DEVELOPMENT BANK OF THE PHILIPPINES, JESUS P. ESTANISLAO, DOLORES A. SANTIAGO, LYNN H. CATUNCAN, NORMA O. TERREL, MA. ANTONIA G. REBUENO, PETITIONERS, VS. COMMISSION ON AUDIT, R…

Development Bank of the Philippines versus Commission on Audit

The Case

This is a petition for review on certiorari filed by the Development Bank of the Philippines, together with several of its officers, against the Commission on Audit. The petitioners assail two letter-decisions of the Commission — one issued by its Chairman and one issued by the Commission en banc — which prohibited the Bank from hiring a private external auditor and disallowed the payments already made to that auditor. The case is one of first impression: it asks whether the constitutional power of the Commission on Audit to examine and audit the Bank is exclusive, such that it precludes a concurrent audit by a private external auditor. It matters because the answer turns on the deliberate choice of words made by the framers of the 1987 Constitution in Section 2 of Article IX-D.

Procedural History

There were no ordinary courts below. The matter began administratively before the Commission on Audit itself. On December 12, 1986, the Bank's Chairman wrote the Commission seeking its approval of the engagement of a private external auditor in addition to the Commission. The then Chairman replied that the Commission would interpose no objection, provided the terms of the audit were first reviewed and approved by the Commission. After a change in leadership, however, the new Chairman issued a Memorandum disallowing the payments to the private auditor and holding several Bank officers personally liable. The Bank sought reconsideration, and on August 29, 1988 the Chairman issued a letter-decision denying the Bank's request for concurrence and directing it to desist from the private audit, to refrain from further payments, and to restitute the amounts already paid. The Bank appealed to the Commission en banc, which on May 20, 1989 issued its own letter-decision denying the appeal. The Bank then filed this petition for review with the Supreme Court, together with a prayer for a temporary restraining order, which the Court granted, directing the Commission to cease and desist from enforcing the challenged decisions. The Office of the Solicitor General declined to appear for the Commission, and a private counsel represented it on a pro bono basis.

Facts

In 1986 the Philippine government obtained from the World Bank an Economic Recovery Loan of 310 million dollars. As a condition, the World Bank required the government to rehabilitate the Development Bank of the Philippines, which was then saddled with huge non-performing loans. The government's commitment was embodied in a Policy Statement providing that, like all financial institutions under Central Bank supervision, the Bank would be required to have a private external audit.

To implement this, the Monetary Board amended the Central Bank's regulations, and the Central Bank Governor issued Circular No. 1124, requiring each bank, whether government-owned or private, to undergo an annual financial audit by an external independent auditor, expressly providing that the audit of a government-owned or controlled bank by an external auditor shall be in addition to and without prejudice to that conducted by the Commission on Audit. Pursuant to this circular, the Bank sought the Commission's approval, and the then Chairman interposed no objection, provided the terms were first reviewed and approved. The Bank's Board then approved the hiring of a private auditor for calendar year 1986, and a contract was signed.

A change in the Commission's leadership reversed the course of events. The new Chairman protested the circular as an encroachment on the Commission's constitutional power, instructed the resident auditors to disallow any payment to the private auditor, and later issued a Memorandum disallowing the payments and holding named officers personally liable. After the Bank's request for reconsideration went unanswered for months, the Chairman issued the first assailed letter-decision, and the Commission en banc affirmed it, reasoning that the Constitution vested in the Commission the supreme and exclusive audit power.

Issues

• Whether or not the Constitution vests in the Commission on Audit the sole and exclusive power to examine and audit government banks, so as to prohibit concurrent audit by private external auditors under any circumstance.
• Whether or not there is an existing statute prohibiting government banks from hiring private auditors in addition to the Commission, or, if there is none, an existing statute authorizing them to do so.
• Whether or not, absent any legal impediment, the hiring by the Bank of a private auditor was necessary, and the fees paid were reasonable under the circumstances.

Applicable Provisions

Section 2 of Article IX-D of the 1987 Constitution provides:

Sec. 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned and held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned or controlled corporations with original charters, x x x. (2) The Commission shall have the exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefore, and 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.

The presence of the word exclusive in the second paragraph and its absence in the first is the textual key to the entire case.

Ruling

On the first issue, the Court held that the Commission's power to examine and audit under the first paragraph of Section 2 is not exclusive. The bare language shows that the power in the first paragraph is not declared exclusive, while the authority in the second paragraph is expressly declared exclusive. The Court traced this to the Constitutional Commission, which rejected Commissioner Guingona's proposal to insert the word exclusive in the first paragraph, and later rejected his proposed provision barring private auditing firms from examining government accounts. Commissioner Monsod explained that the framers did not want the provision to be a disincentive or obstacle to private investment, since some government institutions with private investors require the presence of private auditing firms, not exclusively but concurrently. The Court stressed that a qualifying word refers only to the phrase to which it is immediately associated, so the word exclusive in the second paragraph cannot be carried over to the first. The clear conclusion is that the power to examine and audit is non-exclusive, while the authority to define the scope of audit, promulgate rules, and disallow unnecessary expenditures is exclusive. The Court added that the Commission's findings necessarily prevail over those of private auditors.

On the second issue, the Court found no statute prohibiting government banks from hiring private auditors, and noted that the Commission itself had earlier interposed no objection. On the third issue, the Court found the hiring necessary and the fees reasonable under the circumstances.

Doctrine

The Commission on Audit's power to examine and audit under the first paragraph of Section 2 of Article IX-D is non-exclusive; concurrent audit by a private external auditor is permitted. Its authority under the second paragraph — to define the scope of its audit, promulgate auditing rules, and disallow unnecessary expenditures — is exclusive. The word exclusive qualifies only the phrase to which it is immediately attached, not a distantly located sub-section. Where the Constitution omits a word that the framers deliberately rejected, courts must read the provision as it appears.

Disposition

The petition was granted; the Court set aside the assailed letter-decisions of the Commission on Audit and upheld the Bank's hiring of a private external auditor.

Remember This

Memorize the line: the power to audit is non-exclusive, but the power to define the scope of audit and disallow expenditures is exclusive. Examiners use this case to test the contrast between the two paragraphs of Section 2 of Article IX-D and the use of the word exclusive.