Leycano, Jr. vs. Commission on Audit

A member of a Provincial School Board Inspectorate Team who signs a Certificate of Inspection attesting to 100% completion of Special Education Fund projects may be held liable by the Commission on Audit for the resulting disallowance, even if he is not an accountable officer under Section 101 of P.D. No. 1445, because he participates in the use or application of local government funds under Section 340 of the Local Government Code; the Arias doctrine does not shield him where he was not acting as a head of office and exceptional circumstances should have alerted him to the irregularity.

Manuel Leycano, Jr. served as Provincial Treasurer of Oriental Mindoro and, during that tenure, was also a member of the Provincial School Board (PSB) of the province. The PSB appointed him to its Inspectorate Team. The Special Education Fund (SEF) is a local special fund under the Local Government Code, sourced from an additional real property tax and allocated for public school operation and maintenance, construction and repair of school buildings, facilities and equipment, educational research, purchase of books and periodicals, and sports development as determined and approved by the Local School Board. The Commission on Audit exercises constitutional and statutory audit jurisdiction over government funds, including local government funds and expenditures.

Manuel Leycano, Jr. was the Provincial Treasurer of Oriental Mindoro and, at the same time, a member of the Provincial School Board (PSB) of that province. During his tenure, the PSB appointed him as a member of its Inspectorate Team, which, according to him, had the function of monitoring the progress of PSB projects. In 1995, several checks were issued to various private contractors in connection with repair, rehabilitation, and construction projects covered by the Special Education Fund (SEF) of Oriental Mindoro in various public schools.

The Special Audit Team, COA Regional Office No. IV, headed by State Auditor Joselyn Cirujano, audited selected transactions under the SEF, including the projects. The audit found deficiencies, and the team issued Notices of Disallowance Nos. 99-001-221 (95) to 99-005-221 (95), all dated June 10, 1999. These notices held petitioner, along with Sangguniang Panlalawigan Member Remedios Marasigan and Schools Division Superintendent Benjamin Cruz, liable for signing the Certificates of Inspection relative to the projects and falsely attesting to their 100% completion. The notices also held liable Provincial Engineer Elmer Dilay, Engineering Assistant Gerardo Ilagan, Municipal Treasurer Nelson Buñag, Chief of Planning and Programming Section Venancio Austria, and Maintenance and Construction Foremen Rod Villanueva and Richard Magtibay for having certified or reported the projects’ 100% completion.

Petitioner appealed the Notices of Disallowance to the COA through the Regional Director, praying that his name be deleted from among the persons liable. By decision embodied in a 1st Indorsement dated June 21, 2000, the Regional Director modified the Auditor’s findings by excluding petitioner from those liable, noting the joint certification of the Schools Division Superintendent and the Provincial Engineer that the projects found either incomplete or inexistent by the Auditor in 1996 had already been corrected by the contractors. The Regional Director certified the case to the Commission Proper pursuant to Rule V, Section 6 of the Revised Rules of Procedure of the COA. On request of the Local Government Audit Office of the COA, the projects were re-inspected by the Technical Audit Specialist, who still found deficiencies in the completion of the projects in the total amount of ₱1,039,339.57.

The COA, in Decision No. 2002-129 dated July 18, 2002, denied petitioner’s appeal, finding no sufficient justification to exclude him from liability. It reduced the disallowance from ₱1,828,969.66 to ₱1,039,399.57 based on the reinspection by the Technical Audit Specialist and directed the Auditor to adjust the Certificate of Settlement and Balances and monitor the settlement of the disallowance by the persons named liable under the Notices of Disallowance, with periodic reports to the Commission.

Petitioner admitted having signed the Certificate of Inspection in which he attested that the projects were 100% completed, and he did not dispute the COA’s finding that the projects were not completed. He claimed, however, that the PSB intended the Inspectorate Team to perform only monitoring functions, leaving strict implementation and supervision to the Provincial Engineering Office, and that because of the geographical location of the projects and his responsibilities as Provincial Treasurer, he delegated actual inspection to the Municipal Treasurers. He further claimed that he was convinced to sign the Certificate of Inspection by the representation of the Project Engineer and Provincial Engineer in the Statements of Work Accomplished that there was 100% project completion, as well as by the existence of Acceptance Reports issued by officials of the Department of Education, Culture and Sports (DECS). The Court noted that the Acceptance Reports were executed by DECS officials prior to the Inspectorate Team’s assessment of the projects and issuance of a certificate of inspection.

• Reliance on State Auditor’s Findings: Petitioner argued that the COA committed reversible error by relying solely on the findings of the State Auditor.
• Erroneous Findings of Fact and Law: Petitioner maintained that the COA made erroneous findings of fact and law.
• Noncompliance with Auditing Standards: Petitioner argued that the audit report was not in accordance with prescribed auditing standards.
• Harassment: Petitioner argued that the audit report was meant to harass.
• Monitoring Function and Non-Accountability: Petitioner maintained that the Inspectorate Team was intended merely to perform monitoring functions, with strict implementation and supervision of PSB projects left to the Provincial Engineering Office; hence he was not the accountable officer and the Project Engineer and Provincial Engineer should be liable.
• Invalid Creation of Inspectorate Team: Petitioner argued that his membership in the Inspectorate Team was not a valid basis for COA jurisdiction because the creation of the Team was null and void, being beyond the powers of the PSB under the Local Government Code.
• Good Faith and Arias Doctrine: Petitioner invoked good faith, claiming reliance on reports and representations of subordinates and other officers that the projects were completed; he cited Arias vs. Sandiganbayan to argue that heads of offices may rely to a reasonable extent on their subordinates and on the good faith of those who prepare bids, purchase supplies, or enter into negotiations.
• Certificate of Settlement and Balances and Notice of Suspension: Petitioner argued that he could not be held liable for the disallowed amount because the COA released the Notices of Disallowance without first issuing a Certificate of Settlement and Balances and a Notice of Suspension.

• COA Reliance and Factual Findings: Whether the COA committed grave abuse of discretion in relying solely on the State Auditor’s findings and in making erroneous findings of fact and law.
• Liability as Inspectorate Team Member: Whether petitioner, as a member of the PSB Inspectorate Team, may be held liable by the COA for the disallowed SEF expenditures even though he was not an accountable officer under Section 101 of P.D. No. 1445.
• Validity of Inspectorate Team Creation: Whether the creation of the PSB Inspectorate Team was null and void for being beyond the PSB’s powers under the Local Government Code, such that petitioner’s membership cannot be a basis for COA jurisdiction.
• Good Faith and Arias Doctrine: Whether petitioner may invoke good faith and the Arias vs. Sandiganbayan doctrine to avoid liability for signing the Certificate of Inspection.
• Certificate of Settlement and Balances and Notice of Suspension: Whether the COA’s failure to first issue a Certificate of Settlement and Balances and a Notice of Suspension invalidated the Notices of Disallowance.
• Audit Report Propriety: Whether the audit report was not in accordance with prescribed auditing standards and was meant to harass.

• COA Reliance and Factual Findings: No. The COA did not gravely abuse its discretion; petitioner admitted signing the Certificate of Inspection and did not dispute that the projects were incomplete, and the audit findings supported the disallowance.
• Liability as Inspectorate Team Member: Yes. Although not an accountable officer under Section 101 of P.D. No. 1445, petitioner may be held liable under the COA’s constitutional jurisdiction and Section 340 of the Local Government Code because he participated in the use or application of the SEF by signing the Certificate of Inspection.
• Validity of Inspectorate Team Creation: No. The creation of the Inspectorate Team was not null and void; Section 99(b) of the Local Government Code implicitly empowers the PSB to institute measures to ascertain that SEF disbursements conform to the prepared budget.
• Good Faith and Arias Doctrine: No. The Arias doctrine does not apply because petitioner was not acting as a head of office when he signed the certificate, and exceptional circumstances should have alerted him to the irregularity of DECS Acceptance Reports preceding the Inspectorate Team’s assessment.
• Certificate of Settlement and Balances and Notice of Suspension: No. The CSB is a mere summary of audit findings, and petitioner was amply notified through the Notices of Disallowance; a Notice of Suspension was unnecessary because he was held liable for certifying completion, not for failure to submit documents.
• Audit Report Propriety: Not reached. The Court found consideration of petitioner’s fourth argument unnecessary after resolving the other grounds.

• COA Reliance and Factual Findings: Petitioner admitted signing the Certificate of Inspection attesting that the projects were 100% completed and did not dispute the COA’s finding that the projects were not completed. His contention that the Inspectorate Team merely monitored and that the Provincial Engineering Office supervised did not negate his own participation. The Court noted that petitioner’s reliance on PSB Resolution No. 05-96 was misplaced because the resolution was approved on March 25, 1996, while the checks were issued in 1995. Assuming arguendo that the resolution reflected the Team’s functions, its flow chart showed that after project implementation, inspection by the Project Inspectorate Team was necessary before acceptance or turnover and payment. Members of the Team could therefore be held liable for irregular expenditure if their participation was established. No grave abuse of discretion was shown.
• Liability as Inspectorate Team Member: Section 101 of P.D. No. 1445 defines accountable officers as those whose duties permit or require the possession or custody of government funds or property. Petitioner, as a member of the Inspectorate Team, was not an accountable officer under that provision. Nonetheless, the COA has broad constitutional jurisdiction under Article IX(D), Section 2(1) 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. Article IX(D), Section 2(2) also empowers the COA to promulgate accounting and auditing rules, including those for the prevention and disallowance of irregular expenditures. Section 340 of the Local Government Code provides that other local officers, though not accountable by the nature of their duties, may be held accountable and responsible for local government funds through their participation in the use or application thereof. Because payment should not be made to a contractor without prior inspection by the Inspectorate Team, the members who sign the certificate of inspection participate in the use and application of the SEF. Petitioner’s act of attesting to 100% completion despite undisputed deficiencies was an irregularity for which he could be held liable.
• Validity of Inspectorate Team Creation: Section 99(b) of the Local Government Code enumerates the functions of the PSB, including the authority to authorize the provincial, city, or municipal treasurer to disburse funds from the SEF pursuant to the budget prepared and in accordance with existing rules and regulations. While the provision does not expressly mandate the creation of inspectorate teams, it implicitly empowers the PSB to institute measures for ascertaining that the intended disbursements will be in accordance with the prepared budget. The creation of the Inspectorate Team was one such measure and was therefore not null and void. Petitioner’s membership in the Team could serve as a basis for COA jurisdiction.
• Good Faith and Arias Doctrine: The Arias vs. Sandiganbayan doctrine states that heads of offices may rely to a reasonable extent on their subordinates and on the good faith of those who prepare bids, purchase supplies, or enter into negotiations, and that an auditor is not ordinarily expected to personally examine every voucher in detail absent an added reason. The doctrine did not apply because when petitioner signed the Certificate of Inspection, he acted not as Provincial Treasurer but as a member of the Inspectorate Team. Inspecting PSB projects is not among the duties of a treasurer under Section 470 of the Local Government Code. Since petitioner was not acting as a head of office, Arias found no application. Petitioner himself argued that he was not a public officer in his capacity as a member of the Inspectorate Team, which further negated any claim that he was a head of office in that capacity. Moreover, Arias may be barred by exceptional circumstances. Under Cruz vs. Sandiganbayan, an exceptional circumstance should have prodded the officer to be curious and go beyond what his subordinates prepared or recommended. Here, assuming PSB Resolution No. 05-96 accurately reflected the functions of the Inspectorate Team, acceptance or turnover of PSB projects is effected only after the projects have gone through the Inspectorate Team. Petitioner should have perceived the anomaly in the existence of Acceptance Reports executed by DECS officials prior to the Inspectorate Team’s assessment and issuance of a certificate of inspection. Instead, he claimed those Acceptance Reports were among his bases for signing the Certificate of Inspection. Good faith was therefore unavailable.
• Certificate of Settlement and Balances and Notice of Suspension: Section 3.5 of the Manual on Certificate of Settlement and Balances prescribed by COA Circular No. 94-001 defines the CSB as a written notification by the auditor to the agency head and the accountable officer concerned of the total suspensions, disallowances, and charges found in audit, as well as the total settlements thereof. Section 11.1.1 states that the CSB summarizes all suspensions, disallowances, and charges found in audit, including settlements thereof, as of a given date. The CSB is thus a mere summary of audit findings furnished to the officers concerned. Its alleged non-issuance could not have prejudiced petitioner because he was already amply notified by the COA of his total liability through the Notices of Disallowance, all received on the same day. As for the Notice of Suspension, Section 3.18 of the Manual defines suspension as the deferment of action to allow or disallow in audit a transaction pending compliance with certain requirements, and Section 11.2 provides that a Notice of Suspension informs the concerned officer of the requirements he must submit to the auditor so that the suspension may be lifted. Petitioner was held liable not for failure to submit a required document, nor for the deficiency in the projects themselves, but for his act of certifying the 100% completion of the projects when they were not completed. A Notice of Suspension would have served no purpose.
• Audit Report Propriety: In light of the foregoing discussions, consideration of petitioner’s fourth argument has become unnecessary.

• COA’s Broad Audit Jurisdiction and Disallowance Power — Under Article IX(D), Sections 2(1) and 2(2) of the 1987 Constitution, the COA has the authority 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, and to promulgate accounting and auditing rules, including those for the prevention and disallowance of irregular expenditures. The Court applied this jurisdiction to hold petitioner liable notwithstanding that he was not an accountable officer under Section 101 of P.D. No. 1445.
• Liability of Non-Accountable Local Officers for Participation in Use or Application of Local Government Funds — Section 340 of the Local Government Code provides that other local officers, though not accountable by the nature of their duties, may be held accountable and responsible for local government funds through their participation in the use or application thereof. The Court applied this provision to Inspectorate Team members who sign certificates of inspection, because payment cannot be made without prior inspection, so their act participates in the use or application of the SEF.
• Implied Power of the Provincial School Board to Create Inspectorate Teams — Section 99(b) of the Local Government Code authorizes the PSB to authorize the treasurer to disburse SEF funds pursuant to the prepared budget and existing rules. Although it does not expressly mandate the creation of inspectorate teams, it implicitly empowers the PSB to institute measures to ascertain that disbursements conform to the budget. The Court thus upheld the creation of the Inspectorate Team as not null and void.
• Arias Doctrine on Good Faith Reliance on Subordinates — Heads of offices may rely to a reasonable extent on their subordinates and on the good faith of those who prepare bids, purchase supplies, or enter into negotiations; an auditor is not ordinarily expected to personally examine every voucher in detail absent an added reason. The Court held the doctrine inapplicable because petitioner was not acting as a head of office when he signed the Certificate of Inspection.
• Exceptional Circumstance Exception to the Arias Doctrine — The Arias doctrine may be barred where exceptional circumstances should have prodded the officer to be curious and go beyond what his subordinates prepared or recommended. The Court found such an exceptional circumstance in the DECS Acceptance Reports being executed prior to the Inspectorate Team’s assessment, which should have alerted petitioner to the anomaly.
• CSB as Mere Summary and Notice of Suspension as Deferment for Compliance — Under COA Circular No. 94-001, the Certificate of Settlement and Balances is a written notification and summary of suspensions, disallowances, and charges found in audit, while a Notice of Suspension defers action pending compliance with certain requirements. The Court held that non-issuance of the CSB did not prejudice petitioner because the Notices of Disallowance notified him, and that a Notice of Suspension was unnecessary where liability arose from false certification rather than missing documents.

• "In light of this function of the Inspectorate Team, its members may be held liable by the COA for any irregular expenditure of the SEF if their participation in such irregularity can be established." — This states the basis for COA liability of Inspectorate Team members despite their not being accountable officers.
• "Since, as earlier noted, payment should not be made to a contractor without the prior inspection of the project by the Inspectorate Team, the members thereof who sign the certificate of inspection participate in the use and application of local government funds (in this case, the Special Education Fund of the Province of Oriental Mindoro)." — This applies Section 340 of the Local Government Code and explains why signing the certificate creates liability.
• "Since, petitioner was not then acting as a head of office, Arias finds no application." — This is the Court’s concise reason for rejecting petitioner’s good faith defense under Arias.
• "Thus, petitioner should have perceived the anomaly in the existence of Acceptance Reports executed by DECS officials prior to the Inspectorate Team’s assessment of the projects and its issuance of a certificate of inspection." — This identifies the exceptional circumstance that barred the Arias defense.

• Arias vs. Sandiganbayan, G.R. No. 81563, December 19, 1989, 180 SCRA 309, 316 — Cited by petitioner for the doctrine that heads of offices may rely to a reasonable extent on subordinates and on the good faith of those who prepare bids, purchase supplies, or enter into negotiations; the Court distinguished and did not apply it because petitioner was not acting as a head of office and exceptional circumstances existed.
• Cruz vs. Sandiganbayan, G.R. No. 134493, August 16, 2005 — Cited by the Court to show that the Arias doctrine may be barred by exceptional circumstances that should have prodded the officer to be curious and go beyond what subordinates prepared or recommended; the Court found such an exceptional circumstance in this case.

• Article IX(D), Section 2(1), 1987 Constitution — Vests the COA with authority 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. Applied to hold petitioner liable despite not being an accountable officer under P.D. No. 1445.
• Article IX(D), Section 2(2), 1987 Constitution — Empowers the COA 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. Applied as an additional source of authority to hold petitioner liable.
• Section 101, P.D. No. 1445 — Defines accountable officers as every officer of any government agency whose duties permit or require the possession or custody of government funds or property, and requires them to be bonded. The Court held petitioner was not an accountable officer under this provision in his capacity as Inspectorate Team member, but this did not preclude liability.
• Section 340, Local Government Code of 1991 — Provides that any officer of the local government unit whose duty permits or requires possession or custody of local government funds is accountable, and that other local officers, though not accountable by the nature of their duties, may be similarly held accountable through their participation in the use or application of local government funds. Applied to hold petitioner liable for signing the Certificate of Inspection.
• Section 99(b), Local Government Code of 1991 — Enumerates the PSB’s function to authorize the provincial, city, or municipal treasurer to disburse SEF funds pursuant to the budget prepared and in accordance with existing rules and regulations. Applied to imply the PSB’s power to create the Inspectorate Team as a measure to ascertain compliance with the budget.
• Section 470, Local Government Code of 1991 — Enumerates the powers and duties of the local treasurer. Applied to show that inspection of PSB projects is not among the treasurer’s duties, so petitioner was not acting as a head of office when he signed the Certificate of Inspection.
• Sections 309 and 272, Local Government Code of 1991 — Define the Special Education Fund and its application to public school operation and maintenance, construction and repair of school buildings, facilities and equipment, educational research, purchase of books and periodicals, and sports development as determined and approved by the Local School Board. Cited to identify the SEF involved in the disallowance.
• Rule V, Section 6, Revised Rules of Procedure of the COA — Provides that the Director may reverse, modify, alter, or affirm the Auditor’s decision or ruling, but if the Director reverses, modifies, or alters it, the Director must certify the case and elevate the entire record to the Commission Proper for review and approval. Applied in the Regional Director’s certification of the case to the Commission Proper.
• COA Circular No. 94-001, Manual on Certificate of Settlement and Balances, Sections 3.5, 11.1.1, 3.18, and 11.2 — Define the Certificate of Settlement and Balances as a written notification and summary of suspensions, disallowances, and charges found in audit, and the Notice of Suspension as a deferment of action pending compliance with certain requirements. Applied to reject petitioner’s third ground.

Artemio V. Panganiban (Chief Justice), Reynato S. Puno, Consuelo Ynares-Santiago, Leonardo A. Quisumbing (on sick leave), Angelina Sandoval-Gutierrez (on sick leave), Antonio T. Carpio, Ma. Alicia Austria-Martinez (on leave), Renato C. Corona (on leave), Adolfo S. Azcuna, Romeo J. Callejo, Sr., Dante O. Tinga, Minita V. Chico-Nazario, and Cancio C. Garcia.