Development Bank of the Philippines v. Commission on Audit
NEW DOCTRINEFacts
The Antecedents: In 1986, the Philippine government secured an Economic Recovery Loan (ERL) from the World Bank, contingent upon the rehabilitation of the Development Bank of the Philippines (DBP). The DBP was burdened with significant non-performing loans, and its revitalization was deemed crucial for national economic recovery. As part of this rehabilitation commitment, the government agreed to require DBP to undergo a private external audit, in addition to the audit conducted by the Commission on Audit (COA). Procedural History: Following the government's commitment, the Central Bank issued Circular No. 1124 in December 1986, mandating annual financial audits by independent external auditors for all banks, including government-owned ones like DBP. The DBP, seeking to comply with the World Bank loan conditions and the Central Bank circular, engaged Joaquin Cunanan & Co. as its private external auditor. Despite initial approval from the COA Chairman, a subsequent change in COA leadership led to a reversal. The new COA Chairman protested the Central Bank circular, asserting COA's exclusive auditing authority. Consequently, the COA disallowed payments to the private auditor and later issued a letter-decision denying the DBP's request for concurrence with the private audit contract. The DBP appealed this decision to the COA en banc, which also denied the appeal. This led to the DBP filing a petition for review on certiorari with the Supreme Court. The Petition: The Development Bank of the Philippines, through a petition for review on certiorari under Rule 45 of the Rules of Court, assails the letter-decisions of the Commission on Audit. The core of the petition is the question of whether the COA's constitutional power to audit government entities is exclusive, thereby precluding a concurrent audit by a private external auditor. The DBP argues that the Constitution, specifically Section 2 of Article IX-D, does not grant exclusive auditing power to the COA and that existing laws and regulations, including Central Bank Circular No. 1124, authorize or permit such concurrent audits, especially when required by international financial institutions like the World Bank for crucial economic recovery loans.
Issue(s)
Whether the Constitution vests in the COA the sole and exclusive power to examine and audit government banks, precluding concurrent audits by private external auditors. Whether an existing statute prohibits government banks from hiring private auditors in addition to the COA, or conversely, authorizes such hiring. Whether the DBP's hiring of a private auditor was necessary and the fees paid were reasonable under the circumstances.
Ruling
The petition is meritorious. 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 SET ASIDE, and the temporary restraining order issued by the court enjoining respondent Commission on Audit from enforcing the said decisions is made PERMANENT.
Ratio Decidendi
On the exclusivity of COA's audit power: The Court ruled that the Constitution does not grant the COA the sole and exclusive power to examine and audit government banks. While Section 2(2) of Article IX-D of the Constitution explicitly grants the COA "exclusive authority" to define audit scope and promulgate rules, Section 2(1) of the same Article, which grants the power to examine and audit, does not contain the word "exclusive." Deliberations of the Constitutional Commission revealed that the word "exclusive" was intentionally omitted from Section 2(1) to allow for concurrent audits by private external auditors, particularly in situations involving private investment, privatization, public listing, or securing foreign loans. This flexibility is crucial for the government to engage in the global marketplace and attract necessary investments and loans. The Court also noted that the Central Bank's constitutional power of "supervision" over banks, which includes examination and audit, creates a concurrent jurisdiction with the COA over government banks. However, the COA's findings and conclusions still prevail over those of private auditors and the Central Bank in matters of disallowance, as its jurisdiction in that regard is exclusive. On statutory prohibitions or authorizations: The Court found no statute prohibiting government banks from hiring private auditors concurrently with the COA. Sections 26, 31, and 32 of PD No. 1445 (Government Auditing Code of the Philippines) were examined and found not to contain any express or implied prohibition. Section 26 defines COA's general jurisdiction but does not make it exclusive. Section 31 authorizes COA to deputize private professionals, but this does not preclude government agencies from hiring private auditors independently. Section 32 pertains to contracts for studies and services related to government auditing, not the audit itself. Conversely, Central Bank Circular No. 1124, issued pursuant to the Central Bank's constitutional and statutory powers, explicitly required banks, including government-owned ones, to undergo annual financial audits by external independent auditors in addition to the COA audit. This circular, having the force and effect of law, provided a clear legal basis for DBP's action. The Court also noted Section 58 of the General Banking Law of 2000 and Sections 25 and 28 of the New Central Bank Act, which empower the Monetary Board to require banks to engage independent auditors, reinforcing the legality of such engagements. On necessity and reasonableness of fees: The Court held that the hiring of a private auditor was a necessary corporate act. It was an express condition imposed by the World Bank for the grant of the US$310 million Economic Recovery Loan, which was vital for the rehabilitation of DBP and the recovery of the Philippine economy. Refusal to comply would have jeopardized this critical loan. Furthermore, Central Bank Circular No. 1124 mandated such an audit. Regarding the fees paid to Joaquin Cunanan & Co. (₱487,321.14 for 1986 and ₱529,947.00 for 1987), the Court found them not to be excessive, extravagant, or unconscionable, especially when compared to the COA's audit fees for subsequent years. The fees were considered part of the government's cost of borrowing from the World Bank, and the audit report was primarily for the World Bank's information, making the expense a reasonable business practice for a lender.
Main Doctrine
The Constitution does not vest in the Commission on Audit (COA) the sole and exclusive power to examine and audit government banks, thus allowing for concurrent audits by private external auditors. The COA's authority to define audit scope, promulgate rules, and disallow expenditures is exclusive, but its power to examine and audit is not.