

Standard deviation

.778

.862

.814

Legend: Poor (1.00-1.80) Fair (1.81-2.60) Good (2.61-3.40) Very Good (3.41-4.20) Excellent (4.21-5.0)

The relatively low scores on four factors are quite noticeable: (a) extent of defining the purpose, authority, and responsibility of the internal audit activity; (b) provision of funds for IAS activities; (c) provision of equipment, supplies and other physical facilities; and (d) deployment of the necessary manpower. It seems that all four factors are affected by the lack of funds allotted to IAS units. Relationship with Management. The recognition of internal auditor as a valued member of the management team is evident in the results shown in Table 7.

Table 7. Mean scores on the assessment of the relationship of IAS units with management.

RELATIONSHIP WITH MANAGEMENT

CITY n=22

PROV n=14

TOTAL n=36

VALUE

1

Internal auditing as a valued member of the management team.

3.50

3.86

3.64

VG 2

Organizational placement of the internal audit functions to ensure unhampered activity and achieve their internal auditing objectives.

3.41

3.29

3.36

G

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RELATIONSHIP WITH MANAGEMENT

CITY n=22

PROV n=14

TOTAL n=36

VALUE

3 The manner by which impairments to independence and objectivity is addressed.

3.32

3.14

3.25

G

4

The extent by which the IAS communicates the results of audit to top management or similar governing bodies.

3.27

3.07

3.19

G 5

The extent of the top management utilization of audit findings and recommendations

3.14

3.21

3.17

G

Overall mean score

3.33

3.31

3.32

G

Standard deviation

.768

.877

.810

Legend: Poor (1.00-1.80) Fair (1.81-2.60) Good (2.61-3.40) Very Good (3.41-4.20) Excellent (4.21-5.0)

Internal auditors work well with top management and with other members of the organization. But definitely, the functional relationship between the IAS unit and the management will need to be improved. Internal audit independence was rated “good” among the LGUs surveyed. Interviews with some respondents, however, reveal that in Philippine local governments, culture plays a lot in the selection of people to occupy certain positions thereby affecting the objectivity and independence of internal audit work. Audit process and reporting. All the variables in the audit process and report category are rated “good” by the respondents (Table 8). Nevertheless, the LGUs should continuously improve in terms of prescribed audit processes and reporting procedures.

Table 8. Mean scores on the assessment of the audit process and report.

AUDIT PROCESS AND REPORT CITY n=22

PROV n=14

TOTAL N=36

VALUE

1

Duration of the audit

3.23

3.07

3.17

G

2

Timeliness of the audit reports

3.23

3.07

3.17

G

3

Clarity of audit reports

3.14

3.14

3.14

G

4

Accuracy of audit findings

3.32

3.21

3.28

G

5

Internal audit follow–up on corrective actions

3.27

3.07

3.19

G

Overall mean score

3.24

3.11

3.19

G

Standard deviation

.716

.772

.738

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Legend: Poor (1.00–1.80) Fair (1.81–2.60) Good (2.61–3.40) Very Good (3.41–4.20) Excellent (4.21–5.0)

In terms of audit reporting, the writing tasks are usually left to more senior IAS staff while the rank and file employees review transactions and gather data. Value added of IAS units. Table 9 shows the mean scores on the assessment of the value added of IAS units. It shows that in terms of value added, IAS units are generally “good” with a mean score of 3.33.

Table 9. Mean scores on the assessment of the value added of IAS units.

VALUE ADDED CITY n=22

PROV N=14

TOTAL N=36

VALUE

1 Usefulness of the audit in improving business processes.

3.41 3.29 3.36 G

2 Assistance to management in risk assessment. 3.27 3.29 3.28 G 3 Partnership with management on control

issues. 3.27 3.43 3.33 G

4 Degree of impact on organizational governance.

3.36 3.21 3.31 G

5 Promotes a customer orientation by providing quality work.

3.36 3.43 3.39 G

Overall mean score

3.34

3.33

3.33

G

Standard deviation .733 .775 .747 Legend: Poor (1.00–1.80) Fair (1.81–2.60) Good (2.61–3.40) Very Good (3.41–4.20) Excellent (4.21–5.0)

The table also shows that the respondents perceive internal auditing as an important tool in improving organizational processes and systems by identifying process defects and system weaknesses. Interviews with key informants in selected LGUs reveal that local internal auditors have yet to explore risk assessment, and partnership with management on internal control issues as important areas for further improvement. Table 10 shows the summary of LGU scores pertaining to internal audit quality. Generally, the there is positive perception on the state of internal auditing in local government both in terms of human resource component and audit performance. However, it is quite evident that there are many aspects where capacities need further development, like those pertaining to the five quality indicators used in the study.

Table 10. Mean scores on the assessment of the internal audit activity.

INTERNAL AUDIT QUALITY

CITY

PROV

TOTAL

VALUE

Quality of audit staff 3.41 3.29 3.36 G Authoritative support 3.27 3.29 3.28 G Relationship with management 3.27 3.43 3.33 G Audit process and report 3.36 3.21 3.31 G Value added of IAS unit 3.36 3.43 3.39 G

Overall mean score 3.34 3.33 3.33 G Legend: Poor (1.00-1.80) Fair (1.81-2.60) Good (2.61-3.40) Very Good (3.41-4.20) Excellent (4.21–5.0)

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Test of Hypothesis

The responses of the two groups of respondents from the city and provincial governments were tested at one percent (.01) significance level to find out if there is significant difference on their ratings. Results show that the significance probability of each of the five variables is greater than 1% which means that the difference in the responses of the two groups of respondents is not significant. In other words, their responses exhibit homogeneity or similarity in all indicators. This implies that respondents from both the cities and provinces have quite similar perceptions about the internal audit activities in the local government. CONCLUSIONS AND RECOMMENDATIONS Conclusions Generalizations based on the data at hand is limited considering the sampling method and the sample size. But considering the dearth of information as regards to the internal auditing practice of LGUs in the Philippines, the authors believes that the findings of this study can help in advancing internal audit among Philippine LGUs towards good local governance.

There is adequate awareness among the surveyed LGU officials on the various rules and regulations pertaining to the establishment of IAS unit in LGUs. However, full compliance to such rules and regulations remains a formidable challenge to the LGUs. In fact, the Budget Circular No. 2004-4 and other government policies have been non-complied with by the LGUs in several aspects. The problem stems from failures in the macro policy environment. Specifically, the current scenario wherein the LGC of 1991 specifically Article IV, Section 474 and major government policy pronouncements such as the AO No. 70 and Budget Circular No. 2004-4 contradict each other leaves the LGUs quite baffled. Hence, LGUs differs as regards to the placement of IAS units in their organizational structure. There were IAS units incorporated in the accounting department while there were others established as separate divisions under different offices like the office of the local chief executive or that of the local executive secretary. With this, the LGUs are then confused on the operational scope of their respective IAS units.

There is an adequate mix of personnel within the IAS units of surveyed LGUs considering the educational and technical qualifications of the IAS employees. With this, the LGUs possess good potential for effectively implementing nationally accepted internal audit functions. One significant stride towards realizing such potential is the awareness among the survey respondents of the capacity development needs of their respective personnel. However, many of the respondent LGUs could not send their IAS personnel to capacity development programs more frequent than once a year. In fact, in most cases, personnel are sent to capacity development programs only about once every two years. The lack of funds is said to be the main reason. However, lack of funds may just be a portion of the problem. The lack of interest or support from the LGU officials seems to be the more daunting problem. The study shows that the support provided by management to the IAS unit in LGUs is very minimal, deviant to the

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provisions of AO No. 278. Without support from the LGU officials, initiatives to improve the internal audit performance may end up at the lowest of priorities causing transparency of local fiscal administration to suffer.

In implementing technical and professional development activities, the LGUs can tap professional bodies like the AGIA as a valuable ally as embedded in AO No. 70. Independent professional bodies can deliver training programs and other technical services for technical skills improvement and professional advancement in a wide range of concerns in internal auditing, including system development and organizational design learning from collective experiences. This is especially important considering that the IAS staffs of the surveyed LGUs are in real need of skill enhancement especially in the unexplored areas of internal auditing. Currently, the participation of IAS heads and staff in the activities of AGIA is very minimal contrary to the provisions of AO No. 278. Thus, LGUs could not capitalize on the full potentials of their linkage with AGIA. From another perspective, this poses a great challenge for AGIA to intensify its campaign for improving internal auditing practice in the government and reach more LGUs for capacity development.

Despite the inadequacies among the surveyed IAS units, there is genuine appreciation on the value added by IAS units towards good local governance especially in areas of risk management, control, and governance in general.

Recommendations The observed difficulty of the LGUs to fully perform internal audit functions poses a challenge to both the LGUs and the national government to exert greater effort in pushing for a more developed and standardized audit system at the local level. Meeting this challenge requires a more holistic approach. In terms of the policy environment for internal auditing in the LGUs, the Philippines is not lacking in initiatives. However, problems arise from the inconsistencies of the current national policy framework for internal auditing. Hence, any reform in the existing internal auditing system at the local level should start from the macro policy environment. This should involve a review of existing national government pronouncements and issuances pertaining to internal auditing, ensuring that policies are not contradicting each other. The amendment of the LGC, particularly Article IV, Section 474 to separate internal audit from accounting functions can be the start. The creation of an IAS unit as a mandatory department in LGUs should also be stipulated in the proposed revision of the LGC. Once the policy inconsistencies are resolved, attention can be focused to strict implementation of such policies. For instance, the IIA has issued an internationally recognized definition of the scope of internal auditing. But IAS units in LGUs currently focus only on the review of documentary requirements for disbursement which is more of a pre-audit activity rather than internal audit. As a way to resolve this issue, the authors recommend the strict enforcement by government of Budget Circular No. 2004-4, through the DBM. A transparent government will always require an effectively-functioning internal audit in the first place. To support the implementation of a national standard for internal auditing, there has to be an effective system for monitoring and evaluating (M&E) the compliance and

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performance of LGUs in terms of the mandates. At the national level, monitoring compliance by the Office of the President to its recently issued Memorandum Circular No. 89, dated August 18, 2005 and benchmarking of LGUs that have established IAS units separate from the accounting department is considered a priority. AGIA in this context recommends establishing a rating system to distinguish LGUs that have (i) not complied entirely with any of the above provisions; (ii) complied partially or minimally; (iii) complied partially but significantly; (iv) fully complied. Further, the Presidential Anti-Graft Commission (PAGC) under the Office of the President, can initiate the development of a plan that will ensure the periodic adoption of the ISPPIA taking into consideration areas of risk management and assessment, control, and governance.

At the local level, this can be complemented by enacting local ordinances that shows in adequate detail the following:

a. Internal audit functions as stipulated in Section 4 of Budget Circular No. 2004-4; b. Internal audit activities as stipulated in Section 1 of AO No. 278; c. Functions of routine operating character that are excluded from internal audit as

shown in Section 2 of AO No. 278; d. Organization and staffing based on Section 4 of Budget Circular No. 2004-4; and e. Expression of support from management as stipulated in Section 3 of AO 278.

The M&E can be designed such that the necessary performance parameters are measured and that information collected are fed back to relevant components of the system. Implementation of such M&E system can be done in close collaboration with the Department of Interior and Local Government (DILG) or at the least be incorporated in the Local Financial Performance Management System (LFPMS) being prioritized by both the Department of Finance (DOF) and the DILG. The status of establishment of IAS unit can also be included as an indicator in the Local Government Performance Measurement System (LGPMS).

One regulatory measure that can be adopted is encouraging attendance of internal auditors to capacity building interventions offered by AGIA emanating from the Office of the President in the form of a memorandum circular. Another is to include AGIA activities in the list of exemptions from expenses subject to cost cutting. As an advocacy measure, AGIA should provide the LGUs and the public as well with adequate information on its projects and activities, especially those related to audit standards, practices, research undertakings, and to the profession as a whole. It can also serve as a repository of technical resources and useful tools for government internal auditing. Specifically, it has to engage in the development and dissemination of materials for training; technology transfer and information dissemination; quality assessment; and documentation of exemplary practices and emerging approaches. Capacity building must be given due priority by the LGUs. If reforms are to take place, new auditing tasks need to be introduced requiring an upgraded set of skills and competencies. The New Government Accounting System and its electronic component as well as the New Government Procurement System are internal audit areas where capacity should be further enhanced. Also, both regulatory and advocacy measures should be undertaken to encourage compliance in consonance with certain provisions of AO No. 278 and AO No. 70.

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References: Administrative Order No. 70. April 14, 2003. Strengthening of the Internal Control Systems of

Government Offices, Agencies, Government Owned and/or Controlled Corporations, including Government Financial Institutions, State Universities and Colleges and Local Government Units. Malacañan. Manila, Philippines.

Administrative Order No. 278. April 28, 1992. Directing the Strengthening of the Internal Control

Systems of Government Offices, Agencies, Government Owned and/or Controlled Corporations, including Government Financial Institutions, and Local Government Units, in their Operations. Malacañan. Manila, Philippines.

Budget Circular No. 2004-4. March 22, 2004. Guidelines on the Organization and Staffing of

Internal Auditing Units (IAUs). Department of Budget and Management. Manila, Philippines.

Memorandum Circular No. 89. August 18, 2005. Reiterating Compliance with AO 70, s. 2003

“Strengthening of the Internal Control Systems of Government Offices, Agencies, Government Owned and/or Controlled Corporations, including Government Financial Institutions, State Universities and Colleges and Local Government Units” and it‟s Implementing Guidelines under DBM Budget Circular No. 2004-4. Malacañan. Manila, Philippines.

Mendoza, Rufo R. Current State of Internal Auditing in Philippine Local Governments. A

Research Report. Association of Government Internal Auditors (AGIA). December 2005 Manila, Philippines.

Republic Act No. 7160. October 10, 1991. Local Government Code of 1991. Philippines. The Professional Practices Framework. January 2004. The Institute of Internal Auditors.

Florida, USA.