In its 2002 audit report, the COA warned that GSIS could face a financial disaster similar to the collapse of Enron which also failed to book their actuarial deficit.
COA said that since 1990, GSIS’ actual reserve set up was lower than the requirement but the actuarial deficit was never recognized in the book of accounts.
According to COA, this practice was a deviation from the generally-accepted accounting practice in the insurance industry which required that the actuarial deficit be booked by debiting losses account and crediting the deferred credit account.
COA explained that the actuarial reserves are established in order to provide funds for future liabilities that might arise. "In the case of GSIS which is a social security institution, and considering its current programs, it is certain that at least one of the contingencies covered will occur in the indeterminate future," the COA report said.
COA explained that since the actuarial reserve requirements were estimates of future liabilities, these should have been backed up by assets.
"The necessity of recognizing the actuarial deficit in the books of accounts has been discussed by the COA in a conference attended by officials of the GSIS," the report said. "The [COA] informed the body that the collapse of the Enron is mainly due to the failure of management to book their actuarial deficit which is a real accounting loss and that the real liability was not recognized."
COA argued that since it was GSIS that established the assumptions regarding probabilities of mortality, morbidity and withdrawal, they should also believe in their own assumptions.
"Hence if there is an actuarial deficit, it should be recognized as real accounting loss and that the deferred liability be recognized and that even though the loss were not yet incurred, it was a real liability," COA said.
According to the GSIS, however, it was not only a life and non-life insurance institution but it is also a social security institution. When asked to explain, GSIS said that as a matter of practice among social security institutions, the net income was recorded as an increment to the financial reserves.
"While GSIS has a computed actuarial deficiency, in reality this may not be so," the GSIS explained.
GSIS reasoned that the assets that back up reserves were still booked at purchase or acquisition cost. It said that many of GSIS assets were real estate properties acquired many years ago and "by now have appreciated tremendously in market values."