The Supreme Court ruled that the Commission on Audit (COA) cannot arbitrarily disallow expenditures of government funds. The COA’s power is limited to transactions that are irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. In this case, the COA’s disallowance based solely on loan delinquency was deemed a grave abuse of discretion, emphasizing the importance of due process and a clear basis for holding individuals personally liable for disallowed amounts.

When Loan Approvals Meet Disallowance: Was the COA’s Audit Justified?

This case revolves around Orestes S. Miralles, who, as a Regional Vice President of Quedan and Rural Credit Guarantee Corporation (QUEDANCOR), approved loan applications under two programs: the Sugar Farm Modernization (SFM) Program and the Food and Agricultural Retail Enterprises (FARE) Program. After borrowers defaulted, the COA issued Notices of Disallowance (NDs), holding Miralles personally liable for the uncollected loan amounts. The central legal question is whether the COA acted with grave abuse of discretion in holding Miralles personally liable for these disallowed amounts, given his role in approving the loans and the circumstances surrounding the loan defaults.

The Constitution grants the COA broad authority to audit government funds and prevent irregular expenditures. However, this power is not unlimited. As the Supreme Court emphasized, the COA’s authority to disallow expenditures hinges on whether the transactions are deemed irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. This means that a disallowance must be grounded on a clear finding that the expenditure falls into one of these categories.

Section 2.(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefor, 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.

In the case of ND No. RLAO-2005-052, the COA disallowed the loan amounts under the SFM Program because QUEDANCOR Management had not taken appropriate legal action to collect the delinquent accounts. The Supreme Court found this to be an insufficient basis for disallowance. The Court noted that the COA’s action was essentially an attempt to “insure compliance” with its directives, rather than a finding that the loan approvals were themselves irregular or illegal. Furthermore, the Court highlighted the inconsistency in holding Miralles personally liable when the stated reason for the disallowance was the QUEDANCOR Management’s failure to pursue collection efforts, a responsibility that did not fall under Miralles’ duties.

This decision underscores the importance of due process in administrative proceedings. The Court emphasized that Miralles was denied a fair opportunity to address the specific issue raised against him. The lack of clarity regarding the cause of the disallowance – whether it was the approval of the loans or the non-collection of delinquent accounts – effectively deprived Miralles of his right to be heard. The COA’s own statements revealed the confusion surrounding the basis for the disallowance, further highlighting the procedural deficiencies in the case.

Contrastingly, the ND No. RLAO-2005-055, which disallowed loans under the FARE Program, was based on the finding that the borrowers did not have viable businesses as required by the program. The Court upheld the validity of this disallowance, citing the investigations that revealed the borrowers’ ineligibility. However, the Court disagreed with the COA’s decision to hold Miralles personally liable for these disallowed transactions.

The Court invoked the Arias doctrine, established in Arias v. Sandiganbayan, which allows heads of offices to rely on the findings and recommendations of their subordinates to a reasonable extent. The Court recognized that it would have been impracticable for Miralles to personally verify every detail of the numerous loan applications he approved. The COA’s argument that Miralles should have been aware of the irregularities was deemed speculative and unsupported by evidence. The Court stated that there was no definitive finding of Miralles’ awareness of illegal activities, warranting his liability for the disallowed amounts.

The Court noted that the COA failed to present evidence of bad faith or gross negligence on Miralles’ part. The supposed deficiencies and inconsistencies in the loan applications cited by the COA were not sufficient to establish Miralles’ personal liability. This highlights the COA’s duty to accurately and fairly identify the persons liable for disallowances, based on adequate factual evidence. In the absence of such evidence, the presumption of regularity in the performance of official duties should prevail.

The Supreme Court’s decision emphasizes that the COA’s power to disallow expenditures is not absolute and must be exercised judiciously. The COA must provide a clear and justifiable basis for its disallowances, grounded on findings of irregularity, illegality, or other specified grounds. Moreover, the COA must ensure that individuals are afforded due process and are not held personally liable without adequate evidence of their participation in the disallowed transactions. This ruling serves as a reminder that the COA’s role as the guardian of public funds must be balanced with the protection of individual rights and the principles of fairness and due process.

FAQs

What was the key issue in this case?	The key issue was whether the Commission on Audit (COA) gravely abused its discretion in holding Orestes S. Miralles personally liable for disallowed loan amounts under the Sugar Farm Modernization (SFM) and Food and Agricultural Retail Enterprises (FARE) Programs. The core question was whether the COA’s disallowances were justified and whether Miralles’ role warranted holding him personally accountable.
What is the “Arias Doctrine” and how did it apply in this case?	The “Arias Doctrine” allows heads of offices to rely on the findings and recommendations of their subordinates to a reasonable extent. In this case, the Supreme Court found that Miralles could reasonably rely on the certifications and recommendations of his subordinates, especially given the volume of loan applications he had to approve.
On what basis did the COA issue the Notices of Disallowance (NDs)?	The COA issued ND No. RLAO-2005-052 (SFM Program) because of the QUEDANCOR Management’s failure to take legal action to collect delinquent accounts. ND No. RLAO-2005-055 (FARE Program) was based on the finding that borrowers did not have viable businesses as required under the loan program.
Why did the Supreme Court nullify ND No. RLAO-2005-052?	The Supreme Court nullified ND No. RLAO-2005-052 because the COA’s basis for the disallowance was QUEDANCOR Management’s failure to pursue collection efforts, a responsibility that did not fall under Miralles’ duties. The COA was deemed to have acted arbitrarily, and Miralles was denied a fair opportunity to address the issue.
Why did the Supreme Court affirm ND No. RLAO-2005-055 but lift Miralles’ personal liability?	The Court affirmed ND No. RLAO-2005-055 because the borrowers did not meet the requirements of the FARE Program. However, it lifted Miralles’ personal liability because he could reasonably rely on his subordinates’ recommendations, and there was no evidence of bad faith or gross negligence on his part.
What is the significance of due process in COA disallowance cases?	Due process requires that individuals be given a fair opportunity to be heard and to address the specific issues raised against them. In this case, the Supreme Court emphasized that Miralles was denied due process because the basis for the disallowance was unclear and inconsistent.
What are the grounds for the COA to disallow expenditures?	The COA can disallow expenditures that are irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. The disallowance must be grounded on a clear finding that the expenditure falls into one of these categories.
What is a Notice of Charge, and how does it differ from a Notice of Disallowance?	A Notice of Charge (NC) applies to the audit of revenues or receipts of a government agency, while a Notice of Disallowance (ND) applies to the audit of disbursements. The liability under the ND is based on the participation of the persons involved in the disbursement of the disallowed amount, but the liability for audit charges is measured by the individual participation or involvement of persons in the charged transaction.

The Supreme Court’s decision in this case provides important guidance on the limits of the COA’s disallowance power and the importance of due process in administrative proceedings. By emphasizing the need for a clear and justifiable basis for disallowances and the protection of individual rights, the Court has helped to ensure that the COA’s role as the guardian of public funds is balanced with the principles of fairness and accountability.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Miralles vs. Commission on Audit, G.R. No. 210571, September 19, 2017