Miralles vs. Commission on Audit

The COA may disallow expenditures or uses of government funds only when the transaction is irregular, unnecessary, excessive, extravagant, illegal, or unconscionable; a disallowance based solely on the delinquency of loans and the agency’s failure to collect them is not a valid ground and constitutes grave abuse of discretion. Under the Arias doctrine, a head of office may rely to a reasonable extent on the findings and recommendations of subordinates and cannot be held personally liable for a disallowance absent evidence of bad faith or gross negligence.

Orestes S. Miralles was a Regional Assistant Vice-President of the Quedan and Rural Credit Guarantee Corporation (QUEDANCOR), a government financing institution created under Republic Act No. 7393 and formerly a subsidiary of the National Food Authority. QUEDANCOR’s mandate was to accelerate investment and credit resources into the countryside, and it implemented direct lending programs such as the Food and Agricultural Retail Enterprises (FARE) Program and the Sugar Farm Modernization (SFM) Program under policies and guidelines issued by its Governing Board. The Commission on Audit (COA) is the constitutional body vested with authority to audit government funds and disallow expenditures or uses of government funds and property. The dispute concerned the COA’s power to hold Miralles personally liable for loans he approved under these QUEDANCOR programs.

QUEDANCOR was a government financing institution formerly a subsidiary of the National Food Authority, created under Republic Act No. 7393, and mandated to accelerate the flow of investment and credit resources into the countryside. Its Governing Board issued policies, implementing guidelines, and standard operating procedures for its programs, including the SFM Program under Circular No. 102, Series of 1999, which financed the purchase of brand-new or second-hand tractors and implements, and the FARE Program under Circular No. 079, Series of 1997, which augmented the working capital of retailers selling raw, semi-processed, or fully processed agricultural, aquatic, poultry, livestock, and other agri-related commodities. These policies served as directives for all Quedan Operations Officers and supervisors assigned in regional and provincial field offices. Petitioner Orestes S. Miralles was the Regional Assistant Vice-President of QUEDANCOR and, in that capacity, approved or recommended approval of loan applications under these programs.

On September 24, 2003, the Audit Team Leader assigned to QUEDANCOR issued an Audit Observation Memorandum relative to loans granted under the SFM Program because of the failure of QUEDANCOR Management to collect on the loans. Regional Cluster Director Horacio An. Oida of the COA Regional Legal Adjudication Office for Region III concurred and issued ND No. RLAO-2005-052 dated April 7, 2005 for P3,092,900.00, representing uncollected loan amounts granted to several loan applicants. The notice held petitioner personally liable for having approved the loan transactions, and held other officers liable for failing to verify the veracity of the financial documents submitted by the loan applicants.

The COA Legal Adjudication Office for Region III later created a Special Audit Team to validate the observations in the AOMs relating to uncollected or unsettled accounts of various QUEDANCOR debtors. On January 14, 2005, the SAT found that QUEDANCOR Management had not adequately verified the existence of viable businesses or projects of the concerned borrowers, a requirement for qualification under the FARE Program, and that some borrowers had never engaged in retail business at the time their loan applications were processed and approved, contrary to their representations. Based on these findings, Regional Cluster Director Oida issued ND No. RLAO-2005-055 dated June 6, 2005, disallowing P4,450,000.00 representing loans granted to various borrowers who had no viable businesses or projects as required under the FARE Program. The notice again held petitioner personally liable as the authority approving or recommending approval of the delinquent loans.

Petitioner appealed the notices. He maintained that he was not personally liable under ND No. RLAO-2005-055 because his approval of the FARE Program loans had been based on the review and recommendation of the QOOs. He also sought exclusion from liability under ND No. RLAO-2005-052, arguing that his approval of the SFM Program loans had been in faithful compliance with Circular No. 102, Series of 1999, and only after rigid credit and background investigations and upon favorable recommendations from the Credit Guarantee Committee and the Sugar Regulatory Administration. The COA Legal Services Sector denied his appeal, and the COA Proper likewise denied his further appeal, affirming both notices.

The COA found that the FARE Program borrowers had no viable businesses or projects, and that some had never engaged in retail business. It also found that the SFM Program loans remained unsettled and unpaid despite demands, and that QUEDANCOR Management had not taken appropriate legal action to collect them. Petitioner, for his part, asserted that responsibility for collection pertained to QUEDANCOR’s Legal Affairs Department, not to the Operations Department where he worked, and that his role was limited to endorsing delinquent accounts to the Legal Affairs Department. He also claimed that there were about 11,152 beneficiaries of loan releases in his department for 2002 alone, making it impracticable to check all details of every loan application.

• ND No. RLAO-2005-052 (SFM Program): Petitioner argued that the COA gravely abused its discretion in affirming ND No. RLAO-2005-052 because he had approved the SFM Program loans in accordance with and pursuant to QUEDANCOR’s guidelines and policies, and because the COA’s audit findings lacked factual and legal support. He maintained that he should be excluded from liability because his approval was based on rigid credit and background investigations and favorable recommendations from the Credit Guarantee Committee and the Sugar Regulatory Administration, and because responsibility for collection pertained to the Legal Affairs Department, not the Operations Department where he worked.
• ND No. RLAO-2005-055 (FARE Program): Petitioner contended that the COA further gravely abused its discretion in refusing to reconsider its conclusion that FARE Program loans had been granted to borrowers without adequately verifying the existence of their viable businesses, and in upholding ND No. RLAO-2005-055 with respect to nine borrowers in Bataan.
• Arias Doctrine: Petitioner invoked the Arias doctrine and argued that the COA gravely abused its discretion in refusing to absolve him from civil liability, because heads of offices may rely to a reasonable extent on the findings and recommendations of their subordinates.

• ND No. RLAO-2005-052: The COA countered that petitioner had not established grave abuse of discretion in the affirmance of ND No. RLAO-2005-052.
• ND No. RLAO-2005-055 and Arias Doctrine: The COA countered that it correctly affirmed ND No. RLAO-2005-055; that the Arias doctrine was not applicable because peculiar circumstances should have prompted petitioner to exercise a higher degree of circumspection; and that petitioner was negligent as the final reviewer of the loan documents because he failed to notice notable deficiencies and inconsistencies in the borrowers’ loan folders, which should have alerted him to potential irregularities in the evaluation conducted by his subordinates.

• Verification of Viable Businesses (FARE Program): Whether the COA gravely abused its discretion amounting to lack or excess of jurisdiction in upholding the finding that QUEDANCOR Management granted loans to borrowers without adequately verifying the existence of viable businesses or projects validly covered by the FARE Program.
• ND No. RLAO-2005-055 (FARE Program): Whether the COA gravely abused its discretion in upholding ND No. RLAO-2005-055 dated June 6, 2005 with respect to nine borrowers in Bataan under the FARE Program.
• ND No. RLAO-2005-052 (SFM Program): Whether the COA gravely abused its discretion in upholding ND No. RLAO-2005-052 dated April 7, 2005 with respect to two borrowers in Tarlac under the SFM Program.
• Arias Doctrine / Personal Liability: Whether the COA gravely abused its discretion in refusing to absolve petitioner from civil liability under the Arias doctrine.

• Verification of Viable Businesses (FARE Program): No. The finding that FARE Program borrowers lacked viable businesses was supported by the investigations of the Operations Audit Division and the Special Audit Team, and by QUEDANCOR Management’s concession that its QOOs could have been guilty of fraud or negligence.
• ND No. RLAO-2005-055 (FARE Program): No. ND No. RLAO-2005-055 was validly issued because the loans were granted to borrowers who had no viable businesses or projects as required under the FARE Program; the disallowance was factually and legally warranted.
• ND No. RLAO-2005-052 (SFM Program): Yes. The COA gravely abused its discretion in affirming ND No. RLAO-2005-052 and in holding petitioner personally liable; the disallowance was based solely on the failure to collect delinquent SFM loans, which is not among the recognized grounds for disallowance, and petitioner was denied administrative due process.
• Arias Doctrine / Personal Liability: Yes. The COA gravely abused its discretion in refusing to apply the Arias doctrine to petitioner; as final approving authority, he could reasonably rely on the recommendations of his subordinates, and no evidence showed bad faith or gross negligence on his part.

• Verification of Viable Businesses (FARE Program): The COA’s power to disallow is limited to transactions that are irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. The disallowance under ND No. RLAO-2005-055 rested on the finding of “absence of viable business qualified under the loan program availed of,” referring to FARE Program loans involving nine borrowers whose applications petitioner had approved or recommended. The Operations Audit Division and the Special Audit Team conducted separate investigations and found that the borrowers had never engaged in the food or agricultural retail business required under the FARE Program. QUEDANCOR Management even conceded that its QOOs could have been guilty of fraud or negligence in verifying the borrowers’ qualifications and guaranteed the filing of appropriate charges against them. These circumstances supplied a factual and legal basis for the disallowance; the COA did not gravely abuse its discretion in finding that the loans were granted without the required viable businesses.
• ND No. RLAO-2005-055 (FARE Program): The validity of ND No. RLAO-2005-055 was sustained because the FARE Program loans were granted contrary to the program’s requirement that borrowers have viable businesses or projects. The absence of such viable businesses made the transactions irregular and warranted disallowance under the COA’s constitutional and statutory authority over irregular, unnecessary, excessive, extravagant, illegal, or unconscionable expenditures or uses of government funds. The Court therefore affirmed the notice of disallowance as factually and legally warranted.
• ND No. RLAO-2005-052 (SFM Program): ND No. RLAO-2005-052 was issued on the basis of the 2nd Indorsement letter dated April 5, 2005, which stated that the disallowance was intended to insure the collection or settlement of delinquent loan accounts under the SFM Program. The letter directed QUEDANCOR Management to foreclose the equipment attached as collateral and, if the collateral was insufficient, to enforce the contract, and stated that the notice of disallowance on the unpaid balance of loans granted to Severo Robles and Gaudencio Dizon could be lifted if QUEDANCOR Management filed a collection suit. The disallowance was thus issued only because of the COA’s concern over the failure of QUEDANCOR Management to take appropriate legal action to collect the delinquent accounts. Such a ground could not validly justify a disallowance because notices of disallowance are not tools to insure compliance with COA directives, and there was no antecedent finding that the disallowed transactions were irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. The basis for ND No. RLAO-2005-052 therefore did not fall within the recognized grounds for a valid disallowance. There was also incongruity between the stated basis for the notice and the identification of the persons personally liable, including petitioner, simply because they had approved the loan applications of borrowers who later defaulted. The COA’s own pronouncements revealed a lack of clarity on whether the cause of the disallowance was the approval of the loans or the non-collection of the delinquent accounts. Petitioner was effectively denied the opportunity to be informed precisely of the issue being raised against him, depriving him of administrative due process, whose essence is the opportunity to be heard. It was also unfair to hold petitioner personally liable when the COA’s justification was the inaction of QUEDANCOR Management in pursuing collection, a task outside petitioner’s direct involvement; responsibility for legal actions against delinquent borrowers pertained to the Legal Affairs Department, not the Operations Department where petitioner worked, and his responsibility was limited to endorsing the delinquent accounts to the Legal Affairs Department. Under Section 19.1 of COA Circular No. 94-001, liability for audit disallowances is determined by the nature of the disallowance, the duties and responsibilities of the officers concerned, the extent of their participation or involvement in the disallowed transaction, and the amount of losses or damages suffered by the Government. Petitioner’s participation was limited to approving the loan applications in faithful compliance with QUEDANCOR’s program policies and guidelines, and the COA made no findings of irregularity in the approval of the SFM Program loans. A Notice of Charge, not a Notice of Disallowance, would have been more fitting, because a Notice of Charge applies to the audit of revenues or receipts, while a Notice of Disallowance applies to the audit of disbursements; liability under a Notice of Disallowance is based on participation in the disbursement, while liability for audit charges is measured by individual participation in the charged transaction, such as public officers whose duties require appraisal, assessment, or collection of government revenues and receipts. The COA therefore acted arbitrarily in upholding ND No. RLAO-2005-052 and in refusing to lift petitioner’s personal liability.
• Arias Doctrine / Personal Liability: Even though ND No. RLAO-2005-055 was valid, petitioner’s status as final approving authority did not necessarily make him personally liable for the disallowed transactions. Petitioner showed that there were about 11,152 beneficiaries of loan releases in his department for the year 2002 alone, making it impracticable, though not physically impossible, for him to check all the details and conduct the necessary physical inspections and verifications of the merits of all loan applications because of the voluminous paperwork and legwork. His reliance on the certifications and recommendations of his subordinates was unavoidable and could not be considered wrong, unreasonable, or unwarranted, especially because the applications had already undergone processing, review, and evaluation by two QOOs. The Arias doctrine, announced in Arias vs. Sandiganbayan, allows heads of offices to rely to a reasonable extent on the findings and recommendations of their subordinates provided there is no reason for them to go beyond those recommendations. The COA refused to apply the doctrine on the ground that petitioner had foreknowledge of facts and circumstances suggesting irregularity, citing the public knowledge in Bataan that borrower Rowena Fernandez served as a “processor” of loan applications and collected processing fees, and citing QOO Manahan’s affidavit. That refusal was arbitrary because it stood on highly speculative grounds. The COA made no definitive finding that petitioner was aware of the illegal activities of his subordinates, and QOO Manahan’s affidavit did not show that petitioner had been aware of such activities as to prompt him to go beyond his subordinates’ recommendations and inquire more deeply into the borrowers’ applications and supporting documents. The COA’s claim that petitioner was negligent as final reviewer because he did not notice deficiencies and inconsistencies in the loan folders was similarly unwarranted. The supposed deficiencies included home addresses indicated by borrowers, non-submission of ITRs by some borrowers, and amounts of declared business capitalizations, but the borrowers’ ITRs and information on initial capitalization were not required under the FARE Program guidelines, and the discrepancy in home addresses did not denote the absence of viable businesses, which was the stated basis for ND No. RLAO-2005-055. Petitioner should have been presumed to have acted in the regular performance of his official duty because no evidence showed bad faith or gross negligence. The COA could not justly disallow expenditures unless it accurately but fairly identified the persons liable, which it could do only with adequate factual basis. Petitioner’s invocation of the Arias doctrine was therefore appropriate, and his personal liability under ND No. RLAO-2005-055 was lifted.

• COA Disallowance Power (IUEEU) — The COA may disallow expenditures or uses of government funds only when the transaction is irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. The decision defines irregular as an expenditure incurred without adhering to established rules, regulations, procedural guidelines, policies, principles, or practices recognized in law; unnecessary as one that could not pass the test of prudence or diligence of a good father of a family and is not supportive of the agency’s objectives; excessive as unreasonable expense incurred at immoderate quantity and exorbitant price; extravagant as incurred without restraint, judiciousness, and economy; and unconscionable as unreasonable and immoderate, which no man in his right sense would make nor a fair and honest man would accept as reasonable. A disallowance based solely on loan delinquency or failure to collect is not within these grounds and constitutes grave abuse of discretion.
• Grave Abuse of Discretion — Grave abuse of discretion means an evasion of a positive duty or a virtual refusal to perform a duty enjoined by law or to act in contemplation of law, such as when the assailed decision or resolution is not based on law and evidence but on caprice, whim, and despotism. The COA’s affirmance of ND No. RLAO-2005-052 and refusal to lift petitioner’s liability were held to constitute grave abuse because the disallowance had no recognized legal basis.
• Arias Doctrine — Heads of offices may rely to a reasonable extent on the findings and recommendations of their subordinates provided there is no reason for them to go beyond those recommendations. The doctrine protects an approving officer from personal liability where reliance is reasonable and there is no evidence of bad faith or gross negligence. Applied to petitioner, who approved voluminous loan applications based on subordinate reviews and recommendations and was not shown to have foreknowledge of irregularities.
• Administrative Due Process — The essence of administrative due process is the opportunity to be heard. One is heard in administrative proceedings only when accorded a fair and reasonable opportunity to explain his case or given the chance to have the ruling complained of reconsidered. The COA denied petitioner this opportunity with respect to ND No. RLAO-2005-052 because it did not clearly inform him whether the disallowance was based on approval of the loans or on non-collection of the delinquent accounts.
• Notice of Disallowance vs. Notice of Charge — A Notice of Disallowance applies to the audit of disbursements, while a Notice of Charge applies to the audit of revenues or receipts. Liability under a Notice of Disallowance is based on the participation of the persons involved in the disbursement of the disallowed amount, while liability for audit charges is measured by individual participation or involvement in the charged transaction, such as public officers whose duties require appraisal, assessment, or collection of government revenues and receipts. In ND No. RLAO-2005-052, a Notice of Charge would have been more fitting because the concern was non-collection of loans.
• Liability for Audit Disallowances under COA Circular No. 94-001 — Section 19.1 of COA Circular No. 94-001 provides that liability of public officers for audit disallowances shall be determined on the basis of: (a) the nature of the disallowance; (b) the duties and responsibilities of the officers/employees concerned; (c) the extent of their participation or involvement in the disallowed transaction; and (d) the amount of losses or damages suffered by the Government. The COA failed to apply these factors properly when it held petitioner liable under ND No. RLAO-2005-052 despite his duties not including collection or foreclosure.
• Presumption of Regular Performance of Official Duty — Public officers are presumed to have acted in the regular performance of their official duties absent evidence of bad faith or gross negligence. Petitioner was entitled to this presumption because no evidence showed he acted in bad faith or with gross negligence in approving the FARE Program loans.

• "The power of the Commission on Audit (COA) to disallow expenditures or uses of government funds can only be exercised as to transactions thereon that are deemed irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. Otherwise, the disallowance is whimsical, capricious, or arbitrary. A disallowance based solely on the delinquency of loans extended by the Quedan and Rural Credit Guarantee Corporation (QUEDANCOR) to boost countryside investments and credit resources constitutes grave abuse of discretion amounting to lack or excess of jurisdiction." — This passage states the core ratio: the COA’s disallowance power is confined to the enumerated IUEEU grounds, and a disallowance resting solely on loan delinquency is arbitrary and constitutes grave abuse of discretion.
• "Thus, it is clear that the disallowance was issued by the COA only because of its concern about the failure of the QUEDANCOR Management to take appropriate legal action for the collection of the delinquent accounts. Such ground could not validly justify the disallowance, however, considering that the NDs were not meant to be tools "to insure compliance" with the COA's directives, and further considering that there was no antecedent finding that the disallowed transactions had been irregular, unnecessary, excessive, extravagant, illegal or unconscionable." — This passage explains why ND No. RLAO-2005-052 was invalid: it was used to compel collection rather than to disallow a transaction falling under a recognized ground.
• "We would be setting a bad precedent if a head of office plagued by all too common problems — dishonest or negligent subordinates, overwork, multiple assignments or positions, or plain incompetence — is suddenly swept into a conspiracy conviction simply because he did not personally examine every single detail, painstakingly trace every step from inception, and investigate the motives of every person involved in a transaction before affixing his signature as the final approving authority." — This is the canonical formulation of the Arias doctrine, which the Court applied to shield petitioner from personal liability for the disallowed FARE Program loans.
• "We find that the petitioner should have instead been presumed to have acted in the regular performance of his official duty because no evidence had been presented to show his having acted in bad faith and with gross negligence." — This passage states the evidentiary basis for lifting petitioner’s personal liability: absent bad faith or gross negligence, the presumption of regular official performance prevails.

• Arias vs. Sandiganbayan, G.R. No. 81563 and G.R. No. 82512, December 19, 1989, 180 SCRA 309 — The source of the Arias doctrine, which the Court applied to shield petitioner from personal liability because he reasonably relied on his subordinates’ recommendations absent bad faith or gross negligence.
• Development Bank of the Philippines vs. Commission on Audit, G.R. Nos. 216538 & 216954, April 18, 2017 — Cited for the definition of grave abuse of discretion; the Court used it to measure the COA’s act of affirming a disallowance without a recognized ground.
• Technical Education and Skills Development Authority (TESDA) vs. Commission on Audit, G.R. No. 204869, March 11, 2014, 718 SCRA 402, 437 — Cited in the same discussion of grave abuse of discretion as the standard for intervening in COA decisions.
• Fontanilla vs. The Commissioner Proper, Commission on Audit, G.R. No. 209714, June 21, 2016, 794 SCRA 213, 226 — Cited for the essence of administrative due process in COA proceedings, which the Court found violated as to ND No. RLAO-2005-052.
• Besaga vs. Acosta, G.R. No. 194061, April 20, 2015, 756 SCRA 93 — Cited together with Fontanilla and Vivo on administrative due process.
• Vivo vs. Philippine Amusement and Gaming Corporation (PAGCOR), G.R. No. 187854, November 12, 2013, 709 SCRA 276, 281 — Cited for the opportunity to be heard as the essence of administrative due process.
• Albert vs. Gangan, G.R. No. 126557, March 6, 2001, 353 SCRA 673, 684-685 — Cited for the requirement that the COA accurately and fairly identify the persons liable for disallowances only upon adequate factual basis.

• Section 2(2), Part D (Commission on Audit), Article IX, 1987 Constitution — Vests the COA with exclusive authority to define the scope of its audit and examination, establish techniques and methods, and promulgate accounting and auditing rules, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties. The Court used this to limit the COA’s disallowance power to the enumerated grounds.
• Section 2(1), Article IX, 1987 Constitution — Grants the COA the power, authority, and duty to examine, audit, and settle all accounts pertaining to revenue and receipts, and expenditures or uses of funds and property owned or held in trust by the Government. The Court acknowledged this broad audit power but held it subject to the recognized grounds for disallowance.
• Section 4, Presidential Decree No. 1445 (Government Auditing Code of the Philippines) — Lays down fundamental principles for financial transactions, including that government funds shall be spent solely for public purposes, fiscal responsibility shall be shared by all exercising authority over financial affairs, and claims shall be supported with complete documentation. The Court cited these principles in discussing the COA’s audit authority.
• Section 1, Rule IE of the 1997 Revised Rules of Procedure of the Commission on Audit — Reiterates the COA’s exclusive authority to disallow expenditures or uses of government funds and properties found to be irregular, unnecessary, excessive, extravagant, or unconscionable. The Court relied on this to reiterate the limits of disallowance.
• Section 19.1, COA Circular No. 94-001 dated January 20, 1994 (Manual of Certificate of Settlement and Balances) — Provides that liability for audit disallowances shall be determined by the nature of the disallowance, the duties and responsibilities of the officers/employees concerned, the extent of their participation or involvement in the disallowed transaction, and the amount of losses or damages suffered by the Government. The Court applied these factors to find petitioner not liable under ND No. RLAO-2005-052.
• Section 4, 1997 Revised Rules of Procedure of the Commission on Audit — Defines charges as inclusions or additions to an accountability pertaining to the assessment, appraisal, or collection of revenues, receipts, and other incomes. The Court used this to distinguish a Notice of Charge from a Notice of Disallowance.
• Section 19, Manual on Certificate of Settlement and Balance (Revised 1993) — Distinguishes liability under a Notice of Disallowance, based on participation in the disbursement, from liability for audit charges, measured by individual participation in the charged transaction. The Court cited this in saying a Notice of Charge would have been more fitting for ND No. RLAO-2005-052.
• COA Circular No. 85-55-A dated September 8, 1985; COA Circular No. 2012-003 dated October 29, 2012 — Provide definitions of irregular, unnecessary, excessive, extravagant, and unconscionable expenditures. The Court restated these definitions to identify the recognized grounds for disallowance.
• Republic Act No. 7393 — Created QUEDANCOR as a government financing institution mandated to accelerate countryside investment and credit resources. The Court cited it as the statutory backdrop of QUEDANCOR’s lending programs.
• Circular No. 102, Series of 1999 — Outlined the SFM Program and its purpose of financing the purchase of brand-new or second-hand tractors and implements. The Court referred to it in describing the SFM Program loans.
• Circular No. 079, Series of 1997 — Covered the FARE Program and stated its purpose of augmenting the working capital of retailers of agricultural and related commodities. The Court referred to it in describing the FARE Program loans.

Carpio (Acting C.J.), Peralta, Leonardo-De Castro, Del Castillo, Leonen, Caguioa, Martires, and Reyes, Jr., JJ., concurred. Sereno, C.J., was on official leave; Perlas-Bernabe, J., was on official business; Jardeleza, J., took no part; Tijam and Gesmundo, JJ., were on official business.