Internal Audit Department

April 25, 2012 IAD REPORT -2012-12-005 FOR : ABETO A. UY Chairman and CEO

FROM : Internal Audit Department RE : Review of Paint Line Cleaning Chemical (ALKALI Cleaner) at PSCC Cabuyao

Cc : AVE, BMY, ACY, EDD _____________________________________________________________________________ We submit the result of the review of Paint Line Cleaning Chemical (Alkali Cleaner) transaction at PSCC Cabuyao Plant. The objectives are as follows: 1. Determine why PSCC shifted to a new cleaning process 2. Check if suppliers protocol is followed during production 3. Compliance to receiving procedures of chemicals. Background: PSCC was using a Conventional System with chemical supplied by Philippine HENKEL before 2007. Another system, Dry-in-Place was introduced on February 01, 2007 in which the chemicals were supplied by Philippine Parkerizing Inc until now. Both systems were using chemicals in cleaning the surface of the metal in the pre treatment stage. Audit Findings: 1. We coordinated and interviewed personnel at the plant, but efforts remain futile as of today in the search for any documentation or memorandum indicating approval by EXCOM in the change of PSCC Cleaning line process. 2. Deviation from suppliers protocol started on March 26, 2009 based on PSCC QA/QC Department Checklist Form. We did not find any memorandum or recommendations for such deviation duly approved by EXCOM. Prepared by Reviewed by Approved by

ED Jao/ TK Yap Internal Auditors

Rafael D Salazar Senior Audit Supervisor

Getre Y Pechayco Internal Audit Head

Details of the Audit Findings A. Change in Cleaning Process 1. Mr. Nestor I. Cabreras (Former PSCC Plant Manager) letter addressed to AGBU both HENKEL and Parkerizing products underwent DIP process and manifested great improvements of the painted products compared to conventional approach in the pre treatment of PLF coils in the continuous color line (CPL) of PSCC. The letter also noted that the Philippine Parkerizing Chemicals is cheaper than Henkel.(Refer Annex A) 2. PSCC Quality Control Department conducted a cost comparison between Conventional and Dry in Place in the pre treatment stage. Both processes have the same consumption of chemical per metric ton where, cost of chemicals of Philippine Parkerizing was less expensive than Henkel. (Refer Annex B) 3. A fax message on October 9, 2007 shows that Mr. NI Cabrera instructed Ms. Evelina Diocampo Technical Services Specialist under the office of the Chairman and Ms.Juliet P Alforja PSCC Assistant QC Manager to draft a protocol for protection of PSCCs interest. (Refer Annex C)) AUDIT FINDINGS Number 1 : We did not find any documentation or memorandum indicating approval by EXCOM or Top Management the change to the new process. AUDITEES COMMENTS: Mr. Antonio C. Yee Plant Manger (OIC) a. Philippine Parkerizing has provided the comparison of the conventional versus the Dry in place process. b. Based on the comparison, three (3) activities only for Dry in Place versus five (5) activities for old conventional. c. Dry in Place - cost of operating is economical versus conventional. No waste is produce compared to old (conventional) with more sludge and chemicals for treatment are needed for waste treatment. d. Parkerizing and PSCC Protocol was established during the time of Mr. Nestor Cabrera sometimes January 24, 2008. e. Technical Reports conducted sometimes March 26, 2008 as trial run. f. Another Technical Report conducted sometimes on April 30, 2008 a trial run. g. Commercial run was initiated last July 2008 by ACY and JRA.
(See attached Audit feedback form of Mr. Antonio Yee and its attachments)

Mr. Jenny Anyayahan Production Manager a. We cannot provide the other documents but we have a history during transition of conventional to DIP process. To wit;

Initial meeting / discussion with HENKEL, Parkerizing and CHEMETAL regarding Dry in Place January 2007. January 30,31,2007 Simulation test of DIP chemicals made by Parkerizing See attached report of Parkerizing dated April 19, 2007. HENKEL Presentation of DIP Pre- Treatment Process February 7, 2007 Start of CPL line modification for DIP process February 2007 onwards Laboratory testing and evaluation of DIP chemicals from three (3) suppliers March 2007 DIP chemicals from three supplier for trial run arrived at PSCC but trial run was not materialized due to PMT and water requirement July 2007 Procurement of Boiler and 8 gallons DI water equipment September 2007 Boiler and 8 gallons DI water equipment installed December 2007 Trial run of HENKEL DIP chemicals January 24, 2008 Trial run of Parkerizing DIP chemicals

B. During that time based from what we have gathered from our paint supplier we are the only one Painting company that still using conventional process in CPL pre treatment. C. We are far behind from our competitor since they are already using Dry in Place treatment process. D. Before we start the trial run Henkel and Parkerizing there were several study and seminars conducted by the two suppliers. See attached seminars reading materials, however we cannot provide the other documents since the one who safe keep or made the documents was already resigined from the company. (Ms. Juliet Alforia PSCC QC Manager). (See attached Audit Feedback form of Mr. Jenny Anyayahan and its attachment) AUDIT NOTE: Internal Audit Department is after the report with recommendation prepared by the plant, duly approved by the Top Management. This report is lacking. B. Compliance to Suppliers Protocol in the Use of the Chemical Cleaner 1. Starting March 26, 2009 the ALKALI (Fine Cleaner) concentration was set at below standard against agreed technical protocol. Refer attached samples of Line Clearance Checklist Form(Refer Annex D)) 2. Subsequent random sampling of Line Clearance testing by QA/QC of actual production run was conducted. Out of forty-eight (48) days of line clearance testing on free ALKALI, twenty (20) days of which were below standard per protocol.(Period Covered August 26, 2008 to May 27, 2011 Refer Annex E) 3. Moreover, Philippine Parkerizing presented summary of their technical evaluation regarding PSCC use of Alkali (Fine Cleaner) from year 2008 to 2011. Based on the summary of Parkerizing, there are applications of Alkali deviating from protocol.
(Refer Summary Parameters and performances of Free Alkali- (Fine Cleaner D 5410)

AUDIT FINDINGS Number 2: PSCC deviated from protocols and the supplier has explicit knowledge of the said deviation. However, PSCC failed to obtain new or amended protocols to ensure proper performance and safety on the use of the supplied chemicals. AUDITEES COMMENTS: No comment was obtained from Ms. Evelina Diocampo, Quality Control Manager Quality Control, as she already resigned from PSCC Mr. Jenny Anyayahan Production Manager At initial commercial run of Parkerizing Chemicals using Fine Cleaner D 5410 for stage #1 the Free Alkali concentration per protocol was 20 26 points, (see attached protocol) however as we go along with the commercial run a strong offensive smell coming from the stage 1 was complained by our operators. This finding was likewise complained to Parkerizing and the supplier revised the stage 1 concentration .(Refer Annex F))

C. Compliance to Materials Receiving 1. Base on the samples examined, results were generally in order. (Refer Annex G) AUDIT RECOMMENDATIONS: 1. All changes in production process, parameters, and materials usage (e.g. concentration) must be supported by extensive study and testing and subsequently approved by EXCOM. 2. Technical protocols from supplier must be properly evaluated by the plant, result of which is reported to Top Management for further comments or deliberations and approval.

Prepare by

Reviewed by

Approved by

ED Jao / TK Yap Internal Auditors

Rafael D. Salazar Senior Audit Supervisor

Getre Y. Pechayco Internal Audit Head