Loans to Members of GSIS

Abstract
Government Service Insurance System (GSIS) provides social security coverage for
employees in the government sector. A large part of the benefits provided by these government
institutions to their members was in the form of loans. Three credit services are provided to its
members, salary loans, insurance policy loan and mortgage loan. In 1996, a mainframe based
computer is changed to an open system platform which lowered the transaction processing time
for salary and policy loans. It is also when GSIS started coordinating with government
institutions and batch filing of loans and claims application.
The financial statement of GSIS shows that loans to members occupy twenty seven
percent of its total admitted assets. However, based on the financial position last 1999,
Commission on Audit (COA) said that the amount of 44 billion loans to members cannot be
confirmed due to the inability of GSIS to provide an updated list of individual borrowers. GSIS
records cannot provide a strong validation of its accounts. The same statement has been said for
1995 to 1998 audit certificate except for the total amount of the loans portfolio. As a policy,
GSIS charged below-market interest rates for salary loans, e.g., 5% when market loan rates were
14% for corporate and 36% for credit card loans.
The figure illustrated in the case flows with GSIS as the main source of funds which in
turn approve loans to government institution to reach the desired loan of the employees. Then,
upon salary deduction from the employees, the government institution would remit the deducted
salary to GSIS. But the problem is, the total amount remitted by the agency do not reconcile with
the breakdown of remittances by members paying their loans. The general ledger made by the

controller does not match with the subsidiary ledger provided by IT. Many other errors relating
to that error might occur. Examples are error in the breakdown of borrowers remittance to GSIS,
errors in the take-up of the remittance by computerized media as required by IT of GSIS, delays
by the submission in the submission of remittances and refusal of the borrower to pay his
deduction for the month and accommodation by the agency of the request.
The question lies on how financial statements were made without the reconciliation of
general ledger and subsidiary ledger. Estimates were not accepted accounting procedure and not
IFRS compliant. The balance of loans to members was not supported by an updated subsidiary
ledger and this what COA pointed out.
Questions for Discussions
1. What should the Board of Trustees policy as to how management should deal with COA
auditors findings or exceptions?
The Board of Trustees must have legal responsibility in formulating lending policies and
supervising their implementation. Lending policies should be clearly defined and set forth in
such a manner to provide effective supervision by the directors and senior officers. Therefore
examiners should encourage establishment and maintenance of written, up to date lending
policies which have been approved by the board of directors. A lending policy should not be a
static document, but must be reviewed periodically and revised in light of changing
circumstances surrounding the borrowing needs of the employees as well as changes that may
occur within the GSIS itself.
2. Is the audit finding relative to the balance sheet of GSIS a serious, major or minor one? Why?

The audit finding to the balance sheet of GSIS is a major and serious one. A company
with subsidiary ledger, not reconciling with the general ledger, would not be able to create
reliable financial reports for internal or external purposes. Thus, it would not be able to
determine how to allocate its resources and would be unable to know which of its segments or
product lines are profitable and which are not. Additionally, it could not manage its affairs, as it
would not have the ability to tell the status of its assets and liabilities and would be rendered
undependable in the marketplace due to its inability to consistently produce its services in a
reliable fashion. Accordingly, an audit system is crucial in preventing debilitating misstatements
in a company's records and reports.
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 of and management agree to the correction
process once they understood the correction process?
Board of Trustees must establish and maintain a loan review system that identifies,
monitors, and addresses asset quality problems in a timely manner. They should ensure the
prompt charge-off of loans, or portions of loans, deemed uncollectible. They must ensure that the
process for determining an adequate allowance level is based on comprehensive, adequately
documented, and consistently applied analysis. And in order for the corrective action to happen,
this methods must be followed: a detailed loan portfolio analysis must be performed regularly,
they must consider all loans (whether on an individual or group basis); identify loans to be
evaluated for impairment on an individual basis under FAS 114 and segment the remainder of the
portfolio into groups of loans with similar risk characteristics for evaluation and analysis under
FAS 5; consider all known relevant internal and external factors that may affect loan
collectability; methods must be applied consistently but, when appropriate, be modified for new

factors affecting collectability; consider the particular risks inherent in different kinds of lending;
consider current collateral values (less costs to sell), where applicable; require that analyses,
estimates, reviews and other all methodology functions be performed by competent and welltrained personnel; be based on current and reliable data; be well-documented, in writing, with
clear explanations of the supporting analyses and rationale; and, include a systematic and logical
method to consolidate the loss estimates and ensure that allowance for lease and loan allowaces
balance is recorded in accordance with GAAP.
Yes, they would agree. For this corrective actions would provide reliable financial
information. This would also determine what loans are deemed collectible or not. After taking
these corrective actions, COAs comment about the inability of the GSIS to provide an updated
list of borrowers would not be present anymore. They could validate the financial position of
GSIS already and that GSIS financial statements would be accurate that would enable them to
perform better.
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 allowance is a contra-asset (negative on the asset section) of the Balance Sheet and
reduces the amount in loans receivable to the amount your financial institution management
actually expects to collect. GSIS must maintain an Allowance for Loan and Lease Losses
(ALLL) adequate to absorb estimated credit losses associated with the loan and lease portfolio,
i.e., loans and leases that the institution has the intent and ability to hold for the foreseeable
future or until maturity or payoff.

For individually impaired loans, FAS 114 provides guidance on the acceptable methods
to measure impairment. Specifically, FAS 114 states that when a loan is impaired, a creditor
should measure impairment based on the present value of expected future principal and interest
cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price or the fair value of
collateral, if the loan is collateral dependent. When developing the estimate of expected future
cash flows for a loan, an institution should consider all available information reflecting past
events and current conditions, including the effect of existing environmental factors.