EXHIBIT 5.

REPORT OF THE AUDITOR FOR THE PHILIPPINE ISLANDS FOR THE FISCAL YEAR ENDED JUNE 30, 1903.

THE GOVERNMENT OF THE PHILIPPINE ISLANDS,

OFFICE OF THE AUDITOR,

Manila, P. I., November 1, 1903.

SIRS: In compliance with the provisions of rule 38 of Act No. 90 of the Philippine Commission, I have the honor to submit my annual report of the financial concerns of the government for the fiscal year 1903, showing the receipts and disbursements of the various branches. of the government, by departments, bureaus, offices, and provinces, together with such deductions from results obtained and suggestions as to future policy as seem advisable.

In this report are considered all transactions of the said fiscal year which were embraced in accounts received to November 1, 1903, for the period ended June 30, 1903, and such settlements pertaining to prior fiscal years as were not included in previous annual reports.

All accounts of transactions pertaining to the fiscal year 1903 but subsequent to June 30, and all suspended items in accounts of said fiscal year, will be considered in subsequent reports according to the fiscal year in which admitted, but on account of the fiscal year to which the transactions pertained.

The organization of the office and the personnel of the executive staff at the close of the fiscal year were as follows: Auditor, A. L. Lawshe; deputy auditor, William W. Barre; chief clerk, W. H. Clarke; bookkeeping division, H. C. Lewis, chief; customs division, A. J. Gibson, chief; postal division, W. A. Walsh, chief; miscellaneous division, C. H. French, chief; provincial division, O. H. Tibbott, chief; property division, C. A. Smith, chief.

The authorized personnel at the close of the fiscal year was an auditor, a deputy auditor, three clerks of class 3, four clerks of class 4, three clerks of class 5, nine clerks of class 6, five clerks of class 7, nine clerks of class 8, ten clerks of class 9, six clerks of class 10, four clerks of Class A, two clerks of Class B, two clerks of Class C, three clerks of Class D, three clerks of Class E, two clerks of Class F, two clerks of Class G, two clerks of Class H, two clerks of Class I, two employees at $180 per annum each, and two employees at $150 per annum each. A net increase of nine clerks was granted in the appropriation for the first half of the current fiscal year.

THE BOOKKEEPING DIVISION.

Effective April 1 an exchange of positions for the period of six months was made at my request between Mr. H. C. Lewis, chief accountant of the Bureau of Insular Affairs at Washington, and Mr. W. Y. Handy, chief of the bookkeeping division of this office, for the

purpose of harmonizing accounting methods and promoting a better understanding between the two bureaus. As each and every settlement of an account, with its corresponding detail of expenditures or receipts, is required to be forwarded to the Bureau of Insular Affairs for separate compilation, it is of vital importance that the two offices shall apply the same methods of treatment and statement of the accounts, so that apparent if not real differences may be avoided.

The result of this exchange has been very satisfactory and advantageous to this office, and I have no doubt the same result will accrue to the Insular Bureau. Mr. Lewis's detail has recently been extended to January 1, in order that the accounts of the fiscal year 1903 may be settled and closed before his departure.

To the bookkeeping division is assigned, among the more important duties, that of auditing the account of the insular treasurer, covering both the insular general revenues and funds handled by the treasurer in the capacity of depositary of trust funds, the latter including the account of the Treasurer of the United States, United States Army and Navy disbursing officers, money-order funds, and all general and special trust funds of which the treasurer is by law the custodian. The combined balance of all funds in the hands of the treasurer on June 30, 1903, was $17,871,025.19 United States currency value. Detailed statements of the accounts of the treasurer as audited are certified to the Secretary of War at the close of each month. A complete statement of the accountability of the treasurer of the islands appears elsewhere in this report.

Accounts with appropriations are kept, and the work of properly distributing appropriations, charges for withdrawals of funds, and credits for unexpended balances returned to the treasury is conducted in this division.

This division examines all certificates of settlement by the auditor and keeps ledger accounts with each collecting and disbursing officer throughout the islands handling insular funds, separate accounts being kept with each officer in each official capacity in which he may serve; and so-called statistical accounts are kept whereby the compilations of the final summary of the work of all settlements declared are obtained.

All settlements of accounts payable as claims are made through the bookkeeping division and proper ledger entries made to preserve a full record of each settlement. The usual payments made in this way consist of special appropriations, of loans to provinces and payments of revenues ceded or refunded to provinces, return of deposits for export duties refundable under conditions prescribed by law, invalid money orders, and disbursements from the insular salary and expense fund. All requisitions for accountable warrants are first presented to this division, whose duty it is to ascertain that the officer making the requisition is duly authorized in the premises; that the disbursing officer to whom warrant may issue is duly appointed in the capacity named and is bonded; and to determine that the sum asked for is available for withdrawal from the appropriations made for the purpose named. It is also the duty of the division to make memorandum charges against officers to whom warrants are issued and to see that warrants are properly charged as issued when certificates of audit of the accounts of payees are received.

Abstracts of classified payments by settlement warrants are drafted each month and copies thereof sent to the Secretary of War at Wash

ington. All credits entered in the settlement of accounts of officers for deposit of funds with the insular treasurer are verified by checking the same against the corresponding entries in the treasurer's account. Correspondence relative to these subjects is handled in this division.

In the fiscal year just closed there were 1,043 separate settlements of claims on which warrants were issued; 1,802 accountable warrants were issued during the same period. There were 6,506 receipts issued by the treasurer during the year, and these were double entried and checked against the invoices accompanying the deposits and presented to the auditor for counter signature. There were received in this division 1,198 certificates of settlement of insular accounts, covering period settlements of from one to twelve months made by other divisions, and these were double entried, the first entries being in personal accounts and the other in the statistical accounts.

There are running accounts on the ledger for fiscal year 1903 with 254 insular collecting officers and 215 insular disbursing officers, some of whom are serving in more than one capacity, making a total of 275 disbursing accounts, exclusive of postmasters' accounts. There are also 86 open accounts with provincial treasurers in their capacities of collecting and disbursing officers.

Where it appears, whether by application for funds, by deposit of collections, or otherwise, that any employee of the Government is acting in a capacity in which he should be bonded but is not, the attention of the proper official is at once directed to the matter.

There has recently been introduced a more comprehensive doubleentry system of bookkeeping than was formerly employed, having for its object the better analysis of settlements and a greater security for correctness of compilations. This change is an extension of the customary accounting methods in vogue in the United States, but it is fully authorized by rules and instructions governing the accounting system which the Commission deemed proper to incorporate into Act No. 90.

By this system there are provided a general-account ledger and individual ledgers corresponding, respectively, to the several general accounts, and the ordinary clerical errors must be corrected, else a balance of all accounts can not be drawn. By the distribution of the individual ledgers among several clerks, each of whom must present the balance shown by his individual ledgers, which in turn must correspond to the aggregate balance disclosed by the several general accounts, the opportunity for counterbalancing errors is eliminated.

Of perhaps equal importance is the necessity occasioned by this system for the consideration of all of the factors entering into every phase of the accounting and the effect of each upon the general result. Almost innumerable transactions enter into the account of appropriations, many of them caused by the unstable currency, and it is wellnigh impossible to keep this account with positive accuracy without the aid of the check against the balances afforded by this double-entry system.

Revenues are determined by the charges made against collecting officers for revenues coming into their hands, and when an excess collection has been made or an excess charge for any reason enters into the accounts as audited, the adjustment by the double-entry system in the officer's account compels a corresponding change in the revenue account. These changes are often for small amounts and their cor

rectness in the revenue accounts would be of slight importance, but in some cases the sum involved is of such importance as to be very material in the consideration of the revenue accounts. The expense account, which must always be subject to adjustment for various suspended items, is also often changed materially by subsequent transactions and occurrences not foreseen, but which aggregate sufficient amounts to make the entries in the expense account of equal importance with those in the accounts of officers.

It is not believed that a situation resulting from the handling of three interchangeable currencies has ever before been presented to an accounting officer of the United States Government. The situation has been met, however, and at this time the accounts stand audited and balanced as a whole in the respective currencies. The appropriation account is carried in a single-currency expression, with the exception of two or three special appropriations, and the treasurer's account is audited and balanced to date, the three currencies each having been properly treated.

THE CUSTOMS DIVISION.

This division receives and settles all accounts of the customs service and also the accounts of the bureau of coast guard and transportation. There are in the Philippine Islands 6 entry ports, 20 coast-inspection districts, and 170 subinspectors of customs at coastwise ports.

The division had on hand July 1, 1902, 315 unaudited revenue accounts, and received 477 revenue accounts pertaining to the fiscal year 1903.

During the fiscal year 2,724 manifests of vessels were received, of which number 1,245 have been liquidated, leaving 1,479 on hand Sep

tember 1.

In the audit of the customs revenue accounts 78,132 vouchers were examined and liquidated and the following discrepancies noted, expressed in United States currency: Under collections, $9,043.49; overcollections, $1,169.94. The amount noted as overcollected does not represent a sum of money refundable to importers; on the contrary, a very small part only is refundable, on account of the failure of importers to detect overcollections on account of improper classification of merchandise and to file protests in accordance with law.

Under the customs laws and regulations moneys overcollected from importers on account of "manifest clerical errors" are refundable upon application at any time within one year from the time of payment, but moneys overcollected on account of error in classification or appraisement of merchandise are refundable only in cases where the importers have filed with the collector written protests within two days, exclusive of Sundays and legal holidays, after the payment of duties. At least 90 per cent of the above-mentioned overcollections noted arose on account of errors in the classification of merchandise and are not refundable for the reason above stated. In connection with the examination of revenue accounts, all free entries have been rigorously scrutinized in this office, and there have been no irregularities on this

account.

During the fiscal year 227 applications for refunds were received and settled. Of this number 215 were settled in favor of the claimants, and 12, aggregating $754.34 United States currency, were denied on the ground that the importer in each case had failed to file a protest

with the collector of customs within the period prescribed by sections 30 and 286 of the customs administrative act, which provides that the decision of the collector as to the classification or appraisement of imported or exported merchandise shall be final and conclusive, except in case of protest and appeal.

The law governing protests and appeals is found in chapter 23 of the customs administrative act, and provides that

The decision of the collector of customs at a subport of entry as to the rate and amount of duties chargeable upon imported merchandise, including all dutiable costs and charges, and as to the dutiable value of merchandise, and as to all fees and exactions of whatever character, shall be final and conclusive against all persons interested therein unless the owner, importer, consignee, or agent of such merchandise, or the person paying such fees, charges, and exactions other than duties, shall, having first paid all duties, fees, charges, and exactions, within two days, exclusive of Sundays and holidays, after such payment, as well in cases of merchandise entered in bond as for consumption, if dissatisfied with such decision, give notice in writing to the collector of customs, setting forth distinctly and specifically, and in respect to each entry or payment, the reasons for his objections thereto.

In view of the fact that this law, which is perfectly clear in its language and mandatory in its requirements, has been in force nearly one year this office does not now exercise discretion in considering applications for refunds, but adheres strictly to the law and allows no refund in cases where protest was not filed, although there may have been some merit in some of the cases filed for settlement. Any other policy lays the government open to the charge of discrimination and favoritism.

In the United States customs service importers are allowed ten days after the liquidation of an entry in which to consider the action of the customs authorities and to protest against such action. In the Philippine customs service two days only are granted, which is hardly sufficient when we consider that here in the Philippines decisions as to appraisements are made in many instances by appraisers who are not as experienced as those in the United States and consequently commit more errors in judgment.

These errors in many instances work hardships on the importer, resulting in considerable losses to him in cases where he fails to discover such error within two days after payment of duties or for some other good reason is unable to file a protest within the time prescribed by law.

It therefore seems just and proper that the government, which reserves the right to correct any errors against itself within a year after payment by demanding of the importer any sums undercollected on the original entry, should extend to the importer at least ten days in which to file a protest against a collector's decision when, in the opinion of the importer, more money is collected under such decision than is due. I think it will be conceded that it is far better to amend the law, suggested, than to make a lax construction of it, which can only result in dissatisfaction to those not favored.

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During the fiscal year 15 settlements were made on account of refunds on coal consumed on steam vessels engaged in trade with the Philippine Islands, as authorized by section 224 of the customs administrative act. The amount refunded was $4,693.56 United States currency on 18,774.28 tons of coal consumed, and was paid to 6 firms only. It will be observed that the benefits of this law have accrued to but a few firms, whereas, in the opinion of this office, it is clearly the