Development Bank of the Philippines vs. Commission on Audit

The constitutional power of the Commission on Audit to examine and audit government entities is non-exclusive and permits concurrent audit by private external auditors, while the Commission's authority to define the scope of its audit and promulgate rules on disallowances remains exclusive.

In 1986, the Philippine government obtained a US$310 million Economic Recovery Loan from the World Bank to rehabilitate the DBP, which was then burdened with non-performing loans. A condition of the loan required the DBP to engage a private external auditor in addition to the COA audit. To implement this, the Central Bank issued Circular No. 1124, mandating all banks, including government-owned ones, to undergo annual financial audits by external independent auditors. The DBP subsequently hired Joaquin Cunanan & Co. as its private external auditor for 1986.

• World Bank Loan Condition: The Philippine government secured a US$310 million Economic Recovery Loan from the World Bank in 1986, conditioned on the rehabilitation of the DBP and the hiring of a private external auditor.
• Central Bank Circular No. 1124: The Monetary Board amended banking regulations to require all banks, including government-owned ones, to cause an annual financial audit by an external independent auditor in addition to the COA audit.
• Initial COA Concurrence: COA Chairman Teofisto Guingona, Jr. initially interposed no objection to the DBP's engagement of a private auditor, provided the terms were first reviewed and approved by the COA.
• COA Reversal and Disallowance: Following a change in COA leadership, Chairman Eufemio Domingo protested Central Bank Circular No. 1124 as an encroachment on COA's constitutional powers. The DBP paid the private auditor ₱487,321.14 for 1986 services. The COA Chairman disallowed the payment, declared the private audit unconstitutional and illegal, and held the responsible DBP officials personally liable.

• Constitutional Exclusivity: Petitioner argued that the Constitution does not vest the COA with the sole and exclusive power to examine and audit government banks, and thus does not prohibit concurrent audits by private external auditors.
• Statutory Authorization: Petitioner maintained that no statute prohibits the hiring of private auditors; rather, Central Bank Circular No. 1124 and the General Banking Law authorize and require such audits under the Central Bank's supervisory powers.
• Necessity and Reasonableness: Petitioner contended that hiring a private auditor was necessary to comply with the World Bank loan condition and Central Bank regulations, and the fees paid were reasonable and not unconscionable.

• Exclusive Constitutional Power: Respondent argued that Section 2, Article IX-D of the Constitution grants the COA the sole and exclusive power to examine and audit government agencies, precluding any concurrent private audit.
• Statutory Prohibition: Respondent contended that Sections 26, 31, and 32 of PD No. 1445 (Government Auditing Code) prohibit the hiring of private auditors by government agencies, limiting private participation to deputization by the COA.
• Unnecessary and Unconscionable Expenditure: Respondent argued that the private audit was a useless duplication of the COA audit, rendering the fees an excessive, extravagant, or unconscionable expenditure of government funds.

• Constitutional Exclusivity of Audit Power: Whether the Constitution vests the COA with the sole and exclusive power to examine and audit government banks so as to prohibit concurrent audit by private external auditors.
• Statutory Prohibition or Authorization: Whether existing statutes prohibit government banks from hiring private auditors, or whether existing laws authorize such hiring.
• Necessity and Reasonableness: Whether the hiring of the private auditor was necessary and the fees reasonable under the circumstances.

• Constitutional Exclusivity of Audit Power: The COA's power to examine and audit government agencies is non-exclusive. The word "exclusive" in Section 2(2), Article IX-D of the Constitution qualifies only the authority to define the scope of audit and promulgate rules on disallowances, not the audit power itself. The framers intentionally omitted "exclusive" from the audit provision to allow concurrent private audits, recognizing the need for flexibility when the government borrows from abroad or attracts private investment. The COA's findings remain preponderant and binding on government agencies over those of private auditors.
• Statutory Prohibition or Authorization: No statute prohibits the hiring of private auditors. Sections 26, 31, and 32 of PD 1445 define COA jurisdiction, allow deputization of private auditors, and govern contracts for auditing studies, respectively, but none expressly or impliedly bans concurrent private audits. Conversely, Section 58 of the General Banking Law of 2000 and Sections 25 and 28 of the New Central Bank Act authorize the Monetary Board to require independent audits, emanating from the Central Bank's constitutional power of supervision over banks.
• Necessity and Reasonableness: The hiring of the private auditor was necessary and the fees reasonable. The private audit was an express condition for the US$310 million World Bank loan critical to the DBP's rehabilitation and the national economic recovery. Refusal would have aborted the loan and violated Central Bank Circular No. 1124. The fees, amounting to roughly half a million pesos, were reasonable compared to the COA's subsequent audit fees and constituted a normal cost of borrowing.

• Non-Exclusivity of COA's Audit Power — The constitutional power of the Commission on Audit to examine, audit, and settle all government accounts is not exclusive. The Constitution intentionally differentiated between the COA's power to audit (non-exclusive) and its authority to define the scope of audit and promulgate rules on disallowances (exclusive). Concurrent audits by private external auditors are permissible.
• Preponderance of COA Audit Findings — While the COA's power to audit is non-exclusive, its findings and conclusions prevail over those of private auditors insofar as government agencies and officials are concerned, unless modified or reversed by the courts.
• Concurrent Jurisdiction over Government Banks — The Central Bank's constitutional power of supervision over the operations of banks includes the power to examine and audit government banks, creating a concurrent jurisdiction with the COA. However, the COA retains exclusive authority over the disallowance of expenditures.

• "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." — Commissioner Christian Monsod explaining the Constitutional Commission's rejection of the word "exclusive" in the audit provision.
• "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."
• "As long as the COA is there, and the COA's power cannot be eliminated by law, by decree or anything of that sort, then the government funds are protected... there should be some flexibility so that a procedural requirement does not impede a substantive transaction as long as COA is there."

• Felipe vs. De la Cruz, 99 Phil. 940 (1956) — Followed. Cited for the rule that 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.
• Alger vs. Court of Appeals, 135 SCRA 37 (1985) — Followed. Cited for the principle that courts will pass upon the constitutionality of a statute only when it is absolutely necessary to decide the case, leaving the issue for another case if the dispute can be resolved on other grounds.

• Section 2, Article IX-D, 1987 Constitution — Defines the COA's power, authority, and duty to examine, audit, and settle all government accounts (paragraph 1), and its exclusive authority to define the scope of its audit and promulgate accounting and auditing rules (paragraph 2). Applied to determine that the audit power is non-exclusive, while the rule-making and disallowance authority is exclusive.
• Section 3, Article IX-D, 1987 Constitution — Prohibits any law from exempting any government entity or public investment from COA jurisdiction. Applied to affirm that concurrent private audits do not divest the COA of its mandated audit power.
• Section 20, Article XII, 1987 Constitution — Grants the central monetary authority supervision over the operations of banks. Applied to establish the Central Bank's concurrent jurisdiction to examine and audit government banks.
• Sections 26, 31, and 32, PD No. 1445 (Government Auditing Code) — Define COA jurisdiction, deputization of private professionals, and government contracts for auditing services. Applied to show that these provisions do not expressly or impliedly prohibit the hiring of private auditors by government agencies.
• Section 58, RA No. 8791 (General Banking Law of 2000) — Authorizes the Monetary Board to require banks to engage independent auditors. Applied as statutory basis allowing the Central Bank to mandate private audits of government banks.

Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban, Quisumbing, Pardo, Buena, Ynares-Santiago, De Leon, Jr., and Sandoval-Gutierrez, JJ.