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.

Case Summary (G.R. No. 88435)

Factual and Transactional Background

Following the World Bank’s requirement that government banks be privately audited in addition to COA audit as a condition to an Economic Recovery Loan, the Monetary Board (Central Bank) adopted Circular No. 1124 (Dec. 5, 1986) mandating annual external independent audits for all banks, expressly stating that such audits are “in addition to and without prejudice to” COA audits. DBP sought COA concurrence, initially received a non‑objection from COA Chairman Teofisto Guingona, Jr., and then selected and contracted Joaquin Cunanan & Co. as private external auditor. A subsequent change in COA leadership led to COA objections, disallowance of payments made to the private auditor, and personal liability notices to DBP officers for expenditure of funds for the private audit.

Procedural History before the Court

DBP sought reconsideration of COA's disallowance; COA denied the appeal (Chairman’s letter‑decision and COA en banc letter‑decision). DBP filed a petition for review on certiorari under Rule 45, obtained a temporary restraining order against COA enforcement, and proceeded to challenge COA’s determinations before the Supreme Court.

Issues Presented to the Court

  1. Whether the 1987 Constitution vests in COA the sole and exclusive power to examine and audit government banks, thereby prohibiting concurrent private audits.
  2. Whether any statute prohibits government banks from hiring private auditors in addition to COA.
  3. Whether any statute authorizes such hiring if not prohibited.
  4. If hiring is permissible, whether DBP’s engagement of the private auditor was necessary and whether the fees paid were reasonable.

Constitutional Text and Framers’ Intent

The Court analyzed Section 2, Article IX‑D of the 1987 Constitution, noting two distinct paragraphs: the first grants the COA “the power, authority, and duty to examine, audit, and settle all accounts” of government entities but does not expressly use the word “exclusive”; the second expressly confers “the exclusive authority” to define the scope of its audit and to promulgate auditing rules and to disallow expenditures. The Court emphasized that the framers deliberately rejected proposals to make the first paragraph exclusive and that Constitutional Commission records were explicit: the framers intended flexibility to permit concurrent private auditing in circumstances such as private investment, listing, privatization, or foreign‑loan conditions. Consequently, the Court concluded that the COA’s audit power under the first paragraph is non‑exclusive, while the authority described in the second paragraph (defining scope, methods, and disallowance powers) is exclusive.

Relationship Between COA Power and Monetary Board (Central Bank) Supervision

The Court reconciled COA authority with the Constitutional grant of supervisory power over banks to the Central Bank/Bangko Sentral (Section 20, Article XII). Historically and statutorily, the Central Bank (and later Bangko Sentral) conducts periodic and special examinations of banks and may require independent auditors. The Court held that the constitutional scheme contemplates concurrent jurisdiction between COA and the Central Bank with respect to examination/audit of banks, but that COA’s constitutionally mandated role retains preponderance: COA findings bind government agencies and officials, and COA retains exclusive power over matters described in the second paragraph (scope and disallowances). The Central Bank’s supervisory power thus coexists with COA authority.

Statutory Provisions Cited by COA and Court’s Interpretation

  • Section 26, PD No. 1445 (General Jurisdiction): The Court interpreted this as a comprehensive grant of COA jurisdiction, but not a declaration of exclusivity. It is a definitional provision of general jurisdiction that does not on its face preclude concurrent jurisdiction by other constitutional or statutory supervisors.
  • Section 31, PD No. 1445 (Deputization): COA argued Section 31 limits private participation to deputization by COA. The Court held Section 31 empowers COA to deputize private licensed professionals to assist COA auditors but does not prohibit government agencies from hiring private auditors who operate independently and in their own name. Section 31 is not an absolute statutory ban on independent private audits.
  • Section 32, PD No. 1445 (Contracts for auditing-related studies/services): The Court read Section 32 as covering contracts for studies and related services on government auditing for which COA has a right of first refusal and cost review; it does not address, nor purport to curtail, the audit of government agencies itself, which COA is mandated to perform. Thus Section 32 does not prohibit concurrent private external audits.

Central Bank Circular No. 1124 and Banking Law Authority

The Court found Central Bank Circular No. 1124 to have been lawfully promulgated pursuant to the Central Bank’s supervisory and regulatory powers under the General Banking Act (and under the then‑operative constitutional provisions). The Circular expressly required annual external independent audits for banks, including government banks, “in addition to and without prejudice to” COA audits. The Court held that the Monetary Board’s power to require independent auditors (as later reiterated in Section 58 of RA No. 8791 and in provisions of the New Central Bank Act concerning examinations) supports the validity and binding effect of Circular No. 1124. Rules and regulations of the Central Bank issued pursuant to its supervisory authority have the force and effect of law; compliance with Circular No. 1124 was therefore a clear legal obligation of DBP and noncompliance could have administrative and penal consequences under banking law.

PD No. 2029 and the Court’s Disposition on Its Constitutionality

DBP also invoked Section 8 of PD No. 2029 as additional statutory authority for engaging private auditors. COA challenged PD No. 2029’s constitutionality as potentially conflicting with COA jurisdiction (Section 3, Article IX‑D). The Court declined to decide the constitutionality of PD No. 2029 because resolution of the primary issues was possible on other grounds; it left questions on PD No. 2029’s constitutionality for another case where such determination is necessary.

Necessity of the Private Audit and Reasonableness of Fees

The Court found DBP’s hiring of a private external auditor was both necessary and lawful in the circumstances: it was a condition imposed by the World Bank for release of loan tranches crucial for national economic recovery, and it was required by Central Bank Circular No. 1124. Concerning fees, the private auditor billed approximately P487,321.14 for the 1986 audit and P529,947.00 for 1987.

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