Title
Development Bank of the Philippines vs. Commission on Audit
Case
G.R. No. 88435
Decision Date
Jan 16, 2002
DBP hired a private auditor for World Bank loan compliance; COA objected, claiming exclusive audit power. Supreme Court ruled COA’s power non-exclusive, upheld private audit as necessary and reasonable.
private auditors
government banks
exclusive power
A

Case Summary (G.R. No. 88435)

Factual Background

The Philippine government obtained from the World Bank an Economic Recovery Loan of US$310 million in 1986 conditioned, inter alia, on rehabilitation of the Development Bank of the Philippines and the requirement that government banks submit to annual audits by private external auditors in addition to COA audits. Pursuant to that commitment the Monetary Board adopted amendments and the Central Bank issued Circular No. 1124 on December 5, 1986, requiring external independent audits for all banks and expressly providing that such audits would be in addition to COA audits. DBP sought COA concurrence and, initially, COA Chairman Guingona interposed no objection provided that the terms be reviewed. The DBP Board engaged Joaquin Cunanan & Co. as private external auditor for calendar year 1986 and the DBP paid the auditor. A change in COA leadership produced opposition. COA Chairman Domingo protested Circular No. 1124, directed resident COA auditors to disallow payments to private auditors, and issued memoranda and letter-decisions disallowing the DBP payments and ordering restitution and personal liability of officers. DBP sought reconsideration before COA and then filed a petition for review with the Supreme Court.

Procedural History

DBP filed the petition for review under Rule 45, Rules of Court, challenging the COA Chairman’s letter-decision of August 29, 1988 and the COA en banc letter-decision of May 20, 1989. The Supreme Court issued a temporary restraining order on June 15, 1989 enjoining COA from enforcing its decisions. The Office of the Solicitor General declined to represent COA and private counsel appeared pro bono. The petition reached final resolution by the Court’s en banc decision dated January 16, 2002.

Issues Presented

The petition presented four principal questions: whether COA possesses the sole and exclusive constitutional power to examine and audit government banks so as to prohibit concurrent private external audits; whether any statute prohibits government banks from hiring private auditors in addition to COA; whether any statute authorizes such hiring; and, if no legal impediment existed, whether the DBP’s hiring of a private auditor was necessary and whether the fees paid were reasonable under the circumstances.

Parties’ Contentions

The COMMISSION ON AUDIT maintained that Sec. 2, Article IX-D of the 1987 Constitution vested in it the exclusive power to examine and audit all government agencies and that PD No. 1445 (Sections 26, 31, and 32) limited private auditor participation to deputization by COA and thus barred independent private audits. COA relied further on COA Circular No. 860254 and on an interpretation that an exclusive auditing monopoly is implicit in the Constitution. The DEVELOPMENT BANK OF THE PHILIPPINES argued that Circular No. 1124 and the government’s commitments to the World Bank required private external audits in addition to COA audits, that no statute expressly barred concurrent private audits, and that banking supervisory statutes and the Central Bank’s regulatory authority authorized the Monetary Board to require independent auditors. DBP also stressed that the private audit was a condition precedent to loan tranches under the World Bank agreement and that failure to comply would jeopardize national economic recovery.

Ruling of the Supreme Court

The Court granted the petition. It set aside the COA Chairman’s letter-decision dated August 29, 1988 and the COA en banc letter-decision dated May 20, 1989. The temporary restraining order previously issued was made permanent.

Legal Basis and Reasoning — Constitutional Interpretation

The Court interpreted Sec. 2, Article IX-D of the 1987 Constitution as distinguishing two distinct grants of power. The first paragraph conferred the power, authority, and duty to examine and audit all government accounts but did not employ the word exclusive. The second paragraph expressly conferred exclusive authority to define the scope of audits, establish techniques and methods, and promulgate accounting and auditing rules. The Court found this difference of expression deliberate and dispositive. It relied on the Constitutional Commission’s deliberations which rejected proposals to make the first paragraph exclusive and which expressly recognized situations where concurrent private auditing may be required, such as private investment, stock exchange listing, or foreign lending. Thus the framers intended that COA’s power to examine and audit be non-exclusive while its authority to define audit scope and to disallow unlawful expenditures remain exclusive. The Court therefore held that private external audits may be conducted concurrently with COA audits in circumstances permitted by law and necessity, provided that COA’s constitutionally exclusive regulatory and disallowance functions remain unimpaired.

Legal Basis and Reasoning — Harmonization with Banking Supervision

The Court reconciled COA power with the Central Bank’s constitutional supervisory authority under Sec. 20, Article XII of the Constitution and related statutory provisions. It recognized that the Central Bank and its Monetary Board have long exercised supervisory and examination powers over banks and that these powers include the authority, historically vested in Section 6-D, RA No. 337, and re-enacted in Section 58, RA No. 8791, to require banks to engage independent auditors acceptable to the Monetary Board. The Court concluded that the Constitution contemplates concurrent jurisdiction: the Monetary Board may require independent external audits as part of bank supervision while COA retains its constitutionally mandated audit functions whose scope and disallowance authority are exclusive.

Statutory Analysis of PD No. 1445 and Central Bank Circular No. 1124

The Court examined PD No. 1445 provisions relied upon by COA. It held that Section 26 of PD No. 1445 defines COA jurisdiction but does not convert that jurisdiction into an exclusive monopoly over audit so as to prohibit concurrent private audits. Section 31 authorizes COA to deputize private professionals to assist COA but does not amount to an absolute bar against independent private audits by agencies or banks. Section 32 addresses contracts for studies and services relating to government auditing and concerns COA’s right of first refusal for such services; it does not purport to forbid private external audits of agencies or banks. By contrast, Central Bank Circular No. 1124, promulgated pursuant to the Central Bank’s constitutional and statutory supervisory powers and to the then-applicable banking statutes, expressly required external independent audits for banks and stated that such audits would be in addition to COA audits. The Court treated Circular No. 1124 as having the force and effect of law, consistent with precedent on Central Bank rulemaking, and held that DBP was legally obliged to comply with the Circular and the World Bank loan condition.

Application of Constitutional Deliberations and Precedent

The Court relied on the recorded deliberations of the Constitutional Commission to resolve textual ambiguities, giving weight to the framers’ explicit rejection of exclusive language in the first paragraph of Section 2 and their intent to permit concurrent private audits in market-driven transactions. The Court reiterated that COA’s findings and conclusions as to government agencies remain

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