COA’s Disallowance Power: A Case Where Good Faith Prevails

G.R. No. 258510, May 28, 2024

Imagine a small business owner, diligently supplying goods to a government agency, only to find months later that payment is being withheld due to internal procedural issues within the agency. This scenario highlights a critical area of Philippine law: the power of the Commission on Audit (COA) to disallow government expenditures. This case, Jess Christopher S. Biong vs. Commission on Audit, clarifies the boundaries of COA’s authority and underscores the importance of good faith in government transactions. The Supreme Court ultimately ruled in favor of the petitioner, emphasizing that disallowance cannot be arbitrary and must be grounded in actual losses suffered by the government.

Understanding Irregular Expenditures and COA’s Mandate

The Commission on Audit (COA) is constitutionally mandated to safeguard public funds and ensure accountability in government spending. Its power to disallow expenditures stems from its duty to prevent irregular, unnecessary, excessive, extravagant, or illegal uses of government funds.

Section 2, Article IX-D of the 1987 Constitution states: “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 or held in trust by, or pertaining to, the Government…”

An “irregular expenditure” refers to one incurred without adhering to established rules, regulations, procedural guidelines, policies, principles, or practices recognized by law. COA Circular No. 85-55A provides further clarity. However, not every deviation from procedure warrants disallowance. The deviation must be directly linked to the expenditure itself. For instance, if a purchase is made without proper bidding, it’s an irregular expenditure. But if a minor clerical error occurs after a legitimate transaction, it typically wouldn’t justify disallowance.

Imagine a scenario where a government office purchases office supplies. If the purchase order was issued without proper authorization, that’s an irregular expenditure. However, if the supplies were delivered and used, but the delivery receipt was misplaced afterward, the expenditure is less likely to be deemed irregular.

The Case of Jess Christopher S. Biong: A Procedural Labyrinth

Jess Christopher S. Biong, an officer at the Philippine Health Insurance Corporation (PhilHealth) Region III, found himself embroiled in a disallowance case related to purchases of printer inks and toners from a supplier, Silicon Valley. The COA disallowed payments due to delays in delivery, missing inspection reports, and falsified supply withdrawal slips. The initial issue arose when PhilHealth Region III withheld payments to Silicon Valley due to missing inspection and acceptance reports (IARs).

To address this, Balog, Vice President of PhilHealth Region III, consulted Trinidad Gozun, State Auditor IV and Audit Team Leader of PhilHealth Region III, who suggested that in lieu of IARs, alternative documents may be attached to the disbursement voucher (DV).

The case unfolded as follows:

• Initial Deliveries and Payment Issues: Silicon Valley delivered office supplies, but the absence of IARs led to payment delays.
• Alternative Documentation: Biong, as GSU Head, provided a certification of delivery, along with Supplies Withdrawal Slips (SWSs) and a Monthly Report of Supplies and Materials Inventory (MRSMI).
• Payments Released: Based on these alternative documents, PhilHealth released payments to Silicon Valley.
• Discovery of Theft and Falsification: A month later, Biong discovered theft of office supplies and falsification of SWSs within the GSU office.
• COA Disallowance: The COA issued Notices of Disallowance (NDs) to PhilHealth officers, including Biong, citing the lack of IARs, delayed deliveries, and falsified SWSs.

The COA’s decision hinged on its finding of “apparent and consistent negligence” on Biong’s part. The COA stated, “[Biong’s] apparent and consistent negligence as the GSU Head as shown by his failure to discover the falsified SWSs and MRSMI that led PhilHealth Region III to pay Silicon Valley despite the lack of supporting documents.” However, Biong argued that he acted in good faith, relying on the advice of the Office of the Auditor and that the theft and falsification occurred after the transactions were completed.

Supreme Court’s Reversal: Good Faith and Absence of Loss

The Supreme Court overturned the COA’s decision, emphasizing the importance of due process and the absence of government loss. The Court noted that Biong was not properly served a copy of the COA’s decision before the Notice of Finality was issued, violating his right to due process. More critically, the Court found that the disallowance was unwarranted because PhilHealth Region III had a valid obligation to pay Silicon Valley for goods actually delivered and that the procedural lapses and subsequent theft were not directly linked to the initial expenditure.

The Court cited Theo-Pam Trading Corp. v. Bureau of Plant Industry, stating that violation of internal rules is not a ground to evade payment for goods that were actually received and used. “To the Court’s mind, the sales invoices showing that the items were delivered to and actually received by PhilHealth Region III employees is sufficient basis for PhilHealth Region III to comply with its contractual obligation to pay Silicon Valley under the subject POs.”

The Court also highlighted that the falsification of SWSs occurred after the transactions were completed and that the COA failed to establish a direct link between Silicon Valley’s deliveries and the falsified documents. Furthermore, the Court pointed out that the COA itself acknowledged that PhilHealth Region III was not prejudiced by the payments to Silicon Valley, undermining the basis for the disallowance.

Practical Implications for Government Transactions

This case serves as a crucial reminder of the limits of COA’s disallowance power. It underscores that good faith and the absence of actual government loss are critical factors in determining liability. Government officers cannot be held liable for mere procedural lapses, especially when they act on the advice of auditors and there is no evidence of malice or bad faith.

Key Lessons:

• Due Process is Paramount: Government agencies must ensure that all parties are properly notified and given an opportunity to be heard before any adverse decisions are made.
• Good Faith Matters: Acting in good faith and seeking guidance from relevant authorities can mitigate liability in disallowance cases.
• Causation is Key: A direct causal link must exist between the alleged irregularity and any actual loss suffered by the government.

This case offers a sigh of relief to many honest public servants who try to follow the rules and regulations on procurement. This case says that COA cannot just unilaterally disallow payments for transactions that have been completed based on mere technicalities.

Frequently Asked Questions

Q: What is a Notice of Disallowance (ND)?

A: A Notice of Disallowance is a formal notification issued by the COA, informing government officials and employees that certain expenditures have been disallowed due to irregularities or non-compliance with regulations.

Q: What does it mean to act in “good faith” in government transactions?

A: Acting in good faith means that government officials and employees genuinely believe they are acting lawfully and appropriately, without any intent to deceive or defraud the government.

Q: What happens if I receive a Notice of Disallowance?

A: If you receive an ND, you have the right to appeal the decision to higher COA authorities. It’s crucial to gather all relevant documents and evidence to support your case.

Q: Can I be held liable for a disallowance even if I didn’t directly benefit from the transaction?

A: Yes, you can be held liable if you were involved in the transaction and found to have acted with gross negligence or bad faith, even if you didn’t personally profit from it.

Q: How does the Madera ruling affect disallowance cases?

A: The Madera ruling provides guidelines on the extent of liability of government officials and employees in disallowance cases, particularly regarding the return of disallowed amounts.

Q: Is it possible to seek condonation or forgiveness for a disallowance?

A: While the concept of condonation has been largely abandoned, there may be grounds to argue for the reduction or elimination of liability based on good faith, lack of benefit, or other mitigating circumstances.

ASG Law specializes in government procurement and administrative law. Contact us or email hello@asglawpartners.com to schedule a consultation.