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The flags are scarlet (1)

"Who are these millennials who dared look into Pharmally’s financial statements?"

Meet Ken Abante, Jahleel-an Burao, and John Michael Lava. They are 29, 34, and 28 years old, doing their work from the provinces of Camarines Sur, Iloilo, and Quezon, respectively. They know each other because they were, in different years, among the Ten Outstanding Students of the Philippines. Now they are all volunteers for Citizens’ Budget Tracker – a community of professionals lending their technical expertise to efforts to look into government procurement during the pandemic.

It started last year when Abante, who had gone home to his hometown for the lockdown, witnessed healthcare workers – including many of his family members and relatives –having little to no access to personal protective equipment. Why couldn’t they get the most basic protection they deserved, he asked, when there was money supposedly allotted by the government for this purpose?

He took a step back and pondered the bigger picture. He began with a basic spreadsheet, he says. “It was just on Google Sheets, and we used publicly available data.”

Eventually he started calling on friends and volunteers. “You needed people to visualize and cross-check the balances,” he says. Burao, Lava, and other accountants, auditors, data scientists, lawyers and other professionals heeded his call. “There were many who wanted to help in this open data and accountability effort.”

Lava honed his experience working for a big auditing firm. Burao worked in management consulting, specializing in risk management and advisory services, and then moved on briefly to the academe and in microfinance banking. Now she is in the start-up space.

“This is probably why we had the courage to write this report—because we don’t have any interests at all,” Burao says. “We can’t be accused of promoting our management services. We are just plain citizens who have no stake except our concern for our democratic institutions that we will inherit. We also have a practical stake in terms of our taxes. This is why we got involved.”

According to Lava, they analyzed Pharmally Pharmaceutical Corporation’s finances through documents available through the Securities and Exchange Commission. It was a straightforward analysis. They ensured that their wording would be as objective as possible. “This is fact-based, this is what we saw from reading the report. We did not infer or do an assumption – the financial statements can stand on their own. What we recommended was for the company to release some documents to support or refute our observations. That is the beauty of audit,” he says.

But what does their analysis of the financial statements of Pharmally – that controversial company which cornered billions of pesos worth of taxpayers’ money in pandemic-related deals, and that company which the President and his subalterns are staunchly defending – even contain in the first place?

At the very least, six things. The team noted five high-risk observations and one medium-risk observation in relation to the contracts awarded to Pharmally by the Procurement Service – Department of Budget and Management. The contracts awarded between April 2020 and June 2020, totaling P7.9 billion, were all signed by Undersecretary Lloyd Christopher Lao.

The high-risk observations are:

Potential under-declaration of input VAT related to purchases amounting to P402.2 million. This represents revenue that the government could have collected and circulated within the economy to deliver much-needed services to the people.

Insufficient contracting capacity. To see whether a company could undertake the contract to be entrusted to it, it is commonsensical for approving authorities to see whether the company is technically, financially and legally capable. This can easily be gleaned by looking at the Single Largest Completed Contract or the Net Financial Contracting Capacity.

With Pharmally, there are no contracts that could be used to evaluate the SLCC. There were no significant operations in 2019 – the year Pharmally was set up – and the 2020 statements do not have disclosures on contracts. There is also a formula for the computation of the NFCC; the team arrived at the NFCC based on available information and came up with P5.99 million (mainly current assets of P599,450 multiplied by the NFCC factor of 10)—a far cry from the staggering amount of the contracts. There are also no indications of liabilities or lines of credit.

“Capitalization was grossly insufficient to warrant the awarding of P7.9 billion worth of contracts from April 2020 to June 2020,” the report said. “The risk of default and insolvency is very high, and is quite a gamble given the volume and urgency of the items for procurement. Should the company be unable to deliver on its commitments, the government will be assuming the risk of default.”

Insufficient disclosures and details for donations that were declared as fully deductible expenses. In the 2020 income statement, Pharmally reported donations of P33.13 million, representing 78.6 percent of general and administrative expenses. The company provided no details of the donation.

Missing and incomplete material disclosures in the 2020 financial statements. The Philippine Financial Reporting Standards for Small to Medium Enterprises and the Corporation Code require companies to disclose relevant information for material line items. There was insufficient disclosure on donations, related party relationships, loans and special agreements, sales and revenues, and appropriated retained earnings. “There could be a risk of fraudulent financial reporting,” the report says.

Sources of interest expense and foreign exchange gains/ losses are not presented and disclosed in the 2020 financial statements. There was an interest expense of P1.7 million but the team could not verify the source. The company also posted unrealized foreign exchange gains amounting to P63.2 million in 2020‚—“an extremely curious case,” according to the analysts.

The medium-risk observation is that reported amounts cannot be matched in the disclosures. The team recommended that the company present the reconciliation between the subsidiary ledger and general ledger, and provide the relevant documents to prove that there is no financial statement manipulation.

The second part of my column will talk about Abante’s, Burao’s, and Lava’s thoughts on accountability, governance, and citizens’ crucial role in achieving them. 

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Topics: The flags are scarlet , Pharmally , millennials , financial statements

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