Biong vs. Commission on Audit

A Commission on Audit notice of disallowance is unwarranted and constitutes grave abuse of discretion where the cited irregularities—such as delayed delivery under a contract, absence of internal inspection and acceptance reports, and post-payment falsification of internal documents—do not render the expenditure itself irregular and no monetary loss to the government is shown; the COA’s audit power does not extend to imposing a penalty on a public officer for alleged negligence in the absence of a restitutory obligation.

PhilHealth Region III purchased printer inks and toners from Silicon Valley under four purchase orders between 2008 and 2009. The Comptrollership/Accounting Unit later discovered that inspection and acceptance reports were missing, and payments due to the supplier were withheld. Rodolfo M. Balog, Vice President of PhilHealth Region III, consulted Audit Team Leader Trinidad Gozun, who suggested that alternative documents could be attached in lieu of the missing reports. PhilHealth Region III subsequently attached a certification of delivery issued by petitioner as GSU Head, supplies withdrawal slips, and a monthly report of supplies and materials inventory, and released four Philippine Veterans Bank checks to Silicon Valley in December 2010. In January 2011, petitioner discovered theft of office supplies and falsification of supplies withdrawal slips within the GSU office. An internal investigation pointed to a project-based employee allegedly pilfering supplies and a clerk falsifying withdrawal slips to conceal the shortage. The COA Audit Team then issued notices of disallowance covering the payments to Silicon Valley.

• The Purchase Orders and Payments: PhilHealth Region III acquired printer inks and toners from Silicon Valley under PO No. 09-236 dated December 4, 2009, PO No. 043 dated April 25, 2008, PO No. 160 dated November 4, 2008, and PO No. 09-005 dated February 4, 2009. Each purchase order required delivery within 15 calendar days and imposed a penalty for delay. Silicon Valley delivered on a staggered basis spanning almost six months. In August 2010, the Comptrollership/Accounting Unit found that no inspection and acceptance reports (IARs) had been prepared, and payments were withheld.

• Alternative Documentation and Release of Payment: Vice President Balog consulted Audit Team Leader Gozun, who suggested that alternative documents be attached to the disbursement voucher. PhilHealth Region III then attached a certification issued by petitioner Biong as Head of the GSU stating that the supplies were delivered, supplies withdrawal slips (SWSs) requisitioned by end-users, and a Monthly Report of Supplies and Materials Inventory (MRSMI) prepared by the GSU. After evaluation, PhilHealth released four checks totaling PHP 1,106,199.52 to Silicon Valley in December 2010.

• Discovery of Theft and Falsification: On January 31, 2011, petitioner Biong discovered that inks and toners delivered by other suppliers had been stolen from the GSU office. Petitioner filed an Incident Report on February 22, 2011, naming project-based employee Jajomar Marbebe as the person allegedly bringing inks out of the office. Clerk Mary Joy Cruz admitted to falsifying SWSs to cover the missing stocks. Petitioner requested relief from accountability for the lost property from the COA Audit Team; the record does not disclose if that request was resolved.

• The COA Audit and Notices of Disallowance: The COA Audit Team issued ND No. 11-002-000(10) covering PO No. 09-236, and ND No. 11-003-000(10) covering the three other POs. The disallowances were grounded on: (a) staggered delivery beyond the 15-day period; (b) absence of IARs in violation of Section 465 of COA Circular No. 368-91; (c) use of alternative documents in lieu of IARs; (d) altered SWSs and padded issuances; (e) SWSs with no corresponding end-user copies; (f) supplies issued to unknown end-users; and (g) unaccounted deliveries. Silicon Valley was not included among the persons held liable.

• The COA Proper’s Ruling: In Decision No. 2019-040, the COA Proper affirmed the disallowances as modified, finding that PhilHealth Region III had a valid obligation to pay Silicon Valley. It excluded all officers except Cruz and petitioner Biong from liability. Petitioner Biong was held liable on the ground of “apparent and consistent negligence” as GSU Head for failing to discover the falsified SWSs and MRSMI, leading PhilHealth to pay without proper supporting documents.

• Substantial Compliance with Inspection Requirement: Petitioner argued that Silicon Valley undisputedly delivered the items; the lone inspector was often unavailable, but PhilHealth consulted the COA Audit Team Leader and complied with her recommendation to submit alternative documents. The IAR requirement was thus substantially complied with, and payments were released only after the alternative documents were submitted.

• Good Faith and Due Diligence: Petitioner maintained that he exercised the diligence of a good father of a family. The tampering of documents occurred after office hours and on weekends, beyond his control, and it was during his term that the long-running theft was discovered, reported, and discontinued. He acted in good faith and without bad faith, malice, or gross negligence, and he was not a recipient of the disallowed amounts.

• Absence of Government Loss: Petitioner contended that PhilHealth had a valid and legal obligation to pay Silicon Valley for goods actually delivered and received, as evidenced by sales invoices. The internal issues—lack of inspection reports, theft, and falsified SWSs—did not liberate PhilHealth from its obligation, and the government suffered no squandering of funds. The staggered delivery merely triggered the contractual penalty, which Silicon Valley paid.

• Due Process and Speedy Disposition: Petitioner asserted that he was not served a copy of COA Decision No. 2019-040 before the Notice of Finality was issued, depriving him of the opportunity to move for reconsideration. He also invoked the constitutional right to speedy disposition of cases, citing the eight-year interval between the commencement of proceedings in 2011 and the COA decision in 2019.

• Gross Negligence: The COA countered that petitioner failed to show grave abuse of discretion. Civil liability may arise upon a showing of bad faith, malice, or gross negligence, and petitioner’s certification of delivery without the mandatory IARs, coupled with his failure to detect the falsified SWSs and MRSMI, constituted gross negligence warranting liability.

• Faithful Adherence to Regulations: The COA maintained that the benefit PhilHealth received could not outweigh the disallowance, citing Section 4(7) of the Government Auditing Code, which requires faithful adherence to all laws and regulations applicable to financial transactions.

• Irregular Expenditure: Whether the payments made to Silicon Valley constituted irregular expenditures warranting disallowance based on delayed delivery, absence of IARs, and falsified SWSs.

• Petitioner’s Civil Liability: Whether petitioner Biong’s certification of delivery without IARs and his alleged failure to detect falsified SWSs amounted to gross negligence that justified holding him liable for the disallowed amounts.

• COA’s Authority: Whether the COA exceeded its audit powers by imposing civil liability on petitioner in the absence of any monetary loss, damage, or injury to the government.

• Due Process: Whether the COA’s failure to serve petitioner with a copy of Decision No. 2019-040 before issuing the Notice of Finality, and the alleged delay, violated petitioner’s rights to due process and speedy disposition of cases.

• Irregular Expenditure: The payments were not irregular expenditures. The 15-day delivery period was a mere contract stipulation, not a rule or regulation with the force of law; its breach exposed Silicon Valley to liquidated damages or contract termination, not disallowance. Silicon Valley had delivered all items and paid the penalties. The lack of IARs was an internal procedural lapse attributable to PhilHealth, not the supplier; the sales invoices proving delivery and receipt were sufficient to trigger PhilHealth’s reciprocal obligation to pay. The falsification of SWSs occurred after the transactions had been consummated and was disconnected from the subject purchase orders; the supplies were fungible and there was no logical proof that the falsified slips pertained specifically to Silicon Valley’s deliveries rather than those of other suppliers. Hence, no irregularity tainted the expenditures themselves.

• Petitioner’s Civil Liability: The COA’s imposition of liability on petitioner was arbitrary. Because the disallowances themselves were invalid, no return was required from any person. Even if the disallowance were valid, the COA had already recognized a valid obligation to pay Silicon Valley yet exempted the payee while imposing the entire burden on petitioner—a departure from Madera jurisprudence, under which the payee’s receipt of an amount adjudged illegal is considered erroneous and triggers a solutio indebiti obligation. Further, liability for disallowance is restitutory in nature; the amount to be returned cannot exceed the government’s loss. PhilHealth suffered no loss, having paid for goods actually received. The COA’s decision was not aimed at restitution but at punishing petitioner for supposed negligence, effectively imposing a fine or penalty and thereby usurping the disciplinary authority of PhilHealth, the Civil Service Commission, or the Office of the Ombudsman.

• COA’s Authority: The COA overstepped its audit mandate. The conduct of an audit is not an exercise of administrative supervision over public officers, and liability in a disallowance case must partake of the nature of an obligation for restitution, not a penalty. Absent any monetary loss, the imposition of a fine on grounds of misfeasance is outside the scope of audit powers. Upon discovery of a violation, the COA’s authority is limited to initiating appropriate administrative, civil, or criminal action, not to directly imposing administrative penalties.

• Due Process: The COA committed a procedural violation by failing to serve petitioner with a copy of Decision No. 2019-040 before issuing the Notice of Finality, in breach of Section 7 of the 2009 Revised Rules of Procedure of the COA and of petitioner’s right to due process. This defect alone justified setting aside the notice of finality, though the disallowance also failed on substantive grounds.

• Irregular Expenditure Defined — An irregular expenditure is one incurred without adhering to established rules, regulations, procedural guidelines, policies, principles, or practices that have gained recognition in law; a transaction conducted in a manner that deviates or departs from, or does not comply with, recognized standards. The irregularity must exist at the time the expenditure is incurred; a deviation that occurs after the expenditure or is disconnected from the transaction does not warrant disallowance.

• Internal Procedural Lapses Do Not Defeat Third-Party Supplier’s Right to Payment — The primary responsibility for complying with internal inspection, acceptance, and documentation requirements rests on the government agency. A third-party supplier is a stranger to these internal rules, and its right to recover payment for goods actually delivered and received cannot be conditioned on strict compliance with procedures over which it has no control. Sales invoices showing delivery and receipt are sufficient to trigger the government’s reciprocal obligation to pay.

• Restitutory Nature of Disallowance Liability — Liability under a notice of disallowance partakes of the nature of an obligation for restitution. The amount to be returned by persons held liable shall not exceed the loss, damage, or injury to the government. Absent any monetary loss, there is no basis for a restitutory obligation, and the disallowance cannot be used to impose a fine or penalty on a public officer.

• Limits of COA’s Audit Power — The COA’s audit function does not encompass administrative supervision over public officers. Its power to disallow expenditures proceeds from the duty to prevent irregular, unnecessary, excessive, extravagant, or illegal uses of government funds. Upon discovering a violation of law or regulation, the COA’s authority is limited to initiating appropriate administrative, civil, or criminal action; it cannot itself impose administrative penalties for misfeasance or nonfeasance. A disallowance that effectively imposes a fine on an officer for negligence usurps the disciplinary powers of the agency concerned, the Civil Service Commission, or the Ombudsman.

• Madera Guidelines on Civil Liability (No Return Where Payee Not Liable) — When a disbursement is adjudged to be irregular or illegal, the payee’s receipt is considered erroneous and the payee is liable for return under the principle of solutio indebiti. The solidary liability of officers found to have acted in bad faith, malice, or gross negligence is limited to the net disallowed amount—the total disallowed amount minus the amounts excused to be returned by the payees. Where the payee is exempted and no loss exists, no return is required from any person.

• “The term irregular expenditure ‘signifies an expenditure incurred without adhering to established rules, regulations, procedural guidelines, policies, principles or practices that have gained recognition in law.’ … Verily, for a transaction to be deemed an irregular expenditure, the deviation from established rules, regulations, procedural guidelines, policies, principles, or practices should have transpired at the time the expenditure is incurred. Stated differently, if the irregularity transpired after the expenditure had been incurred, or worse, was disconnected from the transaction in question, disallowance is not warranted.”

• “…the primary responsibility of complying with these procedural requirements rests on BPI and NPAL because these are internal rules. … a third-party supplier’s right to recover cannot be conditioned upon strict compliance with these requirements inasmuch as they are strangers to these internal rules.”

• “It would be the height of injustice if an innocent supplier would be deprived of compensation for goods delivered and/or services rendered due to a government agency’s poor internal control and security.”

• “…liability for disallowance partakes of the nature of an obligation for restitution. Thus, the amount that should be returned by persons held liable under an ND should not exceed the loss, damage, or injury to the government. Consequently, the absence of loss, damage, or injury to PhilHealth Region III as a result of the payments made to Silicon Valley is inconsistent with petitioner Biong’s liability under the subject NDs.”

• “The COA should be reminded that the conduct of an audit is not an exercise of the government’s administrative supervision over public officers. … absent any monetary loss, damage, or injury on the part of the government, the imposition of a fine or a penalty on the ground of misfeasance, nonfeasance, or malfeasance of a public officer is outside the scope of the COA’s audit powers.”

• Theo-Pam Trading Corp. v. Bureau of Plant Industry, G.R. No. 242764, January 19, 2021 — Followed. Established that violation of internal agency rules on inspection and acceptance is not a ground to evade payment for goods actually received and used, as the supplier is a stranger to those internal procedures.

• De Castro v. Commission on Audit, 886 Phil. 104 (2020) — Relied upon for the definition of irregular expenditure, the restitutory nature of disallowance liability, and the limits of the COA’s audit power, holding that the COA overstepped its authority when it imposed liability on the ground of supposed misfeasance.

• Madera v. Commission on Audit, 882 Phil. 744 (2020) — Applied as the governing framework for determining civil liability in disallowance cases; the guidelines dictated that no return was required from petitioner where the payee was exempted and no government loss existed.

• Aquino v. Commission on Audit, 888 Phil. 643 (2020) — Cited for the rule that the solidary liability of officers is limited to the net disallowed amount (total disallowed amount minus amounts excused to be returned by payees), and that any reduction in payees’ liability redounds to the benefit of the officers.

• Philippine Health Insurance Corp. v. Commission on Audit, G.R. No. 250787, September 27, 2022 — Cited for the rule that when a disbursement is adjudged irregular, the payee’s receipt is deemed erroneous and the payee must return the amount under the principle of solutio indebiti.

• Section 465, COA Circular No. 368-91 (Government Accounting and Auditing Manual) — Prescribes rules on inspection and verification of purchases, including the requirement that purchases be inspected by an authorized inspector and that evidence of inspection be noted on the order and invoice. The COA cited this provision as the basis for the irregularity, but the Supreme Court held that non-compliance was an internal procedural lapse that could not defeat the supplier’s right to be paid for goods actually delivered.

• Sections 102, 104, and 105, Government Auditing Code of the Philippines (Presidential Decree No. 1445) — Define primary and secondary responsibility for government funds and property, the duty of agency heads to exercise the diligence of a good father of a family to prevent loss, and the liability of accountable officers for loss or damage occasioned by negligence. The Court noted that any liability of petitioner for stolen supplies was governed by these provisions and his pending request for relief from accountability, not by the disallowance.

• Section 73, Government Auditing Code of the Philippines (PD 1445) — Governs credit for loss due to theft or casualty; requires an accountable officer to apply for relief and sets the procedure. The Court observed that petitioner’s liability, if any, was limited to the money value of the loss and should be determined through that separate process, not through a disallowance encompassing the entire purchase orders.

• Section 7, 2009 Revised Rules of Procedure of the Commission on Audit — Requires that a copy of any order or decision be served on each person liable, personally or by registered mail. The COA’s failure to serve the decision on petitioner before issuing a notice of finality was a violation of its own rules and a denial of due process.

• Section 16.1, COA Circular No. 2009-006 (Rules and Regulations on Settlement of Accounts) — Enumerates the bases for determining the liability of public officers for disallowances, including the amount of damage or loss to the government. The Court emphasized that the absence of loss was inconsistent with petitioner’s liability.

Gesmundo, C.J., Leonen, SAJ., Caguioa, Hernando, Lazaro-Javier, Zalameda, M. Lopez, Gaerlan, Rosario, J. Lopez, Dimaampao, Marquez, Kho, Jr., and Singh, JJ., all concurred. No separate concurring opinions were recorded.