Republic of the Philippines P2,493,000.00; Voltronics, on the other hand, offered P1,190,000.
00 exclusive of
SUPREME COURT
Manila
EN BANC
 
G.R. No. L-107016 March 11, 1994
DEVELOPMENT BANK OF THE PHILIPPINES, VIVENCIO MACAPAGAL, ALFREDO
CASAL, EDUARDO MENDOZA, ADORACION GARCIA, RODEL MAGNAYON, ROSARIO
ELEP, MA. ANTONIO REBUENO, JOSE RIVERA, M. SAPALICIO and G.
ROJAS, petitioners,  Purchase Order No. 137 dated October 14, 1988 in order. We would
vs.
COMMISSION ON AUDIT, respondent.
Office of the Legal Counsel for petitioners.
The Solicitor General for respondent.
 
BIDIN, J.:
This petition for certiorari seeks the reversal of the May 13, 1992 decision of
respondent Commission on Audit (COA) disallowing the amount of P246,539.25
representing payment of customs duties and taxes for one (1) unit of KVA
Uninterruptible Power Supply (UPS) purchased by petitioner Development Bank of the
Philippines (DBP) at a public bidding conducted by DBP itself.
On September 13, 1988 the Procurement Committee of DBP conducted a public bidding
for one (1) unit of Uninterruptible Power Supply (UPS). Of the eight (8) suppliers who
participated in the bidding, four (4) were disqualified outright for failure to submit the
required bidder's bond. The remaining four (4) bidders were subjected to an evaluation
process under the "must" criteria to determine whether the unit offered by the bidders
complies with DBP's specifications. Under this evaluation process, only two (2) bidders
qualified, namely: Paris-Manila Trading Corporation (Paris-Manila), and Voltronics
Industrial Corporation (Voltronics). These bidders were further evaluated under the
"wants" category which has the following criteria: (a) delivery time; (b) maintenance
strategy; (c) cost; (d) manufacture support; and (e) company profile. Under this
category, Paris-Manila got a rating of 75.02% while Voltronics got a rating of 78.75%.
With respect to the amount of bids, Paris-Manila offered a bid in the amount of
customs duties and taxes at P246,539.25 or a total bid price of P1,436,539.25.
On the basis of a thorough evaluation conducted, the Special Technical Committee
recommended to the DBP Vice Chairman that the UPS be purchased from Voltronics. In
this connection, DBP submitted all the bidding documents to the Corporate Auditor for
pre-audit pursuant to COA Circular No. 86-257. After a review of the documents, then
Corporate Auditor Elisa C. Gervasio issued a reply finding the subject transaction to be
"in order" but with a corresponding observation regarding customs duties and taxes to
wit:
In our review of bidding documents for the purchase of one (1) unit
Uninterruptible Power Supply System, we found the proposed
like to invite your attention, however, for (sic) the lack of additional
provisions on the terms and conditions in the DBP Bid Form for
customs duties and taxes for purchases of this kind. It is suggested that
in future biddings, the quotation or bid price should always mean the
total price to be paid by DBP including customs duties and/or other
charges (Rollo, p. 42).
Thereafter, DBP issued Purchase Order No. 0137 to Voltronics at the adjusted price, i.e.,
P1,436,539.25 inclusive of customs duties and taxes.
In the meantime, COA Circular No. 89-299 was passed lifting the pre-audit of
government transactions. A new Corporate Auditor was also assigned to petitioner
DBP.
After a post-audit, the new Corporate Auditor sent an "Auditor's Notice to Person's
Liable" to the Chairman of DBP notifying him of the disallowance of the amount of
P246,539.25 representing customs duties and taxes and at the same time holding him,
along with the other petitioners herein, jointly and severally liable for the aforesaid
sum. DBP moved for reconsideration in a letter-clarification dated November 2, 1990
but the same was denied. On appeal, the Commission en banc affirmed the disallowance.
In this petition, petitioner claims that:
I RESPONDENT COMMISSION ERRED IN APPLYING THE POST-AUDIT
SYSTEM UNDER COA CIRCULAR NO. 89-299 CONSIDERING THAT AT
THE TIME OF THE QUESTIONED BIDDING THE "LAW" IN FORCE WAS
COA CIRCULAR NO. 86-257
 II RESPONDENT COMMISSION IS ESTOPPED FROM IMPUGNING THE
DECISION OF ITS DULY CONSTITUTED REPRESENTATIVE EXERCISED
IN THE ORDINARY COURSE OF ITS FUNCTION
III RESPONDENT COMMISSION MISAPPRECIATED FACTS WHICH HAD
THEY BEEN PROPERLY APPRECIATED WOULD HAVE ALTERED ITS
DECISION
The pivotal issue in this case hinges on whether or not the disallowance of the payment
made by DBP representing customs duties and taxes is valid.
Petitioners submit the contrary on the ground that the transaction in question had
already been approved and passed in audit in accordance with the pre-audit system
then obtaining and the later circular requiring post-audit should not be applied
retroactively.
While it is true that the applicable procedure in force at the time of the questioned
transaction was COA Circular 86-257 requiring a pre-audit, there is nothing to preclude
respondent COA from conducting a post-audit of the already pre-audited transaction. As
pointed out by the Solicitor General:
A pre-audit is an examination of financial transactions before their
consumption or payment and is basically a special development of the
control aspect of accountancy as well as an integral part of the
accounting and payment process. Thus, pre-audit seeks to determine
that:
1. The proposed expenditure complies with an
appropriation law or other specific statutory
authority;
2. Sufficient funds are available for the purpose;
3. The proposed expenditure is not unreasonable or
extravagant and the unexpended balance of
appropriations where it will be charged to is
sufficient to cover the entire amount thereof; and
4. The transaction is approved by proper authority
and the claim is duly supported by authentic
underlying evidences (COA Journal, August 1976, p.
8) (Rollo, p. 69).
Besides, the favorable action of the then Corporate Auditor as regards the transaction
does not necessarily mean that the same was passed in audit. Circular 86-57 provides:
V. DUTIES AND RESPONSIBILITIES OF COA OFFICIALS AND
REPRESENTATIVES
The head of the audit unit shall:
3. Act on the transaction subject to pre-audit within
twenty-four (24) hours from receipt by his Office of
the pertinent vouchers/documents. The action herein
required does not necessarily mean approval or
allowing in audit.
More importantly, Article IX (D) Section 2(1) of the Constitution expressly grants
respondent Commission the power to conduct a post-audit, to wit:
Sec. 2. (1) The Commission on Audit shall have the power, authority,
and duty to examine, audit, and settle all accounts pertaining to the
revenue and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to, the Government,
or any of its subdivisions, agencies, or instrumentalities, including
government-owned or controlled corporations with original charters,
and on a post-audit basis: (a) constitutional bodies, commissions and
offices that have been granted fiscal autonomy under this Constitution;
(b) autonomous state colleges and universities; (c) other government-
owned or controlled corporations and their subsidiaries; and (d) such
non-governmental entities receiving subsidy or equity, directly or
indirectly, from or through the Government, which are required by law
or the granting institution to submit to such audit as a condition of
subsidy or equity . . . (emphasis supplied).
DBP is no doubt a government corporation and the question of whether COA Circular
86-299 was retroactively applied to the subject transaction is thus of no moment. To
begin with, there was never any retroactive application of post-audit. Regardless of the
result of the pre-audit, it cannot be denied that respondent COA is so empowered to
conduct a post-audit.
It is thus erroneous for DBP to claim that respondent Commission is estopped from
questioning, in the process of post-audit, the previous acts of its officials. Further, well-
settled is the principle that estoppel does not lie against the government (Cruz, Jr. vs.
Court of Appeals, 194 SCRA 145 [1991]; Republic vs. Court of Appeals, 182 SCRA 290
[1990]), more so if they are erroneous, let alone irregular (Republic vs. Intermediate
Appellate Court, 209 SCRA 90 [1992]; Sharp International Marketing vs. Court of
Appeals, 201 SCRA 299 [991]).
As to whether or not the result of the post-audit is proper, in this case the disallowance
of the customs duties and taxes, is another matter altogether.
In the Notice to Persons Liable, the Corporate Auditor disallowed the payment of
customs duties since "there was no quotation on this regard and to include this further
would improve the bid after the opening which privilege was not given to other
bidders" (Rollo, p. 43). On its face, it would appear that the Auditor's reason
aforequoted was based on the presumption that petitioner DBP had no knowledge
whatsoever that the price quoted by Voltronics did not include customs duties and
taxes, i.e., there was no disclosure of such fact by Voltronics at the time of the bidding.
In fact, the question of whether or not Voltronics so informed petitioner DBP of the non-
inclusion of customs duties and taxes in its bid became the thrust of both petitioner
DBP and respondent COA's pleadings submitted before this Court.
DBP maintains that it was so informed by Voltronics in a letter dated September 12,
1988 along with the bid form that its quotation did not include the customs duties and
taxes. Petitioner DBP insists that subsequent communications even made reference to
this letter. On the other hand, respondent COA claims that there was no such
attachment to the bid form and if there was any, the form would have so stated. Since
there was no mention anywhere in the bid form of Voltronics or the Abstract of Bids as
to any attachment, respondent COA concludes that no September 12, 1988 letter was
appended thereto.
In the light of all these contentions, it is difficult to determine with utmost certainty the
truth as to the existence of the September 12, 1988 letter at the time of or even prior to
the opening of the bids. However, inasmuch as this is a question of fact involving an
occurrence where DBP itself participated as the party conducting the bidding, the
presumption lies in favor of the latter that such a letter did exist informing if that the
quoted bid of Voltronics excluded customs duties and taxes. Bolstering this position is a
November 14, 1990 letter of the Senior Vice President of DBP for Operations addressed
to the Corporate Auditor confirming the fact that "Supplementary to the Bid Form
submitted by Voltronics Industrial Corp. (winning bidder) is a letter dated September
12, 1988 (Annex C) specifically mentioning that its bid of P1,190,000.00 does not include
customs duties and taxes (Rollo, p. 44; emphasis supplied). But even without the
contested letter, it cannot be denied that Voltronics did specify in its bid "DUTIES AND
TAXES NOT INCLUDED" (Rollo, p. 25). This alone would suffice to sustain the claim that
DBP was well aware of Voltronics' bid to be exclusive of the aforesaid charges.
In this regard, the notice of disallowance which states: "(w)hen Voltronics offered the
amount of P1,190,000.00, it is understood that said amount represents the total cost to
paid (sic) by DBP upon delivery of the item, i.e., taxes/customs duty, handling costs"
(Rollo, p. 43) deserves scant consideration. It was based merely on the presumption
that the bidders had prior understanding of what the "total" bid price should comprise,
when in truth there was no clear-cut definition of the term conveyed to the
participating bidders. In fact, such lack of prior understanding compelled the former
Corporate Auditor, who, after pre-auditing the questioned transaction, suggested that
"in future biddings, the quotation or bid price should always mean the total price to be
paid by DBP including customs duties and/or other charges" (Rollo, p. 42). Surely, the
former Corporate Auditor would not have found the need to define in clearer terms
what "total bid price" should refer to if it was already a settled concept to begin with.
Neither can we subscribe to the argument of respondent COA that the allowance of the
questioned amount would be tantamount to granting a privilege to Voltronics which
was not accorded to the other bidders. As far as the use of the term "privilege" is
concerned, it would be well to point out that no such privilege was accorded to
Voltronics. The then Corporate Auditor was well aware of the non-inclusion of duties
and taxes relative to the purchase of the UPS. This notwithstanding, she found the
Purchase Order to be in order knowing that even if the duties and taxes amounting to
P246,539.25 were to be added to the bid price of P1,190,000.00, the total selling price
would still be lower by more than a million pesos than the selling price offered by Paris-
Manila. Based on the above computation and in so allowing the payment of
P246,539.25, representing custom duties and taxes, no undue advantage could be said
to have been awarded to Voltronics. And as far as Voltronics is concerned, there is no
doubt that it acted in good faith. Secondly, Voltronics came out as the winner of the
bidding only after undergoing the evaluation process required by petitioner DBP.
Hence, the amount of the bid was not the only consideration for choosing Voltronics as
the winning bidder. It also ranked higher than Paris-Manila under the "wants" criteria
with a rating of 78.75%. Thirdly, even if the same "privilege" of "improving" its bid after
the same has been opened were accorded to the so-called "other" bidders, only Paris-
Manila would qualify as the "other" bidder(s) since it was the only one aside from
Voltronics which qualified under the "must" criteria, the final stage of the evaluation
process. All the rest were either immediately disqualified or did not meet the standards
of the aforesaid criteria. Thus, even if Paris-Manila were afforded the opportunity to
improve its bid, considering the disparity of its bid with Voltronics' bid of
P1,436,539.25, inclusive of duties and taxes, the latter would still be the lowest bidder.
In other words, the alleged "privilege" had little effect on the ultimate outcome of the
bidding. Inasmuch as neither Paris-Manila nor petitioner DBP was prejudiced by
allowing the exclusion of the customs duties and taxes to the total bid price, the result
of the pre-audit should be allowed to stand.
WHEREFORE, the petition is GRANTED. The decision of respondent COA dated May 13,
1992 is hereby REVERSED and SET ASIDE. Respondent COA is hereby DIRECTED to
allow in post-audit the payment of P246,539.25.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Padilla, Regalado, Davide, Jr., Romero, Nocon, Bellosillo,
Melo, Quiason, Puno, Vitug and Kapunan, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
 
G.R. No. 92279 June 18, 1992
EDMUNDO C. SAMBELI, doing business as ECS ENTERPRISES, petitioners,  showing the difference:
vs.
PROVINCE OF ISABELA, PROVINCIAL TREASURER OF ISABELA and COMMISSION
ON AUDIT, respondents.
PARAS, J.:
The instant petition seeks to annul and set aside the ruling of respondent Commission
on Audit (COA) affirming the action of respondent Provincial Auditor of Isabela which:
(a) withheld the payment to petitioner of the amount of P380,400.10,
representing the unpaid balance of the price of 300 units of
wheelbarrow and 873 pieces of shovel;
(b) required the refund of the amount of P195,893.10 representing the
overpayment to petitioner for the same items. (p. 35, Rollo)
The pertinent background facts are uncontroverted.
On October 2, 1987, an agreement was entered into by and between the Province of
Isabela and ECS Enterprises, herein petitioner, for the purchase of 300 units of
wheelbarrows, 837 pieces of shovels and 1 set of radio communication equipment. Out
of the items to be delivered, a partial delivery of 150 units of wheelbarrows and 419
pieces of shovels were made on November 11, 1987 for the total price of P380,538.60.
The Provincial Auditor allowed the payment of only 50% or P190,338.20 "pending
receipt of the reply to the query to the Price Evaluation Division, COA, Technical Staff
Office, Quezon City."(Annex "N" Petition, p. 25 Rollo)
A second delivery of 150 units of wheelbarrows and 418 pieces of shovels was made on
December 1, 1987, and payment of P190,200.00 or 50% of P380,400.00 was allowed by
the Provincial Auditor, bringing the total payments made to P380,538.20 or 50% of
P761,077.20 (the total cost of 300 units of wheelbarrows and 837 pieces of shovels).
Based on the findings of the Price Evaluation Division, COA Technical Service Office,
Quezon City, the Provincial Auditor advised the Provincial Treasurer in his letter dated
February 20, 1988 that an overprice in the total amount of P619,042.20 exists out of the
total price of P761,077.20 offered by ECS Enterprises or an overpayment of
P195,893.10. The said findings of the Price Evaluation Division are hereinbelow quoted
as follows:
A comparison between the purchase price of the Province and the
findings of the Price Evaluation Division is presented hereunder
Purchase Price Price Hvs. Div.
Item/Description Unit Price Total Unit Price Total Difference
1) 200 units P1,768.00 P530,400.00 P320.00 P96,000 P434,400.00
2) 837 pcs.
shovels 230.00 230,676.40 55.00 46,035 184,641.40
———— ———— —————
Total P761,076.40 P142,035 P619,041.40
========= ======= =========
Payment of Three Hundred Eighty Thousand Five Hundred Thirty
Eight and 60/100 Pesos Only (P380,538.60) was made on the strength
of the certification issued by the Bureau of Supply Coordination that
the prices are reasonable. A difference of Two Hundred Thirty Eight
Thousand Five Hundred Three and 60/100 PESOS Only (P238,503,60)
between the amount paid of Three Hundred Eighty Thousand Five
Hundred Thirty Eight and 60/100 Pesos Only (P380,538,60) and the
total price due if computed on the Price Evaluation Division canvass
Manila Price of One Hundred Forty Two Thousand Thirty Five and
00/100 Pesos Only (P142,035.00)
If thirty percent (30%) equivalent to Forty Two Thousand Six Hundred
Ten and 50/100 (P42,610.50) of the Manila Price total will be allowed
for handling, and freight expenses to be deducted from P238,503.60,
still an overpayment of One Hundred Ninety Five Thousand Eight
Hundred Ninety Three and 10/100 Pesos Only (P195,893,10) still
exists.
 It is recommended that future claims of ECS Enterprises be withheld
and applied to the refund for overpayment. (Annex J, Petition, pp. 122-
124, Rollo)
The President/General Manager of ECS Enterprises in his letter dated April 1, 1988 to
the Provincial Treasurer made no comment on the overpricing but instead proposed
10% deduction on the unpaid balance.
The Provincial auditor forwarded the matter to the COA Regional Director who formally
endorsed the stand of the Provincial Auditor, as follows:
In view of the foregoing, we favorably endorse the stand of the
Provincial Auditor in his letter to the Provincial Treasurer Ilagan,
Isabela that the total claim of ECS Enterprises in the total amount of
P761,077.20 is overpriced by P619,041.40 or a refund of P195,893.10
must be made by the supplier out of the P380,538.60 total payments
already made by the Province of Isabela as presented by the Provincial
Auditor in the preceding indorsement. (Annex N, Petition; p.
125, Rollo)
The Regional Director further made the following findings:
the submitted documents disclosed the following deficiencies:
1. The contract for the purchase of 300 units of wheelbarrows and 837
pieces of shovels was entered into by and between the Province of
Isabela and ECS Enterprises without the prior necessity of a public
bidding to determine the most advantageous prices;
2. The following conditions among others, set in the 2nd indorsement
dated December 10, 1987 of Mr. David Rubio, Director, Supply
Coordination Office to the Provincial Governor, Ilagan, Isabela were
not adhered to:
(a) the agency concerned shall negotiate further for
lower prices such terms and conditions advantageous
to the government; and
(b) substitute offer/s at lower prices shall be given
due consideration upon appreciation of their quality
and effectiveness. (p. 26, Rollo)
ECS Enterprises appealed to the respondent Commission on Audit. In a letter dated
December 12, 1989, the said Commission denied the appeal and affirmed the position of
the Provincial Auditor and the COA Regional Director, as follows:
This has reference to your appeal in behalf of ECS Enterprises from the
action of the Provincial Auditor of Isabela in withholding the payment
of P380,400.60 representing the unpaid balance of the price of 300
units of wheelbarrows and 837 pieces of shovels purchased by the
Province of Isabela from your company.
Relative thereto, we invite your attention to the letter of this
Commission to then Governor Melanio T. Singson of Isabela, dated
August 3, 1988, copy attached, confirming the action taken by the
Provincial Auditor in demanding the refund of the excess payment
made by the Provincial Treasurer of Isabela to your Company for the
reasons stated therein.
Upon a circumspect evaluation of the grounds relied upon, your within
appeal, this Commission finds the same to be devoid of any merit. The
price quotation of the Supply Coordination Office provides that the
prices set therein are authorized ceiling or purchasing prices. It can be
deduced therefrom that the prices to be agreed upon shall not exceed
said amount, thereby signifying that negotiations for a lower price may
be resorted to in the best interest of the government. Moreover, the
action taken by the Provincial Auditor and the COA Regional Director,
as representatives of the Commission on Audit, is in accordance with
the law and in pursuance of the mandate of the Constitution which
vests in this Commission the exclusive authority "to promulgate
accounting and auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary, excessive,
extravagant or unconscionable expenditures, or uses of government
funds and properties." (Art, IX-D, Sec. 2(2) 1987 Constitution).
Accordingly, this Commission regrets to dismiss, as it hereby
dismisses, your herein appeal for lack of merit. (Annex R, Petition, pp.
126-127, Rollo).
Hence, the present petition.
Petitioner assails the ruling of the COA as not valid. It contends that the contract of sale
has not only been perfected between the Province of Isabela and petitioner but delivery
has been made by it with the corresponding partial payment by the Province of Isabela.
Thus, it is allegedly incumbent upon COA to authorize the payment of the balance
because to act otherwise will constitute an impairment of contract.
We reject petitioner's contention.
In the exercises of the regulatory power vested upon it by the Constitution, the
Commission on Audit adheres to the policy that government funds and property should
be fully protected and conserved and that irregular, unnecessary, excessive or
extravagant expenditures or uses of such funds and property should be prevented. On
the proposition that improper or wasteful spending of public funds or immoral use of
government property, for being highly irregular or unnecessary, or scandalously
excessive or extravagant, offends the sovereign people's will, it behooves the
Commission on Audit to put a stop thereto. (Tantuico, State Audit Code Philippines, p.
235)
In the cases of Danville Maritime, Inc. v. Commission on Audit, 175 SCRA 701 (1989)
and D.M. Consunji Inc. v. Commission on Audit, 199 SCRA 549 (1991), We defined the role
of the COA in this wise:
. . . No less than the Constitution has ordained that the COA shall have
exclusive authority to define the scope of its audit and examination,
establish the techniques and methods required therefor, and
promulgate accounting and auditing rules and regulations, including
those for the prevention and disallowance of irregular, unnecessary
excessive, extravagant or unconscionable expenditures or use
of government funds and properties. (Art. IX D, Sec. 2 (2) 1987
Constitution of the Philippines) (emphasis supplied)
Indeed, not only is the Commission on Audit (COA) vested with the power and
authority, but is also charged with the duty to examine, audit and settle all accounts
pertaining to . . . the expenditure or uses of funds . . . owned by or pertaining to, the
Government or any of its subdivisions, agencies or instrumentalities (Article IX (D-1)
Section 2(1), 1987 Constitution). That authority extends to the accounts of all persons
respecting funds or properties received or held by them in any accountable capacity.
(Section 26, P.D. No. 1445). In the exercise of its jurisdiction, it determines whether or
not the fiscal responsibility that rests directly with the head of the government agency
has been properly and effectively discharged (Section 25 (1) ibid), and whether or not
there has been loss or wastage of government resources. It is also empowered to review
and evaluate contracts. (Section 18 (4), ibid.). And, after an audit has been made, its
auditors issue a certificate of settlement to each officer whose account has been audited
and settled in whole or in part, stating the balances found due thereon and certified,
and the charges or differences arising from the settlement by reason of disallowances,
charges or suspensions. (Sec. 82, ibid.) (Dingcong v. Guingona 162 SCRA 782)
VIEWED in this light, the disallowance made by the respondent Commission on Audit is
not without any Constitutional and legal basis. We, therefore, affirm the same.
WHEREFORE, for lack of merit, the petition is DISMISSED. No costs.
SO ORDERED.
Narvasa, C.J., Gutierrez, Jr., Cruz, Feliciano, Padilla, Bidin, Griño-Aquino, Medialdea,
Regalado, Davide, Jr., Romero, Nocon and Bellosillo, JJ., concur.
EN BANC
[G.R. No. 126557. March 6, 2001]
RAMON ALBERT, petitioner, vs. CELSO D. GANGAN, in his capacity as Chairman,
Commission on Audit, ROGELIO ESPIRITU, in his capacity as
Commissioner, Commission on Audit, SOFRONIO URSAL, in his capacity as
Commissioner, Commission on Audit, EMMA M. ESPINA, in her capacity as
Director, Commission on Audit, and LAKAMBINI RAZON, in her capacity as
Then Resident Auditor for National Home Mortgage Finance
Corp., respondents.
DECISION
BUENA, J.:
This petition for certiorari seeks to nullify Commission on Audit (COA) Decision
No. 2700 dated February 19, 1993, finding petitioner, then President of the National
Home Mortgage Finance Corporation (NHMFC), liable for the amount of P36,796,711.55
covering the payment of the loan proceeds for the lot acquired by the Alyansang Maka-
Maralitang Asosasyon at Kapatirang Organisasyon (AMAKO) which was disallowed in
audit.
The facts are undisputed:
The Housing and Urban Development Coordination Council (HUDCC) together
with the Presidential Commission for Urban Poor (PCUP), NHMFC, and Home Insurance
Guarantee Corporation (HIGC) formed an inter-agency committee to conceptualize and
prepare the guidelines and procedures for the Community Mortgage Program (CMP),
[1]
 a sub-program of the Unified Home Lending Program (UHLP). The CMP is an
innovative scheme in mortgage financing where an undivided tract of land may be
acquired by several beneficiaries through the concept of community ownership. It was
adopted to assist residents of blighted or depressed areas to initially own the lots they
occupy, and, eventually, to build a decent house thereon to the extent of their
affordability within the concept of low-cost-home financing and after due compensation
to the landowner. The beneficiaries of the financing shall then form or establish an
association, or cooperative, duly registered with appropriate governmental agencies
and accredited with the PCUP. Under the financing procedure of the CMP, an application
of an association for a loan is coursed through duly accredited originators, such as the
National Housing Authority (NHA), and Non-Government Organizations (NGOs). [2]
On August 20, 1988, the NHMFC Board issued Resolution No. 419, Series of 1988,
approved the CMP.[3]
On December 19, 1988, Carlos P. Doble, then Vice President of HIGC, issued an
appraisal policy for the CMP which was concurred in by the HIGC President, Federico
Gonzales, herein petitioner, NHMFC OIC/EVP, and HUDC Teodoro Katigbak. [4] On the
same date, Doble likewise issued to HIGC Technical Service Department personnel the
Appraisal Policy for the CMP.[5]
On April 12, 1989, the NHMFC board issued Resolution No. 546, Series of 1989,
approving the amended/expanded guidelines for CMP. [6]
On April 4,1989, the Sapang Palay Community Development Foundation Inc.,
(Foundation) applied for accreditation with the NHMFC as originator of land and
housing project through a Purchase Commitment Line. The application consists of
sixteen (16) project sites situated in different parts of the country. Among these is the
AMAKO Project which was submitted for accreditation to the NHMFC by Nelson
Concepcion, President of the Foundation. The AMAKO project refers to seventy-three
(73) hectares of land located at Sta. Catalina, Angeles City, which was offered by
Severino H. Gonzales, Jr. Construction, Co, Inc. (SHGCCI), through its shareholder,
Engineer Ceres Pajaron, to the members of AMAKO. Mr. Concepcion who was also the
concurrent head of the PCUPs Housing and Settlement Division, delivered on September
7, 1989, to the CMP Unit then under Mortgage Takeout Department (MROD)-HMFC the
project documents of AMAKO for pre-evaluation which were returned to the
Foundation on September 22, 1989 by the CMP unit.
On October 4, 1989, Mr. Concepcion submitted an application for Purchase
Commitment Line in the amount of P36,794,250.00, specifically for the AMAKO project
together with an Information Sheet of the Foundation, the AMAKO project profile, and
the Department of Agrarian Reform certification dated December 4, 1988. On the same
day, Mr. Generozo Cruz, Foundation Vice President and PCUP Director, redelivered the
documents to the CMP unit to discuss the Foundations proposal on the AMAKO project.
On October 5, 1989, the Officer-in-charge of the Credit and Collection Group,
NHMFC, recommended to petitioner the grant of an additional line in favor of Sapang
Palay Community Development Foundation, Inc., in the total amount
of P36,8000,000.00[7] approved by the NHMFC Credit Committee on October 13, 1989
subject, however, to the approval of the NHMFC Board.
On December 14, 1989, the NHMFC, upon the recommendation of the CMP Task
Force, together with the Certification of Mortgage Examinations, [8] issued a Letter of
Guaranty in favor of SHGCCI. [9]Thereafter, the disbursement voucher (No. 89F2-5732)
was prepared by the CMP Task Force in favor of SHGCCI. [10] Mr. Rogelio Olaguer, head of
the CMP Task Force, likewise inspected the project site and assured petitioner that the
project is above board and in accordance with the NHMFC-CMP guidelines. With this
assurance, petitioner approved the payment to the SHGCCI. Thus, on January 4, 1990,
the amount of P36,796,711.55 under Philippine National Bank Land Bank of the
Philippines Check No. 362994, was released to Engineer Severino A. Gonzales, Jr. of the
SHGCCI.[11]
Sometime in June 1990, petitioner instructed the Community Mortgage
Management Office (CMMO) to conduct a routine inspection of the AMAKO
Project. Upon verification, it was discovered that the AMAKO project was three (3)
months in arrears in their amortization. As a consequence, petitioner, sometime in July
1990, tasked the Committee on Evaluation of Originating Institutions to investigate the
originators with respect to their compliance with corporate circulars, other rules and
regulations issued by NHMFC regarding its lending programs. One of the originators
investigated was the Foundation which was instrumental in the granting of the loan to
the AMAKO Project.[12]
On September 3, 1990, the COA Resident Auditor of NHMFC disallowed the loan
granted to the AMAKO Project for the following reasons: (a) non-submission of
documentary requirements/non-complying or defective documents as required under
NHMFC Corporate Circular No. CMP-001; and (b) irregular/excessive expenditures per
COA Circular No. 85-55A dated September 8, 1985. The Auditor determined the
following officers of NHMFC, as personally liable, viz.: petitioner as President; Fermin T.
Arzaga, OIC, Finance, Corpan & Computer Services Group; Roger Olaguer, Head, CMP
Task Force; Vivien Noble, Deputy Head, CMP Task Force; Ernesto Salvador, Executive
Asst. CMP Task Force; Cynthia O. Alas, Div. Chief II, Budget and Irma Fuentes, COD,
CMMO.[13]
On September 18, 1990, petitioner filed with the Ombudsman a letter-complaint
against his subordinate employees who appeared to be responsible for the fraud with
respect to the AMAKO loan transaction. [14]However, said complaint was withdrawn by
petitioners successor, Acting President Florentino Mauricio, and re-filed with the Civil
Service Commission on August 5, 1991. Petitioner also filed a civil case for sum of
money, annulment, damages and attorneys fees with preliminary attachment, against
SHGCCI, AMAKO, Sapang Palay & Development Foundation, Inc., and other persons
responsible for the misrepresentation, tortious and fraudulent acts in connection with
the loan granted to AMAKO project.[15] The complaint was subsequently amended to
include Rogelio Olaguer, Ernesto S. Salvador and Vivien Noble, who are employees of
NHMFC, and Eugenio M. Cunanan, Jr. of HIGC.[16]
On October 19, 1990, petitioner requested for the lifting of the disallowance on the
loan grant to AMAKO[17] which was denied on October 25, 1990. Petitioner moved for a
reconsideration which was elevated to the COA Corporate Audit Office pursuant to
Section 65 of PD 1445.[18]
 On February 19, 1993, the COA rendered Decision No. 2700, finding petitioner as
among the persons liable for the amount representing the payment of the loan proceeds
obtained by AMAKO. COA disallowed the plan payment because it found the payment
irregular and an excessive expenditure, and held petitioner primarily liable pursuant to
Section 103 of P.D. 1445.[19]
Petitioners motion for reconsideration of the above-mentioned decision was
denied on August 29, 1996 per COA Decision No. 96-484,[20] excerpts of which reads:
x x x x x x x x x
In a motion for reconsideration dated April 6, 1993, Mr. Albert, thru Counsel, contended
that he (Mr. Albert) cannot and should not be held personally liable for the amount of
the loan as he acted only in the performance of his official duties and that there was no
clear showing of bad faith, malice or gross negligence on his part.
This Commission finds the explanation or justification devoid of merit. It is significant
to note that Mr. Albert himself was the final approving authority of the transaction in
question and that the officers/employees who processed the same were directly under
his supervision. The CMP Task Force created in his very own office provides a situation
where he could have conclusively determined the validity of a transaction involving
such large amount as P36,796,711.55.
Likewise, this Commission cannot with expediency exculpate Mr. Albert from liability
by accepting his claim of good faith and exercise of due diligence, otherwise this
principle would be rendered worthless. Good faith and exercise of due diligence are
disputable presumptions, and these presumptions are overcome by evidence of specific
acts constituting an offense, as where there exists the fact that loss of government funds
resulted from official action. Besides, Section 3 (9) of R.A. 3019 (Anti-Graft Law)
declares to be unlawful the act of entering, in behalf of the Government, into contract or
transaction manifestly or grossly disadvantageous to the same, whether or not the
public officer profited or will profit thereby.
Aggrieved, petitioner now comes to this Court contending that he cannot be held
personally liable for the amount of P36,796,11.55 representing the loan proceeds to
AMAKO, because the questioned COA decisions do not have any findings that he has
knowingly participated in the alleged fraudulent transaction. He claims that there is no
clear showing that he acted in bad faith, with malice, or gross negligence when he
approved the loan transaction. The approval of the loan was based on the certification
of the duly authorized officers of the Community Mortgage Program Task Force.
While the petition is pending , NHMFC filed a petition for extra-judicial foreclosure
of real estate mortgage against AMAKO which was represented by its president, Mr.
Mario J. Mamawan, before the Regional Trial Court of Angeles City docketed as FC Case
No. 98-10.
On March 31, 1998, the property was sold at public auction with NHMFC as the
highest bidder. A Certificate of Sale was subsequently issued in favor of NHMFC. [21]
The AMAKO property was then published and offered for sale three times in April
1999, and once in May 1999, but with no bidder. The property was then offered under
the negotiated sale of rights over foreclosed property offer of which was published in
June 1999.
In response to the published offer, VIVE EAGLE LAND, INC. (VIVE) offered to
purchase the property for P40,000,000.00.
On October 21, 1999, the Board of Directors of the NHMFC approved the sale [22] in
favor of VIVE per its Resolution No. 2998 Series of 1999. [23] The sale was confirmed on
November 18, 1999.[24]
We find the petition meritorious.
The mere fact that a public officer is the head of an agency does not necessarily
mean that he is the party ultimately liable in case of disallowance of expenses for
questionable transactions of his agency. Petitioner, as head of the agency, cannot be
held personally liable for the disallowance simply because he was the final approving
authority of the transaction in question and that the officers/employees who processed
the same were directly under his supervision. [25] Though not impossible, it would be
improbable for him to check all the details and conduct physical inspection and
verification of the application of AMAKO considering the voluminous paperwork
attendant to his office. He has to rely mainly on the certifications, recommendations and
memoranda of his subordinates in approving the loan. The processing, review and
evaluation of the loan application passed through the responsible and authorized
officers of the CMP Task Force. As admitted by the Director of the Corporate Audit
Office, Emma M. Espina, the officers of the CMP Task Force erred in discharging these
assigned duties.[26] Moreover, the high appraisal of the subject property cannot be
attributed to herein petitioner because the valuation of the said property is undertaken
by the HIGC,[27] an entity separate and distinct from the NHMFC and over which
petitioner exercises no control or supervision.
We have consistently held that every person who signs or initials documents in the
course of transit through standard operating procedures does not automatically
become a conspirator in a crime which transpired at a stage where he had no
participation. His knowledge of the conspiracy and his active and knowing participation
therein must be proved by positive evidence. The fact that such officer signs or initials a
voucher as it is going the rounds does not necessarily follow that the said person
becomes part of a conspiracy in an illegal scheme. The guilt beyond reasonable doubt of
each supposed conspirator must be established. [28] Thus, in Pareo vs.
Sandiganbayan[29] we held that:
It is rather apparent that under the Sandiganbayans decision, a department secretary,
bureau chief, commission chairman, agency head, department head or chief of office
would be equally culpable of every crime arising from transactions or held guilty of
conspiracy simply because he was the last of a long line of officials or employees
who acted upon or affixed their signatures to a transaction. We cannot allow this
because guilt must be premised on a more knowing personal and deliberate
participation of each individual who is charged with others as part of a
conspiracy. There must be more convincing proof which in this case is wanting.
(Underscoring Supplied)
The rationale behind this ruling is best enunciated in the early case of Arias vs.
Sandiganbayan[30] where we emphatically ruled:
We would be setting a bad precedent if a head of office plagued by all too common
problems- dishonest or negligent subordinates, overwork, multiple assignments or
positions, or plain incompetence- is suddenly swept into a conspiracy conviction simply
because he did not personally examine every single detail, painstakingly trace every
step from inception and investigate the motives of every person involved in a
transaction before affixing his signature as the final approving authority.
x x x x x x x x x
We can, in retrospect, argue that Arias should have probed records, inspected
documents, received procedures and questioned persons. It is doubtful if any auditor
for a fairly sized office could personally do all these things in all vouchers presented for
his signature. The Court would be asking for the impossible. All heads of offices have
to rely to a reasonable extent on their subordinates and on the good faith of those
who prepare bids, purchase supplies, or enter into negotiations. If a department
secretary entertains important visitors, the auditor is not ordinarily expected to call the
restaurant about the amount of the bill, question each guest whether he was present at
the luncheon, inquire whether the correct amount of food was served, and otherwise
personally look into the reimbursement vouchers accuracy, propriety and
sufficiency. There has to be some added reason why he should examine each voucher in
such detail. Any executive head of even small government agencies or
commissions can attest to the volume of papers that must be signed.There are
hundreds of documents, letters, memoranda, vouchers, and supporting papers
that routinely pass through his hands. The number in bigger offices or
departments is even more appalling.
There should be other grounds than the mere signature or approval appearing on a
voucher to sustain a conspiracy charge and conviction. (Underscoring Supplied)
Additionally, the assailed decision failed to mention petitioners direct
participation in the fraudulent scheme. It merely held that petitioner be immediately
and primarily held responsible for the disallowance, for the simple reason that, as the
approving officer, any transaction presented to him for approval is subject to his
discretion. His reliance on the supposed review and evaluation done by his
subordinates is also discretionary on his part. The COA concluded that whatever
misrepresentation and/or abuse in the performance of their duties made by the
subordinates make petitioner, as head of the agency, also liable, considering that these
people acted on his behalf and with his approval.[31] Such reasoning is non-sequitur.
Section 103 of Presidential Decree No. 1445, [32] which was the basis of petitioners
liability for the disallowance, expressly provides:
Sec. 103 General liability for unauthorized expenditures. expenditures of government
funds or uses of government property in violation of law or regulations shall be a
personal liability of the official or employee found to be directly responsible
therefor. (Underscoring Ours)
Under the said provision, an official or employee shall be personally liable for
unauthorized expenditures if the following requisites are present, to wit: (a) there must
be an expenditure of government funds or use of government property; (b) the
expenditure is in violation of law or regulation; and (c) the official is found directly
responsible therefor.
There is no evidence on record to show that petitioner had knowledge of the
fraudulent scheme perpetrated by some employees of the NHMFC. In fact, petitioner
immediately filed a complaint before the Ombudsman against the subordinate
employees who appeared to be responsible for the fraud. He also directed the filing of a
civil case against the originator and other persons responsible for
misrepresentation. All these acts are indicative that he had no knowledge of the
fraudulent scheme perpetrated by certain officials or employees of his agency. No less
than Lakambini Q. Razon, State Auditor IV of the Commission on Audit, in her letter
dated January 8, 1991 to the Director of the Corporate Audit Office, wrote that:
In the said memorandum, we informed Mr. Albert that we had considered his
participation in the AMAKO transaction, but we cannot lift his liability as head of the
Corporation pursuant to the provisions of Section 2, P.D. 1445 and Section 32 of the
Manual on Certificate of Settlement and Balances. This prompted Mr. Albert to request
for reconsideration on the action taken by this Office on the appeal submitted
previously.
Considering the reasons given and circumstances surrounding the case, we believe
that the President cannot determine the irregularities committed in this
transaction. As a matter of fact, an administrative case was filed by the President of
NHMFC against several officials of the Corporation and other government agencies to
the office of the Ombudsman on October 1, 1990. x x x[33]
The actions taken by petitioner involved the very functions he had to discharge in
the performance of official duties. He cannot, therefore, be held civilly liable for such
acts unless there is a clear showing of bad faith, malice or gross negligence. [34] Inasmuch
as no evidence was presented to show that petitioner acted in bad faith and with gross
negligence in the performance of his official duty, he is presumed to have acted in the
regular performance of his official duty. Similarly, it is a basic tenet of due process that
the decision of a government agency must state the facts and the law on which the
decision is based. The COA decision merely stated conclusions of law. Facts and
circumstances, as well as the whys, the whats and the hows of the disallowance, were
patently missing, inaccurate or incomplete. The COA cannot just perform its
constitutional function of disallowing expenditures of government funds at sheer
discretion. There has to be factual basis why the expenditure is alleged to be fraudulent
or why was there a misrepresentation. Liability depends upon the wrong committed
and not solely by reason of being the head of a government agency. The COA even
mentioned the anti-graft law which imputes liability for a grossly disadvantageous
contract entered into by a government functionary. But as to why and how the
disbursement of funds in this case was considered disadvantageous must be duly
supported by findings of facts.
Consequently, respondent COA committed a grave abuse of its discretion when it
held petitioner personally liable for the subject disallowance.
WHEREFORE, the assailed Decision and Resolution of the respondent Commission
on Audit are hereby REVERSED and SET ASIDE, insofar as they refer to petitioner.
SO ORDERED.
Davide, Jr. C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban,
Quisumbing, Pardo, Gonzaga-Reyes, Ynares-Santiago, De Leon, Jr., and Sandoval-
Gutierrez, JJ., concur.
EN BANC
[G.R. No. 88435. January 16, 2002]
DEVELOPMENT BANK OF THE PHILIPPINES, JESUS P. ESTANISLAO, DOLORES A.
SANTIAGO, LYNN H. CATUNCAN, NORMA O. TERREL, MA. ANTONIA G.
REBUENO, petitioners, vs. COMMISSION ON AUDIT, respondent.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari[1] of the letter-decision of the Chairman of
the Commission on Audit[2] (COA for brevity) and the letter-decision of the COA en
banc[3], prohibiting the Development Bank of the Philippines (DBP for brevity) from
hiring a private external auditor. This petition raises a question of first impression,
whether or not the constitutional power of the COA to examine and audit the DBP is
exclusive and precludes a concurrent audit of the DBP by a private external auditor. 
The Antecedent Facts
In 1986, the Philippine government, under the administration of then President
Corazon C. Aquino, obtained from the World Bank an Economic Recovery Loan (ERL for
brevity) in the amount of US$310 million. The ERL was intended to support the
recovery of the Philippine economy, at that time suffering severely from the financial
crisis that hit the country during the latter part of the Marcos regime. 
As a condition for granting the loan, the World Bank required the Philippine
government to rehabilitate the DBP which was then saddled with huge non-performing
loans. Accordingly, the government committed to rehabilitate the DBP to make it a
viable and self-sustaining financial institution in recognition of its developmental role
in the economy. The DBP was expected to continue providing principally medium and
long-term financing to projects with risks higher than the private sector may be willing
to accept under reasonable terms. [4] The governments commitment was embodied in
the Policy Statement for the Development Bank of the Philippines which stated in part: 
4. Furthermore, like all financial institutions under Central Bank supervision, DBP will
now be required to have a private external audit, and its Board of Directors will now be
opened to adequate private sector representation. It is hoped that with these
commitments, DBP can avoid the difficulties of the past and can function as a
competitive and viable financial institution within the Philippine financial system.
[5]
 (Emphasis supplied)
On November 28, 1986, the Monetary Board adopted Resolution No. 1079
amending the Central Banks Manual of Regulations for Banks and other Financial
Intermediaries, in line with the governments commitment to the World Bank to require
a private external auditor for DBP. Thus, on December 5, 1986, the Central Bank
Governor issued Central Bank Circular No. 1124, providing that: 
SECTION 1. Subsection 1165.5 (Book I) is amended to read as follows:
1165.5 Financial Audit. - Each Bank, whether Government-owned or controlled or
private, shall cause an annual financial audit to be conducted by an external
independent auditor not later than thirty (30) days after the close of the calendar year
or the fiscal year adopted by the bank. x x x.
x x x The Audit of a Government-owned or controlled bank by an external independent
auditor shall be in addition to and without prejudice to that conducted by the
Commission on Audit in the discharge of its mandate under existing law. x x x.
xxx
SECTION 3. The requirement for an annual financial audit by an external independent
auditor shall extend to specialized and unique government banks such as the Land Bank
of the Philippines and the Development Bank of the Philippines. [6]
On December 12, 1986, pursuant to Central Bank Circular No. 1124 and the
governments commitment to the World Bank, DBP Chairman Jesus Estanislao wrote the
COA seeking approval of the DBPs engagement of a private external auditor in addition
to the COA.[7]
On January 2, 1987, to formalize its request for the ERL, the Philippine government
sent the World Bank a letter assuring the World Bank that pursuant to Central Bank
Circular No. 1124, all Banks, including government banks, shall be fully audited by
external independent auditors x x x in addition to that provided by the Commission on
Audit. The letter was signed by the Central Bank Governor and the Ministers of Finance,
Trade and Industry, and Economic Planning of the Philippine government.  [8]
On January 8, 1987, the Philippine government and World Bank negotiating panels
reached final agreement on the private audit of the DBP, as follows:
13. With respect to the draft Policy Statement, it was agreed that Sections 4, 7 and 11
would be amended as follows:
x x x (iii) Section 11 should in line with the letter of Development Policy, confirm that
the external independent audits would commence with a balance sheet audit as of
December 31, 1986 and a full financial audit, including income statements, starting with
the period July 1 to December 31, 1986. A copy of COAs letter (referred to in par. 1, a
draft of which is attached as Annex VIII) regarding DBPs appointment of a private
external auditor will be sent to the Bank before the distribution of the loan documents
to the Banks Board, along with a copy of the scope of audit as approved by COA and
satisfactory to the Bank.
With regard to the scope of the audit to be undertaken by the private external auditors,
the terms of reference which will be issued to the selected auditors should be generally
consistent with the attached model terms of reference for financial audits (Annex IX).
These general terms of reference were discussed during negotiations and form a part of
the World Banks guidelines for financial information on financial institutions. [9]
On January 20, 1987, then COA Chairman Teofisto Guingona, Jr. replied to the
December 12, 1986 letter of the DBP Chairman. The COA Chairmans reply stated that:
x x x the Commission on Audit (COA) will interpose no objection to your engagement of
a private external auditor as required by the Economic Recovery Program Loan
Agreements of 1987 provided that the terms for said audit are first reviewed and
approved by the Commission.[10]
The following day, the COA Chairman also informed the Consultant of the Central
Bank that the COA interposed no objection to the proposed scope of audit services to be
undertaken by the private external auditors to be engaged by the DBP.  [11]
On February 18, 1987, the Board of Directors of the DBP approved the hiring of
Joaquin Cunanan & Co. as the DBPs private external auditor for calendar year 1986 as
required by Central Bank Circular No. 1124 and the World Bank. The DBP Board of
Directors placed a ceiling on the amount of reimbursable out-of-pocket expenses that
could be charged by the private auditor.[12]
On February 23, 1987, the World Bank President, in his Report to the Banks
Executive Directors on the Philippine governments application for the ERL, certified
that the Philippine government was complying with the requirement of a private
external auditor. The World Bank Presidents certification stated that:
74. Accounting and Auditing. All banks both government and private are now subject to
accounting and auditing standards as established by the Central Bank. To ensure full
public accountability, the Monetary Board now requires that all government banks be
subject to annual audits by independent private auditing firms, in addition to those
normally undertaken by the Governments Commission on Audit. DBP and PNB have
already selected private auditors, and audited accounts for 1986 and 1987 will be a
requirement for the releases of the second and third tranches, respectively, of the ERL.
[13]
However, a change in the leadership of the COA suddenly reversed the course of
events. On April 27, 1987, the new COA Chairman, Eufemio Domingo, wrote the Central
Bank Governor protesting the Central Banks issuance of Circular No. 1124 which
allegedly encroached upon the COAs constitutional and statutory power to audit
government agencies. The COA Chairmans letter informed the Governor that:
This Commission hereby registers its strong objection to that portion of the CBP
Circular No. 1124 which requires government banks to engage private auditors in
addition to that conducted by the Commission on Audit, and urges the immediate
amendment thereof. It is the position of this Commission that the said requirement: (a)
infringes on Article IX-D of the Philippine Constitution; (b) violates Section 26 and 32 of
the Government Auditing Code of the Philippines; (c) exposes the financial programs
and strategies of the Philippine Government to high security risks; (d) allows the
unnecessary and unconscionable expenditure of government funds; and (e) encourages
unethical encroachment among professionals.[14]
On May 13, 1987, after learning that the DBP had signed a contract with a private
auditing firm for calendar year 1986, the new COA Chairman wrote the DBP Chairman
that the COA resident auditors were under instructions to disallow any payment to the
private auditor whose services were unconstitutional, illegal and unnecessary. [15]
On July 1, 1987, the DBP Chairman sent to the COA Chairman a copy of the DBPs
contract with Joaquin Cunanan & Co., signed four months earlier on March 5, 1987. The
DBP Chairmans covering handwritten note sought the COAs concurrence to the
contract.[16]
During the pendency of the DBP Chairmans note-request for concurrence, the DBP
paid the billings of the private auditor in the total amount of P487,321.14 [17] despite the
objection of the COA. On October 30, 1987, the COA Chairman issued a Memorandum
disallowing the payments, and holding the following persons personally liable for such
payment:
SVP Fajardo who approved the voucher for payment; VP Santiago who certified that the
expenditure was authorized, necessary and lawful; SM Terrel, Catuncan and Rebueno
who signed the checks; and the head of office who signed the contract and who is
immediately and primarily responsible for the funds of the Bank. [18]
On January 19, 1988, the DBP Chairman wrote the COA Chairman seeking
reconsideration of the COA Chairmans Memorandum. [19] However, the DBP received no
response until August 29, 1988 when the COA Chairman issued a letter-decision
denying petitioners July 1, 1987 note-request for concurrence. The letter-decision, one
of the two COA decisions assailed in this petition, declared in part as follows:
(a) In the letter to the Central Bank Governor x x x, this Commission clearly stated its
non-negotiable stand on the issue in the following terms:
x x x the very essence of the Commission on Audit as an independent constitutional
commission in the total scheme of Government, is its singular function to [E]xamine,
audit, and settle x x x all accounts pertaining to x x x the Government, or any of its
subdivisions, x x x including government-owned or controlled corporations. To allow
private firms to interfere in this governmental audit domain would be to derogate the
Constitutional supremacy of State audit as the Governments guardian of the peoples
treasury, and as the prime advocate of economy in the use of government resources.
xxx
(c) In the letter to the Secretary of Finance dated January 28, 1988 x x x, this
Commission maintains:
1. COA is in no way prepared to permit use of private auditors except
insofar as the law allows, which is to deputize and retain in the name
of the Commission such certified public accountants and other
licensed professionals not in the public service as it may deem
necessary to assist government auditors in undertaking specialized
audit engagements (Sec. 31, PD No 1445). Outside of this, the
Commission does not consider the matter of hiring private auditing
firms a negotiable matter, and this we want to emphasize to avoid
future embarrassment to the Government. The Commission on Audit
is a constitutionally-created independent and separate body, and
neither Congress nor the Executive Department has the power to
detract from its mandated duties, functions, and powers.
2. Since the proceeds of the proposed loan accrue to the Republic of the
Philippines as borrower, it follows that its accounting and audit must
comply with the laws of this country. To specify in the Loan
Agreement that the loan account, once released to the Government,
shall be audited by independent auditors acceptable to the Bank is
not only to entirely by-pass this Commission but to ignore as well
the Constitution and the laws of this country which vests in this
Commission the power, authority, and duty to examine, audit, and
settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property x x x pertaining to the
Government. (Sec. 2, Art. IX-D, Phil. Const.).
Such brazen disregard of the fundamental law of this country cannot
be countenanced by this Commission.
In view of all the foregoing, you are hereby advised:
1. To desist from proceeding with the audit of Joaquin Cunanan & Co. of the Banks
financial statements for the year ending December 31, 1987.
2. To refrain from making any payments out of the funds of the Development Bank of
the Philippines, in the event that such audit services have already been rendered,
attention being invited to the following provisions of the Government Auditing Code of
the Philippines:
Sec. 108. General liability for unlawful expenditures Expenditures of government funds
or uses of government property in violation of law or regulations shall be a personal
liability of the official or employee found to be directly responsible therefore.
3. To restitute, within thirty (30) days from receipt hereof, the total amount
of P513,549.24 under CV Nos. 9136, 5014, 6201 and 4082 for professional services
rendered in the audit of the 1986 financial operations of the Bank. Pursuant to the
aforequoted provisions of law, such unlawful expenditure is the personal liability of the
official directly responsible therefore.
Please be guided accordingly.[20]
On September 26, 1988, the DBP Chairman appealed the letter-decision to the
COA en banc. On May 20, 1989, the COA en banc, in a letter-decision, denied the DBPs
appeal. This letter-decision, now also assailed by the DBP, held that:
Upon a circumspect evaluation of the grounds upon which your instant request is
predicated, this Commission finds the same to be devoid of merit. As hereunder
demonstrated, the justifications offered do not inspire rational belief in the mind of this
Commission.
First, it bears stress that CB Circular No. 1124, series of 1986, which has earlier been
shown to be constitutionally and legally infirm, cannot by any means possess any
binding and conclusive effect upon this Commission and, hence, may not be properly
invoked in support of the instant appeal.
Secondly, it was not the International Bank for Reconstruction and Development which
required the audit of government banks by private auditing firm, but the Central Bank
itself.
Thirdly, insofar as this Commission is concerned, PD 2029 is an anachronism of sorts if
viewed in the light of the present Constitution recognizing this Commission as the
supreme and exclusive audit institution of the government. This is necessarily implicit
from the bare language of Section 2(1), Article IX-D thereof which, despite the absence
of the qualifying adjective exclusive that anyway would be a surplusage, ought to be
reasonably construed as vesting in this Commission the power, authority, and duty to
audit all government accounts to the exclusion of any other person or entity, whether in
the public or the private sector. Expressio unius est exclusio alterius. A contrary
interpretation, such as that being pressed upon this Commission, would reduce this
constitutional ordinance to an absurdity (reductio ad absurdum) as it thereby would
give rise to the rather confusing spectacle, as it were, of a government agency or
corporation being audited not only by this Commission but also and in addition thereto
by one or two or several private accounting firms certainly a situation never intended
by the framers of the Constitution.
Lastly, while this Commission has not lost sight of the letter of then COA Chairman
Guingona, Jr. to the DBP Chairman, dated January 20, 1987, it has opted to be guided
and influenced by the more persuasive and controlling COA Circular No. 860254 dated
March 24, 1986, which in categorical and precise terms ordained that:
Accordingly, by way of reassertion and reaffirmation of its primary audit jurisdiction, as
herein above defined, the Commission on Audit hereby issues the following directives:
1. Any ongoing audit of a government-owned and/or controlled corporation or any of
its subsidiaries or corporate offsprings being conducted by a private auditor or
accounting firm shall cease and terminate on April 15, 1986. Henceforth, from and after
said date, the audit of said corporate entity shall be undertaken solely and exclusively
by the Commission on Audit. x x x.
Premises considered, it is regretted that your instant request for reconsideration has to
be, as it is hereby, denied.[21]
Hence, on June 14, 1989 the DBP filed this petition for review with prayer for a
temporary restraining order, assailing the two COA letter-decisions for being contrary
to the Constitution and existing laws. On June 15, 1989 this Court issued a temporary
restraining order directing the COA to cease and desist from enforcing its challenged
letter-decisions. The Office of the Solicitor General, in a Manifestation dated October 18,
1989, declined to appear on behalf of the COA on the ground that the Solicitor General
was taking a position adverse to that of the COA. Consequently, a private counsel on pro
bono basis represented the COA. 
The Issues 
The DBPs petition raises the following issues:
1. Does the Constitution vest in the COA the sole and exclusive power to
examine and audit government banks so as to prohibit concurrent audit
by private external auditors under any circumstance?
2. Is there an existing statute that prohibits government banks from hiring
private auditors in addition to the COA? If there is none, is there an
existing statute that authorizes government banks to hire private auditors
in addition to the COA?
3. If there is no legal impediment to the hiring by government banks of a
private auditor, was the hiring by the DBP of a private auditor in the case
at bar necessary, and were the fees paid by DBP to the private auditor
reasonable, under the circumstances?
 The Courts Ruling
The DBPs petition is meritorious.
First Issue: Power of COA to Audit under the Constitution
The resolution of the primordial issue of whether or not the COA has the sole and
exclusive power to examine and audit government banks involves an interpretation of
Section 2, Article IX-D of the 1987 Constitution. This Section provides as follows:
Sec. 2. (1) The Commission on Audit shall have the power, authority, and duty
to examine, audit, and settle all accounts pertaining to the revenue and receipts
of, and expenditures or uses of funds and property, owned and held in trust by,
or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned or controlled corporations
with original charters, x x x.
(2) The Commission shall have the exclusive authority, subject to the
limitations in this Article, to define the scope of its audit and examination,
establish the techniques and methods required therefore, and promulgate
accounting and auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant,
or unconscionable expenditures, or uses of government funds and properties.
(Emphasis supplied)
The COA vigorously asserts that under the first paragraph of Section 2, the COA
enjoys the sole and exclusive power to examine and audit all government agencies,
including the DBP. The COA contends this is similar to its sole and exclusive authority,
under the second paragraph of the same Section, to define the scope of its audit,
promulgate auditing rules and regulations, including rules on the disallowance of
unnecessary expenditures of government agencies. The bare language of Section 2,
however, shows that the COAs power under the first paragraph is not declared
exclusive, while its authority under the second paragraph is expressly declared
exclusive. There is a significant reason for this marked difference in language.
During the deliberations of the Constitutional Commission, Commissioner Serafin
Guingona proposed the addition of the word exclusive in the first paragraph of Section
2, thereby granting the COA the sole and exclusive power to examine and audit all
government agencies. However, the Constitutional Commission rejected the addition of
the word exclusive in the first paragraph of Section 2 and Guingona was forced to
withdraw his proposal. Commissioner Christian Monsod explained the rejection in this
manner:
MR. MONSOD. Earlier Commissioner Guingona, in withdrawing his amendment to
add EXCLUSIVE made a statement about the preponderant right of COA.
For the record, we would like to clarify the reason for not including the word. First,
we do not want an Article that would constitute a disincentive or an obstacle to
private investment. There are government institutions with private investments in
them, and some of these investors - Filipinos, as well as in some cases, foreigners
- require the presence of private auditing firms, not exclusively, but
concurrently. So this does not take away the power of the Commission on
Audit. Second, there are certain instances where private auditing may be required,
like the listing in the stock exchange. In other words, we do not want this
provision to be an unnecessary obstacle to privatization of these companies or
attraction of investments.[22] (Emphasis supplied)
Shortly thereafter, Commissioner Guingona attempted to resurrect his amendment
by proposing the following provision:
Private auditing firms may not examine or audit accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property owned or held in trust by or
pertaining to the Government or any of its subdivisions, agencies or instrumentalities.
[23]
Guingona argued that a private audit in addition to the COA audit would be a useless
duplication and an unnecessary expense on the part of government.
The Constitutional Commission also rejected this proposed provision, after
Commissioner Monsod made the following explanation:
MR. MONSOD. x x x But it is also a fact that even government agencies,
instrumentalities and subdivisions sometimes borrow money from abroad. And if
we are at all going to preclude the possibility of any concurrent auditing, if that is
required, and insist that it is only exclusively the government which can audit, we
may be unnecessarily tying their hands without really accomplishing much more
than what we want. As long as the COA is there, and the COAs power cannot be
eliminated by law, by decree or anything of that sort, then the government funds
are protected.
As far as the question of fees is concerned, this is always negotiable. Besides, if one
talks about auditing fees, these are governed by certain regulations within the
auditing profession, beyond which auditing firms cannot go. Furthermore, the
government can always refuse to pay unconscionable fees. So, that matter really is
not that relevant. But I think what we want to insist on is that there should be
some flexibility so that a procedural requirement does not impede a substantive
transaction as long as COA is there.[24] (Emphasis supplied)
The rejection of Guingonas second proposal put an end to all efforts to grant the COA
the sole and exclusive power to examine and audit government agencies.
In sharp contrast, the Constitutional Commission placed the word exclusive to
qualify the authority of the COA under the second paragraph of the same Section 2. The
word exclusive did not appear in the counterpart provisions of Section 2 in the 1935
and 1973 Constitutions.[25] There is no dispute that the COAs authority under the second
paragraph of Section 2 is exclusive as the language of the Constitution admits of no
other meaning. Thus, the COA has the exclusive authority to decide on disallowances of
unnecessary government expenditures. Other government agencies and their officials,
as well as private auditors engaged by them, cannot in any way intrude into this
exclusive function of the COA.  neither by-passed nor ignored since even with a private audit the COA will still conduct
The qualifying word exclusive in the second paragraph of Section 2 cannot be
applied to the first paragraph which is another sub-section of Section 2. A qualifying
word is intended to refer only to the phrase to which it is immediately associated, and
not to a phrase distantly located in another paragraph or sub-section. [26] Thus, the first
paragraph of Section 2 must be read the way it appears, without the word exclusive,
signifying that non-COA auditors can also examine and audit government
agencies. Besides, the framers of the Constitution intentionally omitted the word
exclusive in the first paragraph of Section 2 precisely to allow concurrent audit by
private external auditors.
The clear and unmistakable conclusion from a reading of the entire Section 2 is
that the COAs power to examine and audit is non-exclusive. On the other hand, the COAs
authority to define the scope of its audit, promulgate auditing rules and regulations, and
disallow unnecessary expenditures is exclusive.
Moreover, as the constitutionally mandated auditor of all government agencies,
the COAs findings and conclusions necessarily prevail over those of private auditors, at
least insofar as government agencies and officials are concerned. The superiority or
preponderance of the COA audit over private audit can be gleaned from the records of
the Constitutional Commission, as follows:  nullify this flexibility in the instances mentioned, or in similar instances, will be ultra
MR. GUINGONA. Madam President, after consultation with the honorable members
of the Committee, I have amended my proposed amendment by deleting the word
EXCLUSIVE because I was made to understand that the Commission on Audit will
still have the preponderant power and authority to examine, audit and settle.
[27]
 (Emphasis supplied)
The findings and conclusions of the private auditor may guide private investors or
creditors who require such private audit. Government agencies and officials, however,
remain bound by the findings and conclusions of the COA, whether the matter falls
under the first or second paragraph of Section 2, unless of course such findings and
conclusions are modified or reversed by the courts.
The power of the COA to examine and audit government agencies, while non-
exclusive, cannot be taken away from the COA. Section 3, Article IX-D of the Constitution
mandates that:
Sec. 3. No law shall be passed exempting any entity of the Government or its
subsidiary in any guise whatsoever, or any investment of public funds, from the
jurisdiction of the Commission on Audit.
The mere fact that private auditors may audit government agencies does not divest the
COA of its power to examine and audit the same government agencies. The COA is
its usual examination and audit, and its findings and conclusions will still bind
government agencies and their officials. A concurrent private audit poses no danger
whatsoever of public funds or assets escaping the usual scrutiny of a COA audit.
Manifestly, the express language of the Constitution, and the clear intent of its
framers, point to only one indubitable conclusion - the COA does not have the exclusive
power to examine and audit government agencies. The framers of the Constitution were
fully aware of the need to allow independent private audit of certain government
agencies in addition to the COA audit, as when there is a private investment in a
government-controlled corporation, or when a government corporation is privatized or
publicly listed, or as in the case at bar when the government borrows money from
abroad.
In these instances the government enters the marketplace and competes with the
rest of the world in attracting investments or loans. To succeed, the government must
abide with the reasonable business practices of the marketplace. Otherwise no investor
or creditor will do business with the government, frustrating government efforts to
attract investments or secure loans that may be critical to stimulate moribund
industries or resuscitate a badly shattered national economy as in the case at bar.  By
design the Constitution is flexible enough to meet these exigencies. Any attempt to
vires, in the absence of a statute limiting or removing such flexibility. 
The deliberations of the Constitutional Commission reveal eloquently the intent of
Section 2, Article IX-D of the Constitution. As this Court has ruled repeatedly, the intent
of the law is the controlling factor in the interpretation of the law. [28] If a law needs
interpretation, the most dominant influence is the intent of the law. [29] The intent of the
law is that which is expressed in the words of the law, which should be discovered
within its four corners aided, if necessary, by its legislative history. [30] In the case of
Section 2, Article IX-D of the Constitution, the intent of the framers of the Constitution is
evident from the bare language of Section 2 itself. The deliberations of the
Constitutional Commission confirm expressly and even elucidate further this intent
beyond any doubt whatsoever.
There is another constitutional barrier to the COAs insistence of exclusive power
to examine and audit all government agencies. The COAs claim clashes directly with the
Central Banks constitutional power of supervision over banks under Section 20, Article
XII of the Constitution. This provision states as follows:
Sec. 20. The Congress shall establish an independent central monetary authority, the
members of whose governing board must be natural-born Filipino citizens, of known
probity, integrity, and patriotism, the majority of whom shall come from the private
sector. They shall also be subject to such other qualifications and disabilities as may be
prescribed by law. The authority shall provide policy direction in the areas of money,
banking, and credit. It shall have supervision over the operations of banks and exercise
such regulatory powers as may be provided by law over the operations of finance
companies and other institutions performing similar functions. (Emphasis supplied)
Historically, the Central Bank has been conducting periodic and special
examination and audit of banks to determine the soundness of their operations and the
safety of the deposits of the public. Undeniably, the Central Banks power of supervision
includes the power to examine and audit banks, as the banking laws have always
recognized this power of the Central Bank. [31] Hence, the COAs power to examine and
audit government banks must be reconciled with the Central Banks power to supervise
the same banks. The inevitable conclusion is that the COA and the Central Bank have
concurrent jurisdiction, under the Constitution, to examine and audit government
banks.
However, despite the Central Banks concurrent jurisdiction over government
banks, the COAs audit still prevails over that of the Central Bank since the COA is the
constitutionally mandated auditor of government banks. And in matters falling under
the second paragraph of Section 2, Article IX-D of the Constitution, the COAs jurisdiction
is exclusive. Thus, the Central Bank is devoid of authority to allow or disallow
expenditures of government banks since this function belongs exclusively to the COA.
Second Issue: Statutes Prohibiting or Authorizing Private Auditors
The COA argues that Sections 26, 31 and 32 of PD No. 1445, otherwise known as
the Government Auditing Code of the Philippines, prohibit the hiring of private auditors
by government agencies. Section 26 of PD No. 1445 provides that:
Section 26. General Jurisdiction. The authority and powers of the Commission shall
extend to and comprehend all matters relating to auditing procedures, systems and
controls, the keeping of the general accounts of the Government, the preservation of
vouchers pertaining thereto for a period of ten years, the examination and inspection of
the books, records, and papers relating to those accounts; and the audit and settlement
of the accounts of all persons respecting funds or property received or held by them in
an accountable capacity, as well as the examination, audit, and settlement of all debts
and claims of any sort due or owing to the Government or any of its subdivisions,
agencies or instrumentalities. The said jurisdiction extends to all government-owned or
controlled corporations, including their subsidiaries, and other self-governing boards,
commissions, or agencies of the Government, and as herein prescribed, including non-
governmental entities subsidized by the government, those funded by donations
through the government, those required to pay levies or government share, and those
for which the government has put up a counterpart fund or those partly funded by the
government.
Section 26 defines the extent and scope of the powers of the COA. Considering the
comprehensive definition in Section 26, the COAs jurisdiction covers all government
agencies, offices, bureaus and units, including government-owned or controlled
corporations, and even non-government entities enjoying subsidy from the
government. However, there is nothing in Section 26 that states, expressly or impliedly,
that the COAs power to examine and audit government banks is exclusive, thereby
preventing private audit of government agencies concurrently with the COA audit.
Section 26 is a definition of the COAs general jurisdiction. Jurisdiction may be
exclusive or concurrent. Section 26 of PD No. 1445 does not state that the COAs
jurisdiction is exclusive, and there are other laws providing for concurrent jurisdiction.
Thus, Section 26 must be applied in harmony with Section 58 [32] of the General Banking
Law of 2000 (RA No. 8791) which authorizes unequivocally the Monetary Board to
require banks to hire independent auditors. Section 58 of the General Banking Law of
2000 states as follows:
Section 58. Independent Auditor. - The Monetary Board may require a bank, quasi-bank
or trust entity to engage the services of an independent auditor to be chosen by the
bank, quasi-bank or trust entity concerned from a list of certified public accountants
acceptable to the Monetary Board. The term of the engagement shall be as prescribed
by the Monetary Board which may either be on a continuing basis where the auditor
shall act as resident examiner, or on the basis of special engagements; but in any case,
the independent auditor shall be responsible to the banks, quasi-banks or trust entitys
board of directors. A copy of the report shall be furnished to the Monetary Board. x x
x. (Emphasis supplied)
Moreover, Section 26 must also be applied in conformity with Sections 25 and
28[33] of the New Central Bank Act (RA No. 7653) which authorize expressly the
Monetary Board to conduct periodic or special examination of all banks. Sections 25
and 28 of the New Central Bank Act state as follows:
Sec. 25. Supervision and Examination. The Bangko Sentral shall have supervision
over, and conduct periodic or special examinations of, banking institutions x x
x. (Emphasis supplied)
x x x 
 Sec. 28. Examination and Fees. The supervising and examining department head,
personally or by deputy, shall examine the books of every banking institution once
in every twelve (12) months, and at such other time as the Monetary Board by an
affirmative vote of five (5) members may deem expedient and to make a report on
the same to the Monetary Board: x x x. (Emphasis supplied)
The power vested in the Monetary Board under Section 58 of the General Banking
Law of 2000, and Sections 25 and 28 of the New Central Bank Act, emanates from the
Central Banks explicit constitutional mandate to exercise supervision over the
operations of banks. Under Section 4 of the General Banking Law of 2000, the term
supervision[34] is defined as follows:
Section 4. Supervisory Powers. The operations and activities of banks shall be
subject to supervision of the Bangko Sentral. Supervision shall include the
following:
xxx
4.2. The conduct of examination to determine compliance with laws and regulations if
the circumstances so warrant as determined by the Monetary Board;
xxx
4.4. Regular investigation which shall not be oftener than once a year from the last date
of examination to determine whether an institution is conducting its business on a safe
or sound basis: Provided, That the deficiencies/irregularities found by or discovered by
an audit shall immediately be addressed;
x x x. (Emphasis supplied)
Clearly, under existing laws, the COA does not have the sole and exclusive power to
examine and audit government banks. The Central Bank has concurrent jurisdiction to
examine and audit, or cause the examination and audit, of government banks.
Section 31 of PD No. 1445, another provision of law claimed by the COA to prohibit
the hiring of private auditors by government agencies, provides as follows:  auditing which the COA may or may not want to undertake itself for a government
Section 31. Deputization of private licensed professionals to assist government
auditors. - (1) The Commission may, when the exigencies of the service so require,
deputize and retain in the name of the Commission such certified public
accountants and other licensed professionals not in the public service as it may
deem necessary to assist government auditors in undertaking specialized audit
engagements.
(2) The deputized professionals shall be entitled to such compensation and
allowances as may be stipulated, subject to pertinent rules and regulations on
compensation and fees.
According to the COA, Section 31 is the maximum extent that private auditors can
participate in auditing government agencies and anything beyond this is without legal
basis. Hence, the COA maintains that the hiring of private auditors who act in their own
name and operate independently of the COA is unlawful.
Section 31 is bereft of any language that prohibits, expressly or impliedly, the
hiring of private auditors by government agencies. This provision of law merely grants
authority to the COA to hire and deputize private auditors to assist the COA in the
auditing of government agencies. Such private auditors operate under the authority of
the COA. By no stretch of statutory construction can this provision be interpreted as an
absolute statutory ban on the hiring of private auditors by government
agencies. Evidently, the language of the law does not support the COAs claim.
Moreover, the COA further contends that Section 32 of PD No. 1445 is another
provision of law that prohibits the hiring of private auditors by government
agencies. Section 32 provides as follows:
Section 32. Government contracts for auditing, accounting, and related
services. (1) No government agency shall enter into any contract with any private
person or firm for services to undertake studies and services relating to
government auditing, including services to conduct, for a fee, seminars or
workshops for government personnel on these topics, unless the proposed
contract is first submitted to the Commission to enable it to determine if it has the
resources to undertake such studies or services. The Commission may engage the
services of experts from the public or private sector in the conduct of these
studies.
(2) Should the Commission decide not to undertake the study or service, it shall
nonetheless have the power to review the contract in order to determine the
reasonableness of its costs. (Emphasis supplied)
Section 32 refers to contracts for studies and services relating to government
agency. Stated another way, Section 32 speaks of studies and services that the COA may
choose not to render to a government agency. Obviously, the subject of these contracts
is not the audit itself of a government agency because the COA is compelled to
undertake such audit and cannot choose not to conduct such audit. The Constitution
and existing law mandate the COA to audit all government agencies. Section 2, Article
IX-D of the Constitution commands that the COA shall have the x x x duty to examine,
audit, and settle all accounts of government agencies (Emphasis supplied). Similarly,
the Revised Administrative Code of 1987 directs that the Commission on Audit shall
have the x x x duty to examine, audit, and settle all accounts [35] of government agencies
(Emphasis supplied). Hence, the COA cannot refuse to audit government agencies under
any circumstance.
The subject of the contracts referred to in Section 32 is necessarily limited to
studies, seminars, workshops, researches and other services on government auditing
which the COA may or may not undertake at its discretion, thereby excluding the audit
itself of government agencies. Since the COA personnel have the experience on
government auditing and are in fact the experts on this subject, it is only proper for the
COA to be granted the right of first refusal to undertake such services if required by
government agencies. This is what Section 32 is all about and nothing more. Plainly,
there is nothing in Section 32 which prohibits the hiring of private auditors to audit
government agencies concurrently with the COA audit.
On the other hand, the DBP cites Central Bank Circular No. 1124 [36] as legal basis
for hiring a private auditor. This Circular amended Subsection 1165.5 (Book I) of
the Manual of Regulations for Banks and other Financial Intermediaries to require [E]ach
bank, whether government-owned or controlled or private, x x x (to) cause an annual
financial audit to be conducted by an external auditor x x x. Moreover, the Circular
states that the audit of a government-owned or controlled bank by an external
independent auditor shall be in addition to and without prejudice to that conducted by
the Commission on Audit in the discharge of its mandate under existing
law. Furthermore, the Circular provides that the requirement for an annual audit by an
external independent auditor shall extend to specialized and unique government banks
such as the Land Bank of the Philippines and the Development Bank of the Philippines.
The Central Bank promulgated Circular No. 1124 on December 5, 1986 pursuant to
its power under the Freedom Constitution, the fundamental law then in force, as well as
pursuant to its general rule making authority under the General Banking Act (RA No.
337), the banking law in effect at that time. Under the Freedom Constitution, the Central
Bank exercised supervisory authority over the banking system. Section 14, Article XV of
the 1973 Constitution, which was re-adopted in the Freedom Constitution, provided as
follows:
SEC. 14. The Batasang Pambansa shall establish a central monetary authority
which shall provide policy direction in the areas of money, banking and credit. It
shall have supervisory authority over the operations of banks and exercise such
regulatory authority as may be provided by law over the operations of finance
companies and other institutions performing similar functions. Until the Batasang
Pambansa shall otherwise provide, the Central Bank of the Philippines, operating
under existing laws, shall function as the central monetary authority. (Emphasis
supplied)
Section 6-D of the General Banking Act (RA No. 337) vested the Monetary Board with
the specific power to require a bank to engage the services of an independent auditor to
be chosen by the bank concerned from a list of certified public accountants acceptable
to the Monetary Board. 
The 1987 Constitution created an independent central monetary authority with
substantially the same powers as the Central Bank under the 1973 Constitution and the
Freedom Constitution. Section 20, Article XII of the 1987 Constitution provides that the
Monetary Board shall have supervision over the operations of banks. The specific
power of the Central Bank under the General Banking Act (RA No. 337) to require an
independent audit of banks was re-enacted in Section 58 of the General Banking Law of
2000 (RA No. 8791).
Indubitably, the Central Bank had the express constitutional and statutory power
to promulgate Circular No. 1124 on December 5, 1986. The power granted to the
Central Bank to issue Circular No. 1124 with respect to the independent audit of banks
is direct, unambiguous, and beyond dispute. The Bangko Sentral ng Pilipinas, which
succeeded the Central Bank, retained under the 1987 Constitution and the General
Banking Law of 2000 (RA No. 8791) the same constitutional and statutory power the
Central Bank had under the Freedom Constitution and the General Banking Act (RA No.
337) with respect to the independent audit of banks.
Circular No. 1124 has the force and effect of law. In a long line of decisions, [37] this
Court has held consistently that the rules and regulations issued by the Central Bank
pursuant to its supervisory and regulatory powers have the force and effect of law. The
DBP, being a bank under the constitutional and statutory supervision of the Central
Bank, was under a clear legal obligation to comply with the requirement of Circular No.
1124 on the private audit of banks. Refusal by the DBP to comply with the Circular
would have rendered the DBP and its officers liable to the penal provisions of the
General Banking Act,[38] as well as the administrative and penal sanctions under the
Central Bank Act.[39]
The DBP also relies on Section 8 of PD No. 2029 as its statutory basis for hiring a
private auditor. This Section states in part as follows: 
The audit of government corporations by the Commission on Audit shall not preclude
government corporations from engaging the services of private auditing firms:
Provided, however, that even if the services of the latter are availed of, the audit report
of the Commission on Audit shall serve as the report for purposes of compliance with
audit requirements as required of government corporations under applicable law.
Section 8 of PD No. 2029, however, also provides that the policy of withdrawal of
resident auditors shall be fully implemented x x x. Section 2 of the same decree also
excludes from the term government-owned or controlled corporation two classes of
corporations. The first are originally private corporations the majority of the shares of
stock of which are acquired by government financial institutions through foreclosure
or dacion en pago. The second are subsidiary corporations of government corporations,
which subsidiaries are organized exclusively to own, manage or lease physical assets
acquired by government financial institutions through foreclosure or dacion en
pago. Claiming that PD No. 2029 operates to exempt certain government-owned
corporations from the COAs jurisdiction in violation of Section 3, Article IX-D of the
Constitution, the COA is questioning the constitutionality of PD No. 2029.
There is, however, no compelling need to pass upon the constitutionality of PD No.
2029 because the Constitution and existing banking laws allow such hiring. The issues
raised in this case can be resolved adequately without resolving the constitutionality of
PD No. 2029. This Court will leave the issue of the constitutionality of PD No. 2029 to be
settled in another case where its resolution is an absolute necessity. [40]
Third Issue: Necessity of Private Auditor and Reasonableness of the Fees
The remaining issue to be resolved is whether or not the DBPs hiring of a private
auditor was necessary and the fees it paid reasonable under the circumstances.  The
hiring by the DBP of a private auditor was a condition imposed by the World Bank for
the grant to the Philippine government in early 1987 of a US$310 million Economic
Recovery Loan, at a time when the government desperately needed funds to revive a
badly battered economy. One of the salient objectives of the US$310 million loan was
the rehabilitation of the DBP which was then burdened with enormous bad loans. The
rehabilitation of the DBP was important in the overall recovery of the national
economy.
On February 23, 1986, the World Bank President reported to the Banks Executive
Directors that the privately audited accounts of the DBP for 1986 and 1987 will be
a requirement for the releases of the second and third tranches, respectively, of the ERL
(Emphasis supplied). Moreover, the Agreed Minutes of Negotiations on the Philippine
Economic Recovery Program[41] signed by the Philippine government and World Bank
negotiating panels on January 8, 1987, required that a copy of COAs letter x x x
regarding DBPs appointment of a private external auditor will be sent to the (World)
Bank before the distribution of the loan documents to the Banks Board, along with a
copy of the scope of audit as approved by COA and satisfactory to the Bank (Emphasis
supplied).
As a creditor, the World Bank needed the private audit for its own information to
monitor the progress of the DBPs rehabilitation. This is apparent from the said Agreed
Minutes which provided that the general terms of reference (for the hiring of private
external audit) were discussed during the negotiations and form part of the World
Banks guidelines for financial information on financial institutions [42] (Emphasis
supplied).
The hiring of a private auditor being an express condition for the grant of the
US$310 million Economic Recovery Loan, a major objective of which was the DBPs
rehabilitation, the same was a necessary corporate act on the part of the DBP. The
national government, represented by the Central Bank Governor, as well as the
Ministers of Finance, Trade, and Economic Planning, had already committed to the
hiring by all government banks of private auditors in addition to the COA.  For the DBP
to refuse to hire a private auditor would have aborted the vital loan and derailed the
national economic recovery, resulting in grave consequences to the entire nation. The
hiring of a private auditor was not only necessary based on the governments loan
covenant with the World Bank, it was also necessary because it was mandated by
Central Bank Circular No. 1124 under pain of administrative and penal sanctions.
The last matter to determine is the reasonableness of the fees charged by Joaquin
C. Cunanan & Co., the private auditor hired by the DBP. The COA describes the private
auditors fees as an excessive, extravagant or unconscionable expenditure of
government funds. For the audit of the DBPs financial statements in 1986, the private
auditor billed the DBP the amount of P487,321.14.[43] In 1987, the private auditor billed
the DBP the amount of P529,947.00.[44] In comparison, the COA billed the DBP an audit
fee of P27,015,963.00[45] in 1988, and P15,421,662.00[46] in 1989. Even granting that the
COAs scope of audit services was broader, [47] still it could not be said that the private
auditors fees are excessive, extravagant or unconscionable compared to the COAs
billings.
The hiring of a private auditor by the DBP being a condition of the US$310 million
World Bank loan to the Philippine government, the fees of such private auditor are in
reality part of the governments cost of borrowing from the World Bank. The audit
report of the private auditor is primarily intended for the World Banks
information[48] on the financial status of the DBP whose rehabilitation was one of the
objectives of the loan. An annual private audit fee of about half a million pesos added to
the interest on a US$310 million loan would hardly make the cost of borrowing
excessive, extravagant or unconscionable. Besides, the condition imposed by a lender,
whose money is at risk, requiring the borrower or its majority-owned subsidiaries to
submit to audit by an independent public accountant, is a reasonable and normal
business practice.
WHEREFORE, the petition is hereby GRANTED. The letter-decision of the
Chairman of the Commission on Audit dated August 29, 1988, and the letter-decision
promulgated by the Commission on Audit en banc dated May 20, 1989, are hereby SET
ASIDE, and the temporary restraining order issued by the court enjoining respondent
Commission on Audit from enforcing the said decisions is hereby made PERMANENT.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban,
Quisumbing, Pardo, Buena, Ynares-Santiago, De Leon, Jr., and Sandoval-Gutierrez,
JJ., concur.
EN BANC
[G.R. No. 147402. January 14, 2004]
ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte
Metropolitan Water District (LMWD), Tacloban City, petitioner, vs.
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners
RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of
COA Region VIII, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari[1] to annul the Commission on Audits (COA)
Resolution dated 3 January 2000 and the Decision dated 30 January 2001 denying the
Motion for Reconsideration.The COA denied petitioner Ranulfo C. Felicianos request for
COA to cease all audit services, and to stop charging auditing fees, to Leyte Metropolitan
Water District (LMWD). The COA also denied petitioners request for COA to refund all
auditing fees previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of
LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting
payment of auditing fees. As General Manager of LMWD, petitioner sent a reply dated
12 October 1999 informing COAs Regional Director that the water district could not pay
the auditing fees. Petitioner cited as basis for his action Sections 6 and 20 of
Presidential Decree 198 (PD 198)[2], as well as Section 18 of Republic Act No. 6758 (RA
6758). The Regional Director referred petitioners reply to the COA Chairman on 18
October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking
for refund of all auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution
dated 3 January 2000 denying his requests. Petitioner filed a motion for
reconsideration on 31 March 2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition
were resolutions of the Visayas Association of Water Districts (VAWD) and the
Philippine Association of Water Districts (PAWD) supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction over local
water districts in Davao City Water District v. Civil Service Commission and
Commission on Audit,[3] as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught
petitioners contention that they are private corporations. It is clear therefrom that the
power to appoint the members who will comprise the members of the Board of
Directors belong to the local executives of the local subdivision unit where such
districts are located. In contrast, the members of the Board of Directors or the trustees
of a private corporation are elected from among members or stockholders thereof. It
would not be amiss at this point to emphasize that a private corporation is created for
the private purpose, benefit, aim and end of its members or stockholders. Necessarily,
said members or stockholders should be given a free hand to choose who will compose
the governing body of their corporation. But this is not the case here and this clearly
indicates that petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees as well
as petitioners request for COA to refund all auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to
lack or excess of jurisdiction by auditing LMWD and requiring it to pay auditing
fees. Petitioner raises the following issues for resolution:
1. Whether a Local Water District (LWD) created under PD 198, as amended,
is a government-owned or controlled corporation subject to the audit
jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public
accountants from auditing local water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from charging
government-owned and controlled corporations auditing fees.
The Ruling of the Court
 The petition lacks merit.
The Constitution and existing laws [4] mandate COA to audit all government
agencies, including government-owned and controlled corporations (GOCCs) with
original charters. An LWD is a GOCC with an original charter. Section 2(1), Article IX-D
of the Constitution provides for COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or pertaining to,
the Government, or any of its subdivisions, agencies, or instrumentalities, including
government-owned and controlled corporations with original charters, and on a
post-audit basis: (a) constitutional bodies, commissions and offices that have been
granted fiscal autonomy under this Constitution; (b) autonomous state colleges and
universities; (c) other government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the government, which are required by law or
the granting institution to submit to such audit as a condition of subsidy or
equity. However, where the internal control system of the audited agencies is
inadequate, the Commission may adopt such measures, including temporary or special
pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the
general accounts of the Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining thereto. (Emphasis
supplied)
The COAs audit jurisdiction extends not only to government agencies or
instrumentalities, but also to government-owned and controlled corporations with
original charters as well as other government-owned or controlled corporations
without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination
of a doctrine backed by a long line of cases culminating in Davao City Water District v.
Civil Service Commission[5] and just recently reiterated in De Jesus v. Commission on
Audit.[6] Petitioner maintains that LWDs are not government-owned and controlled
corporations with original charters.Petitioner even argues that LWDs are private
corporations. Petitioner asks the Court to consider certain interpretations of the
applicable laws, which would give a new perspective to the issue of the true character
of water districts.[7]
Petitioner theorizes that what PD 198 created was the Local Waters Utilities
Administration (LWUA) and not the LWDs. Petitioner claims that LWDs are created
pursuant to and not created directly by PD 198. Thus, petitioner concludes that PD 198
is not an original charter that would place LWDs within the audit jurisdiction of COA as
defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD
198 does not create LWDs since it does not expressly direct the creation of such
entities, but only provides for their formation on an optional or voluntary basis.
[8]
 Petitioner adds that the operative act that creates an LWD is the approval of the
Sanggunian Resolution as specified in PD 198.
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law. The
Constitution recognizes two classes of corporations. The first refers to private
corporations created under a general law. The second refers to government-owned or
controlled corporations created by special charters. Section 16, Article XII of the
Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private corporations except by a
general law applicable to all citizens. [9] The purpose of this constitutional provision is to
ban private corporations created by special charters, which historically gave certain
individuals, families or groups special privileges denied to other citizens. [10]
In short, Congress cannot enact a law creating a private corporation with a special
charter. Such legislation would be unconstitutional. Private corporations may exist only
under a general law. If the corporation is private, it must necessarily exist under a
general law. Stated differently, only corporations created under a general law can
qualify as private corporations. Under existing laws, that general law is the Corporation
Code,[11] except that the Cooperative Code governs the incorporation of cooperatives. [12]
The Constitution authorizes Congress to create government-owned or controlled
corporations through special charters. Since private corporations cannot have special
charters, it follows that Congress can create corporations with special charters only if
such corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created under
the Corporation Code. LWDs are not registered with the Securities and Exchange
Commission. Section 14 of the Corporation Code states that [A]ll corporations
organized under this code shall file with the Securities and Exchange Commission
articles of incorporation x x x. LWDs have no articles of incorporation, no incorporators
and no stockholders or members. There are no stockholders or members to elect the
board directors of LWDs as in the case of all corporations registered with the Securities
and Exchange Commission. The local mayor or the provincial governor appoints the
directors of LWDs for a fixed term of office. This Court has ruled that LWDs are not
created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the
coverage of the CSC are those corporations created pursuant to the Corporation
Code. Significantly, petitioners are not created under the said code, but on the
contrary, they were created pursuant to a special law and are governed primarily
by its provision.[13] (Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter. Since
under the Constitution only government-owned or controlled corporations may have
special charters, LWDs can validly exist only if they are government-owned or
controlled. To claim that LWDs are private corporations with a special charter is to
admit that their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from the
Corporation Code, LWDs derive their legal existence and power from PD 198. Sections 6
and 25 of PD 198[14]provide:
Section 6. Formation of District. This Act is the source of authorization and power to
form and maintain a district. For purposes of this Act, a district shall be
considered as a quasi-public corporation performing public service and
supplying public wants. As such, a district shall exercise the powers, rights and
privileges given to private corporations under existing laws, in addition to the
powers granted in, and subject to such restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city,
municipality, or province, or region thereof, served by said system, followed by the
words Water District.
(b) A description of the boundary of the district. In the case of a city or municipality,
such boundary may include all lands within the city or municipality. A district may
include one or more municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage
facilities managed, operated by or under the control of such city, municipality or
province to such district upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall
include those purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of term
of office for each.
(f) A statement that the district may only be dissolved on the grounds and under the
conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in
Section 36 of this Title.
Nothing in the resolution of formation shall state or infer that the local legislative body
has the power to dissolve, alter or affect the district beyond that specifically provided
for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to
form a single district, a similar resolution shall be adopted in each city, municipality and
province.
xxx
Sec. 25. Authorization. The district may exercise all the powers which are expressly
granted by this Title or which are necessarily implied from or incidental to the
powers and purposes herein stated. For the purpose of carrying out the objectives of
this Act, a district is hereby granted the power of eminent domain, the exercise thereof
shall, however, be subject to review by the Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly
confers on LWDs corporate powers. Section 6 of PD 198 provides that LWDs shall
exercise the powers, rights and privileges given to private corporations under existing
laws. Without PD 198, LWDs would have no corporate powers. Thus, PD 198
constitutes the special enabling charter of LWDs. The ineluctable conclusion is that
LWDs are government-owned and controlled corporations with a special charter.
The phrase government-owned and controlled corporations with original charters
means GOCCs created under special laws and not under the general incorporation
law. There is no difference between the term original charters and special charters. The
Court clarified this in National Service Corporation v. NLRC[15] by citing the
deliberations in the Constitutional Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment
to now read as follows: including government-owned or controlled corporations WITH
ORIGINAL CHARTERS. The purpose of this amendment is to indicate that government
corporations such as the GSIS and SSS, which have original charters, fall within the
ambit of the civil service. However, corporations which are subsidiaries of these
chartered agencies such as the Philippine Airlines, Manila Hotel and Hyatt are excluded
from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term original charters,
what exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of Congress, or by
special law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the
amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law
are out.
MR. ROMULO. That is correct. (Emphasis supplied)
Again, in Davao City Water District v. Civil Service Commission,[16] the Court
reiterated the meaning of the phrase government-owned and controlled corporations
with original charters in this wise:
By government-owned or controlled corporation with original charter, We mean
government owned or controlled corporation created by a special law and not
under the Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC
(G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82), We held:
The Court, in National Service Corporation (NASECO) v. National Labor Relations
Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting
extensively from the deliberations of the 1986 Constitutional Commission in
respect of the intent and meaning of the new phrase with original charter, in
effect held that government-owned and controlled corporations with original
charter refer to corporations chartered by special law as distinguished from
corporations organized under our general incorporation statute the Corporation
Code. In NASECO, the company involved had been organized under the general
incorporation statute and was a subsidiary of the National Investment Development
Corporation (NIDC) which in turn was a subsidiary of the Philippine National Bank, a
bank chartered by a special statute. Thus, government-owned or controlled
corporations like NASECO are effectively, excluded from the scope of the Civil
Service. (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs
assumes that the Sangguniang Bayan has the power to create corporations. This is a
patently baseless assumption. The Local Government Code[17] does not vest in the
Sangguniang Bayan the power to create corporations. [18] What the Local Government
Code empowers the Sangguniang Bayan to do is to provide for the establishment of a
waterworks system subject to existing laws. Thus, Section 447(5)(vii) of the Local
Government Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang
bayan, as the legislative body of the municipality, shall enact ordinances, approve
resolutions and appropriate funds for the general welfare of the municipality and its
inhabitants pursuant to Section 16 of this Code and in the proper exercise of the
corporate powers of the municipality as provided for under Section 22 of this Code, and
shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance,
and repair of an efficient waterworks system to supply water for the inhabitants;
regulate the construction, maintenance, repair and use of hydrants, pumps, cisterns and
reservoirs; protect the purity and quantity of the water supply of the municipality and,
for this purpose, extend the coverage of appropriate ordinances over all territory within
the drainage area of said water supply and within one hundred (100) meters of the
reservoir, conduit, canal, aqueduct, pumping station, or watershed used in connection
with the water service; and regulate the consumption, use or wastage of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in accordance
with the provisions of PD 198. The Sangguniang Bayan has no power to create a
corporate entity that will operate its waterworks system. However, the Sangguniang
Bayan may avail of existing enabling laws, like PD 198, to form and incorporate a water
district. Besides, even assuming for the sake of argument that the Sangguniang Bayan
has the power to create corporations, the LWDs would remain government-owned or
controlled corporations subject to COAs audit jurisdiction. The resolution of the
Sangguniang Bayan would constitute an LWDs special charter, making the LWD a
government-owned and controlled corporation with an original charter. In any event,
the Court has already ruled in Baguio Water District v. Trajano[19] that the
Sangguniang Bayan resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for the final
creation of a district, this Court is of the opinion that said resolution cannot be
considered as its charter, the same being intended only to implement the provisions of
said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in
order that it may have an original charter. In short, petitioner argues that one special
law cannot serve as enabling law for several GOCCs but only for one GOCC. Section 16,
Article XII of the Constitution mandates that Congress shall not, except by general law,
[20]
 provide for the creation of private corporations. Thus, the
Constitution prohibits one special law to create one private corporation, requiring
instead a general law to create private corporations. In contrast, the same Section 16
states that Government-owned or controlled corporations may be created or
established by special charters. Thus, the Constitution permits Congress to create a
GOCC with a special charter.There is, however, no prohibition on Congress to create
several GOCCs of the same class under one special enabling charter.
The rationale behind the prohibition on private corporations having special
charters does not apply to GOCCs. There is no danger of creating special privileges to
certain individuals, families or groups if there is one special law creating each
GOCC. Certainly, such danger will not exist whether one special law creates one GOCC,
or one special enabling law creates several GOCCs. Thus, Congress may create GOCCs
either by special charters specific to each GOCC, or by one special enabling charter
applicable to a class of GOCCs, like PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of
PD 198[21] declares that LWDs shall be considered quasi-public in nature. Petitioners
rationale is that only private corporations may be deemed quasi-public and not public
corporations. Put differently, petitioner rationalizes that a public corporation cannot be
deemed quasi-public because such corporation is already public. Petitioner concludes
that the term quasi-public can only apply to private corporations. Petitioners argument
is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit
jurisdiction depends on the governments ownership or control of a corporation. The
nature of the corporation, whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over government-owned and
controlled corporations with original charters, as well as government-owned or
controlled corporations without original charters. GOCCs with original charters are
subject to COA pre-audit, while GOCCs without original charters are subject to COA
post-audit. GOCCs without original charters refer to corporations created under the
Corporation Code but are owned or controlled by the government. The nature or
purpose of the corporation is not material in determining COAs audit
jurisdiction.Neither is the manner of creation of a corporation, whether under a general
or special law.
The determining factor of COAs audit jurisdiction is government ownership or
control of the corporation. In Philippine Veterans Bank Employees Union-NUBE v.
Philippine Veterans Bank,[22] the Court even ruled that the criterion of ownership and
control is more important than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section
2(1) that the Civil Service embraces all branches, subdivisions, instrumentalities, and
agencies of the Government, including government-owned or controlled corporations
with original charters. As the Bank is not owned or controlled by the Government
although it does have an original charter in the form of R.A. No. 3518, [23] it clearly
does not fall under the Civil Service and should be regarded as an ordinary
commercial corporation. Section 28 of the said law so provides. The consequence is
that the relations of the Bank with its employees should be governed by the labor laws,
under which in fact they have already been paid some of their claims. (Emphasis
supplied)
Certainly, the government owns and controls LWDs. The government organizes
LWDs in accordance with a specific law, PD 198. There is no private party involved as
co-owner in the creation of an LWD. Just prior to the creation of LWDs, the national or
local government owns and controls all their assets. The government controls LWDs
because under PD 198 the municipal or city mayor, or the provincial governor, appoints
all the board directors of an LWD for a fixed term of six years. [24] The board directors of
LWDs are not co-owners of the LWDs. LWDs have no private stockholders or
members. The board directors and other personnel of LWDs are government employees
subject to civil service laws[25] and anti-graft laws.[26]
While Section 8 of PD 198 states that [N]o public official shall serve as director of
an LWD, it only means that the appointees to the board of directors of LWDs shall come
from the private sector. Once such private sector representatives assume office as
directors, they become public officials governed by the civil service law and anti-graft
laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the
Constitution declaring that the civil service includes government-owned or controlled
corporations with original charters.
If LWDs are neither GOCCs with original charters nor GOCCs without original
charters, then they would fall under the term agencies or instrumentalities of the
government and thus still subject to COAs audit jurisdiction. However, the stark and
undeniable fact is that the government owns LWDs. Section 45[27] of PD 198 recognizes
government ownership of LWDs when Section 45 states that the board of directors may
dissolve an LWD only on the condition that another public entity has acquired the
assets of the district and has assumed all obligations and liabilities attached
thereto. The implication is clear that an LWD is a public and not a private entity.
Petitioner does not allege that some entity other than the government owns or
controls LWDs. Instead, petitioner advances the theory that the Water Districts owner
is the District itself. [28]Assuming for the sake of argument that an LWD is self-owned,
[29]
 as petitioner describes an LWD, the government in any event controls all
LWDs. First, government officials appoint all LWD directors to a fixed term of
office. Second, any per diem of LWD directors in excess of P50 is subject to the approval
of the Local Water Utilities Administration, and directors can receive no other
compensation for their services to the LWD. [30] Third, the Local Water Utilities
Administration can require LWDs to merge or consolidate their facilities or operations.
[31]
 This element of government control subjects LWDs to COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private
entities through the transfer of ownership of water facilities from local government
units to their respective water districts as mandated by PD 198. Petitioner is grasping at
straws. Privatization involves the transfer of government assets to a private
entity. Petitioner concedes that the owner of the assets transferred under Section 6 (c)
of PD 198 is no other than the LWD itself. [32] The transfer of assets mandated by PD 198
is a transfer of the water systems facilities managed, operated by or under the control
of such city, municipality or province to such (water) district. [33] In short, the transfer is
from one government entity to another government entity. PD 198 is bereft of any
indication that the transfer is to privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns
and controls LWDs, Section 20 of PD 198 prevents COA from auditing LWDs.  [34] Section
20 of PD 198 provides:
Sec. 20. System of Business Administration. The Board shall, as soon as practicable,
prescribe and define by resolution a system of business administration and accounting
for the district, which shall be patterned upon and conform to the standards established
by the Administration. Auditing shall be performed by a certified public accountant
not in the government service. The Administration may, however, conduct annual
audits of the fiscal operations of the district to be performed by an auditor retained by
the Administration. Expenses incurred in connection therewith shall be borne equally
by the water district concerned and the Administration. [35] (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any government
auditor for that matter, from auditing LWDs. Petitioner asserts that this is the import of
the second sentence of Section 20 of PD 198 when it states that [A]uditing shall be
performed by a certified public accountant not in the government service. [36]
PD 198 cannot prevail over the Constitution. No amount of clever legislation can
exclude GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C of the
Constitution outlaws any scheme or devise to escape COAs audit jurisdiction, thus:
Sec. 3. No law shall be passed exempting any entity of the Government or its
subsidiary in any guise whatever, or any investment of public funds, from the
jurisdiction of the Commission on Audit. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution
precisely to annul provisions of Presidential Decrees, like that of Section 20 of PD 198,
that exempt GOCCs from COA audit. The following exchange in the deliberations of the
Constitutional Commission elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee
report which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS
OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the
absence of a legislature in the past to obtain presidential decrees exempting
themselves from the jurisdiction of the Commission on Audit, one notable example
of which is the Philippine National Oil Company which is really an empty shell. It is a
holding corporation by itself, and strictly on its own account. Its funds were not very
impressive in quantity but underneath that shell there were billions of pesos in a
multiplicity of companies. The PNOC the empty shell under a presidential decree was
covered by the jurisdiction of the Commission on Audit, but the billions of pesos
invested in different corporations underneath it were exempted from the coverage of
the Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on Audit has
determined that the coconut levy is a form of taxation; and that, therefore, these funds
attributed to the shares of 1,400,000 coconut farmers are, in effect, public funds. And
that was, I think, the basis of the PCGG in undertaking that last major sequestration of
up to 94 percent of all the shares in the United Coconut Planters Bank. The charter of
the UCPB, through a presidential decree, exempted it from the jurisdiction of the
Commission on Audit, it being a private organization.
So these are the fetuses of future abuse that we are slaying right here with this
additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED
EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE
WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF
THE COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed
amendment of Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4,
we will accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: (c) government-owned or
controlled corporations and their subsidiaries? So that if these government-owned and
controlled corporations and their subsidiaries are subjected to the audit of the COA, any
law exempting certain government corporations or subsidiaries will be already
unconstitutional.
So I believe, Madam President, that the proposed amendment is unnecessary.
MR. MONSOD: Madam President, since this has been accepted, we would like to reply
to the point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened
in the past, because the same provision was in the 1973 Constitution and yet somehow
a law or a decree was passed where certain institutions were exempted from audit. We
are just reaffirming, emphasizing, the role of the Commission on Audit so that this
problem will never arise in the future.[37]
There is an irreconcilable conflict between the second sentence of Section 20 of PD
198 prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D
of the Constitution vesting in COA the power to audit all GOCCs. We rule that the second
sentence of Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and
3, Article IX-D of the Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services
violate the prohibition in Section 18 of RA 6758, [38] which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other
Agencies. In order to preserve the independence and integrity of the Commission on
Audit (COA), its officials and employees are prohibited from receiving salaries,
honoraria, bonuses, allowances or other emoluments from any government entity, local
government unit, government-owned or controlled corporations, and government
financial institutions, except those compensation paid directly by COA out of its
appropriations and contributions.
Government entities, including government-owned or controlled corporations
including financial institutions and local government units are hereby prohibited from
assessing or billing other government entities, including government-owned or
controlled corporations including financial institutions or local government units for
services rendered by its officials and employees as part of their regular functions for
purposes of paying additional compensation to said officials and employees. (Emphasis
supplied)
Claiming that Section 18 is absolute and leaves no doubt, [39] petitioner asks COA to
discontinue its practice of charging auditing fees to LWDs since such practice allegedly
violates the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of
compensation from any government entity except compensation paid directly by
COA out of its appropriations and contributions. Thus, RA 6758 itself recognizes an
exception to the statutory ban on COA personnel receiving compensation from
GOCCs. In Tejada v. Domingo,[40] the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is designed to
strengthen further the policy x x x to preserve the independence and integrity of the
COA, by explicitly PROHIBITING: (1) COA officials and employees from receiving
salaries, honoraria, bonuses, allowances or other emoluments from any government
entity, local government unit, GOCCs and government financial institutions, except
such compensation paid directly by the COA out of its appropriations and
contributions, and (2) government entities, including GOCCs, government financial
institutions and local government units from assessing or billing other government
entities, GOCCs, government financial institutions or local government units for services
rendered by the latters officials and employees as part of their regular functions for
purposes of paying additional compensation to said officials and employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the second aspect is
addressed directly against the GOCCs and government financial institutions. Under the
first, COA personnel assigned to auditing units of GOCCs or government financial
institutions can receive only such salaries, allowances or fringe benefits paid
directly by the COA out of its appropriations and contributions. The contributions
referred to are the cost of audit services earlier mentioned which cannot include BENITO M. BUSTAMANTE petitioner,
the extra emoluments or benefits now claimed by petitioners. The COA is further
barred from assessing or billing GOCCs and government financial institutions for vs.
services rendered by its personnel as part of their regular audit functions for purposes
of paying additional compensation to such personnel. x x x. (Emphasis supplied) COMMISSIONER ON AUDIT, and MARTHA ROXANA T. CABURIAN, respondents.

In Tejada, the Court explained the meaning of the word contributions in Section  

18 of RA 6758, which allows COA to charge GOCCs the cost of its audit services:
CAMPOS, JR. J.:
x x x the contributions from the GOCCs are limited to the cost of audit services which
are based on the actual cost of the audit function in the corporation concerned plus a
This petition for certiorari with Preliminary Injunction seeks to annul and set aside the
reasonable rate to cover overhead expenses.The actual audit cost shall include
Decision of the respondent Commissioner on Audit (hereinafter referred to as the
personnel services, maintenance and other operating expenses, depreciation on capital
Commission), dated February 5, 1991 which denied due course to the appeal of
and equipment and out-of-pocket expenses. In respect to the allowances and fringe
petitioner from the disallowance by Regional Auditor Martha Roxana Caburian of
benefits granted by the GOCCs to the COA personnel assigned to the formers auditing
petitioner's claim for transportation allowance for the period covering the month of
units, the same shall be directly defrayed by COA from its own appropriations x x x. [41]
January 1989 in the amount of P1,250.00.
COA may charge GOCCs actual audit cost but GOCCs must pay the same directly to COA
Petitioner is the Regional Legal Counsel of the National Power Corporation (NPC) for
and not to COA auditors. Petitioner has not alleged that COA charges LWDs auditing
the Northern Luzon Regional Center covering the provinces of Rizal up to Batanes. As
fees in excess of COAs actual audit cost. Neither has petitioner alleged that the auditing
such he was issued a government vehicle with plate number SCC 387. Pursuant to NPC
fees are paid by LWDs directly to individual COA auditors. Thus, petitioners contention
policy as reflected in the Board Resolution No. 81-95 authorizing the monthly
must fail.
disbursement of transportation allowance, the petitioner, in addition to the use of
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 government vehicle, claimed his transportation allowance for the month of January
and the Decision dated 30 January 2001 denying petitioners Motion for 1989. On May 31, 1990, the petitioner received an Auditor's Notice to Person Liable
Reconsideration are AFFIRMED. The second sentence of Section 20 of Presidential dated April 17, 1990 from respondent Regional Auditor Martha Roxana Caburian
Decree No. 198 is declared VOID for being inconsistent with Sections 2 (1) and 3, Article disallowing P1,250.00 representing aforesaid transportation allowance.
IX-D of the Constitution. No costs.
In a letter to the said Regional Auditor dated June 18, 1990, the petitioner moved for
SO ORDERED.
reconsideration of the disallowance of the claim for transportation allowance. The
Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, Sandoval- Regional Auditor denied petitioner's motion in a letter dated June 27, 1990. Petitioner
Gutierrez, Austria-Martinez, Corona, Carpio-Morales, Callejo, Sr., and Azcuna, and Tinga, appealed this denial to the Commission on Audit at Quezon City, which denied do due
JJ., concur. course.

Hence this petition.

Republic of the Philippines
SUPREME COURT The issue to be resolved is whether such denial to give due course to the appeal of
Manila herein petitioner constitutes grave abuse of discretion amounting to lack of jurisdiction.

EN BANC Grave abuse of discretion implies such capricious and whimsical exercise of judgment
as is equivalent to lack of jurisdiction, or in other words where the power is exercised in
  an arbitrary or despotic manner by reason of passion or personal hostility, and it must
be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal
G.R. No. 103309 November 27, 1992 to perform the duty enjoined or to act at all in contemplation of law.  1
It is beyond dispute that the discretion exercised in the denial of the appeal is within
the power of the Commission on Audit as it is provided in the Constitution:
Sec. 2. The Commission on Audit shall have the following powers and
functions:
(1) Examine, audit, and settle, in accordance with law
and regulations, and receipts of, and expenditures or
uses of funds and property, owned or held in trust by,
or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including
government-owned or controlled corporations; keep
the general accounts of the Government and, for such
period vouchers pertaining thereto; and promulgate
accounting and auditing rules and regulations
including those for the prevention of irregular,
unnecessary, excessive, or extravagant expenditures
or uses of funds and property. . . . (Article XII-D, 1973
Constitution) 2
In the exercise of such power it promulgated COA Circular No. 75-6 dated November 7,
1975, regulating the use of government motor vehicles, aircrafts and watercrafts,
which, among others, provides:
VI. Prohibition Against Use of Government Vehicles by Officials
provided with transportation allowance ––
No official which has been furnished motor transportation allowance
by any government corporations or other office shall be allowed to use
mother vehicle transportation operated and maintained from funds
appropriated in the abovecited Decree. (Sec. 14, P.D. 733)
The petitioner takes exception from the coverage of said circular contending that such
circular did not mention the NPC as one of the corporations/offices covered by it. We do
not agree with him for it is very patent that the circular is addressed, among others, to
managing heads of Government-owned or Controlled Corporations, the NPC being held
under such category of corporations. Petitioner goes on to argue that existing NPC
policy grants transportation allowance to employees in the likes of petitioner. Under
the NPC Charter, R.A. 6395, petitioner contends that the NPC has the power to
formulate and adopt policies and measures for the management and operation of the
NPC. 3Pursuant thereto, NPC passed Resolution No. 81-95 dated April 20, 1981
authorizing the monthly reimbursement of representation and transportation
allowance. This was implemented by Circular 81-11 dated April 22, 1988. He then
contends that the COA Circular Nos. 7506 and 75-6A should be limited in their
application to the NPC.
We likewise cannot sustain petitioner's contention that the Commission, in the exercise
of its power granted by the Constitution, usurped the statutory functions of the NPC
Board of Directors for its leads to the absurd conclusion that a mere Board of Directors
of a government-owned and controlled corporation, by issuing a resolution, can put to
naught a constitutional provision which has been ratified by the majority of the Filipino
people. If We will not sustain the Commission's power and duty to examine, audit and
settle accounts pertaining to this particular expenditures or use of funds and property,
owned or held in trust by this government-owned and controlled corporation, the NPC,
We will be rendering inutile this Constitutional Body which has been tasked to be
vigilant and conscientious in safeguarding the proper use of the government's, and
ultimately, the people's property.
The factual finding of the Commission that petitioner was indeed assigned a
government, vehicle is conclusive upon this Court. The petitioner faults respondent
Regional Auditor for relying on her serious doubts as to the nature of the use of the
vehicle assigned to petitioner as basis for the disallowance. We hold, however, that such
issue is immaterial in the case at bar for the COA circular, in prohibiting the use of
motor vehicles by officials receiving transportation allowance, is categorical. The use of
government motor vehicle and the claim for transportation allowance are mutually
exclusive. It is on this basis that the P1,250.00 transportation allowance was
disallowed.
Construed in the light of the applicable law and rules on the matter, the decision of the
Commissioner on Audit disallowing the petitioner's claim for transportation allowance
does not indicate a grave abuse of discretion which will warrant setting aside and
nullifying the said COA ruling.
WHEREOF, the instant petition is hereby DISMISSED for lack of merit. With costs
against the petitioner.
SO ORDERED.
Narvasa, C.J., Gutierrez, Jr., Cruz, Feliciano, Padilla, Bidin, Griño-Aquino, Regalado, Davide,
Jr., Romero, Nocon, Bellosillo, and Melo, JJ., concur.